Podcast: Hanwha Aviation explores freighter growth opportunities

Jeff Lee
Hello and welcome to this episode of cargo facts connect, the podcast of cargo facts, the newsletter of record for the air cargo and freighter aircraft industries for over 40 years. I’m Jeff Lee, editor of cargo facts and it’s Friday, the 28th of February. Last month, Cargo Facts was at Engine Leasing, Trading & Finance Americas and Aero-Engines Americas in Fort Worth, and while he was there, my colleague, senior associate editor Robert Luke, sat down with Laura Ivaskaite, vice president of commercial and investments at Hanwha Aviation, to talk about her new role, and how she’s drawing from her previous experience at SmartLynx to help the new lessor expand.

Robert Luke
Thank you, Laura for joining us here today with this session. If you don’t mind, please give us a little bit of background about yourself and what led to the decision to transition from working in a very, very key role with an operator to establishing your presence in the lease sector with Han. Watch,

Laura Ivaskaite
yeah, yeah. Thanks for taking the time, like for me personally. So I come from a very different background, and I sort of started my career and actually did sports betting and gambling and sports management. So I did that for three years, and I was working in Lithuania, where I’m originally from. And obviously in Lithuania there’s a really, really huge aviation industry, with one of the key companies being a solutions group that sort of holds multiple AOCs and mros and other aviation servicing companies. So I sort of quite accidentally bumped into the guys, if I could say so. And that was just around the time when when a lot of your alliance, a lot of AOCs, of the group, were just recovering after the COVID and sort of looking to ramp up their operations and replace so I’ve been invited to join sparlings. So that was, I think, in 2021 that was yesterday, just in the middle of COVID. So when I came in, the airline had 14 aircraft. When I left, it was almost four years later, we had 65 so it’s been a really, really tremendously interesting period. And obviously, in addition to passenger operations, which was something that Spartans always did we started getting into wide bodies. We got a fleet of one Max eight. We got a fleet of AP 21 traders. So, like, it was all very, very fast paced and very, very interesting. So that was definitely a good learning period, and definitely a great company. And overall, I’d say that probably a lot of industry people sort of grew up there and sort of went on to pursue other interests. And from my perspective, again, like I always probably knew that I would want to try the tones again, financing side as well, in addition to being with an operator and how more opportunity came up in the middle of last year, and again, was sort of attracted me that it is a startup, but it’s a very well capitalized one. So we’re owned by one of the biggest athletes called COVID, and their core business is on the military and defense side. So they produce tanks and ballistic missiles and Friday jet engines explosive as well. So I think they’re one of them, sort of aerospace and defense companies worldwide, yeah. And they just decided that they want to get into commercial aviation as well. And that’s sort of a good way to deploy their equity and sort of, you know, expand their customer base. Yeah. So we launched a platform, I think properly, in the middle of last year. The company is being run by Jeff Lewis, who’s one of the guys that originally founded ft aviation, sort of almost 1520, years ago. And what we’re doing in onward now is to some extent replicating the F type business model, which is doing sort of a little bit better. And, you know, with probably, I’d say, more of a strategic shareholder behind us, and at the same time, probably was different about us is that we’re really starting to look at the Nugent engines as well. So to summarize, probably the core service, the core of our business, our narrow body engines. But we will have a small aircraft portfolio as well, and that’s both on the passenger and and cargo side as well again. So the whole idea is to build up the leasing platform. We’re also looking to have MRO capabilities in an engine shop in the near future. So it’s sort of all about putting it together, continuing to assemble a good team. So we already have three offices, one in Dublin, one in Florida, and one in Singapore. So everything is very much still in the startup phase. That’s extremely, extremely exciting, and that’s why I joined, just being able to build something from a ground up. It’s not an opportunity that comes up often. So very happy to do so.

Robert Luke
Thank you for sharing, Laura. That was very insightful. Before we get into the more in depth with Hanwha and the plans for the operations on the aircraft and engine side, I’m curious to know, how did you go from sports gambling to working with an operator? That’s a huge shift for you.

