GE Capital Aviation Services (GECAS) may be the world's largest operating lessor, but president Henry Hubschman is keen to take the company beyond simple lease deals and towards packaged solutions
CAROLE SHIFRIN STAMFORD, CONNECTICUT
For a man running an aircraft leasing company with $20 billion plus in assets - and more on the way - Henry Hubschman, the president of GE Capital Aviation Services (GECAS), is decidedly low-key. At the company's headquarters in Stamford, Connecticut, he greets visitors in shirt sleeves and with no tie. The dress is in keeping with the flexible dress policy General Electric has instituted in its new "e" culture. Hubschman works in a model-filled office with glass walls, so that anyone in the building can see him at work, or at least when he is there. He spends about 25% of his time on the road.
A lawyer by training, Hubschman has been president of GE Capital Aviation Services (GECAS) since October 1997. Although he had some experience with aerospace - primarily on the defence side - as a Washington lawyer for nearly a dozen years, his immersion in aviation really began in early 1992 when he became general counsel for GE Aircraft Engines. During his tenure there, he got involved in business development and strategic planning and, in his words, "just found the business side fascinating".
Now he heads the largest aircraft leasing company in the world. It had 1,073 aircraft in its portfolio last month - about 750 owned aircraft, and the remainder managed for others. The fleet size can change day to day, Hubschman reminds, as it takes new deliveries of aircraft and disposes of others. GECAS, a unit of General Electric Capital, currently has aircraft at 170 airlines - ranging from start-ups and regionals to major flag carriers - in 60 countries. It employs 220 people, around half of which are in Shannon, Ireland, its largest office. The Irish connection dates from the early 1990s when GE Capital stepped in to rescue what was then the world's largest lessor, GPA, from bankruptcy following its disastrous failed flotation. GECAS was eventually born out of the Irish lease management operation and it came to take on GPA's title as leading lessor.
While the company regularly disposes of aircraft as part of its overall portfolio management strategy, the size of the GECAS fleet has grown consistently over the past few years and will continue to increase. GECAS has about 425 new aircraft on firm order, worth billions of dollars, and hundreds more aircraft on option. It is scheduled to take a total of 50-60 aircraft from Airbus and Boeing in each of the next five years. Last year, it became the first leasing company to place firm orders for 150 regional jets - 50 each from Bombardier, Embraer and Fairchild Dornier. Deliveries of the 50-, 70-and 90-seat regional jets will begin in 2002.
Solutions provider
Although GECAS has long been known as a leading aircraft lessor, company officials prefer to call the organisation "a leading aviation solutions provider". It has stepped up those activities considerably, both by taking advantage of the aviation and financial resources within the GE family and by expanding its in-house capabilities through acquisition of other aviation- and finance-related companies.
In the past year, GECAS purchased PK AirFinance, a specialist provider of aircraft-backed finance, from Credit Lyonnais, and it acquired equity stakes in GRA, an aviation consulting firm, and Carmen Systems, a Swedish company offering crew and aircraft scheduling services to some of the largest airlines in the world.
GECAS now offers airlines a full range of "fleet and financing solutions," including operating leases, sale/ leasebacks, finance leases and secured loans, aircraft purchase and trading, engine and rotable leasing, engine and spare parts financing, engine servicing contracts, pilot training, aviation consulting, crew scheduling, fleet planning and financial advisory services.
"We are an operating lessor, but we are much more than that - and it's not just rhetoric," Hubschman says. "We're not just trying to push aircraft on airlines; we're trying to find solutions for them."
Although such transactions are not in the majority, Hubschman points to two multi-faceted deals - with Scandinavian flag carrier SAS and the Amtran, the parent company of American Trans Air (ATA) - as examples of the kind of "comprehensive solutions" GECAS, unique among major aircraft lessors, can provide.
SAS and GECAS, for instance, together set up a joint leasing venture - Commercial Aviation Leasing - which purchased 30 McDonnell Douglas MD-80s from the airline and leased them back. As a result of the leveraged lease venture, both SAS and GECAS own the assets. GECAS acts both as servicer for re-leasing, selling and managing the equipment, and as administrative manager of the joint venture, providing accounting and cash management services. The deal provides SAS with a lower overall cost of capital and substantially increases its financial and operational flexibility.
Hubschman said the "creativity" and the outline of the deal evolved during discussions with SAS chief executive Jan Stenberg and chief financial officer Gunnar Reitan. "We sat down with them and collegially discussed what their balance sheet and fleet planning objectives were over the five-to-ten year period," Hubschman says. "From that evolved a genuine 'win-win' for both, through a very innovative structure."
