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Jet-Lease Billionaire Udvar-Hazy Takes On AIG Hand That Fed Him

Photographer: Misha Gravenor/Bloomberg Markets

Udvar-Hazy at the controls of his own Gulfstream jet. He heads a rapidly growing competitor to the jet leasing firm he ran for insurer AIG. Close

Udvar-Hazy at the controls of his own Gulfstream jet. He heads a rapidly growing... Read More

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Photographer: Misha Gravenor/Bloomberg Markets

Udvar-Hazy at the controls of his own Gulfstream jet. He heads a rapidly growing competitor to the jet leasing firm he ran for insurer AIG.

Airplane-leasing billionaire Steven Udvar-Hazy hates to wait. When the chairman and chief executive officer of Air Lease Corp. (AL) is ready to take off in his Gulfstream IV jet from Los Angeles’s Van Nuys Airport one August morning, he drives straight up to the plane in his black Volks-wagen Jetta, bounds up the stairway, throws off his suit jacket and hops into the pilot seat.

With barely a pause for his co-pilot to go over the pre-takeoff checklist, the Hungarian-born executive pushes onto the taxiway to start the 41-minute hop to St. George, Utah, where he will attend a board meeting at airline SkyWest Inc. (SKYW)

When air-traffic-control delays make him wait for takeoff, he complains about the fuel he’s burning at a rate of 180 gallons (680 liters) an hour, costing up to $16 per minute.

Udvar-Hazy, 66, has always been a man in a hurry. He pioneered the aircraft leasing industry out of college in the 1970s and then built his company, International Lease Finance Corp., into the world’s largest leasing firm.

Insurance giant American International Group Inc. (AIG) made Udvar-Hazy very rich when it bought ILFC from him and his co-founders for $1.3 billion in 1990. AIG then kept him as CEO. He’s well-known for irreverent stunts, such as pushing the fully clothed CEO of Airbus SAS into a pool.

Ever impatient, Udvar-Hazy retired from AIG in 2010 to start Air Lease, after the insurance company was rescued from failure by the federal government. In April, AIG sued Air Lease for poaching employees, some of whom, it claims, left AIG with confidential client information.

Jets Worth $5.9 Billion

“ALC was able to effectively steal a business,” the complaint says. Udvar-Hazy denies the allegations.

By 2011, Udvar-Hazy had built up sales to $336.7 million, with net income of $53.2 million. Air Lease owned a fleet of 137 commercial jets and other aircraft valued at $5.9 billion as of June 30, spread across 65 airlines in 37 countries. Udvar-Hazy kicked off the big Farnborough International Airshow outside London in July with a $7.2 billion order for 75 Boeing Co. (BA) 737 Maxes.

“He’s on fire -- just as much as when he started 40 years ago,” says Jerry Atkin, CEO of SkyWest, as he chauffeurs Udvar-Hazy in his BMW from the St. George airport to SkyWest’s headquarters.

Udvar-Hazy owes the success of his second act both to his formidable reputation and to the airline industry’s rapid growth in emerging markets. While he leases planes to big Western carriers such as Air France-KLM Group (AF), United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV), much of his business is with developing nations.

Manufacturing Boom

Among his customers are giants such as Air China Ltd. (601111) and smaller carriers in countries that include Indonesia, Kazakhstan, Mongolia, Mozambique and Sri Lanka.

The expanding developing-nation airlines have helped spark a boom in jet manufacturing. In the quarter ended on June 30, sales at Boeing’s commercial-jet unit surged 34 percent from the same quarter a year earlier, to $11.8 billion, while Airbus’s parent, European Aeronautic, Defence & Space Co. (EAD), almost doubled first-half earnings before interest and taxes from 2010 and compiled a record backlog.

The glut of new airplane orders comes despite severe turbulence in some parts of the market: AMR Corp. (AAMRQ), parent of American Airlines, is in bankruptcy, and, in August, Australia’s Qantas Airways Ltd. (QAN) canceled an order for 35 Boeing 787-9 Dreamliners valued at $8.5 billion after suffering losses on international routes. Europe’s recession economy has triggered defaults on leasing deals among some weaker regional airlines.

Risky Environment

Investors consider the environment risky, Fitch Ratings analyst Ilya Ivashkov says. As of yesterday, they had driven down Air Lease’s stock 23.5 percent since its listing on the New York Stock Exchange in April 2011. Udvar-Hazy owns more than 4.8 million shares valued at $97.7 million.

