Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad streets in New York City, you're Inside the ICE house, our podcast from Intercontinental Exchange on markets, leadership and vision in global business, the dream drivers that have made the NYC an indispensable institution of global growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism, right here, right now at the NYSE and at ICES exchanges and clearing houses around the world. And now, welcome inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
I think my first flight on a commercial jet was around 1971 or 1972, aboard a Pan-American World Airways Boeing 707 bound for Bermuda by way of the General Edward Lawrence Logan International Airport in Boston. It was my mom and dad's idea of an easily accessible getaway. I still remember the image of turquoise waters beneath my window as the captain lined up the aircraft toward the 21 square mile island, 560 miles off Cape Hatteras on final approach to what is now called the LF Wade International Airport. We deplaned via a set of portable stairs into an awaiting arrival ceremony that featured a local actor dressed up in a Captain Hook costume. That 707 reflected the majestic halcyon days of air travel. It was a far cry from January, 1940 when Captain Charles Lorber guided his Boeing 314 Pan Am American Clipper to a bumpy landing in Bermuda's Great Sound to dock at the Darrell's Island sea plane base after a flight from Baltimore, part of the plane's normal trans-Atlantic run.
Josh King:
Things got worse from there for Captain Lorber. While the United States was still in a mostly isolationist mode, war was raging in Europe and Lorber's aircraft was summarily boarded by Royal Marines who seized 112 bags of air mail for review by British censors. They found three letters postmarked to Adolph Hitler, along with securities, large money transfers and even packages of diamonds bound for British destinations. The airline and the U.S. government protested the intrusion, but eventually a year before Pearl Harbor Pan Am president Juan Trippe joined with the FBI and the OSS along with Britain's MI6 to use Bermuda's waste station to provide a vital intelligence filter to prosecute allied war efforts. So more than two decades after my first ride on a jet plane, I arrived in the Caribbean again, this time aboard the military version of a Boeing 747 400 called the VC 25A with tail number 29,000, known as Air Force One when the president of the United States is a passenger.
Josh King:
Needless to say the local authorities didn't approach President Clinton's aircraft, which was surrounded by a heavily armed detachment of American security forces at the Steven F. Udvar-Hazy Center of the Smithsonian institution in Chantilly, Virginia, you can see a full size Boeing 367 80 with tail number 70700, a prototype of the 707 that I flew to Bermuda. And that also served as the chosen airframe for tail numbers, 26,000 and 27,000. Air Force One for every president from John F. Kennedy to George Herbert Walker Bush. Planes I also flew aboard regularly for pre advances and site surveys around the world. And that Boeing 307 Stratoliner, as the first commercial passenger plane to have a pressurized cabin, allowing it to cruise at altitudes well above the lightning storms. And it changed the passenger experience from white knuckling in their respective seats to gathering around a piano on a bi-coastal Pan Am flight.
Josh King:
Pressurized cabins, which have now been the standard for decades is just one of the thousands of innovations that have moved air travel from a field with the Wright brothers in North Carolina to over 4.5 billion airline passengers in just over a century. Competition for those passengers is fierce and carriers need to regularly refresh their fleets with new planes that provide the best experience to passengers and meet the growing calls for economic and environmental efficiency. Our guest today, Steve Hazy, the namesake of the massive Smithsonian outpost that houses its largest artifacts, is one of the world's leading experts on the business and innovation of aviation. He's also the founder of Air Lease Corporation. That's NYSE ticker symbol AL, whose fleet make up many of the planes the used by the world's largest and also smallest airline carriers. Our conversation with Steve Hazy on air travels next chapter, the growth and importance of airplane leasing, and what he's learned over half a century as a leading aviation business innovator, that's all coming up right after this.
Speaker 3:
Whether it's markets, exchanges or networks, connection makes everything possible. The connection between data and technology, innovation and expertise, and most of all, between people and opportunity for over 20 years, ICE has transformed markets, products and processes to make things work better, faster, smarter. From modernizing energy and commodity trading, to revolutionizing the bond markets, whether it's the world's largest stock exchange or the dream of home ownership, we do more than see the big picture, we create it. You may not know our name but we bet you know our network. ICE. Make the connection.
Josh King:
Steven F. Udvar-Hazy is the executive chairman of Air Lease Corporation. That's NYSE ticker symbol AL, a company he launched in 2010. One of the inventors of the airplane leasing business model in 1973, he co-founded International Lease Finance Corporation and served as its chairman and chief executive officer until his departure in 2010. He's an FAA airline transport pilot with type ratings on multiple jet aircraft and has nearly 70 years of experience flying. Steve's been the recipient of numerous awards for his work in philanthropy. Steve, welcome inside the ICE House, and thanks for joining us.
Steven F. Udvar-Hazy:
It's a great pleasure to be in the ICE House and to discuss and reminisce about my favorite passion, aviation and airplanes.
Josh King:
Did I have that story right about my landing in Bermuda?
Steven F. Udvar-Hazy:
Your memory is 99.97 accurate. The only two items I wanted to clarify is that there's different models of the 707. As you stated, it all began with the prototype that's now at the Hazy Center at the Smithsonian. But that particular airplane you flew on was a Boeing 707-321B operated by Pan American World Airways. And the second item was the Clinton VIP arrival on Air Force One, that's really a 747 200 with 747 300 type engines. It's the same airplane that currently President Biden flies.
Josh King:
I talked about Udvar-Hazy Center in Virginia. At the time of its naming, I think you said, I'm going to quote you here, Steve, "I know this new museum will impart to millions of children the same love of aviation that I have, and it will inspire future generations." I'm curious, going back to your childhood, where did you first get your passion for aviation?
Steven F. Udvar-Hazy:
I was either five or six years old living in Budapest, Hungary, which at that time in the early 1950s was under Stalin and Soviet Union control, and very, very much totalitarian. It was not a perfect environment for a child to grow up. But anyhow, one day my father said, "Look, Sunday, there's going to be an air show at a small airport on the Buda side of Budapest, a grass airfield. And why don't I take you and your brother?" And we'll look at the air show and it's something to distract us from the daily torment of living there. And so we went and it was a beautiful spring morning and I just loved the glimmer and the reflections of these airplanes off their propellers, and just the sounds and the smells, and the whole sense of freedom once these aircraft became airborne. And within a couple of hours, my whole life changed and my interest went from playing soccer to aviation.
