ALAFCO chairman and CEO Ahmad A. Alzabin Interviewed By Robeel Haq
Although the much-awaited Airbus A320neo was unveiled without a launch customer in December 2010, demand for the fuel-saving aircraft has been unprecedented. With more than 1000 orders and commitments from the likes of Lufthansa, AirAsia, Virgin America, IndiGo and American Airlines, it’s little wonder that the European manufacturer has hailed its recent launch as the most successful in aviation history. There has been plenty of interest from Middle East carriers too and while Qatar Airways was expected to place the region’s first order, its delayed negotiations with Airbus has allowed a lesser-known player to steal that mantle.
ALAFCO, a Kuwait-based lease and finance company, signed a memorandum of understanding (MoU) for 30 A320neos at this year’s Paris Air Show, together with a firm order for six A350-900 aircraft. The agreement sent a clear message to the market, according to chairman and chief executive officer Ahmad A. Alzabin, who has played a fundamental role in developing ALAFCO into a global heavyweight, with plans to double its fleet over the next five years. “Even though our company is small in terms of overheads, there’s no doubt that our ambitions are big and that’s something we have proven with the recent order,” he explains. “Enquiries have been flowing ever since our A320neo agreement was signed. We are talking to various customers about leasing them and although the interest is strong, nothing has been confirmed at this stage. The deliveries will be made between 2017 and 2021.”
Despite the fact that Airbus is seeking around US$7-8 million over the standard A320 price for its new engine option (neo) – which means ALAFCO’s order has a list price valuation of $2.7 billion – Alzabin was determined to become an early customer. “Mark my words, airlines that want to reduce their operating costs and replace their older A320 models will jump at this opportunity,” he states with conviction. “At the end of the day, fuel has become the biggest cost for airlines and look at the European Union’s planned carbon emission scheme, which could result in $1 billion extra costs for Emirates over 10 years and something like $700 million for Etihad over the next eight years, it’s not a joke. So the A320neo, which is 15 percent more fuel efficient in comparison to the standard A320 with less nitrous oxide emissions, is a very attractive proposition.”
Such foresight into market trends has been instrumental in ALAFCO’s continued success over the past couple of decades. The company was established by Kuwait Airways Corporation (KAC) in 1992, although a majority share was acquired by Kuwait Finance House (KFH) in 2000 and the company was listed on the Kuwait Stock Exchange six years later. “As a result of the listing, 36 percent of ALAFCO is now owned by private investors, while KFH has a 53 percent share and KAC possesses the remaining stake of 11 percent,” explains Alzabin. “Regardless of these changes, our focus has remained consistent. We have traditionally invested in narrow-body aircraft and that will continue in the future too, with the A320neo being a perfect example of this strategy. Indeed, if Boeing launched a similar product to the A320neo, as expected, we will not hesitate to place an order. Of course, the product would need to be studied before deciding on the extent of our order, but I am keeping a watchful eye on developments.”
The preference for narrow-body aircraft is down to supply and demand, continues Alzabin, as wide-body models have a more limited customer base and are less liquid than narrow-body aircraft. “We deal with high-value assets and they need to move around quickly, instead of staying on the ground,” he says. “We rarely venture into large aircraft purchases and a lot of people ask why ALAFCO has not ordered the Airbus A380, but not many airlines use them. It’s that simple. They are good aircraft and leasing companies can make money with superjumbos, but what happens if you run into trouble with them? Can they be moved around in a quick manner? We have to be careful with our investments.”
It seems an exception to this rule was made in 2007, when ALAFCO become the first Middle Eastern company to purchase Boeing’s 787 Dreamliner. Within a span of four months, 22 of the long-range aircraft were ordered by Alzabin, although leasing agreements with Kuwait Airways and Saudi Arabian Airlines were subsequently dropped as a result of production delays, while eight of the Dreamliners were sold to a third party in agreement with Boeing. Oman Air is still expected to lease six 787s and ALAFCO is marketing the remaining eight to other customers. “We now expect to receive the first Dreamliner in 2014 and discussions are taking place about compensation for the delays, which is usual practice in such circumstances.”
