Friday, 9 September 2011

Interview: John Plueger, Air Lease Corporation President

ALC gives muted reaction to 737MAX amid renewed focus on order book

Air Lease Corporation this week conducted a major product review of the re-engined 737MAX with Boeing, ALC president John Plueger has told Aviation Exchange, with the lessor making no secret of its preference for a brand new single-aisle model. Plueger said ALC will remain "very engaged" with Boeing over the development of the 737MAX, but he acknowledged the manufacturer's need to plan for the "totality of their single and twin-aisle product line," including possible upgrades to the Boeing 777-300ER as well as the planned Boeing 787-10.

ALC was founded last year after industry veteran Steven Udvar-Házy retired as CEO of market leader ILFC to set up a competing lessor. Plueger came on board shortly afterwards, having served as acting CEO at ILFC following Udvar-Házy's departure, and under their joint stewardship ALC has rapidly grown its portfolio to a fleet of 65 aircraft, with forward orders for a further 234 jets by 2020.

Following a successful IPO in April, which raised USD 922.9m, ALC is now shifting its focus away from sale and leasebacks onto its new direct order pipeline. The company announced in its Q2 earnings report that it has arranged facilities with a total of 16 banks, and Plueger said more banks have since been added to that list, with Asian finance houses in particular showing heightened interest. The lessor is committed to obtaining an investment-grade rating and places primary emphasis on unsecured facilities in the institutional debt market, he added.

Commenting on Boeing's decision to launch a re-engined 737 as a competitive response to the fuel-efficient Airbus A320neo – which was seen by most aviators as an easier alternative than launching a brand new narrowbody – Plueger voiced dismay but said he understood the move.

"All companies have limits and they look at the risks of all paths," he explained to Aviation Exchange. "I think it was a decision that was reached in the context of their whole product line. It gives Boeing room to take a look at a simultaneous 777-300ER redesign as well as the [under-development] 787-10 / 10X, in light of the current market conditions and the A350-900 / 1000. From an overall fleet perspective, I understand that decision. But as a pure airplane buff, on a personal level, I still think a new aircraft on an accelerated basis might provide a better outcome."

Declining to speculate on future orders from ALC, Plueger stressed that the product is still under review and issues such as pricing, fan sizes and fuel-efficiency claims all require due scrutiny. The aircraft is scheduled to begin delivering in 2017, and ALC has a "significant quantity" of direct orders for the current-version 737-800 – some of which could potentially be upgraded to the 737MAX depending on the undisclosed terms of agreements with the manufacturer.

Plueger's comments about the 737MAX echoed the muted reaction by Udvar-Házy during ALC's Q2 earnings report, but overall his colleague maintained an upbeat mood given the outlook for the operating-lease sector. Noting that "market turmoil is nothing new to aircraft leasing," Udvar-Házy argued that recent economic headwinds could in fact bolster demand for the products.

"Our management team has navigated through rough waters many, many times," he told investors in last month's conference call. "Based on our experience, we believe turbulent times provide additional opportunities for us to make the case for aircraft leasing even more compelling to the world's airlines." Economic pressures will motivate more conservative leveraging of balance sheets, Udvar-Házy predicted, while the weak US dollar and the advent of the new Aviation Sector of Understanding (ASU) for export credit will further raise leasing demand.

Hinting at the company's long-term strategy, Plueger added that direct orders have now become the "firm backbone" of its growth trajectory. "Acquiring aircraft is our mantra, and that's what our business model is," he said. However, the lessor aims not to sign orders for more than half of the aircraft it expects to place over the next two to three years, which "gives us the ability to take advantage of opportunistic transactions as they arise".

Plueger acknowledged that the airline industry "will always remain under margin and earnings pressure," but he insisted that this sector-wide turbulence is what makes his firm stand out as a comparatively safe bet. "When a debt investor provides a facility to ALC, it's actually betting on the whole portfolio and the whole company," he explained. "Many lenders take the view that you're better off with a well-managed company that relies on a diversified portfolio and cashflow, than you are lending on one specific aircraft to one specific airline."

With a debt-to-equity ratio of less than 1:1, ALC seems determined to strike a balance between rapid expansion and judicious leveraging. Management and board members have invested USD 90m of their own cash, Plueger noted, "so the interests of management and shareholders are aligned". Ultimately, he concluded: "We put our money where our mouth is."