Josh King:
At the Center that bears your name, Steve, there are these four beautiful red Pratt & Whitney engines on that Boeing 367. Air Commodore Sir Frank Widdle is credited with inventing the turbojet engine with a patent in 1930, though Maxime Guillaume and Germans Han von Ohain, also they claimed that invention. What did jet versus turbo prop power mean for air travel?
Steven F. Udvar-Hazy:
Well, it was probably the biggest step change post World War II. As you recall, the initial commercial aviation back in the twenties and even in the early thirties was primarily based on flying air mail and they would stick a person to sit on top of an air mail bag. Frequently the pilot was sitting in an open cockpit, so it was a very primitive form of transportation, and it was subsidized by the U.S. Post Office and also by European governments to fly mail. And the idea of passengers going on these airplanes was almost like a secondary consideration. But the same way the invention of the jet engine first for military applications, but later in the early fifties for commercial applications, and the first one was Rolls Royce with the Rolls Royce Avon engine on the Comet, the jet engine was transformative because what it provided was speed. And it basically more than doubled the speed of conventional piston engine and turbo crop airliners.
Steven F. Udvar-Hazy:
But one other thing changed as well, which also impacted my career. And that is the cost of a jet airliner, the capital cost of a jet airliner, in many case quadrupled, or [quantupled 00:11:15] versus the airplanes they were replacing. So this created a tremendous financial obstacle for airlines to modernize their fleets because the quantum leap in cost was very significant. So those airlines that had access to capital financing, government support and so on, could afford to purchase these aircraft. But I would say that over 80% of the airlines that required jet aircraft did not have the financial means to make that step change. And that was sort of the birth of my thought of aircraft leasing like car leasing, truck leasing, as a avenue for airlines to get the most modern aircraft with a relatively small financial burden, and let the leasing company acquire the aircraft and allow the airline to operate the aircraft. After all, that's where they make their money operating the airplane, not owning the airplane.
Josh King:
We're going to get so much more into that, Steve. Before we get to your career and the business model, I wanted to focus on one other thing because talking about the capital required to initiate a transportation system. One of the prize possessions in the Hazy collection is the Apollo 11 command module that was piloted by Michael Collins who passed away recently, but was also the first director of the Air and Space Museum. And also the space shuttle Discovery, among so many hundreds of other artifacts from America's exploration of space. I'm currently watching the Apple+ series For All Mankind, that poses the question of what would've happened to the world if the Soviets had got to the moon first, and the answers to that are legion.
Josh King:
But today, Steve, you don't see a lot of Tupelovs and Ilyushins gracing the skies or parked on tarmacs even at Russia's or Eastern European airports. Indeed, if you look at Air Lease's news releases, you're delivering an Airbus 321 200 Neo to Air Astana in Kazakhstan for the first of 5, 737 8s to Belavia in Belarus, and more Boeings and air buses to airlines in Romania and Moldova. So like the premise of For All Mankind, what happened to Soviet or Russian commercial aircraft industry and how might of history have been different if they had manufactured aircraft that was more competitive with the west?
Steven F. Udvar-Hazy:
Yeah, that's an excellent question. And having been on both sides of the Iron Curtain, I have a pretty strong conviction and knowledge about what transpired. First of all, Russian aviation during World War II and subsequent was really focused on military applications. And so, if you look at companies like Tupolev, which had a big involvement on a lot of the bombers that the Soviet Air Forces used, Iluyshin, which also had tremendous military involvement even to today, Sukhoi, which builds this little hundred seat super jet, was one of the main fighter applications in the Russian forces. So I would have to say that the manufacturing techniques and the technology developments of Russian aviation were really focused on military, and the commercial applications were all derivatives of military designs.
Steven F. Udvar-Hazy:
So one of the aspects of that has to do with engines. The requirements for a military engine are quite different than a civilian engine. In the military, it's high performance for short period of times, very high temperatures and a short life. And by short life, I'm talking about hundreds of hours. And then the engine has to be either scrapped or rebuilt. The same thing happened to Russian civilian aircraft, where these engines would last anywhere from 600 to 1000 hours, and then they had to be replaced. And I remember talking one day to the CEO of Malin Airlines back in the early 1980s, and they were operating Tupolev 134s and Iluyshin 18s and T154s. And he said, "After about six to nine months, we'd have to send the engine back to Russia. And then maybe a half a year later, we'd get back another engine with a different serial number. And we never, ever saw the original engine again, perhaps because it was unserviceable."
Steven F. Udvar-Hazy:
The second flaw in the Russian military quasi commercial design is that there was very little what I call after sales support. And in the commercial airline business, one of the motivations for an airline is to utilize the aircraft as much as possible, 8, 10, 12, 14 hours a day. These Russian aircraft were not really designed for what I call high utilization nor was there a global infrastructure to support an airline with spare parts, engineering, training, simulators, and so on and so forth. And since the Russian military was the only primary customer for these companies, they never really got the commercial orientation how to support a Western airline. And that is the main reason the Sukhoi super jet failed in Italy and Mexico. Airlines had the airplanes. They flew well when they flew, but they spent most of their time on the ground waiting for parts.
Josh King:
You're talking about the time that your dad brought you to the air show in the Buda section of Budapest, and then your dreams may have been sky high, but at the time you're living behind the Iron curtain, Steve. How did your parents influence you and have the courage to escape and shape your own drive to succeed after even some false starts to your entrepreneurial endeavors?
Steven F. Udvar-Hazy:
Well, my parents were thinking more in thE traditional sense, God bless them. They were saying there's a career ahead as a doctor, as an engineer, what they would characterize as the respected profession and the idea of, of homing in on airplanes and being a pilot and fooling around with airlines, in their minds, after what they had gone through the Depression, World War II, the Communists coming in, destroying the country, losing our properties, losing whatever we had, it was hard for them to imagine that childhood quest that I had in my mind. It's hard for me to transform that to an adult. And it all had to do with this aspiration for freedom. And for me, the airplane represented sort of the pathway to freedom. But while my friends were doing other activities, when I was about 10 years old, what I would do is go down to the square in the center of Budapest, where all the airlines that flew to Budapest had their ticket offices. In those days, you know, you have to get a ticket.