Looking ahead, ALAFCO has reached the targets for its first phase of growth and Alzabin wants to double the company’s fleet under a second phase. “Over the next five years, I expect to have 100 aircraft in the fleet with an average age of six to seven years. Demand is stronger for younger aircraft and if we offload the older models, which can be sold with or without the leases attached, then finance will be available for new purchases,” he reasons, while admitting that ALAFCO is looking at the aircraft of other manufacturers and could make its first purchase outside of Airbus and Boeing in the near future. “We are constantly reviewing our portfolio and looking at new products in the market, not only Airbus and Boeing offerings, but companies such as Bombardier and Embraer too.”
Another strategy for expanding the fleet is sale and leasebacks, where airlines have already placed an order with the manufacturer and leasing companies offer to purchase those aircraft and lease them to the airline. “This is common practice and saves the airlines from capital expenditure. We have experienced success with sale and leasebacks in the past and want to conduct some more while we wait for new aircraft to be delivered. The market is very competitive though, so it’s quite difficult to secure these deals,” explains Alzabin. “However, we have good equity and cash flow, we have a solid track record with financing, and each of these factors help. After all, our operation is basically dependent on two elements; the availability of equity when we place an order, as we have to pay around 20-30 percent of the aircraft price at that stage, and then the availability of finance when we receive the aircraft, with the remaining 70-80 percent coming from major financing houses. Even during the 2009-2010 global downturn, when we took delivery of over 20 aircraft, financing was never an issue. As a result, deliveries were made to customers on time and payments were made to suppliers on time. We always meet our obligations.”
The latest financial results to be published by ALAFCO have supported that claim. During the first nine months of its current fiscal year, the company announced a net profit of $105.7 million, marking a four-fold increase in comparison to the same period last year. “We benefit from having a customer base that is geographically diverse and each of our leases is performing well, with the exception of one. However, the remarkable increase in net income is due to the modification of certain agreements that yielded a one-time gain,” he explains.
In total, ALAFCO profited from two of these ‘one-off’ agreements, which took place in November 2010 and July 2011 – when the company had early delivery slots of certain aircraft that were purchased by a third party. Alzabin confirms one of the deals involved Airbus for six aircraft valued at $62.3 million and other involved Boeing for eight aircraft valued at around $70 million. “These are three-party agreements with ALAFCO, the manufacturer and the interested party. If we agree to waive our rights on aircraft that we have already purchased and have early delivery slots, and the terms are acceptable to both the manufacturer and interested party, then why not benefit from that immediate profit. Again, it creates equity that can be used to purchase more aircraft, with more opportunities as a result of that,” he states. “With the gains from these one-offs, and only three months remaining in our current fiscal year, we expect to close at $183.5 million net profit, which is a record. It makes investors happy, that’s for sure!”
A sticking point amongst this record performance has been ALAFCO’s legal wrangle with former customer Wataniya Airways, which ceased operations in March this year due its financial situation and unrest in the Middle East and North Africa. ALAFCO is seeking $70 million in damages, after Wataniya Airways bailed from a leasing contract for three Airbus A320s that spanned eight years, from 2009 to 2017. Negotiations between ALAFCO and Kuwait National Airlines Company (KNA), the holding company of Wataniya Airways, have failed to reach a conclusion to date.
“I think the situation is very unfortunate, where an airline started so well and then ceases operations, especially because this happened in Kuwait, where we are also based. That means we have a social liability, in addition to the commercial and business nature of this situation,” says Alzabin. “We want to support local airlines and that’s what we did with Wataniya, we were the first leasing company to work with them. Of course, this happens in our industry, it’s not unusual that airlines face trouble and it’s not unusual to enter discussions in such situations to minimise the impact. But at the end of the day, we have to respect their privacy and we therefore express our differences of opinion behind closed doors, not in the public. I’m optimistic though and know we will eventually find a solution, one way or another. It will probably take time, but that’s fine and we have 60 aircraft to worry about, so three out of that 60 is something we can handle.”
There has also been market speculation that ALAFCO is considering an investment in the soon-to-be privatised Kuwait Airways Corporation (KAC), itself a part-owner in ALAFCO. “That will not happen,” refutes Alzabin. “We want to focus on our core business of aircraft and related activities, so there is zero interest in purchasing a stake. I cannot image we will be impacted by KAC’s privatisation either. ALAFCO is a good investment for them and they cash a significant profit at the end of each year from our operations. Of course, we wish them the best of luck and if they ever need our help with the supply of aircraft, we will not hesitate to support them in the future.”