GE nears deal to combine aircraft lease unit with AerCap

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unit, known as GE Capital Aviation Services, or Gecas, is the largest remaining part of GE Capital, a once-sprawling lending operation that rivaled the largest US banks, but nearly sunk the company during the 2008 financial crisis. 2015 was already a big step back from lending when it said it would leave most of GE Capital, and a deal for Gecas would be another big step in that direction.

It would also be another important step from GE CEO Larry Culp to set the course of a company battered in recent years by souring prospects for some of its top businesses and a structure that has fallen out of favor. has hit with investors.

With more than 1,600 aircraft owned or on order, Gecas is one of the world’s largest jet leasing companies, alongside AerCap and Los Angeles-based Air Lease Corp. It leases passenger aircraft from Boeing Co. and Airbus SE, as well as regional and cargo aircraft to customers ranging from flagship airlines to startups. Gecas had $ 35.86 billion in assets as of December 31.

AerCap has a market value of $ 6.5 billion and an enterprise value – adjusted for debt and cash – of approximately $ 34 billion, according to S&P Capital IQ, and approximately 1,400 owned or ordered aircraft. The company has experience in closing deals and paid approximately $ 7.6 billion to International Lease Finance Corp. in 2014. to buy. AerCap’s sales were about $ 4.4 billion last year, up from about $ 5 billion in previous years.

The airline industry has been badly hit by the Covid-19 pandemic, which has resulted in a sharp decline in global travel and prompted airlines to take to the ground. Some airlines have tried to delay lease payments or purchases of new aircraft. Gecas had an operating loss of $ 786 million on revenues of $ 3.95 billion in 2020. GE recorded a write-off of approximately $ 500 million on the value of its aircraft portfolio in the fourth quarter.

By merging the companies, cost savings can be achieved and the new entity can weather the crisis.

The separation from Gecas could assist GE in its efforts to maintain its balance sheet and improve cash flows. Despite a recent rise, GE’s stock price remains below levels before significant problems surfaced in the company’s power and finance units in recent years.

The Boston-based company has a market value of about $ 119 billion after its stock more than doubled in the past six months and posted improved results. Still, the stock has fallen by about three-quarters from the peak of just over 20 years ago.

Mr. Culp became the first CEO from outside GE in late 2018 after the company was forced to cut its dividends and sell companies. The former Danaher Corp.

boss has tried to further simplify GE’s broad conglomerate structure like other industrial giants such as Siemens AG and Honeywell International Inc.

have done in recent years.

Activist investor Trian Fund Management LP, who has held a key position in the company since 2015 and has a seat on its board of directors, has supported such changes.

Early in his tenure, Mr. Culp said he had no plans to sell Gecas, a move his predecessor John Flannery had considered after the unit sparked interest from private equity firms further into the leasing business.

Mr. Culp has tried to equalize cash flows and refocus on core areas. The operations he has retired from include the company’s biotech business, which was bought by Danaher last year in a $ 21 billion deal. GE also sold its iconic lightbulb business in a much smaller deal last year, previously saying it will have its majority stake in oilfield services company Baker Hughes Co.

GE has reduced overheads and jobs in its jet engine unit while streamlining its electricity operations. However, the pandemic continues to weigh on the jet engine business, GE’s largest division.

The company also makes healthcare machines and electricity generating equipment, and the rest of GE Capital provides loans to help customers buy machines and also includes legacy insurance assets.

AerCap is based in Ireland and Gecas is also headquartered there. The aircraft leasing industry has long had a significant presence in Ireland due to the country’s favorable tax regime and the importance of Guinness Peat Aviation to the development of the sector. (A deal between GE and AerCap would reunite two companies that bought their core assets from GPA.) However, the industry has become more competitive as Chinese companies have gained market share, and the combination could help the new group turn that tide.

Shares in aircraft leasing companies plummeted along with much of the market in the early days of the pandemic as demand from major airlines, leasing aircraft to avoid the cost of owning them, evaporated. But many of the big landlord stocks have recovered lost ground, and some more in the months since, as lockdowns ease and the outlook for travel improves.

Aengus Kelly, AerCap’s chief executive, said in this month’s fourth-quarter earnings call that he expects airlines to shift more to leasing aircraft as they rebuild their balance sheet, which would be a boon to the company and its colleagues.

“Their desire to deploy large amounts of scarce capital to purchase aircraft will remain subdued for some time,” he said. “The priority will be to repay debt or government subsidies.”

—Thomas Gryta contributed to this article.

Write to Cara Lombardo at [email protected] and Emily Glazer at [email protected]