Steven F. Udvar-Hazy:
It was handwritten, you paid for it in cash. There was no internet. There was no telex. There was no electronic communication. So everything was done manually. And every couple of months I would sneak down there without telling my parents. And I would go to all the different airline ticket offices and collect their timetables or schedules, which were all nice color printed with maps and showing what kind of airplane is flying from where to where, what days of the week and so on and so forth, and what it cost to go from, say, Rome to London. And I was fascinated by that. And then when I was about 11, I would sneak out to the airport in Budapest. And in those days you could get out on this big terrace and look at airplanes, and I would write down what plane came and where it came from and where it's going. And so this fascination with airline operational networks and things like that really was of interest to me because it had no financial cost. I had no money, but I could at least enjoy what the industry was doing.
Josh King:
I could show you a drawer full of unused, outdated ticket stock from every flight that I took in the 1980s because I just loved the sort of red carbon paper that they were all printed on, and [crosstalk 00:19:41] ...
Steven F. Udvar-Hazy:
Yes, I have those too. I have those too.
Josh King:
Yeah, right? And the great thing about going down to these downtown ticket offices also was the beautiful models that they had in the windows.
Steven F. Udvar-Hazy:
Exactly. And I was like jealous. I said, one of my greatest gifts in sort of all the Christmas presents, if I could have one of those models, that would be just unbelievable. Of course, since then I've had thousands of models in our offices of every shape, size and, and type, but that was, again, for a young teenager, that was again, very much a visual experience.
Josh King:
I mean, talk about your time as a teenager, Steve. I think, while you were in high school, you got your pilot's license? What was it like to actually get behind the stick of that plane for the first time? And do you still take the stick on your own plane when you need to get some place to a meeting?
Steven F. Udvar-Hazy:
Yes, I do. I mean, I wanted to get my pilot's license before I had my driver's license. I lost that battle because we came out to California from New York, but I actually did my first flight in Ohio at a small airport between Cleveland and Columbus called Galion, Ohio. I was able to take the controls of a Cessna 195. There was another gentleman who was flying the airplane and he said, "You fly this thing." I was 14 years old. And I said, "I've got to get this behind me. I've got to get a license." Because aviation was my passion and piloting is just an extension of that. So as soon as we came to California, I started washing cars and doing odds and ends to save money. And then I would go out to Burbank airport or Santa Monica airport and take lessons. So I got my driver's license first, but the pilot's license came very quickly.
Josh King:
You enrolled in UCLA after high school, but at that time you're already lecturing at graduate school classes on airline management and administration. You and I have been talking about looking in the windows of airline ticket offices and the red ticket stock, ut where did you actually begin to think about applying this passion for aviation to business opportunities?
Steven F. Udvar-Hazy:
Again, it all began with airline scheduling, aircraft selection, network utilization, how airplanes are used efficiently. And I think the turning point was when ... I think I was close to finishing high school, there was a small, what they call local service airline on the West Coast called Pacific Airlines. So this airline based in San Francisco had a fleet of F27s and Martin 404s, all 40, 44 passenger aircraft. And I went out to LAX and I noticed that they were not using their planes efficiently. Their schedule was not really what I would call optimal. So in my spare time, I developed a whole new schedule for them. And I sent that schedule to the president of the airline San Francisco called Harry White, thinking he's going to just put it in a trash can, and that's close to what happened. He wrote me a very nice letter, appreciating my interest, but they really felt that my suggestions were not really a priority for the airline at this time.
Steven F. Udvar-Hazy:
So Lord and behold, a couple of months later, I go to LAX again to collect my traditional airline schedules, and 80 or 85% of what I recommended was in their new schedule. So I said, "Wait a minute, maybe I'm not as naive as I thought." I followed up with them and they said, "Well, thank you very much. Yeah, there were some good ideas there," but they never really admitted how valuable this was to them. And what that did, even though there was no financial consideration involved, it gave me a tremendous amount of confidence that at least I had some inkling, some basic knowledge of dealing with this issue of airline scheduling and airline operational planning. So it gave me a tremendous burst of confidence that you can't put into dollar terms.
Josh King:
Talking about people like Harry White and your inroads into aviation through that avenue. I think the 1960s was such an exciting era for air travel, not just the glamor of the passenger experience, but for the innovators who shaped the industry's growth. We mentioned one trip earlier. There was also former astronaut Frank Borman at Eastern, Freddy Laker introduced the sky train. How aware were you of efforts by other pioneers like Herb Kellerher, who was trying to get Southwest Airlines, NYSE ticker symbol LUV, off the ground in Texas?
Steven F. Udvar-Hazy:
Okay. Well, Southwest Airlines is a very interesting example because Herb was a very, very dear friend of mine and my wife and the family. My earliest experience with Southwest was when Southwest ordered four 737-200s to operate this triangle between Dallas, Love Field, Houston Hobby and San Antonio. And they started the airline with four airplanes. And they were really struggling, because American and Braniff were the two airlines who were the incumbents and they fought Southwest tooth and nail. Now Southwest was just a intrastate carrier. It was only certified by the Texan state authorities. It could not fly outside of Texas until 1978, 7 years later. So for seven years it was strangled basically as a intrastate carrier, and the airline was having serious financial problems.
Steven F. Udvar-Hazy:
They were having difficulty raising money. And I think the prospects were very bleak. And I remember at that time, Frontier Airlines was looking to acquire additional 737s because they acquired some new routes that the CAB awarded them. And I remember talking to Herb, and I said, "Herb, instead of going to a bank, why don't you just sell one of the airplanes? And then once you get up on your feet, you can get another one from Boeing and maybe a fifth airplane and maybe a sixth airplane." And that's exactly what happened. They sold one of the four airplanes to get enough liquidity to get through the next winter season. And once the airline stabilized, the pressure from Braniff and American was reduced and Southwest was able to add additional cities like Austin and Amarillo and Lubbock and so forth.
Steven F. Udvar-Hazy:
So from that point on Southwest was unstoppable. These intrastate airlines all were modeled after what today are called the [inaudible 00:26:26] airs and the LCC, low cost carriers. Well, these airlines were really the pioneers. The ones in Texas and California really were the pioneers in this short haul, high frequency, low cost, simple flying, without complicated tickets that we talked about, handwritten, I remember, I flew down the PSA because I wanted to buy their Lockheed Electras and it cost $6.35. And they simply gave you almost like a little receipt that you'd get at a grocery store. There was no handwritten ticket.
