Pegasus Aviation has changed completely from the company that Richard Wiley founded in 1988. For the past 17 years the lessor has gained a reputation for buying older aircraft types and remarketing them to smaller carriers.

In August this changed completely when Pegasus announced an order for six 737-800s. While this is small in comparison with some other lessors, it shows the shift in the lessor's thinking. In September it hired Toby Bright, Boeing's former chief salesman, reflecting this new focus.

While the recent order demonstrated the change in the lessor, it has been growing quickly in the past few years, with its portfolio worth $4.6 billion.

"By the close of its fiscal year in March 2006, Pegasus will have a portfolio in excess of 250 aircraft, consisting primarily of next-generation models," says Wiley, Pegasus' president and CEO. "Over the next five years, we intend to grow our portfolio by $1 billion to $2 billion per year."

Pegasus renewed its aggressive growth strategy in 2004, deciding to expand the company by offering more off-balance sheet products, such as sale/leasebacks for new aircraft deliveries.

"After the industry turbulence in 2002 and 2003, we felt that there would be a shortage of available capital for many airlines and these transactions would be the ideal solution for them," says Wiley.

With the support of Oaktree Capital Management, Pegasus has been able fully to develop this business plan. In fact, the lessor has added $2.5 billion to its portfolio in less than two years.

Oaktree's partnership with Pegasus began in 1996 when the private investment firm participated in a number of one-off transactions with the lessor. However, Oaktree has invested $250 million directly into Pegasus in order to take advantage of the lessor's ability to originate transactions not only in bulk, but also among desirable aircraft and with strong airline customers globally.  "Oaktree was impressed with our business plan and took the decision to focus on our enterprise," says Wiley.

Younger and stronger

Its partnership with Oaktree has given Pegasus the ability to invest in new aircraft, particularly next-generation narrowbodies aircraft. It is this area that is the main focus of its expansion plan.

Pegasus is in the process of closing several sale/leaseback transactions on new deliveries. It is financing three of Air China's new 737-700 deliveries, one of which has already been closed. The lessor is also arranging a sale/leaseback for China Eastern for two A330-200s, which are due for delivery early next year. As part of a previous arrangement with America West, Pegasus is in the process of closing sale/leasebacks on two A319-200s and two A320-200s for the newly merged US Airways (which was originally signed with America West Airlines).

In May 2005 Pegasus provided the equity for a 12-year sale/leaseback transaction for Asiana on one A330-300, which was senior debt financed by DVB and Natexis. Pegasus, together with Avion Capital, arranged the senior debt and Avion also participated as a junior lender in the transaction.

"This was a complicated structure involving five lenders with Avion Capital providing the subordinate loan," says Wiley. "This was our first transaction with Avion, which had wanted to expand its relationship with lessors and saw this as the best opportunity. This deal was also the first time we had financed Asiana."

The order

The six 737-800s that Pegasus ordered in August this year will deliver between 2006 and 2008. The company is actively considering further aircraft orders with both Airbus and Boeing.

"We have already placed some of these aircraft – up to four will be taken on lease by Russian airline Transaero (one in 2006, two in 2007 and one in 2008) and two will be taken to the market," says Wiley.

One of the added benefits of placing this order was the hiring of Toby Bright, who was formerly Boeing's top salesman.

"During the negotiations with Boeing, Toby Bright was brought in as a consultant and lucky for us he decided to stay," says Wiley.  "We are delighted to have him on board. Toby brings a wealth of experience and, due to his many years as the head of sales at Boeing, he will prove to be an invaluable resource for Pegasus."

Flexible solutions

Pegasus' main focus is providing capital to airlines for fleet management and flexibility and, despite its emphasis on new equipment, it is continuing to offer financing solutions for mid-life aircraft.

"Airlines have significant capital requirements and require fleet flexibility. We provide financing for young to mid-life equipment and can also provide bridging solutions for aircraft until new deliveries arrive," says Scott Weiss, senior vice-president, capital markets.

