True Diversification - Airline Economics
12 January 2022
The transportation and leisure industries have been heavily impacted by the pandemic crisis. George Logothetis, chair of The Libra Group, which owns assets across shipping, real estate and aviation, shares his experiences of the crisis period, while Jaspal Jandu, CEO of LCI, Libra Group’s aviation subsidiary, shares his thoughts on rotor and fixed-wing leasing.
Aircraft leasing and hotel real estate may seem like very different industries but in fact they are closely related. Most hotel companies do not own the hotel buildings, they operate the hotel functions. The hotel real estate is owned for the most part by investors. Aircraft lessors act in a similar manner, they provide the aircraft assets to airlines that operate the aircraft as part of their business. The risks are similar in terms of residual values of the asset be it aircraft or property – although aircraft tend to depreciate whereas real estates for the most part tends to increase in value. Libra Group’s business interests span shipping, commercial real estate, renewable energy, hospitality, hotels, and aviation assets through its subsidiary company, LCI, which is a fixed wing and helicopter lessor.
The Libra Group’s commitment to social responsibility is expressed through nine core initiatives that collectively seek to deliver educational opportunity, business opportunity, and acts of humanity towards people who are neglected, marginalized or under-served.
The Libra Group is wholly owned by the Logothetis family. Airline Economics spoke to the Libra Group’s Chairman and CEO, George Logothetis and to LCI’s CEO, Jaspal Jandu.
Airline Economics: The Libra Group’s business interests span shipping, commercial real estate and hotels, and aviation assets, but also philanthropic endeavours. How have the different industries the Libra Group works in coped during the pandemic crisis and how has that informed your current business decisions?
George Logothetis: Well, it has been quite a ride. Some industries have benefitted enormously from the pandemic, notably shipping and multifamily housing in the USA, while others were hit extremely hard. The most severely affected was inevitably the hospitality sector. We were forced to temporarily close almost 50 hotels across several countries within couple of weeks during the worst of the pandemic. Then, when we were able to re-open them, stringent safety measures had to be introduced to protect staff and guests.
Shipping has experienced an epic boom due to the shifting of spending from services into goods. It was exacerbated by a fear of shortages, which in the end became a reality with the inevitable panic-driven buying sprees. Border restrictions, social distancing measures and business closures massively disrupted global supply chains, leading to unprecedented port congestion and soaring freight costs.
Our renewable energy businesses have all benefitted from the rising demand for clean energy as the world wakes up to the realities of a climate crisis.
Lockdowns and travel restrictions meant that we had to cut down our internship program from up to 100 students each year to 20. Our interns joined the many who accommodated working from home and attending meetings via video conference.
The Seleni Institute, which is a mental health institute and part of our philanthropic initiatives, saw a massive spike in needs. A global mental health crisis was brought forward by the pandemic. All in all, a time of many extremes during the last 24 months!
Airline Economics: Aviation is a small but enduring aspect of the Libra Group. Can you relate how and why Libra entered the aviation sector in 2004, and the early development of the portfolio?
George Logothetis: Libra was founded in 2003 with the idea of investing in areas outside shipping that was our sole business at the time. We sent several of our top leaders around the world to look into global investment opportunities. The main thesis was to diversify risk away from shipping and get the timing right on cyclical buys in other asset classes.
One day in 2004, I was reading the FT and came across an article stating how aviation was ‘low’. Well, at the time shipping was ‘high’: two commercial cycles that were out of phase. Hence, the idea of looking into buying planes came about. So we started to meet people from various segments of the aviation industry. What struck me was the relative hubris in the shipping markets compared to the relative humility in the aviation markets - it was evident even when meeting people and seeing their body language in meetings. It was almost as if aviation was devoid of hope and shipping was devoid of fear. So we started buying planes while we were selling ships. The first transaction was agreed with my friend Steve Hazy at the bar of the Metropolitan Hotel at an aviation event in June 2004. We agreed the purchase of two narrow-body and one wide-body jets, to be managed by ILFC - All written down on a napkin that Steve and I co-signed. Thus LCI was born.
We were encouraged by the many similarities between aviation and shipping – and many of the banks we used in the shipping world also lent in aviation. A few months after those three planes agreed on the napkin, we negotiated a second package of five planes with ILFC. Interestingly, this deal was concluded with Mike Platt who is now the Vice Chairman of LCI. From these beginnings, our aviation journey began.
Airline Economics: Shipping and Aviation are both cyclical industries and as such complement each other, however the pandemic seems to have broken that cycle somewhat, what are your thoughts for the future of both sectors, and has your strategic planning had to adapt in light of the recent crisis?
George Logothetis: Container shipping has gone through incredibly volatile times. Our shipping company made a huge bet on the container market, buying almost 100 vessels during a 12-year crisis that finally ended with the pandemic. Now, all of a sudden, the whole world knows that 90% of the world’s goods are transported by sea.
