Jetrader - Spring 2018 - 43

above average margins over time because
they bring all of those benefits - metal
pricing, quality - together.
Having said that, this is not a linear
path up to the sky. At some point, certain
economies of scale will come into play.
You can see some anecdotal evidence of
that coming through if you look at the
sheer number of planes that people have
ordered and what that means for lease
rates in today's market. You'll see that at
$40-$45 billion, for example, potentially
there are subpar activities that you would
engage in. We're not sure what the right
scale is, but we definitely know that it's
[close to] where we are - maybe slightly
above that.
Others have expressed an ambition to
go up to $60 billion. We will see how that
works out, but we would argue that at some
point it becomes not so obvious that 60 is
better than 40.
GB: You've gone on record to say that you
would look at speculative orders. Could
you opine on that a bit further in terms
of timing, scale and aircraft type?
FT: We are the only ones in the top
tier who do not have an order with the
OEMs and that's for historical reasons.
Going forward, that's not tenable for our
combined company and the size that we
want to be. It's clear, at least in our minds,
that we need to have a secured pipeline
order. In terms of the quantum, we look at
a planning horizon of about eight years. In
that, we think that the number of aircraft
that we need from the OEM channel is
somewhere between 170 and 250 aircraft.
All else being equal, we'll probably split
it between the two, but the world is not
all else being equal, so who knows where
that's going to end up.
We've also said publicly that while we like
widebody exposure of certain kinds, from a
speculative order position, we'll probably
focus on the narrowbody size.
GB: Speaking about the crowds around
the narrowbody segment at the moment,
we've obviously seen a lot of that. We've
seen some significant depression in lease
rates on newer aircraft as well. Does that
concern you if you're about to make a
speculative order?
FT: Yes. There is a significant disconnect
today between the lease rates available

In terms of fundamentally thinking about
where this industry is structured and where
this industry is headed, we have to solve some
of these things before we have a good sense of
what's next for each one of us.
for both the new technology narrowbody
product - meaning both from Boeing and
Airbus - and the prices at which you can
place an order today with the OEMs for
positions that deliver multiple years into
the future - or even a few years into the
future with escalation, etc.
We think that it is very hard today
for any lessor or any acquiror to make
an investment case to their boards that
says 'OK, pay that price for this sort of
expected return.' So something has to
change. It's unclear, at least to us, what
that something is - whether it's the lease
rates that will change or whether it's the
pricing dynamic.
GB: The sale and leaseback market is
obviously the other avenue in terms
of volume. Do you see DAE as being
a significant player in that market
going forward?
FT: For us, there are two SLB markets;
one is the transactional SLB market, which
is completely insane at the moment, and
the other one is the relationship SLB
market, where real clients need real solutions that are not always driven from a
pipeline product.
We have invested very heavily in our
credit function so that we can take risk
across different jurisdictions, credit types
and asset types, and we believe that the
value that we can add through those transactions will steer us towards those sorts of
SLBs and those sorts of PLB transactions.
We're very happy to do that.
We've done transactions where I think
most lessors would not - all the way from
Papua New Guinea to Libya to Egypt, and
the returns on that are commensurate with
the risks that you end up taking. We have
those capability sets; they've been honed
over a number of years. We're going to
invest in those capability sets with the
hope of out-earning the returns that you
would get just on a transactional SLB basis.
That market is competitive for reasons that
are just difficult.

GB: So you mentioned earlier about fleet
management and your widebody exposure. You also have a legacy turboprop
exposure, which has come into this transaction. How do you see your widebody
and turboprop exposure being managed
through your fleet-management process
over the coming years?
FT: We placed an order for the ATR
72-600, which is our only non-jet asset,
so we don't do anything else. We don't do
Embraer, we don't do Bombardier or any of
the other OEMs that are out there or any
of the other types, even within ATR. That's
because that asset is a unique asset. We
actually love all the characteristics of that
asset. When we placed an order, I said -
and this was in February of 2014 - that
we would be delighted to own somewhere
between 60 and 100 and we're up to just
about 60.
The path to get from 0 to 60 was relatively easy because a couple of big players
decided to exit. ALC and GECAS exited, and
we benefited partially from that. So we're
now the second-largest lessor of the ATR
72-600. If we can find a way to get from
just under 60 to 100, we'd be delighted,
because the assets that we own today are
roughly a billion dollars, and it behaves
like a cohort, so a billion-dollar cohort
earns better than narrowbody assets, for
example, in terms of returns.
GB: In terms of your widebody exposure,
what are the plans for that?
FT: We have exposure to the triple-7
freighter, so we underwrote Emirates'
SkyCargo transaction when they did it
between 2009 and 2015. We own 12 of
those now, and if we could find 12 more
at the right price we would add that
to our portfolio because it's a fabulous
asset. From a lessor perspective it ticks
just about every box there is out there.
In addition, we're underwriting capital
to 787-9 and the A350-900. Everything
else is on a selected basis. We don't do
four-engine aircraft, so we're not doing
Jetrader * Spring 2018 43
Jetrader - Spring 2018

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