Josh King:
Your initial business idea, sort of like Herb Kelleher, was a conventional airline, Astro Air. How did that experience help your future career? And when did you realize that your passion and future lay in the leasing of planes rather than operating a retail airline?
Steven F. Udvar-Hazy:
Yeah. Astro Air was a financial disaster that every person should experience before the age of 25. So I started this airline called Astro Air, flying up and down the California coast and quickly realized that my costs were higher than my revenues. And it was extremely difficult for a small airline to reach that size where it could finally overcome its fixed costs. So the main eye opener was that every month I would have to send Apache Airlines in Phoenix, Arizona $4,500 to lease the airplane that we were using. And whether I had five passengers on a plane or 15, I have to pay the lessor, the owner of the aircraft, $4,500.
Steven F. Udvar-Hazy:
No matter how many people were flying on my plane, and what the fuel would cost, and what I'd have to pay the pilots and so forth. And so as the airline was floundering and needed more money, I was reluctant to invest more money and blow whatever little money I had left in my savings. And I realized the guy that was smiling through all this tragedy was the guy that was leasing me the airplane, because he was getting his rent payments every month, like clockwork and all the suffering and problems and tribulations were mine and the rest of our team.
Josh King:
Today, Steve, I think over half of airline fleets are leased. Air Lease itself owns over 400 aircraft with more than a hundred customers in more than 60 countries, but leasing didn't exist before you started it. Can you explain how the business model works and how quickly did it catch on?
Steven F. Udvar-Hazy:
Well, leasing existed in a different form where airlines that had a surplus would find another airline that could do what I call a short term lease. For example, an airline could operate, say more East coast, West coast, which is heavily summer oriented in terms of traffic volumes. But then you have airlines that flew mainly north, south, like National and Eastern, and they might require an extra airplane in the winter to fly people to Florida. So the first primitive forms of leasing were really between two different airlines. Well, one airline would lease a plane to another airline for a short period of time. But the biggest challenge that I've noticed, which I mentioned earlier, is that a lot of airlines that didn't have government backing or very strong balance sheets, could not make that transition from propeller planes to jet planes without a third party coming to the rescue.
Steven F. Udvar-Hazy:
And as the airline industry transitioned from propeller planes to the jet age in the sixties and the early seventies, that's where I came to the conclusion that aircraft leasing would become a meaningful part of how airlines obtained the most modern airplanes to remain competitive and efficient. So we started with very humble beginnings, before the industry really existed. And three of us, three Hungarian immigrants, put together $150,000 and bought a DC8-51, which is very similar to the plane you flew to Bermuda in terms of size and engines and so forth. And we leased that airplane to Aero Mexico, which was the national carrier of Mexico, to fly a new route that they just received from the US to Mexico between LA and Acapulco. And they needed the airplane to do a daily round trip, which is probably about a seven hour round trip. So that was the beginning of ILFC, International Lease Finance Corp, in September of 1973. I was a young kid. I was bruised and had some scars from the Astro Air experience, but at least I was on the right side of the river this time.
Josh King:
Boeing recently expanded its partnership with Whisk Arrow to create a self flying air taxi. This is the company's most recent play to enter the personal and urban aviation markets that Airbus, I think, has been working on for several years. What are your thoughts on the growth of this part of the industry and would you consider entering the air taxi fleet leasing business?
Steven F. Udvar-Hazy:
Yeah, this is a fascinating area and I think it's really fueled by new technologies, and electric motorization, and automation, and artificial in intelligence. There's fascinating things that are going on in this area, vertical takeoff, small electric air taxis. I remember having a dinner one night a couple years ago with the CEO of Uber where he wanted to get a better sense of, could Uber technologies use these type of air taxis in large urban centers to bypass the congestion on the ground and so forth. Look, the technology is extremely fast moving. One of the issues we have as an aircraft lessor is we need to be mindful of what the value of these assets are. Not just when we acquire them, but three years, five years, seven, 10 years down the line. And just like in the, what I call the computer age, technology is moving so fast on these little electric and hybrid derivatives of these small sort of like helicopters ... Or, they're kind of quasi helicopters and airplanes.
Steven F. Udvar-Hazy:
I'm not sure if we bought one of these machines for, say, a million dollars today, just using a hypothetical number, what is that thing going to be worth in three years or five years? Because other new stuff will come out that will probably significantly improve on that technology. So that's one concern that we have as an investor in aircraft assets I need to have assets that maintain their value and utility for a long period of time. These are not overnight assets. The second thing is safety. Operating in an airline environment between say 30 and 45,000 feet is a lot different than operating at low level in urban areas where you have towers, where you have high tension wires. You have much more constraints due to weather, whether it's fog, rain, wind, nighttime operations, not every building is properly marked that could be an obstruction or obstacle.
Steven F. Udvar-Hazy:
So there are safety issues and I am deeply concerned that if there's any accidents or incidents with these type of aircraft, not because of their inherent design flaw, but just because of the environment that they're operating in, low altitude and inclement weather, what is the regulatory environment? And that has not yet been defined how agencies like the FAA and [inaudible 00:34:17] and others will handle these small machines, particularly if they're autonomous. Because we're dealing in a three dimensional world, unlike a Tesla, which is in a two-dimensional world. So the risks are logarithmically greater in that three-dimensional environment. So I think we're following these technologies and trying to keep up with them, but I don't think we're on the threshold yet of investing in them. Now, some airlines will dip their toe in the water and it's good publicity. Just like the United announcement that they might or some supersonic Boom aircraft airliners. But we see these technologies evolving, maturing, and we need a lot more certainty as an aviation asset owner before we put huge amounts of money in there.
Josh King:
Yeah. I saw the announcement of Boom and talking about other new stuff coming out. I wanted to get into that a little bit, Steve. Because back in the 1960s, the Jetsons imagined a personal aviation vehicle replacing the family car. At the same time, the Concorde, which is the one model that I have up here where I'm living, the first super Sonic passenger jet was in stages of actual planning and construction. And so, when United announced it's agreed to purchase 15 of these Boom supersonic jets from the Denver based startup, we haven't seen a supersonic passenger flight since I think October, 2003, when the Concorde carried a hundred passengers from JFK to Heathrow. Do you share the excitement even though you might not be an initial investor about the potential revival of supersonic transport?
