Ryan's GPA has promise and risk. To realise the first, it needs money. Matthew Lynn probes both need and risk.
Last year, amid the break up of the Soviet Union, Mongolia began prising itself loose from the grip of both communism and Russian domination. For the people at GPA this was more than a geopolitical snippet from a place of which they knew little and cared less. It was a cast-iron commercial opportunity. With maps in their hands, a team from the Irish aircraft lessor descended upon the East Asian wilderness, and opened discussions on leasing a fleet of planes with which the country could start up its own airline. There was one snag, however. In a place where the last ruler of note was Genghis Khan, nobody ever quite got around to putting any relevant laws on the statute book - neither Genghis nor his descendants included leasing in their bag of tricks. Undaunted by this, GPA agreed to ship out more than the plans; they sent over a legal consultant to draft the necessary legislation for the Mongolians and oversee the creation of the legal framework needed to clinch the deal. "We have no hang-ups about approaching a new market with whatever it takes to be successful," says head of leasing, Jim King.
It is a neat anecdote, capturing the trials and tribulations familiar to anyone operating on the outer limits of the commercial universe. But it is one also which illuminates both the strengths and weaknesses of GPA. It is a creative business, full of fizz and dash, able to open up opportunities undreamt of by anyone else; it is a business also, with the willpower to create its own operating environment. And yet, since when was shipping planes on the never-never to the Mongolians a serious way for grown-up people to make a living? It is a question that will reverberate loudly throughout June, when GPA emerges from the seclusion of private ownership and seeks a stockmarket listing. Its value is expected to be pitched at around $2.4 billion, a sum which suggests that the company, at least, takes itself very seriously indeed.
The flotation has not been a smooth ride. Early preparations for the public offering were marked by press reports of a squabble between GPA and its advisers over the price that should be put on the stock. That is now a closed chapter. "The price will ultimately be decided by the market, not by us," says chief executive Maurice Foley. Then in April its plans were hit by another damaging dispute. Advisers to the flotation made it clear that it would not go well if the major shareholders took it as an opportunity to dump their stock on the market; if that was going to happen, the underwriters, fearing they would be left with unsaleable stock, would have refused to support the share issue. Unfortunately, that was what some of the larger stockholders made it clear they wanted to do. Both Aer Lingus and Air Canada, which between them hold 21% of the business, wanted to cash in their stakes to raise finance for investment in their airlines. To prevent that happening, GPA had to hurriedly start negotiating lock-in agreements with the large shareholders, limiting them to selling no more than 20% of their holdings within the first year.
For the shareholders, there was little choice - GPA had promised them a flotation as a way of realising their investment. If they hadn't agreed to the lock-in, the flotation would have stalled, leaving them still sitting on a paper investment. It was unlikely they would resist. And yet the incident contributed to the impression forming in financial circles of a flotation dogged by controversy.
But GPA is a company used to a hardy environment. Its headquarters is at Shannon on the west coat of Ireland, on a flat stretch of ground battered by Atlantic gales; Shannon Airport is a relic of aviation's past. Once it was the place where transatlantic flights stopped to refuel before completing their journeys. Now bigger plans with larger fuel tanks whistle by without stopping. Empty hangars and deserted gates are a reminder that aviation is a young, unstable business, and also of the state of constant turbulence in the industry that has allowed GPA to build a major corporation from unlikely premises.
The company was founded by Tony Ryan in 1975. He had worked for the Irish airline, Aer Lingus since leaving school - starting as a humble dispatcher at Shannon - and then had risen to middle management in the leasing department. The airline found itself with a plane surplus to requirements; Ryan worked out a deal whereby it was leased to Air Siam together with support staff to operate the plane. From that grew the germ of an idea; an idea which in the 17 years since then has turned into a multi-billion dollar company.
