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Nov 26 2013 | 12:50pm ET
Alternative investment firm Apollo Aviation Group has a rather unusual market niche: it specializes in leasing and trading commercial aircraft and engines as well as acquiring and dismantling aircraft and engines for parts.
Since its founding in 2002, Apollo, which has $1.36 billion in assets under management, has set up and managed 10 funds. Currently, it has two: the Sciens Aviation Special Opportunities Investment Fund, which closed in 2010 with commitments of $213 million and is currently harvesting investments; and the Sciens Aviation Special Opportunities Investment Fund II, which closed in January of this year with commitments of $595 million and is currently investing. To find out more about Apollo, FINalternatives Senior Reporter Mary Campbell spoke with Managing Director David Treitel.
Apollo manages used commercial aircraft and/or engine leases. This seems like an unusual investment niche—can you tell me what was the genesis of the strategy and how it works?
Aircraft leasing has become one of the main ways that airlines now finance the equipment that they operate. Today, as much as 50% of the new large commercial aircraft deliveries are leased. This is a very large market with more than $100 billion dollars of deliveries being forecast by the manufacturers.
Commercial aircraft are long-lived assets. In many cases, they will remain in commercial service for more than 30 years. They also have retained value reasonably well. However, the airline industry is not especially profitable and many airlines do not have the earnings to take full advantage of the tax savings related to asset ownership. Accordingly, aircraft leasing has become increasingly popular for both airlines and investors.
Why and under what circumstances do airlines lease aircraft/engines rather than owning them?
Airlines will lease aircraft and engines for several reasons. Leasing often increases flexibility significantly as it can be significantly easier for an airline to increase or decrease capacity with leased equipment. Leasing may also be a lower cost option for the airlines as the rents can be lower than the depreciation and interest cost of buying and borrowing to acquire owned aircraft and engines.
Airline travel is, presumably, subject to economic downturns—how do such downturns affect your funds' performance?
Airline travel is indeed highly sensitive to general economic conditions. It is a cyclical business in many areas. Hence, there are numerous opportunities to mitigate the impact of economic downturns.
How do you view the outlook for the airline industry? Are concerns about its contribution to global warming a factor?
We expect that the global airline industry will continue to grow. Most of the long-term forecasts for the industry project traffic to grow at around 5% per annum.
The industry is extremely sensitive to global warming. For many airlines, fuel will be more than 30% of its cost structure; for some airlines, fuel can be more than 50% of its cost structure. Accordingly, there are powerful economic incentives driving the industry to become ever more fuel efficient. The aircraft manufacturers have responded and developed new models that are much more fuel efficient than the aircraft types that they replace.
Reducing fuel consumption is one important way that the industry is lowering its carbon production so that it can still grow but do so without increasing its contribution to global warming. Nonetheless, there are also many government regulations that are expressly aimed at reducing the airline industry’s carbon production such as the EU’s Emissions Trading Scheme. These regulations could lead to a dampening of industry growth.