Although airline managers may come to different solutions, Hubschman says they must always be considering potential changes in fleet needs, residual aircraft values, economic forecasts, shareholder values, and the benefits of ownership versus the flexibility of various leasing instruments. "The good ones in my view are constantly evaluating and re-evaluating - balancing risk and reward - as they determine their capital needs, funding sources and fleet planning," he adds.
Airline evaluations
In evaluating the SAS case, Hubschman explains that if the airline had been certain it would keep the MD-80s for seven years and that residual values would be maintained, then perhaps the deal would not have been a good one. "But I'm not 100% certain of anything," he says, especially in the cyclical airline industry where change is constant. Sometimes, he elaborates, operating leasing is appropriate, sometimes sale-leaseback is, sometimes a leveraged joint venture is right. For SAS, the leveraged joint venture reduced its residual value risk while maintaining some element of upside.
The ATA deal last May saw another multi-faceted agreement, involving numerous GE group units: GECAS, its subsidiary GE Capital Aviation Training (GECAT) and sister company GE Capital Commercial Real Estate, were included alongside GE Aircraft Engines (through its CFM International joint venture) with its GE Engine Services unit.
Under the transaction, GECAS agreed to finance up to 25 Boeing 737-800s, powered by CFM56-7 engines, while GE Engine Services signed up to provide comprehensive maintenance for CFM engines on 37 aircraft being acquired by ATA. GECAT committed to a $60 million joint venture aviation training facility with ATA in the Chicago Midway Airport area - GECAT's first training facility in North America. Enter GE Capital Commercial Real Estate.
"It's a terrific example of how diverse businesses within GE can partner up to bring flexibility and choice in response to each customer's unique needs," Hubschman says, adding that rival International Lease Finance (ILFC), Boeing Capital, and Rolls-Royce were also involved in other parts of the overall ATA package for 47 new aircraft.
In each case, Hubschman explains, the deals evolved through detailed negotiations. When GECAS began talking with ATA, it initially believed it would be doing a simple operating lease deal. The deal, of course, turned broader as the two sides talked.
In structuring any transaction, GECAS expects a reasonable rate of return, but it also wants to make sure that "the customer is going to do very well," Hubschman says. "When you have about 250 customers in the world, it's absolutely critical that you get repeat business. You don't want to leave anybody feeling at the end of a particular deal that it was so one-sided that they don't want to come back again, "he says. "You've got to leave them feeling that they're genuinely experiencing a 'win-win.' That's what we're about: earn a good rate of return but let the customer win. If the customer wins, we're going to win in the long-term."
GECAS does not cross-subsidise multi-level deals, but it does consider the overall package. "If it's important to an overall deal to have one element with a slightly lower rate of return than some other element, there's nothing wrong with that," Hubschman says. "But in the overall scheme of things, we're only going to do deals that we think represent an appropriate balance of risk and reward." That balance is a theme Hubschman returns to frequently.
GECAS has, he says, a history of being quite conservative in its internal projections and depreciation policy, consistent with the way parent GE approaches these things. "There's a very stringent risk screen we have to meet," he says, not just at GECAS but also with a group of GE corporate "risk people" who, independently and objectively, peruse proposed transactions to make sure the deals pass muster from their "risk-and-reward" point of view. It is one of the benefits of being part of the large GE organisation, Hubschman says. "It's a plus for us, and for GE shareholders."
GECAS has also been very active in initiatives that parent GE has promoted for all its business units: globalisation, total digitisation, the use of its "Six Sigma" quality assurance programme to drive productivity within GE and deliver it to customers and an emphasis on offering customer-focused services, rather than just company products.
Becoming web-enabled
One of GECAS's primary efforts has been to try to make it easier for customers to do business with it through Extranets and via the Internet. Although it is not completely Web-enabled yet, Hubschman says GECAS customers can use its Web facilities 24 hours a day, seven days a week for a variety of functions, including checking availability of aircraft and finding out about their maintenance reserves. Soon, he adds, they will be able to do everything, including lease engines and arrange structured finance deals.
Already, GECAS has done totally paperless deals, one involving Virgin Atlantic Airways and one with another UK carrier. In a deal involving airlines in China, Europe and the USA, the Internet transmission of documents eliminated potential time-zone barriers.
As part of the effort to make customer dealings easier, less time consuming and less expensive, GECAS is making a conscious effort to convince customers to adopt a "common terms agreement" so that they do not start from scratch every time they lease more aircraft, Hubschman says. With a common terms agreement, the parties agree to a one-page addendum to an existing contract for a second, third or 20th aircraft, rather than redraft new agreements each time. "You can image how much that saves them in terms of time and lawyers' fees," he says.
