FLY Leasing sees positive signs: fewer available aircraft, higher lease rates and aircraft prices

And "if consolidation were one of those opportunities [to improve shareholder value] then we would certainly look at it carefully." Meanwhile, the "primary focus" at present is to maximise that value, so the present preference is for equity and debt buyback, rather than expanding the fleet.

CAPA: FLY Leasing Limited is a fresh face in the leasing business, the reincarnation of Babcock & Brown Air Limited. Could you describe the path that the company has taken over the past couple of years to reach this point and what does the FLY Leasing Limited brand stand for.

FLY Leasing is the new name for Babcock & Brown Air Limited, which was formed in 2007. The new name was adopted by the company in June 2010. There has not been any other substantial change to the company: we still have the same management and our fleet is still serviced by BBAM. The name FLY Leasing Limited was inspired by our NYSE sticker symbol, which is "FLY".

CAPA: The company was previously being groomed for a potential sale - are you still seeking fresh investment? Or is this not a good time to sell?

We have not been grooming FLY for a sale. The company listed on the NYSE in October 2007 and has been a public company since then. Like all companies that are anxious to grow, we would like to have new investment over time. '

However, current conditions in the public markets, and particularly related to aircraft leasing companies, are not attractive for raising new equity. Indeed, we have availed of these conditions to repurchase approximately 20% of our own equity at attractive prices and to purchase approximately 20% of our securitised debt at an approximate 50% discount to par. These initiatives had returned significant value to our shareholders.

CAPA: What was the strategic rationale behind the recent investment in a 15% stake in BBAM? How specifically will FLY shareholders benefit from the closer integration between FLY and the manager and servicer of the FLY fleet, BBAM?

BBAM is the servicer of FLY's fleet and as a result is an important part of our future. Our investment in BBAM (and the further investment by BBAM's principals in FLY) was in order to further align the interests of the two companies.

In addition, we are very positive about BBAM's business and its future and we see this investment as being complementary to FLY's current business. We also expect to earn a satisfactory return on our investment.

CAPA: Have the signs of recovery you noted in your first quarter earnings statement continued into the middle stages of 2010? How do you see the aviation market performing for the balance of 2010 and into 2011?

The signs of recovery in the airline sector are quite positive. IATA is now projecting that the world's airlines as a group will make a profit in 2010, as against substantial losses in 2009. Strong and profitable airlines are the primary drivers of the leasing sector.

We are already seeing declines in the number of available aircraft, a strengthening of lease rates and increases in aircraft prices. So, yes we are seeing continuing signs of recovery which we believe will continue for the balance of 2010 and into 2011.

CAPA: With a number of new entrants in the lessor market, which have been able to raise significant amounts of equity, comes the capacity for sale-and-lease back transactions. Do you see an increase in sale-and-lease backs, as the portion of ECA financings diminishes?

FLY and BBAM have been major players in the sale and leaseback business (BBAM for over 20 years) and we expect to continue to be so. To-date we haven't seen any reduction in the availability of ECA and Ex-Im financings, but these continue to be complemented by sale and leasebacks. Meanwhile the emergence of new players backed by private equity has come at a time when other players have retrenched (e.g. ILFC, RBS) or failed to emerge as or to the extent we expected (e.g. DAE, BOCA).

CAPA: Are there advantages to be had in further consolidation within the leasing sector - and will FLY be an active participant in that process?

There hasn't actually been much consolidation in the sector. Of the public companies only AerCap and Genesis have consolidated. FLY benefits from being serviced by BBAM, which is the industry's third largest aircraft lease manager (after GECAS and ILFC).

As such we don't need to consolidate for scale purposes. However, we continue to look for opportunities to make FLY more valuable for our shareholders and if consolidation were one of those opportunities then we would certainly look at it carefully.

CAPA: FLY Leasing currently has a fleet of 62 aircraft placed with 36 airlines in 20 countries. The fleet has been stable for over three years now. Do you plan to grow this portfolio over the medium term?

As stated on our recent Q2 earnings call, we are looking at improvements to our portfolio all the time, including acquisitions and disposals.

It is our intention to grow over time, but our primary focus continues to be on maximising shareholder value and over the last year and a half we have found better opportunities to do this through acquiring our own debt and equity - both of which we believe are undervalued - than by acquiring aircraft.

We believe that there are further opportunities to acquire our shares and we will continue to examine these along with looking at potential acquisitions and disposals of aircraft.

CAPA: Are you actively expanding your presence in emerging aviation markets? Is the risk profile higher in these markets?

BBAM has a strong presence in emerging aviation markets and through their activities in these markets FLY has a reasonable portion of its portfolio in these markets.

We continue to look at opportunities in developing and in developed markets, tempered by our focus on maximising shareholder value as referred to above. In aircraft leasing there are many factors that must be considered in analysing risk; including the aircraft type, the lessee, the jurisdiction, the security package and the lease provisions.

So a popular aircraft type leased to a new credit in an emerging market on a strong lease with a good security package is probably a better deal for a lessor than, for example, a less popular aircraft type leased to an established airline in North America.

CAPA: Do you view the emerging aircraft types, eg Cseries, C919 and others as good investments?

We will follow our airline customers on their choice of aircraft types. So it is too soon to say whether these new types are good investments or not.

CAPA: Do you see a strong case for re-engining the Airbus and Boeing narrowbodies?

Again, this is an issue on which we will be guided by our airline customers, whose thoughts will influence the manufacturers' decisions.