Laura Ivaskaite
That’s a very good question, and you’d be surprised. So like, I’m Lithuanian and in Lithuania the only sport that’s popular is basketball, you probably see that I’m reasonably tall, and a lot of Lithuanians are, and like, basketball is literally everywhere in Lithuania, and sort of a lot of business people actually either own a basketball club or sponsor one or, you know, we’re just sort of around in the games. So when I was actually working for Lithuanian Basketball League and in a commercial capacity, that’s when I met the previous CEO of smartlynx and the owner of avia solutions group, like the huge basketball hours, and always been involved. And that’s sort of how I met them. And throughout the same time, I was just graduating from my finance degree, and, you know, sort of thought that I want to probably do, like, either investment banking or consulting or something that’s very mainstream. And they called me up, and they were like, Okay, there’s this role. Like aircraft sort of leasing, and the fleet management is very close to probably what you want to do, and it’s very exciting. And they’re like, you know, like, if you want to join, you’re welcome to do so. And I did. And look, that’s probably a decision that changed my life. So.

Robert Luke
Apparently so, good transition. So have you come to appreciate or even develop an affinity for airplanes since your involvement with them these days?

Laura Ivaskaite
To an extent? Like, I probably have to admit, like, I’m not that huge of an aviation lover, as probably some people in the industry are, like, I admire them a lot. For me is that I don’t look at the aircraft in the sky and how amazing it is, and how, like, they didn’t have blockers of aircraft on my walls as a kid, I really I love it an asset class. I think it’s a very exciting one. What I probably love the most. I know it’s very cliche, but, like, there are a lot of smart people in the industry, which is pretty rare to find, and at the same time, it’s a very international industry as well, so actually, have a chance to sort of see a lot and a lot of different people experience a lot of different cultures. So that part I definitely love very much.

Robert Luke
That is key to success in aviation, having an open mind and being able to diversify. So as we kind of dig a little bit here now, how much does your experience smartlynx enable you to, I would say, launch some potential lease capacity with Hanwha, and how does that play into the sector down in the Asia Pacific region, which appears to be a concentrated area for Hanwha.

Laura Ivaskaite
look, I’d say very much. Like, probably the best thing about actually working with an airline, and especially starting out there, is that you have an experience that’s very, very broad. And if you would compare it to careers, or probably more traditional careers of leasing people, they’d usually, depending on where they work, would get reasonably siloed and work on one or two main areas. While in an airline, you sort of have to do everything. You have to know the technical side reasonably well. You have to know the legal side. Have to do the financing, have to do the asset management. So that’s something that definitely helped really much. And on top of that is just basically the network you build. Again, as an airline, you get exposed to the lessors, you get exposed the financiers. You talk with a lot of different airlines. What was good about SmartLynx? It was obviously ACMI operator. So again, like we were purely a B to B business, and we worked with other operators, sort of worldwide. So all of that network I built and that knowledge I gained like that, was definitely incredibly helpful. Again, especially when you’re coming into an environment that’s not yet very structured, you actually have to be proactive and sort of very cautious about how you’re building the company and different parts of it, and that how you’re building the business, yeah, so I’d say that was definitely very helpful, and to the part of the question about APAC. So again, that’s something that’s very important for hanwha, we obviously have an Asian Nexus and want to be recognized. It looks a lessor that has a very strong presence, you know. And hence we have, like, formally, our headquarters are in Singapore. So we have a few of the Korean guys that are sort of coming to work with us from the from the mothership, so they were from Singapore, and we’re hired way more people there. And again, like we want to, we want to know that market really well. We want to really have the expertise in APAC. And at the same time, we recognize that that’s that’s the market that will be growing again, both on the passenger and the cargo side, there is going to be a huge demand for the engines there already is. So, yeah, that’s something that’s definitely very important for us, where we really want to differentiate, probably from everyone else.

Robert Luke
Very key. Now, as you said, differentiation is the key. As far as you establishing a new presence in the leasing sector, what kind of challenges have you been facing since you’ve launched this new platform, and how does your ACMI specialist experience enable you to cater to the new developing carriers in that region that are now specializing in that product? And how does it also allow you to help translate or loosen the regulatory restrictions on ACMI operations in APAC.