Steven F. Udvar-Hazy:
No, I share the excitement tremendously, because I remember vividly that I convinced Air France who was, at that time at International Lease Finance Corp, was our largest customer. We had more than 70 jet aircraft leased to Air France, and I convinced their CEO, Cyril Spinetta, to donate one of their Concordes to the Steven F. Udvar-Hazy National Air and Space Museum. And I remember being out on the grass right next to the runway of Dulles International Airport with the director of the airport authority that runs Dulles Airport and seeing this majestic Concorde make its last arrival from a champagne filled flight with a number of dignitaries land at Dulles for the last time. And now that airplane is exhibited at the Smithsonian Air and Space. So the passion and excitement of a supersonic airliner is there. I flew quite a bit, both on Air France and British Airways, my family members that flew across the Atlantic in three, three and a half hours.
Steven F. Udvar-Hazy:
In fact, in the good old days when we didn't have our own corporate jets, the fastest way to get from London to Los Angeles was to fly the Concorde from Heathrow to New York, arrive in New York before you left London, because it was a five hour time difference, but the flight took three and a half hours. Make a quick connection to a TWA flight from New York to LA. It was quicker than taking a nonstop and it was late in the afternoon so I could do a full day of work in London, go to the airport, take the Concorde and connect and be on the West coast in the evening. Look, I think the technology's there for supersonic airliner. I'm not sure about the economics because I don't know what level of premium passengers are willing to pay to go a little faster. We still have the questions of overland flying and the sonic boom itself, even though that can be reduced, it cannot be eliminated. So at the moment there's a prohibition against supersonic flying by commercial aircraft over land, both in Europe and in north America.
Steven F. Udvar-Hazy:
So the advantage is primarily over the sea, over the ocean. So unless they can demonstrate vast improvement, there are speed restrictions just like on the freeway. You have zones where you can only go 55 and I'm here in Texas now, some places you can go 75. So I think the technology's there, I do have concerns that the environmentalists would a mount a major legal challenge to high flying supersonic aircraft that are operating more in an area where we're more susceptible to depletion of the ozone layer. In other words, once you get up to 50, 60, 70,000 feet, it becomes a little more political and also the fuel burn per passenger, the use of carbon fuels on a unit basis per passenger is kind of symbolic to rich people flying on supersonic jets. It is not for the average passenger, the average common passenger. So I believe there will be resistance to it in the political sphere, but certainly technology wise, it's fascinating. It's exciting, but a lot of headwinds to be able to put it into actual service.
Josh King:
A lot of headwinds indeed, but not headwinds before we get to the next part of our conversation with Steve Hazy. After the break, the executive chairman of Air Lease Corporation and I will discuss more recent trends and look back on 10 years of Air Lease to see where the aviation industry is headed. And that's all coming up right after this.
Speaker 5:
Historical data can offer insight into the direction of markets, yet data processing, collection and storage could be challenging and costly. To simplify your data access needs and help find efficiencies, we launched ICE Data Vault, a cloud-based platform that enables you to access ticker history for global exchanges, as well as our proprietary data sourced from our real time feed. Back test your trading strategies to assess performance and viability, conduct transaction cost analysis and support compliance requirements, input data into surveillance systems to help detect and prevent abusive or illegal trading activities. Access over 10 years of deep tech history across asset classes. Get tick data for an entire market or on an underlying list of instruments. Access additional securities as needed with flexible delivery options to compliment your workflow. Simplify your historical data management with ICE Data Vault.
Josh King:
Welcome back. Before the break, Steve Hazy, executive chairman of Air Lease Corporation and I were discussing both his career and how the air lease industry has evolved. Steve, our conversation has been tracking against your career, so we're now at a crossroads where you started International Lease Finance Corporation, ILFC, with Leslie and Louis Gonda. What was the opportunity that launched the company and how were you able to secure funding for your new business idea?
Steven F. Udvar-Hazy:
Getting funding was the most challenging, the most difficult. It was easier to find an aircraft that was suitable for the mission. It easier to find a customer airline that would agree to lease the aircraft. Our greatest challenge was the financing. So basically we lined up an aircraft that would cost about $2.1 million from National Airlines in Miami that was run by Bud Maytag of the Maytag washing machine family. He himself was a pilot and a passionate aviator. And we've found a lessee, an airline operator, Aeroméxico that was going to take the aircraft and lease it for four years, was willing to put up a deposit to secure the aircraft. But most of the banks that I approached were extremely negative because they thought this whole concept of renting leasing airplanes was alien. We had no track record. We had great ideas. We didn't have a lot of financial wherewithal.
Steven F. Udvar-Hazy:
We had limited resources and it would be a concentrated risk in Mexico. So most of the banks said, "Look, this is very nice, very interesting, but no thanks." I did find one bank which doesn't exist anymore called United California Bank who said, "Look, this, this is very interesting. Steve, if you can find a government agency in Mexico, that's recognized to guarantee this lease, to guarantee the lease payments that would cover the loan that we would provide you for $1.7 million, we would love to entertain doing this transaction." So I discussed this with the leadership at Aeroméxico, the chairman and president. And they said, "Well, let us make a few calls. So they called me back and said, "Yes, we have a government agency called the Nacional Financiera, which is like a national economic development bank that is very focused on tourism expansion and economic growth to Mexico and diversifying away from just the oil and gas. So come down to Mexico city and I'll introduce you to the CEO of that organization. And we'll see if we can get them to back this lease."
Steven F. Udvar-Hazy:
So I went down to Mexico City and I was told that we would have about a 9:30 PM appointment at their office, which I found very strange. I showed up at this Nacional Financiera, there was a lot of armed guards. I was escorted to their boardroom. There was two bottles of tequila there. We sat down. I explained to them what we're doing. He had a couple of assistants there. And at the end of the day, he says, "Yeah, this sounds like a reasonable thing. And very low risk to the government. It's helping our country and you're doing something that's good for Mexico. What, what do I do?" So I had a secretary type of a one paragraph addendum to the lease and attach it to the signature page of the lease on aircraft. We just said that this government agency, Nacional Financiera, unconditionally guarantees the financial obligations of air Mexico, pursuant to such and such document. Then he wanted to have a drink. 10 minutes later, his assistant comes back. This is almost midnight already. And we're in a government office.
