I have a confession to make: years ago when we first started doing interviews on this site, I never once thought about asking for a volunteer to cover ?aircraft leasing.?
Or, for that matter, Saudi Arabia, Nordic Renewables, and a whole bunch of other topics.
But I?m glad that so many readers stepped forward and offered to contribute on these topics ? the articles turned out to be fantastic?
And this one on leveraged aircraft leasing might just be even better ? especially if you?re an engineer looking to break into finance and haven?t had much luck at banks, prop trading firms, or sales & trading desks.
Let?s get started with a deep dive on an industry you might not have even known existed:
The Story
Q: You mentioned that aircraft leasing, and equipment leasing in general, are great for engineers who want to break into finance. Were you an engineer or technical major who followed this path?
A: Nope! I studied classical history and languages as an undergrad, at a ?semi-target? school.
I also studied international relations and economics as additional majors.
I didn?t have much solid work experience and had degrees that were only marginally useful, so I decided to go back and get a Master?s degree in Applied Economics right after finishing up with undergraduate.
I ended up as an Analyst at a wealth management firm and did a lot of ?performance evaluation? and some light analytical work. It wasn?t great, but it sure beat unemployment, especially as the recession was starting.
Q: Aha! So then, you got tired of that and moved into aircraft leasing?
A: Nope! I started looking around for other opportunities, and came upon a Project Finance-related role at a government agency.
It involved investing federal, state, and local tax money into infrastructure projects ? there was some overlap with public finance, but this role was more about modeling huge infrastructure projects like bridges, highways, commuter rail, and forecasting demand for transportation services, projecting how well projects would perform, and how the region could best finance them.
It was less about projecting cash flows and more about macro-level forecasts ? but it was actually very relevant to what I had learned in the Master?s program.
Q: I see? but since it was for the government, I?m guessing you got bored of this role fairly early on?
A: Yeah, pretty much. I worked there for almost 3 years, but since it was the state government you hit the ?ceiling? early and it is difficult to advance, in terms of responsibility or compensation.
There was some interesting work, but if you have a relatively young supervisor you?ll never be promoted until they retire ? 25-30 years into the future.
My supervisor was only a few years older than me (26), so I decided it was time to get out and find something else.
I did a ton of networking with mixed success; I was in talks with a few wealth management firms, a few boutique banks on the west coast of the US, and also with a few ratings agencies, but didn?t have much luck with traditional IB/PE-type roles.
Q: Yeah, given the state of the market and the other people applying I?m not too surprised. So will you finally tell us how you ended up in aircraft leasing?
A: It was almost accidental. I applied through the front door (i.e. simple resume submission) to an aircraft leasing firm, went through 4 rounds of interviews with them, and got the job.
While it wasn?t the same as an IB or PE role at a large firm, it was way better than continuing to work for the government, going back to wealth management, or going to a ratings agency ? and, in my view, better than going to an unknown boutique bank as well.
I?ll talk about the recruiting process in more detail later, but I managed all this without much knowledge of equipment leasing in general or aircraft leasing specifically, and they seemed used to meeting candidates who were unfamiliar with such a niche business and who had little to no aerospace experience.
Equipment Leasing 101: Got a Free Private Jet?
Q: Amazing. On that note, what do you actually do in aircraft leasing (and equipment leasing in general)?
I?m assuming it?s quite different from DCM / Project Finance / Aerospace and Defense?
A: Sure. It?s actually closest to what you do in commercial real estate, or maybe at a small private equity firm that focuses on assets rather than entire companies.
Here?s what happens:
- We get an asset-based loan to buy a commercial aircraft from Boeing or Airbus, and we purchase it using a combination of debt and equity?
- And then we rent it out to airlines that are in need of aircraft and can?t purchase them on their own.
If you?re wondering why an airline would not be able to purchase aircraft on its own, in a lot of emerging markets (places like Southeast Asia and Africa) there?s fast-growing demand for flights but these companies have a very difficult time getting loans to buy the aircraft.
On paper, the airline itself still orders and purchases the aircraft from the manufacturer ? we then purchase the aircraft from the airline immediately upon delivery, and then lease it back to them.
Since we use leverage for everything, I spend a lot of time sourcing debt, sending RFPs (Requests for Proposal) to banks seeing how much debt they can raise, and so on.
