Khanh T. Tran has a bird’s eye view of aviation—and the industry’s recent struggles amid the pandemic—as the chief executive and president of Newport Beach-based Aviation Capital Group, where he oversees the leasing of about 450 jets to 90 airlines in 45 different countries.
There’s been plenty of turbulence in 2020, but clear skies are ahead, he said.
“We’re hanging in there,” Tran told the Business Journal in a recent interview.
“The aviation industry is one of the hardest hit, similar to hotels. We are managing through it. It’s the most challenging time any of us have witnessed in our industry.”
The coronavirus is expected to cause a 55% drop in worldwide passenger traffic this year, according to the International Air Transport Association in a July 28 report that predicted prior traffic levels won’t return until 2024.
Some airlines have declared bankruptcy while others such as American Airlines and United Airlines are laying off tens of thousands of employees.
Still, the market believes in the survival of Aviation Capital, a unit of Tokyo Century Corp., a financial services company with operating assets of $30.5 billion.
In July, Aviation Capital was able to issue $1 billion in unsecured debt that was oversubscribed, effectively refinancing some of its prior debt from 7.125% to 5.5%.
Tokyo Century also chipped in another $600 million line of credit that is untapped.
Moody’s Investors Service last week rated the new debt as Baa2, which is an investment grade and two levels above high-yield grade.
“ACG’s Baa2 long-term issuer rating reflects the company’s strong liquidity, a fleet comprised primarily of recent vintage narrow-body aircraft, as well as a strong capital position and long history of profitable operations,” Moody’s said in a July analysis.
“ACG’s liquidity resources are sufficient to meet the company’s cash needs for debt repayment, aircraft acquisitions and operating expenses for over 1.5 years,” the report said.
Another sign of cautious optimism occurred in July when Aviation Capital delivered a new Airbus A320neo aircraft on a long-term lease to China’s Juneyao Airlines.
“In today’s world, airlines would prefer to not add aircraft that they don’t have to,” Tran said. “Most customers would prefer to defer that.”
Buy Planes, Not Bonds
Tran, a native of Vietnam, became familiar with the aviation industry in the 1980s when he worked for Flying Tiger Line Inc., the world’s then-largest global air freight company. He joined Newport Beach-based Pacific Life Insurance Co. in 1990, rising from treasurer to chief financial officer in 1996 and then president in 2012.
He won the Business Journal’s Chief Financial Officer of the Year in 2011 (Aviation Capital’s current CFO Madhu Vijay won the Business Journal CFO of the Year award in 2016).
Aviation Capital, which began in 1989, first received a $5 million convertible debt investment from PacLife in 1996. Tran, who initiated the deal, liked the business because instead of buying bonds issued by the airlines, Aviation Capital could buy the airplanes and then lease them to the airlines.
“I said let’s own the aircraft because if the airlines fail, we own the assets and [can] lease them out,” Tran said in an interview with the Business Journal last year.
“When you are a lender to an airline that goes into bankruptcy, it takes years to get some resolution. If you are a lessor, you can get your aircraft back much quicker, generally in 60 days.”
PacLife eventually took a majority stake in Aviation Capital in 2005 and Tran became CEO in 2016.
The company considered going public, but eventually it was sold last December to Tokyo Century, which paid a Business Journal estimate of almost $3 billion for the 75.5% it didn’t own.
Aviation Capital reported 2019 revenue of $1.1 billion, ranking it No. 19 on the Business Journal’s annual list of the county’s largest private companies.
Relief Sought
Most of Aviation Capital’s lessees have requested some form of rental relief, although the amount of deferral has only amounted to about 6% to 7% of 2019 operating lease revenue, Tran said.
“That percentage might creep up a little bit,” he said.
“In the overall scheme of things, it’s very manageable.”
In the first half of 2020, its revenue fell to $531.8 million, a 4.7% drop from the same period in 2019, according to its most recent financial statement. It reported $103.7 million in net income for the first half, down 28% from 2019’s first half.
Its cash has remained steady, rising from $341.2 million on Dec. 31 to $350.9 million as of June 30.
“We are granting airline relief as warranted, generally on short term basis,” Tran said. “Our biggest focus now is that we remain a highly rated company.”
In its report last week, Moody’s said Aviation Capital has had strong access to the unsecured debt markets, resulting in low reliance on secured funding and a largely unencumbered fleet, strengthening its liquidity.
Moody’s also said Aviation Capital maintains a conservative capital position with a ratio of debt to tangible equity of 2.0x as of June 30, lower than rated peers
“Our investor base understands our model,” Tran said. “We are going to be around after COVID. They have a strong comfort in our abilities.”
Bankrupt Airlines
About half a dozen larger-sized airlines have filed for bankruptcy, including firms such as Thai Airways, Avianca and South Africa Airways.
“We have managed to avoid many of those” bankruptcies, Tran said.
The reason it has been able to avoid these troubled airlines is the underwriting process, where it studies the airline’s history, capitalization and ownership, among other aspects.
It has also helped that about 85% of Aviation Capital’s leases are single-aisle, narrow body B737s and A320s, Tran said.
“The narrow body planes are faring much better because of the resumption of domestic flying,” Tran said. “International travel has been tough.”
2022 or 2023?
U.S. airlines have built up “a war chest of cash” by raising capital and receiving federal assistance, Tran said.
The federal government provided $25 billion to cover expenses through September and it may provide more in the coming months.
“We’ve had a good six months despite COVID,” Tran said. “Air travel will return, it won’t stop. The question is when it will return to pre-COVID levels—maybe 2022 or 2023 or 2024.”
Aviation Capital itself started working remotely on St. Patrick’s Day. It hasn’t laid off any of its 120 employees and instead has hired employees to perform services previously done by its parent, PacLife, in areas such as technology, internal audits and human resources.
“ACG has been around for 31 years,” Tran said.
“This is not our first crisis. I have been through half a dozen. We are all experienced despite the severity. We’ll come through this solidly.”
