FLY Leasing and partners snap up AirAsia’s leasing assets

Eleanor Steed
By Eleanor Steed March 1, 2018 16:59

FLY Leasing and partners snap up AirAsia’s leasing assets

There’s only one story being talked about in the aviation community today, which is the announcement from FLY Leasing that it will acquire up to 75 A320neos from Air Asia and its leasing subsidiary Asia Aviation Capital (AAC) in a three-phased deal, which is part of a larger acquisition under which FLY, together with parent BBAM’s other capital partners, Nomura Babcock & Brown and Incline Aviation, will acquire a total of 132 aircraft from AirAsia and AAC, as well as options to acquire 50 A320neo family aircraft, to be delivered in the future. AirAsia will also make a $50 million investment in Incline Aviation as part of its consideration.

This is a significant deal, which will ramp up FLY and BBAM’s standings in the aircraft leasing rankings, which is always difficult to assess for BBAM, which is one lessor that prefers to keep its dealings out of the public eye.

For the first phase of the deal, FLY will acquire 54 Airbus narrowbody aircraft and seven CFM engines on lease to Air Asia and its affiliates (the AirAsia Group), and one Airbus narrowbody aircraft on lease to a third-party airline.  In addition, FLY will acquire the option to purchase an additional 20 A320neo family aircraft, not subject to lease, which begin delivering from the manufacturer in 2019.

At the closing of the initial stage of the transaction, FLY will acquire 34 A320-200 aircraft and seven aircraft engines.  Of these aircraft, which have an average age of 6.6 years and a remaining lease term of 6.2 years, 33 are on lease to five different airlines within the AirAsia Group, and one aircraft is on lease to a third-party airline.

In addition to the aircraft acquired in the first stage of the transaction, FLY has agreed to acquire 21 A320neo family aircraft that will be subject to 12-year leases to AirAsia Group airlines. These 21 aircraft are scheduled to deliver new from the manufacturer between 2019 and 2021.

In the final stage of the transaction, FLY will acquire the option to purchase an additional 20 Airbus A320neo family aircraft, not subject to lease, which begin delivering from the manufacturer in 2019.

Under the terms of the agreement, AirAsia will receive approximately $1.0 billion in cash and 3,333,333 newly-issued FLY shares at $15.00 per share as part of the initial stage of the transaction.  The shares acquired by AirAsia will be subject to lock-up arrangements through 2021, and voting and standstill agreements, and will be entitled to registration rights.
In addition, an affiliate of Onex Corporation (Onex) and the management team of BBAM will each acquire 666,667 newly-issued FLY shares at $15.00 per share, for total consideration of $20 million.  When added to pre-existing shareholdings by Onex and the BBAM management team, these investors will hold a total of 5.5 million shares, or 17% of the company’s proforma outstanding shares.

The transaction is expected to close in the second and third quarters of 2018, subject to approval by AirAsia shareholders, receipt of necessary regulatory approvals and satisfaction of other customary closing conditions.

As mentioned above the entire acquisition will see FLY, together with BBAM’s other capital partners, Nomura Babcock & Brown and Incline Aviation, acquire a total of 132 aircraft from AirAsia and AAC, as well as options to acquire 50 A320neo family aircraft, to be delivered in the future. AirAsia will also make a $50 million investment in Incline Aviation as part of its consideration.

FLY’s CEO Colm Barrington commented: “We are thrilled to partner with one of Asia’s premier and fastest expanding airline groups.  These investments will grow FLY’s fleet with the most attractive and newest generation of narrowbody aircraft on known lease and financing terms.  This transaction is expected to drive high levels of stable, long-term profitability and cash flows at FLY for the benefit of our stakeholders.”

Tan Sri Tony Fernandes, AirAsia Group Chief Executive Officer, added: “The AirAsia Group is delighted to begin this new, long-term partnership with Steve and the rest of the team at BBAM. BBAM has a similar culture to AirAsia. Steve is a great entrepreneur with a strategic vision and he has built a strong team with great attention to detail that is incredibly passionate about what they do. I am confident that his management team will drive the value of our investment in both FLY and Incline.”  Mr. Fernandes commented further, “This is a perfect outcome to a strategy we started in 2004 and I’m thrilled at the execution of our long-term vision. We have now disposed most of our physical non-core assets and we are thrilled to be embarking on our new digital strategy, which will build a very valuable group of assets.”

Steve Zissis, Chief Executive Officer of BBAM, commented: “BBAM is providing FLY with unique access to a major investment opportunity that FLY would not have been able to pursue on its own.  We passionately believe BBAM’s unique structure enables us to offer unparalleled fleet planning solutions to our airline customers by enabling us to participate in large scale transactions that few of our peers can deliver.”  Mr. Zissis further commented, “Tony and his team have built an incredible business at AirAsia and we feel fortunate in having this opportunity to build a long-term partnership with an organization of this caliber.”
Advisors

Vedder Price and Jones Day acted as legal advisors to FLY.  BNP Paribas, Citi, Commonwealth Bank of Australia and Deutsche Bank have provided committed financing to FLY for the transaction.  EY and KPMG acted as tax advisors to FLY.

The news has been greeted favourably by analysts with Gary Liebowitz first out of the block to comment that the deal will add scale to FLY’s 84-jet/$3B current fleet that “is expected to drive high levels of stable, long-term profitability”.

Because BBAM and Onex will own 17% of FLY, and the fact they are paying $15 per share for a stock that closed at $11.62 may be a positive signal for the deal’s ultimate EPS accretion, adds Liebowitz.

The bulk of this portfolio is expected to be sold down as soon as possible to diversify away from the AirAsia concentration.

“We would expect FLY to immediately sell down its new AirAsia over-exposure. We note that for a profitable, rapidly-growing emerging-market carrier, AirAsia seems “under-leased” by the broader lessor community – i.e., we think FLY would see multiple bids that could generate a steady stream of trading gains,” writes Liebowitz.

Eleanor Steed
By Eleanor Steed March 1, 2018 16:59