Udvar-Hazy at one point owned 20.2 million AIG shares, and he says he sold the stock before it tanked in the crisis. Udvar-Hazy’s net worth is at least $1.3 billion, according to data compiled by Bloomberg.

Smaller airlines lease to avoid big outlays of cash -- and even then don’t always pay their bills. Udvar-Hazy has had to dispatch pilots to Malta and Brussels to repossess planes leased by deadbeat airlines. He mostly leases popular, midrange, single-aisle airplanes, so they can be easily flipped to a new customer.

“You always want to have a contingency plan,” he says in Air Lease’s headquarters in Los Angeles’s Century City, just a block away from ILFC’s offices.

Beach Reading

Udvar-Hazy lives and breathes aviation.

“I always expected him to be back,” says John Leahy, sales chief at Airbus, who has fought Udvar-Hazy in many leasing negotiations. “Aviation is his life.”

Leahy recalls a visit to the beach during a corporate retreat in Hawaii last summer. The Airbus executive looked over and saw Udvar-Hazy paging through the Official Airline Guide, which lists eye-glazing timetables of the world’s airlines.

“That’s taking your hobby one step beyond,” Leahy says.

Air Lease’s rapid growth is all the more notable given the stiff competition from entrenched companies such as General Electric Co.’s GE Capital Aviation Services (GE) and Udvar-Hazy’s former company, ILFC. At least two other jet-leasing companies financed by private-equity firms have started up since 2010, while Asian leasing companies backed by Bank of China Ltd. and Japan’s Sumitomo Mitsui Financial Group Inc. (8316) have expanded.

Some 40 percent of the global airplane fleet is leased, according to ILFC, up from less than 1 percent when Udvar-Hazy started in the business. SkyWest, where Udvar-Hazy serves on the board, leases up to 80 percent of its fleet of 725 planes -- none from Air Lease.

Making Money

Udvar-Hazy’s insight when he started leasing in the 1970s was that many airlines couldn’t afford to upgrade from propeller planes to jets, especially outside the U.S., where Udvar-Hazy leased most of his planes.

If the leasing company handles it right, the planes pay for themselves and ultimately earn a profit, in the form of lease payments, depreciation and the residual value of the aircraft when it’s either leased a second time or sold, says Richard Aboulafia, a vice president at aerospace analysis firm Teal Group in Fairfax, Virginia.

For the airline, the lease removes the risk of being stuck with a long-term asset that’s depreciating year after year.

“Leases minimize the cash out the door and then minimize the residual risk at the tail end,” says Michael Kraupp, SkyWest’s chief financial officer.

Tax Benefits

John Plueger, Air Lease’s president and Udvar-Hazy’s No. 2 at ILFC, says leasing would be even bigger, except many airlines prefer to own as much as 65 percent of their fleet to take advantage of the tax benefits from depreciation on the planes. Many airlines, however, can’t access the financing needed to pay the list price on a $113 million Airbus A321neo or the $107 million for a Boeing 737 Max 9.

When Udvar-Hazy ran ILFC, his influence was enormous, extending even to how Boeing and Airbus designed their planes.

“When Mr. Hazy speaks, manufacturers and the market listen,” JPMorgan Securities LLC analysts Jamie Baker and Mark Streeter wrote in a May 2011 report. Airbus committed 10 billion euros ($12.8 billion) to redesign its A350 after Udvar-Hazy criticized the plane at industry conferences in 2006, saying it needed an all-new fuselage and wing to better compete with Boeing’s 777.

“He was a big proponent of the new plane,” Airbus’s Leahy says. “We did listen, and he was one of the key influences.”

Legendary Jokester

Bertrand Grabowski, managing director for aviation at DVB Bank SE (DVB) in Frankfurt, one of the biggest lenders in aircraft finance, says airline executives piled on criticism of the A350’s limitations after Udvar-Hazy took the lead.

“He’s very influential, he’s not shy and he just loves airplanes,” Grabowski says.

Udvar-Hazy is a legendary jokester. One prank took place at a 2003 industry conference in Coral Gables, Florida. He told a panel of Latin American airline CEOs that many of them hadn’t paid their bills and that he had a plane waiting to fly them to the Guantanamo Bay military prison unless they coughed up the money. At that point, hired heavies dressed in black walked through the room, closing doors and curtains.

“Everyone starts looking around and saying, ‘What’s going on here?’” says Gilberto Peralta, a senior vice president at GE Capital Aviation who attended the event. After a tense few minutes -- many attendees did owe Udvar-Hazy’s ILFC money -- it became clear that the confrontation was an elaborate joke, and everyone had a big laugh, Peralta says.

