Challenges for Aircraft Lessors

David, a pleasure to have you with us today. I think a good place to start would be to really explore the structure of the aircraft leasing organizations and the teams. Given the portfolio is global, how is the business structured?

It depends, primarily, on the size. A smaller company, or a smaller branch, starts out relatively small. You probably have a sales guy and then he’s reporting back to headquarters, somewhere. If it’s a small company, just starting, there are a small number of people. Those people still have to take on the same tasks, essentially, that are there in a big organization. The salesperson, obviously, to generate and originate the leads. You’ll need finance people to make sure that the finances are under control. Those might be your pricing people, as well. You’ll have a risk person, who may or may not be your finance person. Certainly, you’ll have legal people, tax people, perhaps. Sometimes, if you’re a small company, you might start with outside counsel, but aviation law is considerably different from other types of law, so it’s important to make sure you get people who are knowledgeable in the field.

With the tax people, when you grow in size and become international, in particular, you need people that know the ins and outs of all the tax treaties, between countries and jurisdictions. That becomes quite an important piece that can be overlooked. Technical people are extremely important to the transactions, particularly if it’s used aircraft or pre-owned aircraft, because you can really get caught from just missing paperwork or having an inspection gone wrong. Those are critical, but not so critical when you’re just dealing with new aircraft. If you’ve ordered a bunch of aircraft or you’re just doing purchase leasebacks, that’s not as critical, up front. But when it comes to repossessions or redeliveries, those are some very key people.

What is the biggest challenge with the somewhat decentralized structure? I understand it’s centralized for the HQ and then you have various different regions that are working the same portfolio.

I’ve been in Asia for 30 years and always had a headquarters back in the States. When it’s Asia and the US, it’s not too bad, because you’re 12 hours out. But once you get a European entity in there, as well, then you’re always forced to have calls in your night. Europe hooks up in their daytime and the morning in the States. It does make for a lot of late nights, when you’re out here in Asia. But it comes with the territory; it’s part of life and you get used to it. It can be more difficult not having your entire team out here with you. First of all, they don’t understand the customer as well because you are, primarily, the only advocate for the customer that they don’t know. If it’s an American or a United or a BA or something like that, everybody knows them. When you’re talking Srivijaya or Nok Air or something like that, it’s more difficult. It’s hard to explain and it makes the process more complicated and more challenging.

Let’s say you’ve got a customer in Malaysia or South East Asia, for example, do you have to compete, internally, to allocate aircraft to the customer or do you have a designated number of aircraft for the region? How does that work?

For most companies, you’ve got certain assets you’re trying to place as quickly as you can, at the best price you can. You’re fighting it out with every other salesperson. Quite honestly, the jurisdictions in Asia are tough, from both the legal standpoint and the financial standpoint. It’s more difficult to get management to agree with your deal, as opposed to sticking with a Lufthansa or something like that, which they’re familiar with. It is quite a fight, sometimes.

Moving on to look at the challenges during this crisis, how do you compare the challenge for lessors today, during Covid-19, versus 2008, for example?

The financial crisis of 2008 impacted the financial community, it impacted big businesses. It didn’t impact Asia as much as it did Europe and the US. We actually took a lot of aircraft out of the US and brought them out to Asia, during that time. That crisis didn’t really affect the passenger. I compare this crisis now, more akin to 9/11, because passengers are going to be scared to fly. In the aftermath of 9/11, passengers were scared to get on an airplane. I think this is happening now, as well. After 9/11, regulators and airports were quick to adapt security measures, extra scanning and all that kind of stuff we’ve learned to live with.

In today’s world, passengers are still scared and they’re going to be scared for a while. I think, until there is either a treatment or a vaccine, a lot of people probably won’t fly and that’s far more daunting than either 2008 or 9/11.

Can we walk through the relationship dynamics with the airline, if an airline goes bankrupt, and how the lessor relationship and the repossession of the plane actually works?

A lot of that depends on the parties. Unfortunately, I’ve had to deal with several struggling airlines. Most of them didn’t go bankrupt, luckily, but they reacted in different ways. When an airline just closes the doors, won’t talk to you, shuts the records in a room and makes it very difficult, then it’s very painful for everybody. Lawyers get involved and it becomes quite difficult.

I’ve been lucky enough to work with some airlines, though, that were very accommodating, to the degree that they could be. Nok Air, for example. They were struggling and, luckily enough, they helped me take the aircraft out and get everything repositioned back. Eventually, we renegotiated everything and were able to get them back up and running. That was a credit to both GECAS, my company at the time, and Nok Air management, working together and being able to restructure something.

But we’ve had others that just shut down and I’ve had to sit in the lobby of hotels, waiting for the CEO to come out, just to try to catch him, because he won’t return calls and emails. Those, typically, don’t go so well. It’s unfortunate when it goes like that, because it’s frustrating for everybody.

Are the lessors protected through the security or collateral that they have on these planes?

Typically, if you’ve got a few months deposit, you tend to find that you burn through that pretty quickly, if it’s contested like that. If it’s not, in the case of Nok Air, where they flew the planes out for us and stuff, that was much easier. If they’re grounding the aircraft, shutting the records up, won’t respond to emails, they get some lawyer involved that probably doesn’t have anything to do with aviation law, those bills rack up, pretty quick. You’ve got parking fees, sometimes you’ve got fuel charges. We had one customer that was, unbeknown to us, several months behind on payments for engine reserves, powered by the hour. Those bills rack up really quickly and you just try to minimize as much as you can and move on.

Whether or not you finally go back and try to get them through lawsuits, I don’t see those as being terribly successful; occasionally, but not most of the time.

But the lessor is not liable for those maintenance fees and fees on the engines or the plane?

Theoretically, no. But if they want the aircraft back then, a lot of the time, they have to pay.

So the engine OEMs will come to the lessor, who then own the plane, to pay the power by the hour fees?