Overall we sit somewhere between a financing group like LevFin / DCM, aerospace, and a real estate investment firm that acquires properties and rents them out.
Q: So if I?m looking for a private jet, could you help arrange the financing?
A: Hah! No, unfortunately. My firm only deals with commercial aircraft, so no private jets or private anything else.
However, there are several firms that do specialize in private jet leasing and financing if that is what you find interesting.
Q: So what does the industry look like? I have to admit I know nothing about this, as you?ve already figured out.
A: It?s a very small industry ? there are only around 20 firms total doing this worldwide, and GECAS (General Electric Capital Aircraft Services) and ILFC (International Lease Financing Company, a subsidiary of AIG) together have about 50% market share.
The culture of those firms is very formal and corporate, hours are rigid, and people wear suits every day; the recruiting process is quite structured and the interviews are similar to investment banking interviews.
They also tend to want candidates with several years of experience in either finance or aerospace.
Then there are the publicly-listed aircraft leasing companies such as Air Castle (AYR), AerCap (AER), FLY Leasing (FLY), and Air Lease Finance Company (AL). They?re smaller in terms of both fleet and personnel, and in most cases these firms have pretty formal business cultures.
Then there are several leasing companies that exist as subsidiaries of major banks and insurance companies, such as Bank of China Aviation, Aviation Capital Group (US), and SMBC Aviation Capital (Japan). The culture at these subsidiary lessors also tends to be very corporate and formal, especially in Asia.
Lastly, there are several leasing companies based in Europe, such as AWAS and AVOLON in Ireland, and AerCap in the Netherlands. The culture there tends to be less formal than what you see in finance in the UK, but not as informal as some of the smaller US lessors.
At my firm specifically, the culture is closer to a US-based boutique investment bank ? but the hierarchy is flatter and people don?t care as much about your job title.
There are busy periods and not-so-busy periods, just like what you see in investment banking itself, but there?s not much face time or pressure to work a certain number of hours just for the sake of working.
Q: Ok, thanks for sharing all that? we?re going to jump into more detail on how ?deals? work and some other points later on, but I want to circle back to one point you brought up before we started: that aircraft leasing, or equipment leasing in general, is a good place for engineers.
Why is that the case?
A: Because you need in-depth knowledge of the actual equipment that you?re leasing in order to evaluate investments in that equipment.
This industry is not like PE or banking where you don?t have to understand the technical details of the company to buy or sell it ? here, you actually need to understand engines, aircraft parts, and the differences between models, makes, and so on.
This is especially appealing for any engineers who actually like to learn about and understand machines and capital equipment, as you will spend a great deal of time learning all the ins and outs of the assets to gain an edge. In some cases our team understands the aircraft better than the airline fleet management teams.
And it?s the same in other fields in equipment leasing, such as railroad cars and ships: a technical background really pays off and will give you a big advantage over the typical finance types who might apply for these roles.
So if you?re a mechanical or aerospace engineer, this is one of the best pathways into finance. If you?re a computer scientist, maybe not so much.
Recruiting 101
Q: So let?s say you get interested in this industry and decide to apply for jobs ? what do you need to know for interviews, and how does recruiting work?
A: At larger firms, interviews would be more like traditional IB interviews with the same sort of ?fit? and technical questions.? You can expect some technical questions about the actual equipment assets they deal with.
At my firm specifically, they didn?t care much about accounting or M&A-related interview questions.
Debt structure and cash flow modeling are much more important, as is asset valuation ? specifically how much various aircraft are worth.
They may expect some general finance knowledge about bonds, types of debt, and possibly ask you some DCM-related questions as well.
One interviewer asked me all ?fit? questions for the entire time, but it was really important because my team only has 7 people ? so if you don?t fit in, you?re out.
If you don?t have industry experience, the most common question you?ll get: ?How do you value a commercial aircraft?? ? or other general questions designed to gauge your logical reasoning abilities.
Q: And how do you value a commercial aircraft?
A:?An aircraft can be divided into several segments: Airframe, Engines, Engine Parts, APU, and Landing Gear. Most of an aircraft?s value lies in its engines, and the quality and global usage of the engines is a key consideration when evaluating an aircraft investment.
Additionally, Mid-Life and New aircraft are valued significantly differently, and you need to know the market prices for engines and other parts at various stages in the aircraft?s lifecycle.