Pool Pushing

At a 1995 corporate retreat, Udvar-Hazy needled Leahy by leaving a copy of a newspaper announcement of a $2.25 billion ILFC order with archrival Boeing in front of Leahy’s hotel room door. Leahy retaliated by pushing Udvar-Hazy into a pool at a 120-guest dinner.

“He was walking along the edge of the pool, and I thought he was about to slip,” Leahy says. Udvar-Hazy got the last laugh, first by pushing Leahy in the pool at the same event and then doing the same the following year to Noel Forgeard, who was then Airbus’s CEO.

Udvar-Hazy had humble beginnings. Twelve-year-old Steven and his parents arrived in the U.S. from Hungary in 1958, two years after the Soviet army put down an anti-communist rebellion and occupied the country. His father, who had been in the textile business, suffered from crippling rheumatoid arthritis, and the family moved to Los Angeles in the hope that the hot, dry weather would improve his health.

First Deal

Yet Udvar-Hazy’s father never worked again, and the family survived on the modest salary Udvar-Hazy’s mother earned in the fashion industry.

Udvar-Hazy did his first airplane deal while a 21-year-old economics undergraduate at the University of California, Los Angeles. He convinced executives at Air New Zealand Ltd.-- still a customer today -- to let him sell a Lockheed Electra plane that it wanted to get rid of. The deal earned him a $50,000 fee. It was a short step from there to the leasing business.

In 1973, Udvar-Hazy hooked up with real estate developer Leslie Gonda -- also Hungarian -- and his son Louis to start Interlease Group Inc., which later became ILFC. They took the company public in 1983, before selling to AIG seven years later.

Southwest Airlines founder Herb Kelleher says Udvar-Hazy always drove a hard bargain. When Southwest did a leasing deal with Udvar-Hazy in the late 1990s, Kelleher warned his legal team it would be an unusual experience. True to form, the lawyers said, Udvar-Hazy demanded lifetime passes for him and his executives on all Southwest flights as part of the deal.

ILFC’s Independence

“After the first meeting with Steve, they came staggering back,” says Kelleher, 81, now chairman emeritus of the airline.

He didn’t give Udvar-Hazy the passes.

During the nearly 20 years that Udvar-Hazy ran ILFC, the company was largely independent of AIG, he says. It had its own credit ratings, raised its own financing and filed separate Securities and Exchange Commission reports. The relationship frayed shortly after the government took an 80 percent stake in AIG in exchange for an $85 billion Federal Reserve loan in September 2008.

Udvar-Hazy bristled at the subsequent cost cutting, according to a person familiar with the situation, including rules that forced him to shop for cheap commercial flights instead of flying on the airlines that leased planes from him. They even limited his newspaper subscriptions.

Poaching Charge

When AIG put ILFC up for sale, Udvar-Hazy organized his own bid for a fleet of ILFC’s planes in January 2010. When negotiations broke down, Udvar-Hazy retired and formed his own company, obtaining $1.3 billion in capital from banks including JPMorgan Chase & Co. (JPM) and Commonwealth Bank of Australia and from private-equity investors.

In its April complaint, AIG accused Udvar-Hazy of poaching ILFC employees, listing 29 people hired from ILFC by Air Lease, including Plueger, who had briefly stayed behind as ILFC’s CEO. The suit also says departing ILFC employees downloaded lease expiration information of customers so they could target them to switch to Air Lease.

In a statement after the lawsuit was filed, Udvar-Hazy and Air Lease came out swinging: “Unable to compete effectively and perceiving Air Lease as a growing threat, AIG/ILFC has now resorted to a baseless trade secrets lawsuit that Air Lease will vigorously contest and defeat,” the company said.

Air Lease hadn’t filed a formal answer as of mid-September. Udvar-Hazy denies recruiting ILFC employees. An ILFC spokesman declined to comment on the dispute.

Bumpy Flight

Back in Utah, behind the controls of his Gulfstream for the return flight to Los Angeles, Udvar-Hazy is in no less of a hurry than when he took off earlier that day. He turns onto the taxiway while his co-pilot is still rattling off the preflight checklist and then pushes the throttles forward to lift the plane’s nose off the ground.

“It’s going to get bumpy,” Udvar-Hazy warns later, as he descends through the clouds toward Van Nuys. After the AIG lawsuit and the risk that goes along with leasing airplanes to airlines in countries like Kazakhstan, a little turbulence is all part of the game.

To contact the reporters on this story: Seth Lubove in Los Angeles at slubove@bloomberg.net. Andrea Rothman in Toulouse at aerothman@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.

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