When Japan's Skymark Airlines filed for civil rehabilitation last January it was bad news for the lessors with A330s on lease to the airline - specifically, CIT and Intrepid. Placing these aircraft elsewhere has shown the importance of having a full-service leasing platform.

Olaf Sachau

On 25th August, the Intrepid's highly experienced CFO, Olaf Sachau, was promoted to chief executive officer. This came with the departure of Frank Pray, the company’s former CEO, who headed the organization for the previous four years. At the same time, former Octagon, AWAS and GECAS leasing expert Doug Winter was promoted from CCO to the newly created position of President and CCO with a seat on the Intrepid board.

In this interview with Aviation Finance, Sachau speaks about the immediate challenge Intrepid's team faces in placing the Skymark aircraft and why he is optimistic about the outcome. He also explained why he remains convinced by the company's strategy of specialising in leasing predominantly new wide-body aircraft, with a focus on long-term cash flow, but also how that may evolve in the future.

Now in the CEO seat, Olaf Sachau sees no reason for Skymark to be the 'elephant in the hangar' when discussing the future of the company. "Skymark has obviously been an issue for us," he says. "At the time of their rehabilitation filing, we had four aircraft delivered to them, none of them had been there for very long, and another three that were meant to be delivered to them. Of these three aircraft yet to be delivered, as of today, we've already bought one and that airplane is in Canada for some engineering work, with the other two scheduled to deliver in November. These aircraft were in a unique specification and will need to be reconfigured for the next lessee. "

It was widely reported that Intrepid initially tried to work with All Nippon Airways as a rehabilitation sponsor for Skymark, which would have seen ANA lease Intrepid’s seven A330-300s. Intrepid was the bankrupt airline’s largest creditor. "We worked with ANA about potentially taking our A330s, but since it became clear they weren’t going to proceed with this, we've been in active remarketing mode."

Sachau is also quite clear that placing these aircraft is Intrepid's key focus. "We know that and we will do that. But we have a clear path and way forward to build on from there. We’re a full service platform and know how to handle this work. Obviously, these aircraft will have to be reconfigured and there are lead times and costs associated with that."

"I believe that not every leasing platform, and I say this respectfully, is capable of playing in this space because you really need to have an understanding of the complex configuration requirements and the supply chain in order to meet the customer’s needs in the most effective way," he adds.

A positive to this, Sachau notes, is that the A330 market has a strong operator base and that there are airlines out there that want to take these aircraft. “There is some excess widebody capacity out there now, but what we have are essentially brand new aircraft that will be in an entirely new configuration, and that’s attractive to a number of key airlines,” he adds.

Sachau reflects that despite the experience with Skymark, there are inherent strengths in the wide body space. "They are typically core to the fleet of an airline and these decisions are not made overnight. This is part of long-term planning; a lot of the time these aircraft are the profit generating part of the fleet so they're typically the last ones to leave it, even when things become difficult. A lot of the time too the initial lease periods are extended. That aspect makes it, actually, very meaningful and part of the attraction.”

"There is always a lesson learned and I don't want to downplay this event. It's not going to stop us from succeeding, it's not going to stop us growing and diversifying, but it has an earnings impact. We have tremendous support by banks and certainly from our shareholders."

Reflecting on the work of his predecessor, Sachau says that "Frank came in and did a terrific job of managing this business, transitioning it very carefully, step-by-step into a passenger aircraft leasing business with credibility. It was quite an accomplishment."

Sachau notes that when Intrepid reached its agreements with Skymark the airline had been very profitable. “At that point in time a decision to put seven aircraft (into Skymark) came with an assumption that we could sell down and maybe that's where we should have executed earlier."

Continued belief
Despite the headache caused by Skymark, Sachau still has a strong belief in the strategy underlying the Intrepid platform. "A lot of what we've done still makes terrific sense. We looked at the wide body segment of the market carefully and we felt that a differentiated story focused on longer-term cash flows from newer type aircraft is an attractive niche. But it was always clear to us that this was going to be a much more credit reliant strategy, so you really need to make sure that your airline counter-party is somewhat more established."

