GE Nears Deal combines the aircraft rental unit with AerCap

The GE GE 0.29%

Unit, known as GE Capital Aviation Services, or Gecas, is the largest remaining piece of GE Capital, a lending operation that once spread and rivaled the largest banks in the United States, but almost sink the company during the financial crisis of 2008. GE already took a big step back from the lending business in 2015, when it said it would come out of the thick of GE Capital and an agreement for Gecas would represent another big step in that direction .

It would also represent another significant move by GE CEO Larry Culp to correct the course of a company that has been mistreated in recent years to gain prospects for some of its core business lines and a structure that has fallen in disgrace to investors.

With more than 1,600 aircraft owned or commissioned, Gecas is one of the largest jet rental companies in the world, along with AerCap and Air Lease Corp, based in Los Angeles. Rent passenger planes manufactured by Boeing Co. and Airbus SE, as well as regional aircraft. and cargo planes to customers ranging from star airlines to emerging companies. Gecas had assets of $ 35.86 billion as of December 31.

AerCap has a market value of $ 6.5 billion and a business value (adjusted for debt and cash) of about $ 34 billion, according to S&P Capital IQ, and about 1,400 owned or ordered aircraft. The company has experience in making deals, paying about $ 7.6 billion in 2014 to buy International Lease Finance Corp. AerCap’s revenue last year was about $ 4.4 billion, up from $ 5 billion in recent years.

The aviation business has been hit hard by the Covid-19 pandemic, which has caused a sharp drop in world travel and pushed airlines to head for ground planes. Some airlines have tried to defer payments for leasing or buying new aircraft. Gecas had an operating loss of $ 786 million for revenue of $ 3.955 billion in 2020. GE earned a balance of approximately $ 500 million over the value of its aircraft portfolio in the fourth quarter.

The combination of companies could afford cost-cutting opportunities and help the new entity overcome the recession.

Separating Gecas could help GE with its efforts to strengthen its balance sheet and improve cash flows. Despite a recent rise, GE’s share price remains below what it was before significant problems appeared in the company’s power and finance units in recent years.

The Boston-based company has a market value of about $ 119 billion after shares doubled in the past six months as it achieved improved results. Still, stocks have fallen about three-quarters of the maximum just over 20 years ago.

Culp became the first CEO outside of GE in late 2018 after the company was forced to cut its dividend and sell business. The old Danaher Corp.

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

they have done so in recent years.

Activist investor Trian Fund Management LP, which has held an important position in the company since 2015 and holds a seat on the board of directors, has supported these changes.

Earlier in his term, Mr Culp said he had no plans to sell Gecas, an action his predecessor John Flannery had considered after the unit caught the interest of private equity firms to further boost the business. lease.

Culp has tried to standardize cash flows and refocus on core areas. Among the operations from which it has separated is the company’s biotech business, which was bought by Danaher in a $ 21 billion deal it closed last year. GE also sold its iconic light bulb business on a much smaller deal last year and previously said it was unloading its majority stake in oil field services firm Baker Hughes Co.

GE has reduced overhead costs and jobs in its jet engine unit while streamlining its energy business. The pandemic continues to put pressure on the jet engine business, however, GE’s largest division.

The company also manufactures sanitary machinery and power generation equipment, and the rest of GE Capital provides loans to help customers purchase their machines and also contains inherited insurance assets.

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

Shares of aircraft rental companies fell along with much of the market in the early days of the pandemic, as demand from major airlines, which rent aircraft to avoid the costs of owning them, evaporate. But many of the actions of major landlords have regained lost ground, and then some in the following months, as closures are facilitated and travel prospects improved.

AerCap chief executive Aengus Kelly said this month in his fourth-quarter earnings call that he expects airlines to move more toward aircraft leasing as they rebuild their balance sheets, in the which would be an advantage for the company and its peers.

“His willingness to deploy large amounts of scarce capital in the purchase of aircraft will remain silenced for some time,” he said. “The priority will be to repay government debt or subsidies.”

—Thomas Gryta contributed to this article.

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