ILFC to parachute into new sector with AeroTurbine acquisition

International Lease Finance Corp. will try to breathe new financial life into the oldest segment of its fleet with the planned acquisition of parts-management firm AeroTurbine Inc.

The $228 million deal will not help the jet leasing company's portfolio get any younger, but it does provide ILFC with a secondary in-house option for wringing profits from its most depreciated planes. Now, instead of having to lease its older planes at progressively lower prices, industry experts said, the company can remove them from the market, disassemble them and get a better value by selling off the individual parts.

ILFC boasts one of the largest aircraft portfolios in the world but also one of the oldest relative to its competitors. Though there is still a demand for older planes, pricing has proven much tougher compared with the values given to the newer aircraft owned by smaller companies such as Air Lease Corp. and AerCap Holdings NV.

"ILFC had, in the past, tried a couple of different mechanisms to turn over the older assets in its portfolio," aviation industry consultant Scott Hamilton told SNL. "Because of market conditions and overvaluation and a variety of reasons, they couldn't get any deals done."

That stuck the company with a significant number of planes that were worth more disassembled than kept whole, he added. The engines and other parts of older planes are often reused in younger aircraft, meaning airlines and maintenance, repair and overhaul firms are willing to assign a better value to a plane's individual parts than to the entire plane itself.

Rather than pay a third party to break down and resell its old planes, ILFC moved to bring the entire operation under its umbrella. Doing so cuts out the middleman for its own planes while also allowing it to profit by offering the same services to other airline lessors.

"It's driven by necessity," Hamilton said. "If you can't sell your airplanes at an acceptable price on the open market and you're going to have to part them out anyway, why not do it yourself and see if you can maximize your profits."

Expanding its influence down the industry supply chain certainly has its risks. Though parts management is related to aircraft leasing, it is not the same business, Hamlin Transportation Consulting President George Hamlin told SNL. Therefore, there is always the chance the integration process could go awry or the business could end up mismanaged.

However, the AeroTurbine acquisition is seen as a better alternative than CEO Henri Courpron's original plan to start a parts-management business from scratch. Courpron in an interview with The Wall Street Journal said he contemplated building one on his own prior to exploring an acquisition, an idea that Hamilton said would have cost much more than the $228 million the company committed to AeroTurbine.

"For the price they paid, they get an ongoing business that's established, with an infrastructure and personnel," he said. "I think that's probably the smarter move."

Courpron in the Journal interview added that he plans to operate AeroTurbine as an independent company with its own management, a decision expected to lessen the potential for conflict. Should that plan succeed, industry experts said the parts-management sector looks to be a stable source of supplementary revenue for the leasing company. Airline companies routinely purchase surplus parts for use in newer aircraft, AeroStrategy Partner and co-founder Kevin Michaels told SNL, and most of those surplus pieces come from older planes.

"Something like 80% of all the surplus parts used in aviation today come from cannibalized aircraft, so there's a natural synergy between the business models," he said. "It gives ILFC another service they can offer to their customers."

ILFC did not disclose the extent to which the planned acquisition would impact its financial results, and calls to Courpron were not returned. But if anything, having AeroTurbine at its disposal is expected to help the company clear old planes from its portfolio more profitably, and potentially speed ILFC's move toward younger assets.