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Icelease & IG Invest

Operation

Icelease is a business unit specialising in aircraft trading in the international marketplace. Icelease is an arrangement company which ties together and utilizes the vast knowledge, experience and business contacts within Icelandair Group in the business of buying, selling and leasing of aircraft. All aircraft-related assets for aircraft trading purposes are kept in the holding company IG Invest ehf., which is managed by Icelease.

Icelease has been involved in numerous aircraft transactions in the past three years. The transactions can be categorized either as Investment or Trading. Trading is when an aircraft is bought and sold with back-to-back agreements, usually kept for a short period of time and not affecting the balance sheet. Investment is when an aircraft is bought and kept for a period of time in a rising market, and will then be sold later for a higher price. Usually when Icelease arranges an aircraft purchase for investment purposes, a new limited-liability company (special purpose company, SPC) is set up in co-operation with outside investors. Icelease manages the holding company, IG Invest, which in turn holds the shares of the SPCs. The aircraft is sold into the SPC, then leased to a financially trustworthy airline on a long-term lease agreement that fully covers the aircraft investment company’s operations. The SPCs are eventually sold out of Icelandair Group, with the attached leasing contract, when the market conditions are right, yielding a profit. By negotiating long-term lease agreements, the company increases the likelihood of being able to exit when the market cycle is at a favourable stage. Additionally, Icelease arranges back-to-back aircraft trading, where aircraft are sold immediately upon purchase, thereby eliminating the need for the SPC structure.

In 2007 Icelease received six new generation Boeing 737- 800 aircraft from Boeing. Five aircraft were sold outright, but one aircraft was sold into SPC, in which IG Invest holds 40% of the shares. These aircraft are part of a 15 aircraft agreement with Boeing in 2005 and were bought as an investment. During the year 2007, three of the SPCs in relation to the 737 investment package were sold, in addition to the five aircraft sold outright, yielding acceptable sale profits.

In December 2007 Icelease sold the biggest single asset in its portfolio, with a significant loss. The aircraft, a 747-400 freighter leased to Singapore Airlines, was part of a transfer of assets from FL Group in relation to the IPO of Icelandair Group in the year 2006. The loss from the sale of the aircraft at year end is the main reason why Icelease did not meet its profit target for the year 2007. The aircraft was probably the most critical and volatile asset in the portfolio, and it was decided to realize a loss on that asset in the year 2007 so that all assets in the existing portfolio would be “in the money”.

The assets

In the beginning of the year 2007 it was decided to sell part of the portfolio within the year, to take advantage of a strong market for aircraft. In 2007 a total of nine aircraft and SPCs were sold from the portfolio. IG Invest’s current portfolio consists of 10 passenger aircraft in SPCs, and four future deliveries of passenger aircraft with an additional three purchase options. As mentioned above, all assets in the current portfolio are seen as investments which will generate profit when sold. The future deliveries and all three purchase options are B787 Dreamliner aircraft. As the B787 is a new aircraft type, the market for the aircraft hardly existed a year ago. In the past few months there have been strong indications that the B787 order positions could become very valuable. In 2007 Icelease signed a Letter of Intent to purchase two Airbus 330-200 Freighter aircraft which would be delivered new from the manufacturer in 2010.

Markets and outlook

Icelease is fully aware that the success of its operation is highly dependent on the market cycle. The company intends to utilize the market cycle to maximize the return on equity. The aircraft market has been historically very strong in the past few years and remains so. That is the reason why Icelease will probably sell more of its assets in the coming months. Availability of aircraft is currently very limited, and long delivery lines with aircraft manufacturers make it difficult to buy new equipment to make a profit within a certain period of time. Therefore Icelease is seeking opportunities in trading with older aircraft in the coming years.

Icelease is currently working on some structures on the B787 order positions, which will be announced within the next few months.



 


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