Intrepid has another three A330s coming this year on lease to other airlines – two to EVA (in Taiwan) and one to Evelop (in Spain), which is a subsidiary of the Barcelo Group. The next obligations are in October and December next year, its first two 777s, placed with Philippine Airlines.




In the future, Sachau says, "I can envisage that we might stick to a couple of aspects of our strategy – that is a focus on longer-term cash flows and newer aircraft." He points out that in the S1 form submitted to the SEC last year as part of its IPO plans the reference to its focus on twin engined, wide-bodied aircraft was "predominantly" and not "exclusively".

"That was done consciously and it's not because we don't like the narrow-bodied space," Sachau said. "It was more a focus on where we see the better risk adjusted return opportunities and if you look to where this business (Intrepid) ultimately needs to go, it needs to go into a different ownership structure.”

"We are private equity owned and we have to ask ourselves 'What is the most attractive proposition, and how can we maximise value for our shareholders with that proposition?' And if the answer to that is a more diversified approach to aircraft leasing, which means maybe a slightly more balanced portfolio approach - still focused on wide-bodies but with some narrow-body aircraft, too – then I could see that happening.”

"But what I do like about our business is the long-term cash flow aspect. Our funding strategy matches that a lot – long-term secured debt, matched funding and mixed with unsecured debt to have greater flexibility. I like that mix. That, combined with the equity that's coming into the business from our shareholders, has made terrific sense."

He emphasises that Intrepid is an inherently profitable, lean business. "Keep in mind," he says, "when you play the new end of aircraft you don't need a 30-man technical department."

At heart, without taking away from the aircraft aspect of it, he regards Intrepid as a financing business. "We are essentially a capital provider to the industry, we're wholesale funded, and we lend or provide capital on a long-term basis to airlines and we earn a spread. That's our focus." "We've never shown an assumption about trading gains or taking maintenance to income, it was a pure play, a very conservative approach.” Having had IPO plans stalled by events around Skymark, where does Sachau see future ownership plans evolving?

"I think the way we want to drive this business is to give our shareholders options. I think whether you ultimately look at a strategic sale, M&A activity or an IPO, the path is somewhat similar in the sense that the business needs to develop and grow. There is, of course, embedded growth through what we still have to buy from the manufacturers, but I can also tell you we want to diversify.”

"If we continue to focus on wide-bodies, even with the diversification, I think we will still need substantially more scale than $3 billion to be a relevant player in that space. That's got to be the long-term target. Can we do that just by step-by-step growth or do we need to acquire something? That's just a function of the opportunities out there, but I do feel it needs to get significantly larger to really have the relevant size to offer airline customers the right solutions and at the same time bring the capital costs down.”

“My coming in and running Intrepid jointly with Doug, in what I like to describe as a co-lead approach, is only based on an ambition to drive this business forward and develop it. As much as I have the CEO title, Doug is a very senior guy in this industry who brings a particularly strong customer expertise and focus. He has been appointed President and has a board seat. Whatever I do will be in sync with Doug. My ambition is to make this a strong team – not a strong Olaf. This is about Intrepid, and we have a very strong skill-set on this platform.”

Dublin, Ireland, as a platform for Intrepid
Of Intrepid’s employees today, a substantial number are located in Dublin and further growth is likely to be in Ireland. "Dublin has turned out for us to be an excellent hub and operational headquarters, even though a lot of our placements have actually been somewhat Asian-centric. So even though our customer base tends to be more in that part of the world, we felt that the right place to base the company is in Dublin and to support that with a marketing presence in Singapore," Sachau says.

"Ireland's double taxation provisions help, as does the smaller time difference with our Stamford office. But by far the biggest influence is the ample talent. We have an excellent team in Dublin, and Ireland offers a well established infrastructure and pool of proven talent we can draw from as we look to grow our business.”