It?s also important to follow the commercial aviation industry and understand the big trends. Commercial aircraft manufacturing is essentially a duopoly, and the decisions made by Boeing and Airbus have a dramatic impact on the value of the aircraft we own.
Q: OK, so what kind of candidates are they looking for? Newly-minted undergrads and MBAs, or those with more experience?
A: I?d say the ideal candidate is actually an engineer with an MBA or someone who has worked at one of the manufacturers in sales or finance ? they love to find those people because they understand both the technical/engineering side and the business/finance side.
Recruiting is generally quite informal, and if you can make the right connection you can network your way in or even get in as an intern in an MBA program.
Even the largest firms in this market don?t go to schools to recruit on-campus, so you need to be very proactive.
Attending industry conferences is a great move, because it is such a small, close-knit industry that you will likely meet a large number of people from all over the world in this business.
Getting in as an undergraduate would be very difficult because normally they want to see more experience than that.
There?s also a lot of pressure NOT to hire people in this industry because many leasing companies are subsidiaries of larger firms, or are owned by private equity firms. They want to keep margins as high as possible, so they are very careful about taking on additional employees.
A Day in the Life
Q: So what?s your life like at this firm? Is it similar to what a private equity analyst or associate would do?
A: On an average day, I get in around 8 AM and stay until around 6 PM. It?s effectively a 50-hour workweek unless something crazy comes up, which happens about half the time.
Averaging those possibilities, you could say the hours are less intense than investment banking but still significantly more than a standard 9-to-5.
As the day is starting, I respond to emails from people in other regions ? especially Europe and Asia ? that need deals to be priced and evaluated and require responses to questions.
So I?ll spend some time doing that, and then in the morning look through aircraft spec sheets for specific deals, evaluate the quality of the aircraft in a particular deal, and review the credit quality of potential airline lessees with our risk manager.
I?ll also build models to value aircraft and assess whether or not different deals are viable. The deal evaluation process is very collaborative and I discuss the various aspects in great detail with other members of the team, especially our technical department.
Around mid-day I may call anyone in Europe who?s still waiting for a response (since it?s the end of the day for them), and I also help out with more ?random? tasks like cash management activities and interest rate derivatives (hedging is very important given all the aircraft loans).
Throughout the rest of the day, I?ll place calls and send out RFPs to banks and other lenders to line up financing for new aircraft. Most of this work tends to be with domestic firms since we?re in the same time zone, but these activities can occur at other points in the day if we are dealing with foreign banks.
At the end of the day, I may place calls to people in other time zones where the day is just starting, such as Asia. I might also do some legal work around this time ? the end of the day is the only time you can get legal advice from our general counsel, and it?s very important since a lot of legal and contract work must be completed for each deal.
I spend a lot more time studying term sheets and reviewing small details than a typical IB/PE analyst or associate would ? banks like to sneak in language about extra fees and other restrictive conditions, so it?s our job to discover all that and negotiate to remove it.
Q: Thanks for that overview? I want to go into more detail on a few of those points. First off, what exactly does this ?modeling work? consist of?
A: It?s a lot like a bare-bones LBO model and it?s simpler than a normal LBO model because we model assets and cash flows, as opposed to companies and full financial statements.
We have several deal hurdles mandated from our board, such as IRR targets, borrowing spreads, and long-term asset value.
Typical leases can range from 4-12 years for new aircraft, and less than 6 years for mid-life aircraft.
The deal metrics vary by the length of the lease; generally we target higher IRRs for shorter leases?to make them worthwhile.
Then, just as in an LBO model, we back-solve and see how much we could afford to pay for the aircraft given a certain lease period and the targeted IRR.
Commercial aircraft range in price from $40 ? $180 million USD.
We do use multiple tranches of debt when buying the more expensive assets, and so the terms and structure of debt will also factor into the model.
Q: So that?s how you assess the viability of a deal and how you can value aircraft in some cases, but what else do you need to know on the technical side?
A: Another major factor is learning the maintenance and lifecycle of commercial aircraft.
Aircraft ?age? is based on the number of cycles (1 cycle = take-off and landing) flown, and the rate of corrosion that occurs in the various parts of the aircraft.