Hubschman credits strong competition from ILFC and other leasing companies for keeping GECAS alert, even though the companies operate somewhat differently. ILFC, he notes, has been more active as a launch customer of new aircraft and a strong buyer of widebodies, which represent less than 20% of the overall GECAS fleet. Meanwhile, GECAS is increasingly engaged in broader activities, including financing deals and "comprehensive solutions" offerings.
"Having an outstanding competitor is the best thing that can happen to us, truthfully, because when you have an entity like ILFC with a leader like Steven Udvar-Hazy, the ILFC president, you really have to be on your toes to compete reasonably well," Hubschman says.
He says he feels the same way about the growing asset management activities of Boeing and, to a lesser extent, Airbus, which have been acquiring aircraft from airlines as part of their marketing of new ones. "Competition is not the worst thing for us; the worst thing is arrogance," he says. "We can compete reasonably well against anyone, provided we never get arrogant.
"And having companies with the worldwide reputation of Boeing and Airbus engaged in some of the same activities just makes us understand how fast and good we have to be."
Hubschman thinks, however, that GECAS is ideally positioned to weather the inevitable ups and downs, particularly any economic downturn. He cites, among the reasons, GE's enviable balance sheet, cash generation and leverage, and a culture and environment that prepares the company for changes and challenges. GECAS's global distribution network also is a factor, he says. "We take great pride in the fact that if an aircraft comes out of central Europe or one of the former Soviet countries, we might know that instant that it's needed in some far-flung part of the world."
That global network and corporate culture was put to work in helping customers over the Asian crisis. "Instead of sitting there and wringing our hands about the fact that the Asian market, which we had expected to grow at a certain rate, was not doing so, we simply moved the assets," he says, explaining that the company approached customers and offered to find other homes for their aircraft when needed, helping them to avoid financial problems. "Our objective is to have repeat business, and develop long-term relationships. We viewed it as a situation where we should jointly try to come up with a solution for them."
GECAS also is well positioned as far as aircraft placement is concerned, Hubschman says. All new aircraft scheduled for delivery this year are leased, almost everything coming in 2002 has been leased - with one or two out of an orderbook of 50-60 still available - and a good proportion of aircraft coming in 2003 are already leased. Even some aircraft set for delivery in 2004 are leased and, although not all lessees may stay in place, the company is not out there searching for new customers for a large portion of its aircraft, he adds.
Although it has a hefty order book and has not been active in the launch phase of aircraft before, GECAS is evaluating the Airbus A380 and Boeing 747X. Hubschman says he doesn't think a decision is "imminent", but admits that his definition of "imminent" only means today. "One of the things I've learned - and this was true of the RJ deals and others - is that until one has a deal, you really don't know if there is a deal."
Rigorous, disciplined approach
Hubschman says GECAS has a very rigorous, disciplined approach to the buying of aircraft, a methodology designed in part to avoid being lulled into paying exorbitant prices in times of an overinflated economy. Evaluation of aircraft involves detailed analysis of such elements as customer interest, the depth and breadth of the market, and the kind of market it is - for instance, whether it is operating lease or structured finance. In the end, though, he says: "We only want the aircraft where we think we're getting the pricing and terms and conditions that allow us to get a reasonable rate of return.
"We might love a particular aircraft - and we've had this in the past - but not at the price they're offering it," he says. "Or we might be relatively lukewarm at first about the aircraft but when we hear about various terms and conditions and pricing, we find ourselves in a position where we're convinced we can do reasonably well with it."
Hubschman says it is "too early to tell" whether there will be a downturn. "Certainly the market is not as strong as it was in, say, 1998 and 1999, and maybe early 2000." Already some lessors and lenders who were buying heavily two years ago have approached GECAS to help bail them out, he says. "They weren't prudent; they weren't disciplined. They were only looking at the short term."
Although he hopes there isn't a downturn, Hubschman says that if there were one, it could provide GECAS with an opportunity for additional growth.
The company's estimate of the airline industry's future capital requirements are roughly consistent with the forecasts of Airbus and Boeing over the next 20 years. Historically - at least within the last 10 years - the leasing industry has supplied about 25% of the airlines' demand, he says.
Hubschman expects cargo traffic to rise at a greater rate than passenger traffic and, as a result, expects GECAS activity in the freighter market to increase. It has about 30 freighters in its fleet now, but additional investments - either in new freighters or conversions of passenger aircraft - will mean freighters will rise as a percentage of its overall fleet. Potential assets include both Boeing 767s and 737s.
The heightened interest in freighters stems from traffic forecasts and what customers were telling GECAS. "We were hearing both from our passenger customers with cargo operations and from dedicated cargo carriers that there was a need for alternative financing mechanisms and more activity in that area," Hubschman says. "As with other things, we're always trying to listen to the marketplace."
Source: Airline Business