We are all aware of the vessels outside Long Beach and Los Angeles, of the supply chain crisis and of the difficulty in securing any products. Less known is the mental health crisis for seafarers who cannot leave their vessels; the incredible difficulty of running and operating a shipping company in COVID times; the inability to get spare parts to vessels; the restrictions that can literally trap vessels in ports – on occasions for months. The ‘just in time’ production theory only works if the goods arrive in ‘time’. A whole new appreciation, and concern, is now out there for the supply chain logistics of the world.
The earnings of some vessels has gone from $5k per day to in some cases this year $300k per day for spot trips. Then the vessels sit off the coast of Long Beach waiting for berths. The conflict between, on one hand, the ‘new world expectation’ of being able to order ‘stuff ’ and have it appear tomorrow at your front door, and on the other hand, the harsh ‘old world’ reality of needing to get it made, sent to a port, shipped across the oceans, unloaded at a port etc. has now been brought in to sharp, inescapable focus.
On the aviation side, we are very proud of the work LCI has done over these last years – the leadership shown, the partnerships created, and the innovation that has led to new strategies that will define it in the coming years. Transport will always be at the soul of the Libra Group.
Airline Economics: You recently bought KKR’s share of LCI Helicopters and now own the entire company, can you explain the reason behind your decision? Is this a vote in confidence for the rotor-wing market?
Jaspal Jandu: This a vote of confidence in the aviation leasing market as a whole.
Since it first invested in the rotor- wing market in 2012, LCI has built on its reputation as a proven lessor of fixed wing aircraft by developing a large and diversified portfolio of helicopters that is in operation across the globe. LCI’s recent acquisition of Nova Capital Aviation (Ireland) and with it, the expansion of its portfolio to over 140 rotary and fixed wing aircraft, is testament to the robust leasing platform we have built.
We believe there will be many opportunities in both the rotary and fixed wing markets in the years ahead, and felt this was the right time to be fully invested in LCI’s future.
Airline Economics: LCI exited fixed-wing aircraft assets some years ago to focus on rotor-wing aircraft, what were the main reasons for that and why has LCI recently bought back into the fixed wing space? (Why the A330 type and do you expect to increase your fixed-wing portfolio further, and if so which aircraft types?)
Jaspal Jandu: LCI has always been an aircraft leasing company, and we have had a large portfolio of fixed wing single aisle, then twin aisle and then freighter aircraft within our fleet. We pride ourselves on moving where we identify opportunities in the aircraft leasing marketplace, even if that is not where others are going, and we have been very successful with this strategy.
Our helicopter strategy was always intended as additional element to our aviation leasing and investment platform, and we are delighted how that portfolio has grown and performed.
We believe this is the right time to re-enter the commercial market and we believe that the A330-300 is the right aircraft, along with other fixed wing aircraft that have recently joined our fleet from Nova Capital and serve the emergency medical services market.
LCI has previously owned many A330-300s and they were all good investments. We see an opportunity to re-invest in the type at today’s prices which reflect the downturn in international travel caused by Covid-19. The A330 is a mature and proven design. There is no competitor aircraft that has equivalent seat mile costs or capital cost and we expect the values to come back strongly as international travel resumes.
The A330-300 high gross weight variant (which is the variant LCI has recently acquired) is an extremely capable and versatile aircraft that can fly between 300 and 400 passengers over 6,300 miles. We see good opportunities for existing A330 operators to expand their fleets but, more importantly, for new operators to move into widebodies for the first time. There are currently 108 operators of A330s, but nearly three times as many A320 Family operators who we could easily see up-gauging to A330 as markets grow.
LCI has a very experienced management team with executives that have been in this business for well over 30 years. Libra relies upon their expertise and knowledge of different aircraft types and the long-term demand for them within the marketplace.
Airline Economics: The helicopter industry has had its own cyclical ups and downs. How has LCI coped during the crisis and what are the new challenges ahead – such as ESG funding issues with oil & gas related assets?
Jaspal Jandu: When we entered the helicopter market nearly a decade ago, unlike many of our competitors, we did not chase the then higher yields of the offshore Oil & Gas markets. We deliberately built a diversified portfolio in terms of types, operators and missions, to the extent that Oil & Gas only accounts for around 20% of our total fleet today and continues to fall. However, it remains an important part of the helicopter market and we must remember that these helicopters provide an essential service, providing safe and reliable transportation for thousands of passengers every day.
The energy transition is already taking place, and LCI is taking a leading role in this as one of the first helicopter lessors to target the offshore wind power marketplace. Offshore gas will also play an important role in this transition as we quickly move away from other fossil fuels such as coal.
Helicopters will continue to provide an essential supporting role into the future, and given their range and performance, we do not believe they will be replaced by any new technology vehicles. However, innovation and improvements are continuing and LCI is working closely with manufacturers and other stakeholders, to reduce the carbon footprint of the helicopter industry for example with the adoption of SAF (sustainable aviation fuel). The current generation of helicopters have already replaced older and less efficient models, and overall helicopters are still more fuel efficient and less polluting than vessels.