Steven F. Udvar-Hazy:
And this piece of paper had all kinds of seals on it and stamps and ribbons, colored ribbons, red, white, and green, and a wax seal. He signed it. I said, "This is unbelievable. Somebody must be watching over us." I went back to Los Angeles. I drove to the bank the next day. And I said, "Look, here's the document. We have the lease signed. We have a commitment from a government agency to guarantee a lease." He says, "This looks really good. We'll get back to you tomorrow." The following day, the bank call says, "We got a deal. We'll loan you $1.7 million and every month 80% of the lease payments have to go toward paying down the loan." I said, "Fine." We'll keep the chromes, the bank gets most of the money. And that's how we launched International lease Finance Corp with $150,000 of capital. I convinced the airline to put up three months deposit of rent, which was not easy. It's like convincing a college student to put up three months rent on an apartment, but we got the job done and that got the company going and that developed into the largest aircraft leasing company in the world.
Josh King:
So that sounds, Steve, like the quintessential midnight deal sealed over a couple shots of tequila. Another major milestone, I think is 1978, President Jimmy Carter signs the airline deregulation act, which sets off a race to lower cost and competition that's growing exponentially. Not unlike the impact that the removal of set commissions for trading had here on the New York Stock Exchange. How did this affect the air leasing business? As on one hand, the number of carriers and flights exploded, but also profit margins were slashed.
Steven F. Udvar-Hazy:
There were two critical milestones that transformed the airline industry globally. One was the deregulation act of 1978 where the Civil Aeronautics Board, that was the economic government regulator of airlines, was abolished. So new airlines could spring up and they did. I think it was more than a hundred new airlines that were started. And as long as they met FAA requirements on operation safety, there was no further regulation of air fares or route rights. So any airline could start an airline and fly anywhere within the United States. This allowed airlines like Southwest and PSA and Air California for the first time to not just be intrastate carriers, but they could fly to other states. So for example, Southwest, who was offering out of Love Field in Dallas could now fly to all the adjoining states, New Mexico, Oklahoma, Louisiana, Arkansas.
Steven F. Udvar-Hazy:
So it was really transformative and I think as a result of the U.S. deregulation, a lot of other countries also liberalized their economic regulations on airlines. But more importantly, what began in 1970s was the privatization of foreign airlines. Since world War II, and for the next say, 20 years after the war, essentially all foreign airlines were either government owned or government controlled. And I think governments felt that maybe private enterprise, private capitalists, should enter the picture and more and more airlines were privatized or partially privatized. That meant that airlines could no longer have government guarantees. And that was a recipe for aircraft leasing companies to do a lot more transactions with non-US airlines who kind of lost that umbrella of financial support from their governments, either because the governments became just minority shareholders or the governments no longer felt they had to guarantee the obligations of these airlines.
Steven F. Udvar-Hazy:
So it was like a child maturing into adulthood and government said, "okay, you're on your own now." And that opened up tremendous opportunities along with the things we talked about earlier, which is the transition from propeller planes to jets. So those were all ingredients for a tremendous spurt of growth for, for ILFC that was unprecedented. And during that period aircraft leasing, from I'd say, the middle of the 1970s went from probably less than 1% of all aircraft that were leased to probably more like 10 to 12% by the early 1980s.
Josh King:
Talking about ILFC, in 1990, AIG, ticker symbol AIG, acquired the business and it's no secret, Steve, that Hank Greenberg needed places to park a lot of money. And you stayed on through the acquisition as the CEO, a role you held really for the next two decades. Why was that the right deal for the company at that time? And how did the business grow as the world became increasingly connected and air travel continued to democratize?
Steven F. Udvar-Hazy:
Look, the AIG merger was primarily a stock merger where the shareholders of ILFC were given the opportunity to take cash, which was a huge gain over, as I said, the IPO price in 1983, or you could take shares in AIG, and AIG had demonstrated very fast growth, very international oriented. It was the largest global insurance company. And there was a lot of synergies between our business and their business, but they didn't really overlap or compete. AIG was also one of the very few American corporations that had AAA credit rating. And even though AIG did not guarantee any of ILFC's debt and never did, the halo of that AAA certainly helped us to be able to raise more financing at favorable rates. My guess is that we probably had a 50 basis points advantage. So on a billion dollars of borrowing, let's say that's a $5 million a year advantage just because of the halo.
Steven F. Udvar-Hazy:
AIG did not in any way interfere or get really involved in our business. We were out in California, they were in New York, they were growing rapidly. Basically we were left alone as long as we produced good results and we paid them a dividend, which was 6% of our earnings, we had to send the AIG every quarter, they left us alone and we had a very professional relationship with AIG. And at the same time, AIG stock was an excellent performer. From 1990 until 2000, I think the stock went up several folds. So all of us that had large stakes in AIG did very well. ILFC brought a lot of tax synergies to them because of the accelerated depreciation on aircraft. It was very beneficial to AIG in terms of consolidated tax return. There was a lot of advantages we brought to them, but we felt that the two companies were perhaps drifting apart, not in an unfriendly way, but just our ... We were growing in different directions.
Steven F. Udvar-Hazy:
So we tried to acquire the company back. We were not successful. And then the government bailout came and essentially all of the assets of AIG, including the ILFC planes became pledged to U.S. Treasury as collateral for this huge financial bailout, which was greater for example, than all the automotive industries in the U.S. combined. So it was a huge government intervention. I don't want to go through all the details, but again, we made a heroic effort to buy back the company or a portion of the company and basically exit from this AIG relationship. And we spent about 15 months doing that. And in the end, we again were not able to basically create the separation. So at the end of 2009, after this effort, I just made a decision that it was time for me to retire from ILFC, not resign, just retire. I had already done, 36 years there and look at my options. And that was during the Christmas holidays of 2009.
