For
hiving off jet-leasing isn’t the no-brainer other asset sales of recent years have been.
On Sunday, The Wall Street Journal reported that the world’s no. 1 and no. 2 plane lessors might be about to merge, with GE nearing a $30 billion-plus deal to join its aircraft-leasing business with Ireland’s
The combined company would own about 1,900 planes, almost quadruple the next biggest player.
Many analysts had expected Covid-19 to spark consolidation in this corner of the aviation industry, but not at the very top. If the deal happens and antitrust regulators clear it, more mergers could follow.
It would seem a win for AerCap Chief Executive
Aengus Kelly,
who has long targeted growth. Scale is crucial in the jet-leasing market, because it makes it easier to move planes between different clients, as well as giving better access to capital markets and pricing power when buying from
or
Mr. Kelly is a believer in exploiting crises to expand, and the pandemic certainly qualifies: GE Capital Aviation Services, or Gecas, had operating losses of $786 million last year.
As for GE CEO
Larry Culp,
he gets to unwind another aspect of the legacy of his ill-fated predecessors
Jeff Immelt
and
John Flannery
and put his own spin on the conglomerate. Whether it is a strategic win is more debatable, though.
GE’s exposure to aviation is large even without Gecas. In 2019, jet engines accounted for 34% of total revenues, compared with 13% in 2011. Engine manufacturers are in the eye of the storm because the retirement of older planes depresses lucrative maintenance revenues. Gecas’ portfolio was marked down by $500 million in the fourth quarter, in part due to disproportionate exposure to regional jets, as well as to the kind of older aircraft being scrapped.
This is why the deal presents risks for Mr. Kelly, too. In his last earnings call he didn’t sound optimistic about these types of jets, which he may now have to incorporate into his younger fleet as a trade-off for scale.
The deal’s timing may also favor Mr. Culp more than might be imagined given the industry backdrop. Research by New York University professor David Yu shows that jet book values can take up to 24 months to fully reflect a downturn, so taking AerCap’s money now may be better than waiting. Details of the merger plan haven’t yet emerged, but if the recent rebound in lessors’ stocks is a good guide, Mr. Culp could be getting a decent price, albeit not a pre-pandemic one.
The real question is whether he should be separating Gecas at all.
GE has already sold a lot of its old empire, including most of the once-vast financing operations. The mammoth size and complexity of Gecas make it an obvious next target. For the same reason, however, the deal under consideration isn’t comparable to similar transactions to hive off GE’s former transportation and oil and gas divisions—isolated businesses lacking scale advantages in their respective industries.
Gecas is different not just because it is so big, but also because GE will still rely heavily on the jet-engine business. This derives an important competitive advantage from its connection to a leasing operation. By placing large upfront orders for jets with GE engines and leasing out spares, Gecas can smooth out sales and provide incentives for Boeing and Airbus to opt for those engines.
The intangible value of this connection is hard to estimate. At some point, investors will have to grapple with the question of when the continuing breakup of GE no longer makes sense.
GE has already sold a lot of its old empire, including most of its once-vast financing operations.
Photo:
John Minchillo/Associated Press
Write to Jon Sindreu at jon.sindreu@wsj.com
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