Ryan, one of the richest men in Ireland, is said to be a hard-driving employer. Certainly, around his offices he is treated with a degree of regal reverence which suggests a man more often cruel than kind. His staff are well-paid and expected to deliver. Evidence of a less hard-edged side of his character can be seen in the GPA headquarters, which is festooned with the work of young Irish artists. Then there is his commitment to building industry in the western Irish hills from whence he came. GPA has diversified into activities such as aircraft maintenance, with facilities in the area as much to create jobs and opportunities as to build its empire. Ryan recalls the start of it all: "I felt there was an opportunity out there in the market. The only leasing going on then was airlines offering surplus aircraft to each other, and those transactions were only really going on in the more sophisticated parts of the world. I felt there was an opportunity in the developing world airlines would have great difficulty finding the capital to buy planes. But I wasn't struck by a flash of lightning. I didn't say, ah, now I've got it. It evolved. I think that is the world which best describes how the company got where it is today."
It has evolved a long way since then. Aer Lingus baulked at Ryan's ideas of a big push into a specialised aircraft (though it took a stake in the new company), but the London merchantbank Guinness Peat backed him and GPA was the result. Ryan started with $50,000 in capital. In the years since then it has been built into a major operation; it now has a fleet of 400 aircraft, generating profits in 1991 of $196.5 million. And it has more than half the world leasing market sewn up, twice the share of its only serious rival, the California-based ILFC.
Ryan's earlier attempts to interest City financiers met with a mixture of bafflement and hostility. "This is a new industry, a young industry," says Ryan. "I remember when I first went to the City of London, I talked to 10 or so banks. We were mainly in Boeing 737s then, and they would ask me two questions. One was how much can you buy a 737 for, which in those days was $3 or $4 million new. And the next question was, what is the scrap value of a 737, and I'd say, well, $25,000. They didn't understand that it was a mobile asset that could generate revenues anywhere. They didn't understand the industry. You won't find that question asked today. But it has been a very long, slow educational process." The key to GPA's growth has been its ability to exploit Ryan's original observation of the demand for leases. Leasing is nothing new; transferring the concept to aircraft was. When the company was founded no more than two or three per cent of the world's planes were leased rather than owned. Now the figure is nearer to 20% and expected to climb higher. "The separation between ownership and operation has happened very rapidly," says Ryan.
It has happened for two reasons. One is the de-regulation of the airline business, particularly in the US. Big, well-capitalised airlines don't need leases; they can afford to buy their own aircraft direct from the manufacturers. New start-ups, however, don't have access to that kind of capital, nor do they need to take on board the risks of laying out big sums for a fleet. They prefer to lease their planes. At the same time the squeeze on profit margins, again particularly in America, has sunk the credit ratings of most airlines to the point where many have trouble borrowing money.
Many would be unable to raise finance to buy planes; GPA, with a good credit rating, can raise money more cheaply, and use it to buy planes which it then leases out to less credit-worthy customers. A similar trend has created demand in the developing world. The reluctance of banks to lend money to developing world airlines, usually state-owned, has deepened during the last decade, largely because banks have to make provisions for any loans to those countries. It is financially more efficient for them to lend money to GPA, which passes it on in the shape of aircraft to those countries.
The result has been a fiendishly complex business. "It requires a mixture of good engineering, accounting and legal skills," says Foley. "But behind all that it fundamentally requires good instincts for where money can be made and where it can't. The last thing I'd like anyone to think is that this is an easy business. It would be very nice to tell our investors that this was a real no-brainer, that you could make money like falling off a log. But it is actually quite hard work, though it is possible to do it." At 8.30 every Monday morning, GPA executives from around the world gather in the Shannon headquarters. In a sleek, high-tech conference room with a huge video screen hanging from the wall, they review the week's operations. Behind them a bank of computer screens track the minute-by-minute movements of GPA's 400 planes shared between more than 100 customers. Any problems are identified here, and solutions demanded.
"We have tried to encourage people to believe that there are no insoluble problems," says Foley. "That there are no countries that you can't on principle do business with; that there are no customers you can't in principle do business with; that you have to vary your techniques to a wide range of environments. We send people to a wide range of customers without preconceptions, without a bag of tricks thinking this is the only way they can do it.
"Problem-solving is a key quality; problems regularly crop up. To maintain its profits GPA has to keep its 400 planes constantly out on lease, and being paid for. When airlines start losing money, that can become difficult. Last year, as the combination of the Gulf War and the recession caused an unprecedented three per cent dip. In air travel, there were fears that GPA would be badly caught out. in some cases, it was; Air Europe went bust, with GPA planes on lease; and America West, another customer, filed for Chapter 11 bankruptcy protection.