Steven F. Udvar-Hazy:
And within a few days, I made the decision that I'm just going to start a new company. Let ILFC be what it is and wish them luck. And so we formed Air Lease Corporation in February of 2010, bought our first aircraft on May 19th, 2010. And by then we had raised $1.3 billion of new equity, including about a hundred million invested by myself and our founding management group. And off we were to the races. And then we ordered aircraft from Boeing and Airbus and Embraer and ATR. And we acquired aircraft and leased airplanes from a lot of our loyal longterm customers like Air New Zealand and Aeroméxico and others. And then success builds on success in April of 2011. So basically 11 months after we bought our first plane, we went public on the New York Stock Exchange. We raised another $900 plus million of equity, and we became the best capitalized aircraft lessor in the world. That gave us tremendous financial advantages over the other lessors. It also gave us additional wherewithal to acquire aircraft from Boeing and Airbus in large bulk purchase agreements.
Josh King:
Those of us who travel regularly, Steve, have certainly seen firsthand how air travel customers have been increasing year over year, really over your entire career, I guess, until the pandemic set in last year. But since March of 2021, the TSA is now seeing over a million passengers a day coming through airports. What do you think is the state of the airline business approaching the third quarter of 2021?
Steven F. Udvar-Hazy:
Well, the developments since March of 2020 were extremely great. I mean, essentially the airline ... on global scale lost all of the earnings it generated since the second World War. So in a period of a year, it wiped out all of the profits that the airlines were able to muster through very hard work in a very complex industry. We had never before seen anything on the scale. We had other crisis, we had oil crisis, we had 9/11, we had SARS. We had other, let's say, regional meltdowns, but nothing on this global scale. And frankly in the spring of 2020, none of us knew or could predict with any degree of accuracy where this was going, how long it's going to last and what is its impact on global air travel, we're flying by the seat of our pants. And I spent 99% of my time working with every one of our early customers to make sure we could help them and do everything we could to help them navigate through crisis because their business was devastated.
Steven F. Udvar-Hazy:
And we wanted to see as few of our customers go out of business as possible. So our mission was to keep these dozens and dozens of airlines alive anyway we could with our help and with the help of others. And it was not until the very end of last year that we saw a light at the end of the tunnel when it began to look like the FDA was coming around to approving these vaccines. And then once we saw that, we said, "Okay, we're going to see a gradual recovery." However, what we didn't under understand and we under estimated was the response of governments in opening up, and the regulations and restrictions are so unpredictable globally, whether it's in the US or Europe or Asia, or anywhere else, governments one day would say, "Okay, under these conditions, you can fly, but you have to go into quarantine," or, "On these conditions, you got to take a test before you fly," or ... And these things changed every few weeks.
Steven F. Udvar-Hazy:
And so it's very difficult for people in businesses to make long term travel plants. That has been a huge stumbling block. We are now seeing a little more rationality, a little more willingness to open up, but I think the momentum is strong now. As more people get vaccinated, as we see that airlines are not the spreaders of this disease, I think politicians will begin to realize that we've got to get back to normalcy and aircraft and airline travel are essential tools in the global economy. And people want to go back to their normal lives and then involves traveling and going on holidays, vacations, and seeing their friends and family and relatives. So, to give you an example, yesterday I flew from Dallas to Phoenix, Southwest 737 700, as my first flight this year on a commercial airliner. The plane was a hundred percent full. It was a hundred percent full, a hundred percent load factor, and the airports were jammed. And so I just feel we're getting back to normal very quickly, probably much quicker than anyone has anticipated.
Josh King:
I mean, as much as we all want to get back to normal, even after that happens, things are going to be somewhat different going forward, just because of the things that we've learned. I mean, during the lockdown, Steve, hundreds of airframes parked on the aircraft boneyard outside of Tucson, a ton of Boeing 737 Maxs at the Pinal Air Park, British Airways retires its fleet of 747s. Air France bids adieu to the A380. What kind of reckoning has happened about the future of commercial aircraft as a result of the pandemic?
Steven F. Udvar-Hazy:
Well, pre pandemic, I think airlines were on a very, very strong growth path. They were adding capacity, they were adding airplanes. They were reluctant to retire older airplanes. There was a market share game, airlines were trying to increase their relative positions in the markets they serve. And the number of retirements in the 10 years prior to the pandemic were not normalized retirements. The retirement cycles, normally when aircraft hit about 25 years of age, they're phased out. Once the pandemic hit, then all those airplanes that probably should have been retired or earmarked for retirement, finally hit the wall. And also airlines realized that the very large aircraft, airplanes that have over 400 seats like A380, like the 747, were not the flavor of the month. The smaller twin aisle aircraft, more in the 250 to 350 seat size were more efficient at lower cost of operation. And so airlines had this day of reckoning where they finally had to look in the mirror and say, "What are the airplanes in our fleet that make money? That make sense in this difficult environment and what are the airplanes we ought to be thinking about retiring?"
Josh King:
The scope of airlines that will go out of business or downsize, I think remains to be seen somewhat. Eastern, TWA, Northwest are names of the past, but looking ahead, Breeze, and Avelo launched this year, both looking to disrupt the low cost carrier space, the former with the full might of Jet Blue founder, David Neeleman at the helm. As air travel returns, how will a year and more downtime affect the fleets and the demand to upgrade from planes that have been mothballed since early 2020 and the prospects for things like Neeleman's new startup?
Steven F. Udvar-Hazy:
Well, it's very interesting you say that because David is a very dear friend and I helped him a lot in his early career back at Morris Air, where we were an investor and the primary provider of their planes that later merged into Southwest. Look, these airlines are initially starting with used airplanes. In the case of Breeze, it's Embraer E jets that are coming out of Azul in Brazil, 737 800s are the ones that were introduced here in California, flying from Burbank to Santa Rosa. We have another startup in Norway called Flyer, which just started out with the U737 800s. We're working with an Italian company that's just starting up in Milan. So there are startups. And generally speaking, they start with used aircraft. And then once financially they get stronger, they transition to new airplanes. In the case of Breeze, he's a big fan of the Airbus A220 and those will follow later on this year. There is now a surge in new airline startups because there's capital available, there's aircraft, and there's plenty of pilots looking for jobs.
Josh King:
So Air Lease recently celebrated its 10th year anniversary as a public company. You were on the podium of the New York stock exchange to celebrate the occasion. Today, the company, $50 billion aircraft leasing platform, more than $25 billion in assets, but Air Lease and its IPO was that fresh start for you after you "retired" for three days, how did the timing coming out of the financial crisis and into a decade long bull market set the company up for success?
