The new year will see Khanh Tran go from chief advocate for Aviation Capital Group to chief executive of the aircraft leasing company.
Newport Beach-based Pacific Life Insurance—one of the biggest life insurance businesses in the U.S. and the largest privately held company with headquarters in Orange County with $7.7 billion in annual revenue—announced last week that Tran will shift from his role of president at the insurer to the top day-to-day post at ACG.
The move, which takes effect Jan. 1, came with word that Pacific Life is considering an initial public offering of a portion of the wholly-owned subsidiary, with plans and intentions to retain a majority equity stake in the company afterward.
It’s a bit of a back-to-the-future scenario for Tran and Denis Kalscheur, who will wrap up a three-year stint as chief executive of ACG and become vice chairman.
Longtime Acquaintances
The two worked together in the 1980s for Tiger International in Los Angeles and its subsidiary Flying Tiger Line, a global cargo airline that eventually was sold to FedEx. Tran had an MBA from University of California-Los Angeles’ Anderson School and a stint at United California Bank under his belt.
Kalscheur was a finance specialist and already a veteran of the aircraft industry, including a stint at AirCal, a passenger airline based in OC and headed by William Lyon and George Argyros before being acquired by American Airlines in 1987. Kalscheur then went to work for construction and engineering company Fluor Corp. and later rejoined Lyon at Elsinore Aerospace, where he helped acquire, run and sell various airlines-service businesses.
Tran had gone onto Vons Cos. for a few years before joining Pacific Life in 1990, and within a few years he had taken the lead on a plan that held the potential to diversify the insurer’s portfolio.
“Khanh … had a vision of aviation leasing as an asset management alternative to aerospace and aviation bonds, and was instrumental in getting Pacific Life into the aircraft leasing business,” Kalscheur recalled. “I had known of the Aviation Capital Group guys, which was a small company at the time. I helped introduce the ACG partners to Pacific Life, which led to Pacific Life’s first investment in ACG.”
That was in 1996, and the insurer had taken an 83% interest by 2002.
ACG now has about 100 employees, with 70 or so at its headquarters just down the street from Pacific Life in Newport Center.
ACG also has offices in Bellevue, Wash.; Ireland; England; Chile; Singapore; and China.
The company is looking to tap into institutional investor capital—with an IPO as an option—that could help the Newport Beach-based aircraft leasing company make bigger market impact and speed up its deal pace as it continues to grow its portfolio of jets.
Aviation Capital is among the biggest airplane lessors in the world, working with some 100 airlines in 45 countries, and with about 290 airplanes it owns or manages. The total gets close to 400 when also counting the jets that it has committed to buy or placed orders for.
Resources
Aviation Capital has previously gone to market with numerous debt offerings funded by institutional investors, such as investment and pension funds. That’s allowed the company to engage in a greater number of deals to buy and sell airplanes.
Not that Aviation Capital doesn’t have the financial resources itself.
The company has total assets of $9 billion and an investment by Pacific Life totaling $1.7 billion. It had net income of $90 million in 2014 on nearly $800 million in revenue. It also has raised more than $8 billion in debt financing in the past five years or so.
“We’re profitable, so we can grow our own equity base that will allow us to do more and more deals,” said Kalscheur. “But that’s using our capital. We have sufficient capital, but we can do more and have a bigger imprint in the market if [we have] joint venture partners who want to work side by side with us but [would] have us control the development and management of deals. We’ve been talking with a number of potential joint venture partners over the last couple of years. … We’ve been approached by … a number of investors that want to do it.”
The increasing focus on the airplane leasing industry taken by institutional investors comes against a backdrop of a “dramatic growth” of the sector as a whole, Kalscheur said.
Indeed, leases now account for about 40% of global fleet ownership or control in 2014, versus 1.7% in 1980, according to an analysis by Boeing Capital Corp.
Outlook
Boeing’s latest available Current Aircraft Finance Market Outlook says, “more than $120 billion [is] expected to be needed for [aircraft] deliveries in 2015, and even higher numbers forecast for future years.”
The report adds that leasing companies have shifted a substantial portion of their leverage “from commercial bank debt to more efficient capital market funding,” leading to “expanded capital market liquidity [that’s] attracting new institutional investors and stimulating interest in the creation and evolution of aircraft portfolio securitization structures.”
A key attraction to aircraft leasing is in the long-term nature of the assets and the leases, which serve as a stable source of cash flow and profitability.
“An airplane is designed to be able to fly for 25 years—there’s a lot of them converted to cargo, [so that’s] even longer,” Kalscheur said. “So they’re very long-lived assets to begin with. And then the leases themselves … it can go for an average of eight to 12 years. … On a risk-adjusted basis, [investors] are seeing this leasing space as providing exceptional returns.”
