ISTAT News | 01 December 2019
Jetrader: Q&A With Gerry Laderman
Jetrader: Where did you begin your career, and how did you get started at United Airlines?
Gerry Laderman (GL): When I began my career, I had absolutely no idea I would end up in the airline business. I went straight from college to law school. Upon graduation from law school in 1982, I became an associate at Hughes, Hubbard & Reed, a large New York law firm. One of the firm’s clients happened to be Texas Air Corporation, which controlled several airlines, including Continental, and New York Air and, ultimately, Eastern Airlines and People Express. I started working on the Texas Air account and, over the next several years, ended up spending almost all my time working on aircraft financing transactions for the Texas Air family of airlines.
In 1988, the general council of Texas Air invited me to join its legal department. I accepted the invitation and moved from New York down to Houston. Just to hedge my bets, I took a leave of absence from the law firm because I didn’t think I’d be staying in Houston for an extended period of time. My work for Texas Air was split between Continental and Eastern. Eastern filed for bankruptcy in 1989 and ultimately went out of business, so all my work shifted to Continental. Continental had its own bankruptcy starting in 1990 but successfully emerged from bankruptcy in 1993. As a member of the legal department, I was part of the team involved in the restructuring of the airline.
Following Continental’s emergence from bankruptcy, I took the opportunity to move out of the legal department. My first non-legal role was as vice president of aircraft programs, and my team was responsible for implementing the fleet plan. We managed the airline’s relationships with Boeing, Airbus and the other OEMs, negotiated the acquisition and sale of aircraft, and worked with the treasury team on financing the aircraft. In 1995, when we had a leadership change at Continental, Gordon Bethune became CEO and brought in a new CFO, Larry Kellner. Larry needed somebody to focus on restructuring the balance sheet and meeting the financing requirements for the airline. As a result, I moved to finance and, over the years, took on additional responsibilities. By the time of the merger with United in 2010, I was senior vice president of finance and treasurer, overseeing treasury, corporate finance, fleet, risk management, procurement, tax and a few other areas. I continued in this role at United until a few years ago. After a couple of stints as acting CFO, I become the permanent CFO in 2018.
Jetrader: What did the industry look like when you started versus today?
GL: There has been a remarkable transformation of the U.S. airline industry over the last 35 years. When I first became involved in the airline business in the 1980s, the industry was struggling to deal with the fallout from deregulation. Legacy airlines like Continental had cost structures that made it difficult to compete with the new generation of startup airlines. Legacy airlines had to adjust the way they did business. For Continental, it meant two trips through bankruptcy. For others like Pan Am and Eastern, it meant shutting down. This transitional period lasted until the mid-1990s. The late 1990s was a relatively stable period with most airlines generating profits. This changed on Sept. 11, which, along with the economic slowdown that followed, forced another industry restructuring. All of the major network carriers other than Continental ended up in bankruptcy.
Thankfully, with the benefit of the financial restructuring and industry consolidation that followed, today’s U.S. airline industry is both very competitive and nicely profitable. In essence, it is a more sensible industry. For the first 35 years following deregulation (1978-2012), the U.S. airline industry lost $37 billion. Since 2013, the industry has achieved profits of more than double that number. This lets us reinvest in the business for the benefit of our customers and provide a nice return to our shareholders.
Jetrader: Airbus and Boeing are strongly competing with each other for new orders, so equipment prices must be attractive. Investors love to put their money in commercial jets. Lessors are ultra-competitive. Interest rates are as low as ever before. Fuel price is “reasonable.” As a CFO, is this as close to “paradise” as it gets?
GL: It may not quite be “paradise,” but it is certainly a lot of fun. Gone are the days when we were fighting just to stay in business. We have sufficient liquidity to weather any storm. We have been growing profitably and have attracted investors for both our stock and debt who have been well rewarded for their trust in us. In terms of the aircraft manufacturers, the industry benefits greatly from the strong competition between Airbus and Boeing. Both manufacturers produce great airplanes, and the competition forces both to continually improve their offerings and keep prices from escalating too much. With respect to the lessors, we appreciate the product they offer and occasionally lease aircraft. However, because of the strength of the debt markets, we find it more attractive to purchase new aircraft and use the EETC market or bank market to finance the purchases. As an example, we priced a $1.2 billion EETC in early September with a blended fixed rate of under 2.85%.
Jetrader: Lease rates and market values of midlife and younger 737NG and A320CEO family have been very strong in recent years, partly due to the delays in NEO and MAX deliveries. Once these deliveries come on stream, do you expect the values/lease rates of older kit to nose-dive?