LCI’s leadership in this area and focus on the importance of ESG within its overall commercial strategy reflects the approach of the Libra Group as whole. In Europe, our EuroEnergy subsidiary has built an extensive portfolio of grid- connected solar energy parks and wind farms whilst, in North America, Greenwood Sustainable Infrastructure manages investments in solar energy as well as combined heat and power (CHP) installations. In Central and South America its sister company, Greenwood Energy, is involved in the development, installation, operation and finance of projects in the cleantech space with a focus on distributed generation.
Airline Economics: ESG but specifically sustainability issues have been brought to the fore again following the COP26 conference, what has been your experience with ESG influence on investors and its impact on your business areas today, and how do you expect this to impact them in the short and longer-term future?
George Logothetis: I met with a group of students this week and this point was top of mind. The concern in their faces and eyes when asking me the same question remained with me. Here were 25 young people who were palpably distressed about the way they see the future and the risks to their lives. All I can say is we all have a duty to do what we can to help. It starts with awareness – for we cannot fix what we are not aware of. Unlike five years ago, we see awareness everywhere.
Finally, this cannot be ignored because it is the students that I met this week and their descendants who will pay the price if action is not taken. We see across our businesses a vast amount of capital looking for ‘ESG’ homes – a massive reduction in lenders willing to finance non-ESG assets and so the rules are starting to kick in. Commercial conscience is playing its part – but so too are market forces: companies are coming to realise that they will be unable to close deals and attract the right talent if they do not govern their companies with utmost probity while demonstrating clear responsibility to the environment and to society. Change is occurring and the rate of change is increasing.
Airline Economics: On the “S” in ESG, The Libra Group has a strong reputation for supporting its workforce and promoting diversity, which has been a founding principle of the business, what is your view on the development of regulation in this space and how businesses in general are advancing their own ESG programmes?
George Logothetis: We are proud of the multiple social initiatives that our group leads and the millions of people’s lives around the globe who benefit from them. Philanthropy is at base giving without expecting to get anything back in return. And it starts with being decent and respectful. Once more, awareness is needed. We all live in information pods it seems these days. So sharing best practices with other like-minded organisations has helped us and helped them to improve the programs.
As for regulation, it will probably always be easier to regulate for the ‘G’ in ESG, but it is worth remembering that the ability to do business has always depended both on the terms of the ‘deal on the table’ and on the reputations of the parties concerned. Companies realise that today their reputation is inextricably connected with their actions in respect of the environment and society.
I remember when we started our first internship program in Greece 10 years ago during the crisis.....it was born out of anger at the way young Greeks were being treated. But anger properly governed and weaponised for the better can be a force for good. Other companies who saw our program begin started creating their own. The result is a major positive influence on society and a feeling of having positively contributed. For it is not all about business, spreadsheets, risk models and management meetings.
Airline Economics: Looking ahead, transportation technology is advancing more quickly than in the recent past, with climate change issue pushing the development of cleaner fuels and more efficient vehicles? What are your thoughts on the electric air taxi phenomenon (eVTOL or electric vertical take-off and landing aircraft), which is attracting significant investment? Likewise the push for cleaner fuels – from sustainable aviation fuel to hydrogen, what are your thoughts on the likely timeframe for entry into service, and what would be of interest for early investment by the Libra Group?
Jaspal Jandu: As part of LCI’s efforts to develop a more environmentally efficient portfolio, we are engaged with developers, OEMs, operators, investors and other stakeholders about new initiatives in the AAM (advanced air mobility), eVTOL and electric aircraft markets. We recognise that while some of these projects are fast becoming reality, there remain some significant challenges that the industry as a whole must address.
However there needs to be a sound business case, and this will require support from lessors, financiers and possibly governments. In order to achieve this, there needs to be some product maturity, a wide application and customer base, and longer technology cycles to avoid obsolescence. As an operating lessor, we are a long- term investor, so we are taking a particularly close look at the market and technologies of the future.
While many of the current projects are focused on urban air mobility or air taxis, LCI has typically invested in assets which perform mission-critical functions. These could include cargo transportation and logistics, but also have specific applications in aeromedical (including emergency medical services and search and rescue), reconnaissance or remote sensing or humanitarian support. In these roles, we see AAM and eVTOL playing a complementary role to existing technology, including the larger, new-generation helicopters which comprise the majority of our fleet.
Current timescales for some projects are quite ambitious, and while initial developments could be in the market within five years, we do not expect widespread adoption of these technologies for another decade. Even then, there will be many missions which still require the range, capacity and payloads of current helicopters.
With regards to larger commercial aircraft, there is clearly a fast-growing momentum towards zero-carbon and, while SAF is a near-term solution, in the longer-term the industry will need to find a way to make hydrogen powered aircraft a reality. We all recognise the benefits but there are still logistical and practical challenges to overcome. While there are companies looking to convert current aircraft designs to new fuels, ultimately there will need to be all-new designs which will require very significant investments.
In short, there is plenty to do in the commercial aviation, helicopter and AAM spaces and we are very much open for business and are keen to grow at this time.
Read the original article in Issue Sixty Four of Airline Economics.