"In the case of Air Europe there was little option but to take the planes back and replace them elsewhere. At America West, GPA moved to provide a small amount of finance, a move that acted as the catalyst for a refinancing of the airline which has allowed it to continue operating; that deal prevented GPA from having to find new customers for 16 A320s, tough in a recession-hit industry. But the threat of bankruptcy among customers is one that lurks constantly beneath every deal."
"There are very few credit-worthy airlines," says Patrick Blaney, deputy chief executive of the leasing division. "They have all suffered tremendously from the fall in world traffic, and a lot are in some financial difficulty." GPA keeps constant tabs on its customers, relying mostly on industry gossip to spot likely crashes. And yet, it is seldom deterred by the financial chaos that characterises its customers. "There are relatively few airlines with whom we shouldn't do business," says Blaney. "You have to work out whether there is a viable underlying business for the carrier, and in most cases their customers are still going to want to travel even if the airline has to be restructured."
GPA's ability to ride the downturn in the airline industry was demonstrated in its 1991 figures, which showed a static level of profits rather than the dip which many had expected mostly as the result of an ability to innovate its way out of trouble. "Another characteristic of the company is that we have had to educate ourselves to think big and to think globally," says Foley. "Many people say this is an improbable place to locate a global company. In fact we would say this is a very appropriate place to locate a global company, because to think globally you have to do not have a substantial home market, or bring any baggage with you. It is also helpful not to have placed yourself in any of the conventional financial centres where you are trapped by the conventional wisdom. If you have to think out all your problems for yourself you are more likely to come up with imaginative solutions than if you are conditioned by what everyone is saying at the nearest pub.
"The structural thing and the attitudinal things are the most important in the way we run the company," says Foley. "We have tried to build a business that is very innovative, and which encourages people to identify opportunities. Because of a lot of what GPA does, and what we make most money out of, is doing things that other people aren't doing."
One example was the creation of GPA Capital, a new division of the business, with the former chancellor, Nigel Lawson, as non-executive chairman. It grew out of a deal with a group of Norwegian fishermen. In the mid-'80s the finance department came up with an idea for raising money by selling off aircraft to investors while continuing to manage the leases on their behalf. The Norwegian fishermen bit first and the technique has now been turned into the fastest-growing part of the business.
"When we looked to the future we felt it was important to try to become more like a property developer," says Colm Barrington, chief executive of GPA Capital. Like a developer, GPA Capital plans to turn itself more into a creator and manager of assets, rather than an owner, as it has been up till now. Much of its fleet will be owned by wealthy investors (Japanese property developers are particularly keen on these deals) and investment funds; much of the same people who already own most office buildings.
One reason for creating the new business is to expand the scope of the corporation; another is for GPA to lay its hands on more money. "It is vital to move beyond the traditional aviation financiers," says Barrington. "If you don't, you are just talking to the same people." In the coming decade, the challenge for GPA is to discover enough money to finance the vast number off new aircraft needed. "In the last decade there was a shortage of planes," says Ken Holden, chief strategist at GPA. "This decade there will be a shortage of money." Holden estimates that by the end of the '90s, $400 billion will be spent on new aircraft. Ryan goes further, suggesting that over the next 20 years, $1.5 trillion will need to be spent on planes for airlines to keep pace with the growth of passenger traffic. Finance head John Tierney adds: "With an injection of new equity, we should be able to capitalise on the new financing opportunities opening up in this industry in the future."
Which is one reason for the flotation. GPA says it is floating because it has promised its existing investors, which include Mitsubishi Trust and Prudential Insurance among others, that it would. But the company also wants to raise fresh capital, capital which it needs if it is to hold on to the position it has carved out in financing aircraft.
Even so, with the flotation set for July, with listings planned in Dublin, london and New York, and with offerings lined up in Tokyo and other financial centres, GPA has a tough task to convince investors that it is a sound proposition. It has a financial track record behind it but it is dogged by the perceived riskiness of the airline business. Since its customers are so unstable, it can't be safe, runs the criticism. And yet, uncertainty is at the very heart of its business; it is the elixir that keeps it going. "One man's risk is another man's opportunity," acknowledges Foley. He pauses, and then adds: "But there is a limit." Where that limit is, however, both the company and its investors have yet to discover.