GL: No, I don’t think there’s been a significant spike in values of the midlife aircraft. While it is true that the MAX situation has resulted in some airlines, including United, holding onto some aircraft a little longer, assuming the MAX situation gets resolved in the near future, I don’t think we will see much impact. In fact, we recently signed an agreement to purchase some midlife 737-700s at attractive prices.
Jetrader: What difference for a major airline has the takeover of the A220 by Airbus and the E-Jets by Boeing made?
GL: Assuming the Boeing takeover is completed, from our point of view, I wouldn’t say there’s any significant difference. Instead of having four OEMs to talk to, we will have two. If anything, it will help make both programs stronger.
Jetrader: With A310 and 767-200 not really successful “middle of the market” planes in the past, what is different now to turn the NMA into a success?
GL: I can’t really speak about the A310 because that’s an aircraft that we never really looked at. But, I can tell you about the 767-200, because we did operate them. It’s tough to make the economics work when you shrink an aircraft. The optimal sizes for the 767 were the 767-300 and 400. We acquired a group of 767- 200s relatively late in the 767 life cycle. The economics weren’t great, so we disposed of the aircraft. To be honest, it’s no different than when you look at the 787-8, 9 and 10. The economics on the 9 and 10 are better than the 8, so most of our 787s are the larger variants. I believe that Boeing expects to size the NMA to optimize its economics for its customers. If the aircraft is priced attractively, it could be of interest to us.
Jetrader: For United, what would the ideal “middle of the market” plane look like?
GL: It depends. We’re looking at all the different options available to us. For us, this middle of the market aircraft will be a 757/767 replacement largely flying trans-Atlantic. We were one of the first airlines to fly the 757 trans-Atlantic, and it worked great for routes that didn’t have the demand to justify a larger widebody aircraft. The limitation has been range. The replacement needs to have both better economics and fly further. The A321XLR and NMA should accomplish this. There isn’t one perfect solution for every need, so we will look for the best solution while minimizing complexity.
With respect to one- or two-engine manufacturer options, that’s always a debate. Some leasing companies and airlines greatly value the ability to compete the engine manufacturers against one another. We actually found that it doesn’t matter as much and, in some cases, having just the one engine option like on the 737 can simplify negotiations without impacting price leverage. However, even if there is no engine choice, we always make sure we have a satisfactory offer for support from the engine manufacturer before signing up for the aircraft.
Jetrader: The used large twin-aisle market is not looking too healthy at the moment. The A340 and 747-400 are already almost “dead and buried.” The 777-200/ER has fallen of the cliff and the 777-300ER is very challenging to place in secondary market. Where do you see the main issues?
GL: We have looked at the used twin-aisle market but have generally found it less attractive, even at today’s prices. The problem is that since the interiors tend to be very unique by carrier, the cost of reconfiguration can be substantial. When we looked at some used 777s, after factoring in the cost of reconfiguration to incorporate our new United Polaris business class cabin, it was more economical to buy new aircraft. The only used twin-aisle aircraft we have acquired in the last few years were three 767-300s where the combination of acquisition and reconfiguration costs were reasonable. Since Boeing’s not building new 767s, it ended up being an attractive transaction for us.
Jetrader: Do you think long haul single aisles (A321NEO XLR) could cause a revolution in the networks, similar to what the 767 did to the 747 years ago?
GL: We already demonstrated the value of long-haul single aisles with our trans-Atlantic 757 flights we started many years ago. At the time, there was concern over whether passengers would be willing to fly that far in a single-aisle aircraft. It turned out that they would rather do that than have to connect through one of the European hubs.
Jetrader: What would you like to see in the regional aircraft segment? Any room for a new 50-seater (prop or jet)?
GL: Any new 50-seater would have to provide the customer comfort that the current generation of 70-76 seaters, like the Embraer 175, can provide. The Embraer 175 is a terrific aircraft from a customer standpoint because it provides all the amenities customers have on mainline aircraft, including choice of cabin, plenty of overhead bin space, Wi-Fi and streaming entertainment. We are starting to provide these amenities in the 50-seat category with the introduction later this year of the CRJ 550, where a CRJ 700 is being recertified as a 50-seat aircraft and reconfigured to match the comfort and convenience of the larger aircraft.
Jetrader: Professionally, what’s keeping you awake at night?
GL: My No. 1 concern is the macroeconomic environment. I think that is on the mind of most companies. However, it doesn’t keep me up since we are comfortable that we can adjust our business to successfully manage through the full economic cycle. If you asked me this question 10 years ago, I would have told you my top concern was fuel volatility. However, over the last few years, there have been real changes in fuel supply dynamics, which have kept prices moderate. While oil spikes could happen, there is less risk today of seeing oil at $100 a barrel than any time in recent memory.