International Lease Finance Corporation
International Lease Finance Corporation
Wholly Owned Subsidiary of American International
Sales: $2.44 billion (2000)
NAIC: 532411 Commercial Air, Rail, and Water Transportation Equipment Rental and Leasing
International Lease Finance Corporation (ILFC) is considered the world’s second largest lessor of aircraft after General Electric Capital Aviation Services (GECAS). ILFC makes substantial profits by leasing and selling civil aircraft to airlines. In 2000, the company owned a fleet of 500 airliners worth about $18 billion. The purchasing power of ELFC and its chief rival, GECAS, has helped the pair survive against a massive influx of would-be competitors to the risky yet lucrative business.
The aircraft leasing industry dates to 1965, when Boeing sold its first plane to a leasing company. International Lease Finance Corporation’s origins date to not long after that. Two of ILFC’s founders, Louis Gonda and Steven Udvar-Hazy, met while UCLA students working as aircraft brokers in the early 1970s, records the Financial Times. “We sensed a need for a financing vehicle to relieve airlines of the financial burdens of wide-bodied aircraft,” recalled Gonda some years later. The pair’s first deal involved leasing a DC-8 to a Mexican airline.
Gonda and Udvar-Hazy established International Lease Finance Corporation in 1973. Each contributed $50,000; more funds came from Gonda’s father Leslie, a Hungarian who had made a fortune in Venezuelan real estate before moving to the United States some ten years earlier. Leslie Gonda became chairman, while Udvar-Hazy, also Hungarian, was made president and Louis Gonda executive vice-president. ILFC went public in 1983 on the over-the-counter market; its three founders retained 58 percent of its ownership after the transaction.
Tax law changes in the mid-1980s made short-term operating leases more attractive to airlines than long-term and direct purchase leases, which had formerly offered airlines investment tax credits and depreciation deductions. The price of new aircraft alone was a deterrent to ownership—the Boeing 747, the largest airliner, cost $125 million each, in quantity.
The civil aircraft leasing market continued to grow, lead by GPA Group (formerly Guinness Peat Aviation, later to become a part of General Electric Capital Aviation Services) and ILFC. Operating lease companies bought a tenth of all the airliners made by Boeing and McDonnell Douglas, the two U.S. manufacturers, in 1986.
ILFC’s profits rose 55 percent to $51.2 million in 1987 on revenues of $179.6 million—mostly from lease payments. ILFC had just 16 employees. By this time, wrote the Financial Times, the company had leased 230 aircraft to 70 airlines, with only two bad deals, thanks to its detailed analysis of lessees. The company also had a policy of withdrawing aircraft from lessees at the first sign of trouble. ILFC then specialized in smaller airlines that had difficulty obtaining traditional financing.
In May 1988 ILFC announced orders for 100 Boeing and 30 Airbus airplanes worth $5.04 billion—the largest single purchase of commercial aircraft to that date. The firm also took options for another $1.6 billion worth of planes. The orders were part of an effort to diversify ILFC’s fleet, although McDonnell Douglas was left out of this historic deal.
The large order ensured that ILFC would have planes available as world airlines were expected to replace their aging planes en masse in the 1990s. The company did not generally purchase planes on speculation, however; customers were already lined up.
Critics complained that the growing dominance of the leasing companies blocked airlines from purchasing direct from the manufacturers. Popular models often had waiting lists of up to two years. In 1988, leased planes accounted for about 15 percent of the world fleet and a similar percentage of new aircraft orders. By 1994, however, leased planes were expected to account for half the world fleet.
ILFC reported net income of $43.4 million on revenues of $213.2 million in 1988. The company had about 75 planes in its portfolio, but expected to increase it to 350 planes by 1994.
ILFC bought a 15 percent stake in Alaska Air Group, owner of Alaska Airlines, in January 1990, making it one of the largest shareholders. Alaska Air placed a large aircraft order potentially worth $2.5 billion to support its bid to become a major independent carrier. Alaska planned to lease 24 Boeing 737s from ILFC, but order 20 MD-90s direct from McDonnell Douglas, as well as place options on another 20 MD-90s.
Sold in 1990
American International Group Inc. (AIG), an insurance company, bought ILFC for $1.26 billion in June 1990. The purchase was part of a drive by AIG to obtain earnings from the financial services sector. At the time of the acquisition, ILFC had debts of $2.3 billion and needed to raise $10 billion to pay for aircraft due to be delivered in the next five years. ILFC posted pre-tax profits of $139.7 million in 1991.
To the surprise of some analysts, aircraft leasing companies survived during the recession of the early 1990s, which held some of the airline industry’s worst years. Demand for leased fuel-efficient planes remained stable, as airlines were less willing than ever to commit large sums of capital to aircraft purchases. While airlines were cutting back deliveries, ILFC placed a $4.1 billion order for 82 aircraft in January 1993, betting the market would eventually turn around. Helping to increase demand was a federal mandate to replace older, noisier jets.
