After seven years as GECAS's chief executive, Norm Liu has passed the torch to former GE real-estate head Alec Burger, who took charge of the aircraft lessor at the start of the year.
Liu, a General Electric veteran with 30 years' service, including 20 at GECAS, will remain with the aircraft lessor until late 2016 as chairman.
The timing of his departure has raised eyebrows as it coincides with the sell off of most of GECAS's parent, GE Capital. This unwinding process has included the sale of GE's real-estate division – a task Liu's successor Burger was charged with implementing.
"I don't think you should read anything more here than me retiring," said Liu when he gave Flightglobal his last industry interview as head of GECAS. "I know that doesn't make for great cocktail chatter, but it is what it is."
GE is offloading $200 billion-worth of financial assets, under a plan disclosed in April 2015, so that the corporate behemoth can refocus its attention on its industrial portfolio and related financing units such as GECAS and Energy Financial Services. The sales will also allow GE to apply to regulators to shed its status as a "systemically important financial institution".
Liu notes: "I've had a great three-decade run at GE, and I turn 60 in 2017. My successor led another big GE financial business, so the place is in good hands. Fortunately, I'm finishing up with record earnings and I can't think of anything else we can logically expand into, so now is the time for some fresh thinking."
No doubt, market rumours about a GECAS sale are also being fuelled by recent heavy portfolio sales and slow asset growth. Liu admits that the lessor has been an active seller of aircraft in recent years, but stresses that this is because "the time was right to sell versus buy, and because of the new technology on the horizon". GECAS typically invests $6-7 billion a year in the aircraft market, a figure which is multiples larger than the competition. Although it beat its target in 2015, he says, the lessor had to "pick the spots" as good deals were harder to come by.
"Look, as long as we have the engine business, this thing [GECAS] makes total sense with the GE family. Our ROEs [returns on equity] have been in the mid-to upper-teens, we have scale and deep domain expertise, and though we haven't grown in recent times we generate $1 billion-plus of earnings and significant cash flow," he adds. "There are solid reasons why it makes sense to keep GECAS in the combine, plus 85% of our fleet is GE/CFM kit."
But even with a strong parent, scale, and a global stronghold, the road to retirement has not always been an easy one. GE lost its triple-A rating right after the 2008 financial crisis, taking some of the wind out of the the sails of the storied company and, ultimately, creating the backdrop for the sale of GE Capital.
In fact, most of Liu's time at the helm has been amid economic and political distress, including the global financial crisis.
However, it was earlier in the millennium's first decade – when the 2003 invasion of Iraq and the SARS outbreaks combined with the aftermath of 9/11 – that Liu endured his most difficult period as GECAS commercial leader.
"Those were the really tough times – the US industry was on the edge of failure. We had several majors that were on the brink of collapse, but it was also when we realised, for the first time, the huge potential of the emerging markets," he says. "I remember moving some ex-US Airways [Boeing] 737s to AirAsia, and that this was the first time the emerging markets really started to come into the fore."
Liu declines to take credit for opening up emerging markets to GECAS. "It happened because we are so global. I'd love to say it was some master grand design, but we sort of just fell into this. We started realising this was an opportunity, and that's when we rapidly built out our network."
TIMING IS EVERYTHING
Against a backdrop of abundant liquidity, cheap oil, low returns across various asset types, and a strong US dollar, the number of competitors in the leasing sector swelled during Liu's time at GECAS.
"I was fortunate starting 20 years ago – it was a prime time to enter the leasing market due to the growth potential in various markets. The OEMs didn't have sale networks all over the place. The emerging markets still offered a lot of potential and there were multiple expansion areas like engine leasing, debt, and regional and cargo jets.
"It was a good period riding this growth curve, but that has attracted more competition. Back then, there were maybe five competitors. There are multiple handfuls now."
Increased competition in the aircraft leasing sector, particularly in sale-and-leaseback deals – coupled with value uncertainty looming in the face of last-off-the line aircraft and new-technology replacements – eventually forced Liu to look beyond fixed-wing assets for growth.
In March 2014, he disclosed his intent to spend $2 billion on the buying and renting out of helicopters as part of a move to diversify the business and keep the platform churning.
Less than a year later, GECAS closed the purchase of Dublin-based Milestone Aviation Group for $1.78 billion, making it the largest helicopter lessor in the market.
Even with a difficult outlook for the oil and gas sector amid falling fuel prices, the purchase of Milestone marked an important and necessary move for GECAS, he argues.
"Not only does it offer another growth venue and about $100 million in earnings, it is flying equipment that is powered by GE so it fits the GE domain," he says. "While a struggle in the short term, this is a long-term investment that also suits our infrastructure core, serving energy, medical, and government markets."
Liu remains cautious about further growth prospects for aircraft leasing despite the steady flow of new entrants to the sector.
"I am not as starry-eyed as others about how big this market can get. I am an ex-finance guy, so I look at the numbers and bonds are cheaper than leases, but obviously leasing is needed for flexibility."
On the one hand, Liu reckons there could be an uptick in demand as a result of the approaching technology shift. However, he sees this being offset by healthier airlines, which have become so profitable they can raise financing through various means, including bonds and export credit financing.
He also sees airline industry consolidation as a longer-term limiting factor for leasing.
"There is this steady drumbeat of consolidation – it is happening in the US and it is happening in other prime markets. Once you have large-scale airline buying power and capital-markets execution, then you go for the most effective financing," he says, adding: "Today, lessors are probably at 44% of the fleet; and we could get to 50%. But will we get to 75%? I don't think so."
SLOW BUT STEADY
However, one thing that Liu is sure will continue to grow is China's share of the leasing market. Liu, a Chinese American, remains adamant that the Chinese lessors are more than an ephemeral phenomenon.
"Many people are dismissive of China, but I believe there will be two to three major Chinese leasing players, and one of those will make it into the top three. The question, though, is when."
He adds: "The Chinese have liquidity and a major home market. Sure, there is a bit of a culture thing, but there are a lot of talented young Chinese people out there, learning this business."
Boeing foresees that over the next 20 years there will be demand in the country for 6,330 new aircraft with an estimated value of $950 billion. The region's fleet will almost triple to 7,210 aircraft in 2034 – from 2,570 airplanes in 2014 – with more than 70% of these deliveries accommodating growth.
Chinese economic growth in the near term is likely to slow to 6.2% in 2016, from around 7% in 2015, but Liu insists the long-term growth prospects for the region are firmly in place.
"The mainland has a pro-consumer policy in place and remember, we are talking about some 1.3 billion people in China, so millions of these people will want to see the world. That growth isn't going away."
No doubt the devaluation of the yuan has made leasing and its US-dollar rental streams more attractive to Chinese financiers but, "even after some of this air has gone out", lessor P/E multiples in China are "quite high, so local investors will continue to be attracted to and fuel this sector", he says.
He dismisses the idea that this growth will come about by "roll-ups" – the investment tactic of acquiring multiple companies in a sector and integrating them – or the buying-up of Western competitors and "yesterday's-technology" aircraft fleets.
Instead, he believes this will come about by "slow and steady money with strong funding costs".
Liu asserts: "Roll-ups don't make sense in our industry if you don't have superior capital costs. Cost synergies are relatively small. You would have to string together a lot of these roll-ups to get to anything of size."
A way around this is to "string together a bunch of $10 billion operations".
However, he notes that GECAS is a $40 billion-plus business so "a lot" of smaller leasing companies would need to be acquired to match that level.
"I just don't see this making sense at present, but I also could be wrong – so let's chat five years from now."
Source: Cirium Dashboard
