Apollo Aviation Group has closed its third aviation fund, SASOF III, on $833 million, in excess of its $750 million target. The fund follows on from the $593 million SASOF II and the $213 million SASOF, and will seek to acquire mid-life commercial aircraft and engines either for lease or for disassembly and resale of the components.
Around 40 percent of aircraft operated today are owned by leasing companies or financial investors rather than airlines, opening up the opportunity for private capital involvement.
Private Equity International spoke with Bill Hoffman, chairman of Apollo Aviation, on the opportunities in the mid-life commercial aircraft space and why private equity investors are keen to get involved in the sector.
Q. Which particular niche in the market is SASOF III looking to tap into?
A. The market that we’re in is the seven to 15-year-old aircraft, so we’re not out competing for new aircraft. That part of the market is a cost-of-capital game, and how cheaply you can acquire the asset from either airlines or the manufacturers. We see it as a very crowded space and not one where we see that we can really have an advantage.
Apollo started out disassembling aircraft and jet engines. We’re investing in mid-life aircraft, [so] we’re much closer to the underlying parts value of the asset. We look at an asset and figure out how best to monetise that asset. That might be leasing it for a period of time, or leasing it and then putting it into a securitisation.
In aircraft leasing there’s a concept called maintenance reserves, which are cash payments for the utilisation of the assets which are typically reinvested in the asset. As the asset gets older and is no longer going to be in commercial service, those funds can essentially be taken as income.
If you’re no longer going to lease the asset, you can break the aircraft into its major components – the airframe, the landing gear, the engine, the auxiliary power unit – and either sell those off or you can take them to the piece part level. With engines, typically if there’s serviceable life, meaning they continue to be able to operate in commercial service, you can do a green time lease, where somebody pays you to operate that engine.
Q. What is it about aircraft leasing and the aviation sector in general that makes it such an attractive proposition for private equity investors?
A. Aviation, after nuclear power, is probably the most highly-regulated industry, so it’s not like you’re getting new entrants just popping up saying ‘we want to be an airline’. There’s a long certification process, licenses that you require from governments, so it’s very easy to know who’s in different jurisdictions.
[Regarding manufacturers of] commercial aircraft in excess of 100 seats, you’re really talking about a duopoly, it’s Airbus or Boeing. Boeing and Airbus are sold out in production for eight to 10 years right now, and you know exactly how many of them they’re delivering every month, so you have an absolute understanding of the supply. If you look at the demand for air travel and GDP, those are pretty closely correlated, so you [also] have a very good understanding of the demand.
It’s very different than a shipping fund, for example, because I don’t even know if you could count the number of shipyards around the world making ships, and there’s no real great barriers to entry into the shipbuilding business as there are to aerospace and aviation.
From an underlying value perspective, there’s only a certain number of these assets, you know what the demand is and it’s not like somebody is going to come in in two or three years and all of a sudden start up a new company that builds aircraft in excess of 100 seats. These aircraft just take years and years and billions and billions of dollars to design and manufacture. So in terms of risk, I think it’s a very attractive risk-adjusted return and a hard asset that’s providing a floor underneath their investment.