19 November 2013 | Fitzgerald sets up Stratos, a new Monaco-based aircraft leasing advisory boutique opened last week. Dickon Harris sits down with its managing director ahead of the launch to discuss the firm’s business model.
Gary Fitzgerald, the managing director of newly formed aviation consultancy Stratos, is at pains to highlight that airlines and investors are faced with fundamental challenges. “Airlines today have large fleets of ageing assets that have lost market value much quicker than anyone expected causing a worrying mismatch,” says Fitzgerald. More than half the world’s fleet is leased, and airlines have become good at understanding leasing, especially for new delivery sale/leasebacks. Where carriers face problems is with their older aircraft.
Airlines often have 20-year or 25-year depreciation policies, but the book values of the 10- to 15-yearold aircraft these operators own bear little resemblance to current market values.
Investors, on the other hand, argues Fitzgerald, are struggling to find decent investment opportunities because there is an over-supply of funds chasing returns in the aircraft leasing market. “There is a gap in the market for people who can advise airlines and investors on addressing these challenges,” he says.
This is a niche that Stratos aims to fill. Fitzgerald was previously a commercial vice-president at Avinco. While at Avinco he realized that airlines have intermittent aircraft financing requirements and were not always aware of the best financing offers or lease terms available.
“The industry has been adept at creating new financing solutions for aircraft, so it has become more difficult for airlines to choose the most appropriate funding mix to cater for fleet flexibility. Airlines can find it expensive to keep their personnel abreast of the best financing offers available or lease amendment possibilities at any particular time,” he adds.
Structuring leases for investors
One area where Stratos specializes in, says Fitzgerald, is matching airlines with third-party investors and lenders to create a structured lease to help the airlines to avoid book impairments on ageing aircraft.
He adds: “We create an off-balance-sheet leasing solution, whereby an airline sells the aircraft into an SPV [special purpose vehicle] co-owned by a third-party investor and the airline.
That SPV leases back the aircraft to the airline in question and is then funded so the airline gets to remove the aircraft from its books and convert some of its original equity into a co-investment. It is quite a fancy way of airlines to get out of the aircraft without taking an expensive impairment charge. The leaseback period is typically three to five years, but can vary and at lease expiry the SPV is on the hook for residual values.”
Banks, states Fitzgerald, are now often keener to finance a leased portfolio of aircraft rather than providing bilateral airline loans, and will use the structure, and the creditworthiness of the underlying carrier, to offer cheaper debt to the SPV.
“Banks are generally happier to advance five-year loans for a portfolio of older A320s on a five-year sale/leaseback. Some lenders can advance maybe 60% or 70% of the total purchase price. The banks are becoming more comfortable with these structures because they know there is an airline behind, there is an investor behind, and it is more of a structured lease with an independent asset manager, so in theory more secure than a direct loan to the original airline,” says Fitzgerald. Stratos helps airlines by finding the most appropriate predelivery payment or long-term loans from aviation lenders, as well as finding the best-placed investors to buy their aircraft either naked or with the leases attached.
Fitzgerald stresses that the firm is distinct from Avinco, which specializes in remarketing and managing aircraft. Stratos, he says, advises airlines and investors on leasing strategies for new, or older aircraft. The firm offers airlines and investors independent advice on new or used aircraft leasebacks, and uses advanced lease simulators to walk both groups through different lease economics.
To help him start the new firm Fitzgerald has recruited Aisling McCarthy as Stratos’s commercial director based in Asia, and Mark Shaw as the firm’s marketing director based in Europe. McCarthy was previously trading aircraft at Awas and Pembroke, while Shaw has nearly 30 years’ experience in the leasing and maintenance, repair and overhaul industry, including 12 years as vice-president marketing for aircraft lessor ACG.Ervin Bach, is Stratos’s technical director, based in the US, who moves from Awas.