There were signs of an industrywide recovery in 1995, as Singapore Airlines and others placed large orders with the aircraft manufacturers. At this time, ILFC and General Electric Capital Aviation Services, formed from the effective merger of GPA and San Francisco-based Polaris Aircraft Leasing, controlled the bulk of the aircraft leasing market.
Airbus won a $4 billion order for 65 aircraft from ILFC, its largest customer, in September 1997. The deal brought ILFC’s number of Airbus aircraft on order to 266.
In October 1999, ILFC CEO Steven Udvar-Hazy gave the Smithsonian Institution $60 million toward building an addition to the National Air and Space Museum called the Dulles Center. The donation reflected Udvar-Hazy’s gratitude to the aviation industry and to the United States, to which he had emigrated from Communist Hungary as a young boy. Not content to simply finance flight, he learned how to fly corporate jets.
Although ILFC had been buying more aircraft from the European consortium Airbus Industrie, its favorite aircraft remained the Boeing 737. Economical and flexible to operate, the 737 was popular among numerous airlines, most notably Southwest Airlines, which had based its entire fleet on the type. ILFC ordered 50 of the 737s from Boeing in December 1999 in a deal worth $2.4 billion. The next May, ILFC ordered 50 aircraft worth up to $3.2 billion from Airbus.
More Competition in the 1990s
The 1990s saw a proliferation in the number of companies entering the operating lease business—at least 60 companies were leasing aircraft. By the end of the decade, competition had driven down profits and forced consolidation among the smaller players, noted Aircraft Value News. These smaller lessors typically offered less older, less desirable planes.
Larger, more established lessors benefited from greater purchasing power and higher rental rates. ILFC posted pre-tax income of $703 million on revenues of $2.3 billion in 1999. Among the more serious new entrants, however, were the manufacturers themselves, willing to provide creative financial solutions to keep their assembly lines busy.
In March 2001, ILFC signed a 12-year lease for the top six floors of the new MGM Century City headquarters building. The company had fewer than 100 employees, but had outgrown its offices at the SunAmerica Center in Los Angeles. The lease was estimated to represent a $100 million commitment.
In another round of alternating precedent-setting deals by ILFC and GECAS, Airbus announced an ILFC order for 111 aircraft worth $8.7 billion in June 2001. The largest order in Airbus history, this included five of the new A380 superjumbos.
The inevitability of change creates a constant flow of upswings and downturns in air transportation. But one thing does not change—the continuous need for rapid, economical deployment of high performance aircraft. ILFC understood this reality as early as 1973 when we pioneered the world’s first aircraft operating lease. Quickly, airlines across the globe discovered the benefits. Today, with more than one-third of the world fleet under lease, we see major carriers regularly turn to the operating lease as the right financial solution for building a competitive edge in the marketplace. Despite the success of leasing, there is no room for complacency in our business. We’re challenged daily to adapt our lease products to the fast-paced world around us. New regulatory pressures. Heightened competition. Change in customer preferences. That is why we’ll renew our vision, refine our products and recommit to the mission: to provide airlines worldwide with optimized aircraft fleets to grow and the flexibility to maximize profits and develop markets.
In June 2001, Flight International reported that ILFC had abandoned plans to enter the regional jet (RJ) market. Regional jets had become popular with airlines as an alternative to the noisy and uncomfortable turboprops that had traditionally plied short-haul routes. ILFC apparently felt that as the manpower to service an RJ lease was the same as that required for a large airliner, it had little to gain. Rival GECAS had ordered regional jets for its fleet, however (its sister company GE Aircraft Engines supplied the engines).
At the same time, Boeing announced plans to triple the size of its financial services division by 2006, noted the Financial Times. Boeing Capital Corporation (BCC), inherited through Boeing’s 1997 acquisition of McDonnell Douglas, was now a stand-alone unit with assets of $7 billion. A spokesman played down the potential for conflict with ILFC and other lessors, Boeing’s largest client base, by pointing out that BCC would not be making any speculative orders.
Debis AirFinance, the world’s fourth largest aircraft lessor with annual revenues of $179 million, was then being offered for sale by DaimlerChrysler, which had acquired the unit through its purchase of Ireland’s AerFi Group. Whatever happened among the market’s other players, ILFC seemed assured of a leading role.
Boeing Capital Corporation; Boullioun Aviation; Debis AirFinance; GATX Capital; General Electric Capital Aviation Services; Singapore Aircraft Leasing Enterprise.
- ILFC is formed by Hungarian immigrants.
- ILFC begins trading shares over the counter.
- Insurer AIG buys ILFC for $1.3 billion.
- ILFC gives Airbus its largest order ever, worth $8.7 billion.
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—Frederick C. Ingram