Laura Ivaskaite
So probably a lot in this question. So in terms of the, again, probably differentiation and what do we want to do both in APAC and sort of outside of it is, first of all, like it’s really important for us to scale up our platform again, like, if you would look into similar business models, like, probably our main competition, or, obviously, FI, it’s Willis, the sonic Sandy, ELFC, and what do all of the engine lessors, what do you have is a scale to actually be interesting to an airlines, you have to, you have To be able to offer something that’s very attractive, like nobody wants to lease a single engine, and in a lot of cases, not, not everybody wants to do like a very basic sort of operating aircraft lease. What people want right now is, you know, it’s flight hour program, sending the exchanges all sort of, you know, flexible and customized leases. And to be able to offer that, you actually have to build up a portfolio to at least 2, 3, 400 assets. And again, like, we’re very conscious of that, and that’s what we’re trying to do when, in terms of the challenges, probably the main one is that’s it is pretty obvious. The engine market is very, very hot at the moment. And again, like we get and I get asked a lot about, you know, are we just buying super expensive engines? Are we crazy? And probably the answers to that is, out of all of the opportunities, trading opportunities that are out there, I’d say for every four or 500 assets we see, we buy maybe 10, 20 so we’re very, very sort of conscious about whether we’re buying and where we’re deploying our capital, and, you know, making sure that you know, the credit profile is right. The return profile is right. But look, it is obviously challenging. It is extremely competitive at the moment. And again, like probably where the previous experience really personally helps, just really having that network, having the technical knowledge as well, which is very relevant when you’re buying with like assets and especially the engines, just really knowing the asset, knowing the metal, knowing what to do with it. So, yeah, I’d say that’s very important for us.

Robert Luke
Thank you. So that being said, I’m going to expand on the question a little bit more. How difficult has it been to determine what’s good value in the engine versus getting up the quantity that you need to become attractive to the customers you’re trying to promote and bring into your lease portfolio. And additionally, how will hanwha or what is hanwha’s strategy looking at the market now and where hanwha wants to be in 5, 10, 15 years?

Laura Ivaskaite
Yeah, so that is very good question, and that’s probably, again, as I mentioned before, very, very key parts Our business model is actually having our own engine shop. That’s something that not all of the other stores have, and not all of the other stores are able to sort of fully benefit from. So once we have our engine shop, we’ll obviously start doing the module swaps, parts of changes, and the ultimate idea is basically to be the key supplier to every airline when it comes to any of the narrow body engine types. Again, like primarily when it when it comes to the current gen engines, but again, like eventually GTFS as well. So that’s, that’s what we’re looking at. And as I mentioned, it is very competitive at every investment decision. It is a difficult one because engines are generally expensive and the pricing is inflated and compared to where it was three years ago. Look, you always have to make sure that it works for you. And you know, if the engine is very expensive, it’s also actually going to be expensive, relatively expensive for airlines to lease. So, you know, like, you just have to make sure that both sides of the equation are managed, and you’re taking, you know, fair amount of risk, both when it comes to actual leasing and taking on the residual risk, and again, when it comes to the residual risk that’s really worth having your own shop and being able to sort of swap the engines around and swap the modules that that’s where it really comes into play.

Robert Luke
So in your recipe for success, how much of the engine lease portfolio will consist of next gen, current gen or even classic Gen engine types, and how do you assess that mix, looking at the theaters of operation you want to thrive and grow in?

