Bloomberg News

GE to Air Lease Boost Boeing as Airlines’ Orders Dwindle

July 11, 2012

Air Lease Corp. CEO Steven Udvar-Hazy

Air Lease, founded by industry veteran Steven Udvar-Hazy, ordered 75 737s on July 9 worth $7.2 billion. Photographer: Matthew Lloyd/Bloomberg

Jet-leasing companies are delivering a $19.7 billion windfall for Boeing Co. (BA:US) at the Farnborough air show even as airlines keep their checkbooks closed.

Orders and commitments from buyers ranging from General Electric Co. (GE:US)’s plane leasing unit to Steven Udvar-Hazy’s Air Lease Corp. (AL:US) gave Boeing a head start over Airbus SAS to open the year’s highest-profile aerospace industry trade event. Airbus jumped in today with deals for about $4.4 billion.

Lessors are stepping up after many airlines moved to renew their fleets in 2011, often with Airbus’s new A320neo, and are holding off on planes as the global economy slows. The companies can place more-efficient jets with carriers seeking to cut fuel bills and prepare for passenger traffic that Boeing predicts may rise 5 percent annually for the next two decades.

“Aircraft leasing is a growth industry and they are positioning themselves for global growth,” Ray Neidl, an analyst at Maxim Group in New York, said in an e-mail. “The leasing companies can get a better deal ordering in mass and better financial terms since they have stronger balance sheets than most airlines.”

Without the leasing deals, announcements at the Farnborough International Air Show would have slowed to a trickle so far. And unlike last year, when the haul from the show held in Paris totaled 441 firm orders, this week’s action has been dominated by agreements that aren’t yet complete.

‘Quiet Show’

“We expected this to be a quiet show, order-wise, as 2011 was a likely peak order year,” Stephen Levenson, a Stifel Nicolaus & Co. analyst in New York, said in a note to investors. “But we are pleased to see continued demand for new, more fuel- efficient and less maintenance-intensive airplanes.”

GE Capital Aviation Services, the world’s biggest aircraft lessor, agreed yesterday to buy 75 of Boeing’s upgraded 737 Max narrow-body jetliners and 25 of the current model in the show’s largest transaction, valued at $9.25 billion at list prices.

Air Lease, founded by industry veteran Udvar-Hazy, ordered 75 737s on July 9 worth $7.2 billion. Kuwait-based Aviation Lease & Finance Co., known as Alafco, will acquire 20 of the planes at a list price of $1.9 billion. Avolon Aerospace Leasing Ltd. agreed today to take as many as 30 737s in a deal that Boeing said had a list value of $2.3 billion. Airlines typically buy at a discount.

Airbus Agreements

Airbus’s accords today were both with lessors. CIT Group Inc. (CIT:US) is taking five A330 wide-bodies, and China Aircraft Leasing Co. agreed to acquire 36 jets from the current A320 line.

Airbus’s sales this week include four A320neo-family jets to Arkia Israeli Airlines Ltd. Cathay Pacific Airways Ltd. (293) agreed to buy 10 of the largest A350 wide-bodies, and said it would swap orders of 16 smaller A350s for the biggest model.

Europe’s debt crisis is spurring banks to trim financing of plane purchases, pushing airlines to seek other options to overhaul their fleets, Udvar-Hazy said in an interview.

“The airlines now need the lessors more as a source of funding,” Udvar-Hazy said. “The French banks, some of the U.K. banks, the German banks have really cut back on aircraft financing.”

This week’s transactions gave a vote of confidence in Boeing’s Max, which had gone without an order from a lessor since being introduced last year to challenge the A320neo. Both planemakers are reconfiguring the top-selling narrow-body lines with new engines to boost fuel efficiency and reliability.

Max Support

CIT Chief Executive Officer Jeffrey Knittel, who has not ordered the Boeing Max, said he’s still in negotiations over the aircraft.

“The airplane has been evolving over time, and as airplanes evolve, they improve,” he said at the show. “The discussion continues, and it’s both a discussion about performance of the airpane, and oviously the pricing discussions, and when we have comfort in both those areas we’re more likely to go forward.”

Airbus had 1,425 neo orders heading into the show, more than three times as many as Boeing’s haul of 451 for the Max.

While lessors own about 35 percent of the installed airliner base, they only account for about 20 percent of planemakers’ order backlog, said Yan Derocles, an analyst at Oddo Securities in Paris. After retrenching on orders during the financial crisis that followed the 2008 bankruptcy of Lehman Brothers Holdings Inc., many have some catching up to do, he said.

Boeing expects orders to come this year from both airlines and leasing companies, Beverly Wyse, the 737 program chief, said in an interview. It’s more a coincidence that lessors have placed orders during the show, she said, citing earlier sales to Southwest Airlines (LUV:US) Co., Lion Air Inc. and Virgin Australia.

‘Timing Thing’

“It’s just a timing thing right now,” Wyse said. “You’ll see more airline orders and leasing orders in the month to come.”

United Continental Holdings Inc. (UAL:US) may shift the focus back to airline sales.

The world’s biggest carrier is poised to announce an order for 100 737s tomorrow in Chicago in a transaction with a possible list value of $8.4 billion, said people familiar with the matter who asked not to be identified because the deal isn’t public.

United is unusual in the U.S. industry. The next three largest U.S. airlines were all part of the rush to add new single-aisle jets in the last half of 2011, and haven’t been shopping for new mainline jets.

AMR Corp. (AAMRQ:US)’s American Airlines split a record order for 460 jets between Boeing and Airbus in July 2011. The following month Delta Air Lines Inc. (DAL:US) said it would acquire 100 737s. Southwest agreed in December to buy 208 737s in an order that was the first for the Max.

Leasing companies will continue to outpace airlines on orders, Alafco Chairman and CEO Ahmad al-Zabin said. Over the next eight years, lessors probably will grow to make up as much as half of plane orders, he said.

“Airlines more and more are going to leasing for the economics of it,” al-Zabin said in an interview. “It’s only going to increase.”

To contact the reporter on this story: Tim Catts in Farnborough at tcatts1@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net


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