Top airline-lessor a pivotal player in the aviation world

Steven Udvar-Hazy has scheduled a small dinner party at his home in Beverly Hills, Calif., this Friday. On the menu is the future of the world's commercial aviation business.

Dining with Hazy and his wife will be Louis Gallois, chief executive of Airbus. Gallois is traveling across the world, despite urgent troubles in Europe. That suggests the stature that Hazy, founder and CEO of International Lease Finance Corp. (ILFC), has in the airplane business. Indeed, he has a central role helping Gallois fix Airbus.

Last week, when the industry's top aircraft lessors and financiers gathered at the International Society of Transport Aircraft Trading (ISTAT) annual conference in Phoenix, Hazy talked in an extended interview about how his giant airplane-leasing company is working with Airbus to relaunch the A350 jet that will compete with Boeing's 787 Dreamliner.

Yet Boeing may not have cause for alarm. Hazy also said he eventually expects to own around a hundred 787s — a cool $15 billion at list prices.

He also discussed a longer-term strategic factor that faces both Airbus and Boeing: the threat of a rival airplane maker arising, most likely in China — and what the two airplane giants can do about it as they plan their new single-aisle jet programs.

Hazy's family immigrated to the U.S. from Soviet-occupied Hungary in 1958, when he was 12. With a UCLA economics degree, a private pilot's license and $150,000 in savings, he started his own aircraft-leasing company in 1973.

Today, Los Angeles-based ILFC is the world's largest aircraft lessor. It owns more than 1,000 aircraft, worth around $50 billion at list prices. The company was bought by insurance giant AIG in 1990, but Hazy, 61, remains firmly at the helm.

Hazy's name is on the new 176-acre Smithsonian National Air and Space Museum facility in Washington, D.C., to which he donated $60 million. His personal fortune is estimated by Forbes at more than $3 billion. His influence in the industry is unrivaled, but he doesn't favor Boeing or Airbus. To assure vigorous price competition when he buys airplanes, Hazy wants both to be strong.

Renegotiating the A350

ILFC was one of the original A350 customers, with a contract for 20 airplanes.

But after Hazy scathingly criticized the design at last year's ISTAT conference, Airbus scrapped its plan and produced a radically new design with a wider fuselage, faster wings and a composite fuselage. However, it will be delivered at least 18 months later than originally scheduled.

The A350 is Airbus' contender to stay in the midsize wide-body jet game. Without it, the Boeing Dreamliner will have the whole category to itself.

The re-negotiation of the A350 contract with ILFC is vital to Airbus.

The jet won't be taken seriously if Hazy doesn't buy the new model. It cannot win enough orders without his sales team drawing in airlines that don't have the cash to buy outright — he says Airbus is counting on ILFC to bring in 12 to 15 new airlines to fly the A350.

"We are the largest owner of wide-bodies between 200 and 350 seats, by far. And we're a major marketer of that category of jet," Hazy said. "They absolutely have to have us."

The sticking points are the price — "obviously, we have to keep the price [unchanged], otherwise we just say forget it," Hazy said — the new delivery schedule, and the clauses that account for inflation before delivery.

"Their target is to get it wrapped up by the Paris Air Show [in June] so they can tell the world, 'OK, we made peace with ILFC and it's firmly on board the A350,' " Hazy said, "Then we can go out and sign leases with airlines."

Hazy says he is sure they'll come to an agreement, but noted, "It's in their interest to get it wrapped up sooner" rather than later.

"Otherwise some of these airlines may be tempted to go with the 787."

As for Airbus' broad structural problems, as it faces political pressure and labor unrest in Europe, Hazy said he'll advise Gallois to avoid further political interference by eschewing government launch aid for the A350 and instead go with private risk-sharing partners, as Boeing has done on the 787.

Hazy thinks Gallois has only a limited time to begin his reshaping of Airbus — probably not much beyond the Paris Air Show.

"They've got to get this under control. If there's a few months of turmoil and agony, I think people will look at that as part of a structural change," he said. "But if it goes much longer than that, you could have customers saying ... 'We are going with the more reliable source' [Boeing]."

ILFC now has a firm order for 24 Dreamliners, though only 22 are publicly announced. "I could see us [eventually] having more than a hundred 787s in our fleet," Hazy said.

The ILFC order book includes 78 large 777s, and it already owns more than 90 midsize A330s and 60 767s.

"So a hundred is not an unreasonable number as we get rid of our oldest 767s and the oldest A310s, A300s," he said.

A globalized future

During a panel discussion at the Phoenix conference, Hazy surprised some with the passion of his assertion that by 2020 a significant competitor will emerge to challenge Airbus and Boeing, likely from China, Japan or Russia.

Both Boeing and Airbus have incrementally outsourced more and more of the work of building airplanes to moliffy state-owned customers from nations that demand a share of the manufacturing work.

"Will that satisfy the appetite of the Chinese — being a relatively minor subcontractor, producing landing gear doors, or panels?" he asked, "Will that satisfy their thirst to be a player? I don't think so."

Hazy said his conversations with "senior officials in those countries" have convinced him that "they have greater visions."

"At some point, they want to be in the left seat of the cockpit," where the pilot in command sits, Hazy said. "They don't want to be the supporting cast in a movie. They want to be the Oscar winner in a feature role."

He expects China might begin with a 90- to 100-seat jet, nothing earth-shattering or enough on its own to harm Boeing and Airbus.

"I wouldn't anticipate it'll be a huge, roaring commercial success," Hazy said, "But they are planting the seeds for the tree to grow."

Although outsourcing by Boeing and Airbus may make them vulnerable to such overseas competition, Hazy believes it's bound to continue because of the difference in labor costs.

China, he said, can build airplane parts "without the unions, like the IAM in Seattle, where the guy needs health benefits and his kids need dental care. If they can get away with it cheaper, the market will gravitate to the low-cost solution, as long as the quality is there."

"So I think there is a degree of vulnerability," Hazy said.

So what will he advise Gallois? What would he suggest Boeing Chief Executive Jim McNerney do?

Hazy sees two viable responses, one defensive, one offensive. Either approach could be taken on the next new airplane programs around 2015, when Boeing will replace the 737 and Airbus the A320.

The defensive response is to step up outsourcing: "To collaborate, cooperate, and coordinate with these entities as long as you can, and preserve your role as the final integrator, marketer and assembly point, and just prolong that as long as possible."

The offensive approach? To leapfrog ahead with technology. "To make such a progressive step in this new replacement airplane that no one can match it," Hazy said.

Composite-materials technology will keep the U.S. ahead for now, he agreed. But then again, the Japanese now have that expertise too, from their 787 work.

In a globalized industry, nothing will stave off rivals forever, he said.

"I don't think [Boeing or Airbus] can prevent it," Hazy said, "Eventually, there's going to be competition."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com