Laura Ivaskaite
Yeah. So, like, generally, we don’t really have, like, a very strict mandates from our shareholders, like, which is very, very good and like, we’re very appreciative of that. Obviously, for Hanwha Group, they worked in the military side, but never in commercial aviation. And even being very new into the industry, they’re sort of very, very flexible and supportive of everything we do, so sort of as long as we just find the right opportunities, there’s no, you know, strict mix of where to bring our portfolio, but I’d say that probably at least for the next three or four years, eighty to 90% of our portfolio is going to be current gen narrow body engines, like we very strongly believe that the market is going to stay where it is like, at least for three, four or Five years to come, so that will be the part of the portfolio. But we also recognize at the same time that we need to have some aircraft in that mix as well, to be able to offer that product to airlines as well, and to be able, again, just to hang our engines, on a very expensive engine stand from time to time. So that’s also a very important part, and we’re starting to build our portfolio. So we already have a few, 737 800s committed. That’s on the passenger side, probably to tie it down to cargo. Like we’re definitely very open and are looking to acquire some freighters as well. Again, that ultimately probably is an engine play, like narrow body freighters has been an engine play for a lot of people in the last couple of years. But again, like we probably I’d say that we see the 800 freighter market picking up a little bit. And like we see from the airlines and some of the operators are reasonably good, and actually deploying them and making money for them on the other side the market is still very, very challenging. And again, but actually that that’s where people probably turn to the engine lessors, and want to say, okay, if I cannot really deploy this freighter, you know, at the moment, you know, what can I do with an engine? How can I at least get some value out of it. So you know that, that there is something that we’re definitely exploring and sort of want to get involved in.

Robert Luke
So the short term to midterm capacity with the CFM 56, seven bravos, the CFM, 56 alphas, five A’s and five B’s, and then even some of the V2500s we’re looking at?

Laura Ivaskaite
Yeah. So, so at the moment, our portfolio it is, as you know, that it’s a mix of five bs, 7B’s, V25s, and seven three seven 800.

Robert Luke
Okay, are there? Is there any room for CFM, 56 3c, one, seeing that the classic is continuing to hang around. It just refuses to go quiet.

Laura Ivaskaite
Yeah, well, you’re very right, and you know that. That’s why we recognized that it’s reasonably good. Like, for us, we probably, we don’t want to sort of look backwards, if I could say so. Like, it’s definitely a good engine, but we very much want to focus on the current gen engines and start a slow transition to the new gen engines as well. Probably, like, what not a lot of people appreciate is that there’s a reasonably good market, good secondary market for the new gen engines and aircraft as well. Like, you already have, like, you know, the initial A320 NEOs coming off their initial six year leases. You have some Maxes coming back in the next few years. So, like, that, market is sort of very, very, you know, quickly developing and very interesting. And that’s something we want to look at

Robert Luke
It’s within grasp. It sounds like.

Laura Ivaskaite
Oh, yeah, absolutely. Look when it when it comes to brand new new gen engines, again, it’s a very different market. It is 90% on the local market, unless you’re playing there and having that sort of financing, it’s very difficult to actually compete and return profiles. Probably not something to look at. But when it comes to used new gen engines that is very different, like, it’s a little bit more complex. You have a different operator base, pricing levels and returns are very different. And, yeah, that’s something that interests us for sure.

Robert Luke
Okay, so that’ll be a way to kind of usher in those engine types to continue support in the passenger sector. Yeah, that makes sense now. Just last question here, as you move forward and you consider your lease portfolio mix, well it’s a two part question? If you had to break down the ratio, how much of your aircraft side would be passenger versus freighter, and are you even looking beyond the narrow body scope into different sectors? And if yes, what are those sectors you’re considering?

Laura Ivaskaite
Yes, so in terms of the aircraft portfolio, I’d say we would be primarily passenger aircraft lessor. Again, like only on the aircraft side. But again, ultimately, we’re looking at everything as an engine play 7b whether it hangs on a passenger 800 or 800 freighter like, we’re pretty agnostic in terms of that. And again, like market shifts to a place where we see good opportunities in the freighter market, like we wouldn’t, we wouldn’t be against actually deploying some equity there, and even on our engines, like one of our biggest exposures at the 7b side are ASL, you know, we really, like the guys plans, and we have some engines with Safair. So again, we’re really trying to get in there and support the operators to the extent we can.

Robert Luke
Well, thank you so much. I appreciate you taking time out of your busy schedule here at Aero Engines to sit down with us at cargo facts. We wish you the best, and we’ll keep eyes on you, and you know, we’ll reach out if we hear anything come up. I.

Jeff Lee
That was Dario Matsuguma, Cargo Fleet and Operations Manager at Azul, talking with Robert Luke, Senior Associate Editor of Cargo Facts. And that’s all the time we have today. For more coverage of the freighter aircraft and AAM market, visit cargofacts.com. Thank you very much for tuning in, and join us again next time.