Gpa Is Sharp, But Can It `Defy Gravity'?Mark Maremont
Never has the aviation industry seen such dark days. Last year, global air travel declined for the first time since the dawn of the jet age. The world's airlines lost a record $4 billion. Hundreds of aircraft are sitting idle. Call a company offering to lease planes, and you'll find rates have dropped about 20% since 1990 (chart).
Not the best time to take an aircraft leasing company public? The executives of GPA Group PLC might agree, but they're going ahead anyway. Based in the unlikely location of Shannon, Ireland, GPA has grown in 17 years to become the largest force in one of the most esoteric fields around. Until now, it has tapped sophisticated institutions and banks for the billions needed to fund its ambitious growth. But GPA is about to go public with a stock offering worth as much as $1 billion--with perhaps a third of the shares to be sold by existing holders. The U.S. portion will be led by Goldman Sachs, Merrill Lynch, and Salomon Brothers. GPA's board is likely to give the go-ahead on Mar. 10, and a Securities & Exchange Commission filing could follow before April.
If it succeeds, GPA would be valued at more than $2.7 billion--roughly half the value of AMR Corp., parent of American Airlines. Caveat emptor is the rule with any IPO, and GPA's timing is partly dictated by its pressing need for fresh funding. But GPA can point to an impressive track record. Profit growth in the late 1980s averaged a scorching 60%. The industry's decline, beginning with the invasion of Kuwait in August, 1990, halted that. But GPA managed to net $196.5 million in the last nine months of 1991, on a par with the prior year, partly by shifting focus to the booming Far East and Latin America. "The results have been remarkably good, considering there was one hell of a recession," says John Hopper, aviation group director at Barclays Bank PLC, a GPA lender.
Founded in 1975 by Chairman Tony A. Ryan, who got into the business as an Aer Lingus dispatcher, GPA was a pioneer of aircraft operating leases. Rather than borrow to buy planes, an airline leases a plane for a fixed term. That helps airlines, especially less creditworthy ones, stay flexible with their mix of planes.
In the early days, GPA bought a plane only after it lined up a client. But as leasing began winning converts, GPA started to gamble, placing huge orders for planes. GPA's goal is to buy close to 10% of the world's annual aircraft production, and it has orders and options for $21 billion worth of planes in the next eight years. Such buying clout gets GPA about a 20% discount, letting it keep lease rates competitive without clobbering profits. Gross margins on leasing, 16% in fiscal 1991, dropped to 11% in the first nine months of fiscal 1992.
Diversity reduces risks. GPA planes are flying with more than 100 carriers in 50 or more countries. If an airline or even a region turns sour, GPA can shift planes around. "If a lease doesn't work in Houston, we can move the plane to Rio de Janeiro," says Chairman Ryan. "We have the ultimate mobile asset."
POOL PLAYER. Yet pure leasing provides only a third of profits. The real money-spinner is sales of aircraft: GPA leases a plane, then sells the aircraft with its lease to an investor, using complex tax-shelter financing. When the lease ends, GPA will find a new lessee--for a fee, of course. The company got a scare last year when Japanese investors, who bought nearly half its jets in 1989, suddenly pulled back. But so far it has managed to find new sources of funding, notably in Mexico and the Arab states.
The sheer scale of GPA's activities worries critics. With its billions in orders, a prolonged dip in the market could leave it with dozens of unwanted planes. More than 40 of its 400 planes are already idled. Or GPA could run out of investors to buy 40 to 50 of its lease-and-plane packages every year. "If this slump continues, GPA may not defy gravity for much longer," notes Bruce C. Sutherland, an aviation finance specialist at ANZ Banking Group Ltd. in London.
Executives at GPA counter that they've always prospered through innovation. To address a possible shortage of investors, GPA is testing a "securitized" aircraft fund. Like funds packaging mortgages, it would let investors buy a piece of a $500 million capital pool that owns 14 aircraft. GPA already has a $100 million commitment from Citicorp. To cut risks, the planes will be leased to 14 carriers in 12 countries. "Not a dollar of that would have gone into the aviation industry otherwise," says Colm Barrington, CEO of GPA Capital, who says GPA could launch several such funds a year if this one succeeds.
Despite such confidence, GPA executives privately concede the offering's timing isn't perfect. GPA's share price, calculated by private deals among its limited base of shareholders, has dropped from $32.50 in August, 1990, to about $22 recently. But GPA can't really afford to wait for an upturn. Its debt-to-equity ratio is nearing 3 to 1, following $2 billion in borrowing last year. Bank covenants allow a ratio of 4.5 to 1, but the company needs new equity to keep its plans on course. So, recession or no, GPA is coming soon to a broker near you.