Aircraft lessor Altavair is contemplating acquiring other leasing platforms following a successful raise by the lessor’s PE shareholder KKR of a $1.15 billion aircraft leasing fund, Altitude 2, earlier this year. Altavair CEO Steve Rimmer tells Ishka that the lessor is aware of multiple lessors available for sale.
Commenting on potential M&A plans, Rimmer adds Altavair wants to be competitive, either by doing transactions of scale or by embracing M&A. “I do think we’ll see some M&A activity and, yes, it’s definitely something we’re focused on. With the liquidity that we have and with the financial acumen that comes to the table via our KKR relationship, we’re well-equipped to take advantage of it.”
However, the lessor chief said extracting the full value of a rival leasing platform will be a challenge given the duplication of resources. “The question is: what valuations do you put on the non-assets in a lessor M&A? If somebody comes through the door and their assets are worth $100 million but they want $120 million for everything because they’re valuing the platform at $20 million, that’s kind of hard to justify when you already have a full-service platform in Altavair. If you look around today, there are some opportunities where there’s not much of a team left with some of the portfolios, but they are more limited.”
One potential acquisition opportunity that Rimmer highlights could arise if some of the public lessors choose to delist and opt to “right-size” for the private market.
“I do question whether the public leasing companies are going to be incentivised to stay public and what does that lead to? The stock price valuations aren’t necessarily great. The pressures have increased post-Russia to reposition portfolios and reduce risks in certain geographical sectors. Whether you’re ALC [Air Lease Corporation] or AerCap, if you look at the risks: you’ve got Russia, China, and South America’s financial challenges… They’re all going to make people look and say: ‘what do we do?’ And those entities might be right-sized for the public markets, but if you take them private that may lead to some sort of quasi-M&A opportunity.”
Plans for Altitude 2
The $1.15-billion aircraft leasing fund Altitude 2 was announced in January 2023 and, like its predecessor Altitude 1, was raised via the credit and infrastructure funds of Altavair PE shareholder KKR. Rimmer said Altitude 2 would likely target a mix of aircraft: single-aisles, widebody freighters, and widebody passenger aircraft. “I want to say it will be an equal balance for all three segments, but it will inevitably skew towards widebodies given their higher capex requirement and our experience in that sector,” reflects Rimmer. He adds that Altavair has access to more capital if needs be.
KKR acquired a 50% stake in Altavair in 2018 and offered an initial $1 billion capital commitment to be spent via Altitude Aircraft Leasing (Altitude 1), an aircraft leasing fund serviced by Altavair which has now been fully committed.
One early notable investment under Altitude 1 was the acquisition of an aircraft portfolio from Etihad Airways which included Boeing 777-300ERs and Trent-powered Airbus A330-300s and A330-200s – which was announced in February 2020, mere weeks before the onset of the Covid-19 pandemic. Under the terms of the deal, the 777-300ERs were to be leased back to Etihad, while the Airbus A330s were to be redelivered over the following 22 months for lease placement with other international operators for passenger operations or as converted freighters. The acquisition made Altavair an early leader for converted A330 freighters among lessors.
Currently, Rimmer highlights that Altavair is buying engines to address a potential shortage of spare engine capacity among customers exacerbated by MRO restrictions and long waiting times. He confides that of the 22 A330s acquired from Etihad, six airframes will be sold with Altavair retaining the engines to support the remaining 16 aircraft.
“Because we know that the engine MRO market is not going to be able to support the level of overhaul and shop visit requirements that are needed. In the last two or three years, shop visits were cut back because engine shops were closed or had reduced capacity. So, the overall operating fleet of engines in terms of average maintenance condition is way lower than it was pre-pandemic. You’re going to have to be able to protect yourself against that,” he adds
As for further engine acquisitions, Altavair has been focused on GE90-115Bs, one of the power plants behind the 777, to support remarketing of the aircraft type. “We’re going to need to satisfy a requirement for the next operator who’s going to focus on the fact that engine life is a key element for them,” he adds.
An interesting point raised by Rimmer is how certification delays could negatively impact the marketing of converted 777 freighters. Rimmer highlights lessors could face a significant remarketing challenge if the independent conversion programmes (IAI, Mammoth Freighters, and Kansas Modification Center) do not receive certification quickly. IAI suggests it will receive the supplemental type certificate (STC) for its 777 conversion programme in Q2 2023, Mammoth expects FAA approval in H2 2023, while KMC expects STC issuance and initial re-delivery of its first 777-300ERCF converted freighter in early 2024.
However, Rimmer warns that heightened safety concerns around new aircraft programmes by regulators following the tragic dual 737 MAX crashes in 2018 and 2019 could result in certification delays, particularly in relation to digital systems like the 737 MAX’s infamous MCAS.
Two systems on the 777-300ER (AIMS and ELMS, for which Boeing claims proprietary knowledge) are of particular concern. “The worry is that either the FAA, or Boeing, or both [could] put their hand up and say that these conversion houses don’t know enough and that any system should be examined very carefully,” reflects Rimmer.
He adds that certification is now a key risk for lessors looking to market converted freighters.
“Certification is a bigger risk in some of the current conversion programmes because if you haven’t got an STC yet you are going to be judged against, potentially, new product integrity levels by the regulatory body after the  MAX crash, and you’re potentially going be dealing with an OEM in Boeing who don’t want somebody to convert 777-300s because it impacts the market for the 777-X.”
Rimmer argues there is better OEM Alignment with EFW’s A330 conversion programme, as Airbus owns approximately 40% of the firm. He believes that IAI’s A330 programme could be two to three years away from certification. Altavair has taken redelivery of four EFW-converted A330-200P2F in 2022/3, two of which were subsequently placed on lease to Mexico-based Mas Air and two to China-based Hongyuan Group.
Converted freighters seem to be gaining traction with airlines but do face continuing issues. In 2027, the Boeing 767-300ERF and 777-200LRF production freighters will fall foul of the ICAO environmental regulations while both the Boeing 777-8F (the 777-X freighter variant) and the Airbus A350F are yet to be certificated.
The Ishka View
Altavair has built a powerful and successful niche among leased passenger and freighter widebody lessors at the same time as many competitors are looking to exit widebody investments. It is also interesting that of all the various assets Altavair is chasing – from widebodies to single-aisle passenger aircraft – converted narrowbodies are notably absent. Rimmer has argued before about an overcrowding of the 737 converted freighter market and confirms there has been a recent softening in 737 freighter rents, confiding anecdotally that rents have been down over the last 12 months by between 10% to 15%. He adds that these rents could also suffer when more capable Airbus A321 converted freighters eventually come to the market.
Looking ahead, Rimmer believes that China remains a jurisdictional risk with many lessors looking to limit or reduce their China exposure where possible. Separately, he warns that airlines should be prepared for lengthy waits for new twin-aisle aircraft. “We do foresee more production delays on widebodies. The 787 line has restarted again, but we hear airlines being told that widebodies are going to be a year late later than they anticipated.”
He argues the two newest dedicated large freighters, the 777-8F and the A350F, could face delays due to the same issues – and given that the baseline 777X is not yet certificated the 777-8F is potentially a higher risk than the already certified A350 passenger type. Rimmer anticipates the 777-8F will be delivered by 2028 or 2029, while the A350F could be in service for 2025/2026 but with a “relatively slow” production ramp-up. Rimmer believes the A350F on paper looks “fantastic” but the potential delays in the availability of the new freighter will create a period of uncertainty offering an opportunity for lessors such as Altavair to lease larger converted freighters.