Steven F. Udvar-Hazy:
Well, look, it's the old philosophy, buy low and sell high. So I think the best time to start a new company is when you're at the threshold or the beginnings of a recovery. And the financial crisis in 2008 and lasting til 2009 was really an eyeopener, but we felt that the airline industry needs leasing in a big way. And with the experience and the resources that we had available to us, we felt, and my team, most of whom came from ILFC, felt very strongly that there was a great opportunity to recreate ILFC version two and even make it a better company than we were before. Because we had learned so much over four decades so we felt that a new company would enjoy all of the knowledge that we'd learned intellectually and from bad experiences, how to run this business. We started with a few airplanes in early 2010. It wasn't like we had a big portfolio. We had more capital than airplanes. So we quickly had to find ways of deploying that capital.
Steven F. Udvar-Hazy:
And so we acquired a lot of airplanes in 2010, 2011, from different sources. And then our new deliveries began in 2011, 2012. And then very quickly we grouped the $10 billion company, which had never been achieved in the aircraft leasing sector through organic growth. And basically our game plan is to be a key player in modernizing the airline fleets of the world. And by modernizing, I don't just mean in terms of technology, but in terms of economic benefits, in terms of environmental benefits and to make the world a better place. The more airlines can serve the population, get the growing middle class to fly, interconnect different parts of the world, create trade and commerce and interaction between different cultures, we think that's the best way to have a peaceful global economic expansion. And we think commercial aviation plays such a crucial role in that. And Air Lease can be pivotal in achieving those goals. And that's really the mission of the company, to make this a better world through commercial air transportation at its best.
Josh King:
Do some of the effects from the pandemic like increased video conferencing, increased concerns about climate change, do they affect the outlook of the airline industry in the years to come?
Steven F. Udvar-Hazy:
Yes and no. I think corporations will be cost conscious, but there's no substitute for personal interaction, sitting face to face with a business partner. I'm not a believer that business travel will somehow diminish or evaporate. I think companies will use it very smartly, but if your competitor has an advantage and they're out in the field meeting with clients, you're not going to be left behind watching a screen. And on the other hand, personal travel is going to grow at a rate which is twice GDP growth. I mean, we've seen that decade after decade, and that's not going to stop. People want to spend money on experiences, not just things. And I think the pandemic has had one interesting side effect besides all of the tragic, in fact is that people have saved. If you look at the household savings in Asia, in Europe, in North America, in Latin America, they're at the highest levels ever.
Steven F. Udvar-Hazy:
So people have money because there were limitations of what they could spend money on during the pandemic. So I think air travel will recover faster than what I think the most brilliant economists predict, because I think the human condition is people want to get back to normalcy. They want to go places. They want to see their loved ones, their friends, their families, interact and carry on. And you can only keep this lid on so long. And I was in Europe last week and I'm seeing this. People, there's an urge to go back to traveling and be normal. I think the airlines will be a beneficiary of that. But they need to keep a watchful eye on what the trends are in terms of regulatory frameworks, environmental restrictions, and being good citizens. Airlines have to learn to be better citizens of the world in terms of this whole climate change issue.
Josh King:
I mean, talking about the human condition as we wrap up our conversation here. Steve, airplanes represent more than just a business with concrete cost benefits. I mean, it's all on glorious display at the Steven F. Udvar-Hazy Center at the National Air and Space Museum. It brings us really back to the contributions of people like Charles Lindbergh, Amelia Earhart, John Glenn, Sally Ride, and the thousands of others who used air and space to defend freedom, expand horizons, explore the unknown. Increasingly in the future, I think, traveling by air as on the ground, are going to be managed by computers and machines rather than men and women. What is the role of air travel in society? And what do you think its future is as we finish our conversation here?
Steven F. Udvar-Hazy:
Well, one has to look at the last hundred years and look at what air travel and the technological advances in commercial aviation have done to make the world smaller, to make the world interconnected. Setting aside the military capabilities of aircraft, I don't really see that technology can replace human interaction. I think technology will make it easier to travel and we're going to have great advances in the way things are handled at airports. There is going to be more artificial intelligence introduced into air travel. There could be a day there's only one pilot and one computer technician in the cockpit. There could be improved modes of intercity short range transportation, and we talked about the air taxis and urban mobility. We see air cargo as a growth area with eCommerce on a global scale.
Steven F. Udvar-Hazy:
People want what they order tomorrow or the next day, they don't want to wait three months to get some merchandise. So we see a lot of bright lights, but we do a lot of negativity too, from political perspective where airlines and commercial aircraft are looked upon as polluters, as being environmentally sort of undesirable. But we're not going to go back to stage coaches and the Queen Mary to meet our transportation needs. So we need to progress. We need to figure out ways to make airplanes less polluted, less noisy. The demand for air travel, like you said, we're approaching the point where there's going to be 5 billion passenger trips probably next year. 5 billion. We can't stop that. There's no way to reverse that. There may be bumps in the road like the pandemic, but I think the long term future is very bright.
Josh King:
Long term future, very bright indeed. It's been a great pleasure to talk to you. Thanks so much for joining us inside the ICE House.
Steven F. Udvar-Hazy:
I want to thank the New York Stock exchange for being a supporter of our company and allowing us to go public a little over 10 years ago. And for putting us on a stage on a global scale that has brought us respect and has enhanced our reputation. It's certainly been a great partnership with the New York Stock Exchange.
Josh King:
And whenever your frequent travels bring you back to New York, you're always welcome to come back to our building at 11 Wall Street to ring a bell. When we get to the 15th anniversary, the 20th anniversary and the 25th coming up. Steve, thanks so much for joining us.
Steven F. Udvar-Hazy:
We'll be there. Thank you.
Josh King:
And that's our conversation for this week. Our guest was Steven F. Udvar-Hazy, executive chairman of Air Lease Corporation. That's NYC ticker symbol AL. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @icehousepodcast. Our show is produced by Pete Ash with production assistance from Brian Hopkins and Ian Wolf. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening, and we will talk to you next time.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor it's affiliates make any representations or warranties expressed or implied as to the accuracy or completeness of the information and do not sponsor approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or recommendation of any security or trading practice. Some portions of the proceeding conversation may have edited for the purpose of length or clarity.