The frequency and procedure of aircraft maintenance is highly regulated, with strict rules mandating the timing of the various checks (A check, B check, C check, D check) performed based on how many cycles the aircraft has flown.
The term of the lease can be driven by how an airline plans to use the aircraft.
If an airline plans to run very short flights, which means more cycle wear on the aircraft and earlier heavy maintenance checks,? then we want to structure our lease such that the expiration occurs after those heavy checks begin.
The engines in an aircraft are also a very important part of the process because many commercial aircraft have two or more engine options that airlines can select at delivery.
Lessors need to know what the most common engine types are for a particular aircraft, and there are many ways that a lessor?s team can add value to a deal through a deep understanding of the asset?s lifecycle.
Surviving and Thriving Afterward?
Q: Thanks for that explanation? yeah, it gets really tricky to realize solid returns when the asset declines in value over time.
You mentioned earlier that the culture of these leasing firms varies widely ? anything else to add there?
A: Besides what I described above about the culture of big firms vs. smaller ones, you should also note that there are 4 main departments at most of these firms: Sales & Marketing, Capital Markets, Technical, and Accounting / Legal.
Capital Markets is all about sourcing the debt and financing deals, with some risk management thrown in as well.
The Technical department is mostly former engineers from airlines and the major manufactures, like Boeing, since you need intimate knowledge of aircraft internals and their lifecycles to work there.
Sales & Marketing is mostly about doing deals with the airlines and traveling all over to negotiate lease deals. People in this department come from sales at Boeing and Airbus, or from airline consulting firms.
So the culture varies greatly depending on which department you?re in ? it?s impossible to generalize since they?re all quite different.
I would not really consider any of these ?back office? or ?middle office,? except for maybe Accounting / Legal, since you work with clients and do work that directly contributes to deals in each department.
Q: And now for the obligatory question about pay?
A: The titles and corresponding pay (base salaries + bonuses) are identical to sell-side investment banking.
So even though we?re technically on the buy-side, we don?t get that same jump in pay or prestige, though the hours are much better and the work itself is arguably more interesting.
Q: I like your direct answer there ? much better than interviewees who refuse to say anything!
Now for the exit opportunities? this sounds like a very specialized field, so I?m assuming your options are limited?
A: Yes and no. The most common transitions I know of are:
- Move to a commercial bank that?s making asset-backed loans (e.g.?Structured Finance).
- Go into the finance department at an airline, or do route planning or fleet management there.
- Start your own leasing company, if you have the experience and financing connections.
- Becoming a flight attendant, if you happen to be a supermodel.
I?m joking on the last one, of course, but the first 3 are all do-able.
There?s a lot of skill set overlap with private equity, so theoretically it seems possible to break in ? especially if you work at a firm that?s owned by a PE firm. But in practice, I think you might be more limited to firms that specialize in aerospace and defense and related fields.
Q: So who?s the ideal fit for aircraft leasing, or equipment leasing in general?
A: It?s great if you have an engineering plus business background. They really like people who did undergrad degrees in engineering and then went to business school.
Liking airlines would also help, but it?s not absolutely required as long as you enjoy the work itself and the process of thinking about aircraft.
In all types of equipment leasing you need to like the assets you are dealing with, because you?ll be learning about those assets all day long.
?Typical? bankers would not like it here because the work is quite different, it?s a bit slower-paced, and you don?t see people who are obsessed with their bonuses and earning as much as humanly possible.
And it doesn?t necessarily provide a clear path into PE unless you?re working at the right firm, so it?s not the best option if you?re set on making that move, either.
Q: I see. It sounds like you?ve liked it quite a bit so far, but are you planning to stay there long-term?
A: I?ve definitely learned a lot since I?ve been here, but, as in other fields, it does get harder and harder to switch and move elsewhere the longer you?ve been here.
The best part about this job is that you run into a lot of colorful characters ? in a good way ? in many emerging markets. The CEOs and CFOs of many emerging market airlines are very ?interesting? people and it?s actually a lot of fun to work with them.
The overall environment is much less stuffy than what you see at a bank, so it?s hard to think that I?ll even find ?greener pastures? in that regard.
Bottom-line: I?ve enjoyed this so far and it definitely beats the government and wealth management work I did before.
Q: Awesome. Thanks for sharing your story with us!
A: Any time.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.