Pegasus has closed a number of these bridging deals for airlines awaiting deliveries. It has refinanced five 737-300s and -400s for LOT Polish Airlines, giving the airline greater flexibility in its fleet and bridging the gap in its fleet until its replacement narrowbody fleet is delivered. The company also provided financing for one 767 on lease to LOT, aligned with the airline's recent 787 order. Pegasus is in discussions with a number of airlines that have 787 deliveries about financing on a sale/leaseback basis.

Pegasus leased two 737-500s in September to Air France, which will take two more in the last quarter of 2005, to help the carrier manage its fleet.

Pegasus is also keen to expand its freighter business. Also as part of assisting with fleet management, Pegasus helped Cargolux with financing on two production 747-400 freighters.

Although Alitalia may be struggling, Pegasus is confident of the Italian carrier's freight. It has structured a sale/leaseback transaction for the airline and has also financed the conversion of five MD-11s to freighters, the cost of which will be filtered back into the lease rentals.  "We have seen huge demand for the MD-11, so we've very excited about this asset," says Wiley.

Looking ahead

Pegasus has closed four separate securitizations in the past, known as Pegasus Aviation Lease Securitization. The first closed in 1997, the second in 1999, the third in 2000 and a fourth in 2001. Pegasus has not ruled out another.

Thanks to the recent expansion of its portfolio with young and popular aircraft, the average age of its fleet is four-and-a-half years, which should make another securitization a viable option. In the wake of the recent operating lessor securitizations, such as AerCap (formerly known as debis Airfinance), Pegasus is seriously evaluating a future possible deal.

"Securitization has been great for us but our last deal was back in 2001," says Weiss. "We have issued $2.7 billion of paper in the past but our situation is different now and we have a much younger fleet. Rating agencies and investors do place a higher value on next-generation equipment, so hopefully in 2006 we'll have an attractive transaction to offer."

In the meantime, Pegasus has just closed a $400 million revolving credit facility, which was syndicated to seven European and Asian banks. DVB was the agent. Before this, virtually all of the company's acquisitions were individually financed in the European bank loan markets.

"This is a very exciting development and we now have committed capacity to be able to forge ahead with our plans to grow the business," says Weiss. "The facility will allow us to close deals quickly and airlines will benefit from the better economics this will bring."

The added liquidity will allow the lessor to continue with its expansion plans into emerging markets and Europe. "We aim to have a 25% geographical spread between Asia, Europe, North America and the developing markets," says Weiss. It is pretty close to that now, although Europe is slightly ahead, because one-third of its customers are located in that region. Some 25% of its customers are located in North America but it was not unduly affected by the recent bankruptcies.

"The bankruptcy of Northwest and Delta has not affected Pegasus, but in the long term this is exactly what the US needs – shedding capacity out of airline fleets on a selective basis," says Weiss.

About 20% of Pegasus' business is located in the Asia-Pacific region – and this is one area it is targeting for heavy growth.

"We currently have over 20 aircraft in China and do business with China Southern, Szechuan Airlines, Shanghai Airlines, China Eastern, Air China – all airlines with very strong credits," says Wiley. "ILFC and Gecas are the largest lessors in Asia, so we are about the third- or fourth-largest lessor in the region."

Pegasus is also actively marketing in India, because of the predicted high demand for aircraft in the region. "We have negotiated a few deals in India for 2006 but our involvement in the region is really at the yellow eye stage."

Despite its global focus, Pegasus has no satellite offices. The majority of its business is handled from its main office in San Francisco, although its Miami office deals with its customers in South America.

Pegasus employs 46 people in total and, despite its internal expansion plans, it does not intend significantly to increase that number.

Pegasus is keeping an open mind about future acquisitions but this is not at the forefront of its plans for the short term at least. Awas is again up for sale but Pegasus, having investigated the lessor the first time it was put on the market, is not eager to place a second bid.

"We reviewed acquisitions of other leasing companies and put out a few bids but they traded at higher prices than we were prepared to pay," says Wiley. "We have committed to grow the business organically, which we have done within a very short period of time with investment from Oaktree. With our broad global customer base, we have been originating great transactions and we don't feel the need to pay a premium for acquisitions of size."

Pegasus has set itself an annual growth target of $1 billion to $2 billion and, based on its current prospects, and with Toby Bright on board and solid financial backing, it looks like an achievable goal.