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) - Just as established players in the aircraft-leasing business are getting back on their feet, scrappy start-ups are giving them a run for their money.

Steven Udvar-Házy, who founded the airline-leasing business in the 1970s, left one of the largest firms at AIG to start up a smaller rival earlier this year.

Given the disparity in size between the biggest and smallest competitors, it may not make much of a difference. The two key industry players,

American International Group's

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International Lease Finance Corp. and

General Electric's

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GE Commercial Aviation Services, dominate the industry, with at least three times as many aircraft as their closest competitors.

>>Q&A: AIG Aircraft-Leasing Division CFO

The battle is interesting if only for the high-profile players -- as well as the profits involved in each leasing arrangement as demand has started to heat up.

GECAS and ILFC have been at the top of the aircraft-leasing space for a long time, making it difficult for new entrants to build a book of business. The two firms now boast 1,800 and 1,000 aircraft, respectively; the next largest competitors have 100 to 300 aircraft and smaller start-ups might have less than a dozen.

Yet as the economic crisis grounded passengers and called to question the financial stability of both GE and AIG, other players sensed opportunity.

The most high-profile start-up has been led by Steven Udvar-Házy, the founder of aircraft-leasing at financial firms.

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The Hungary-born billionaire founded ILFC in 1973 with two partners, who subsequently sold out to AIG in 1990, It was a mutually beneficial relationship: ILFC used the insurer's giant balance sheet to grow, while AIG benefited from the leasing business' fat profit margins.

But ILFC lost some of its luster when AIG became the country's single largest bailout case. ILFC's inability to access the capital markets to restructure debt or break free from its troubled owner frustrated Udvar-Házy, according to sources familiar with the situation. (Udvar-Házy did not respond to requests for an interview.)

After a failed attempt to form a coalition of investors to take ILFC private on his own, Udvar-Házy quickly started up a smaller rival, Air Lease Corp., taking 10 top executives with him. ("Three hours into retirement, I was restless," he told the

Los Angeles Times

. "I just decided that I didn't want to be retired at the beach.")

Within a few months, ALC had raised $3.3 billion in debt and equity financing, with aggressive plans to build a fleet of over 100 commercial jets in less than a year.

"There may be some amount of hyperbole to it, but Steve Házy actually invented the business," says Mike Smith, a partner at White & Case who focuses on aircraft finance and leasing. "He obviously had tremendous name recognition and was able to do a successful offering."

ALC isn't alone - there are several other new entrants, often backed by private-equity.

Avolon was started up last year by Dómhnal Slattery - essentially the Irish version of Udvar-Házy who cut his teeth running


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Aviation Capital subsidiary for many years.

Slattery took more than half a dozen RBS colleagues with him, garnering an initial $500 million in financing, followed by a $1.4 billion capital raise in May. Big contributions came from private equity players Oak Hill Capital Partners, Cinven and CVC Capital Partners. Avolon aims to acquire roughly 150 Airbus and


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passenger jets by 2014.

In San Franciso, another team of old hands in the aircraft leasing space partnered with private equity last year to launch Jackson Square Aviation.

Oaktree Capital Management provided $500 million in equity financing for Jackson Square, which is led by a trio of air-leasing experts -- Richard Wiley, Toby Bright and Scott Weiss -- who developed another large, successful leasing business called Pegasus Aviation in the 1990s. They developed that business into a large franchise before selling it to the P.E. firm Terra Partners Group at the height of the market in 2007.

Jackson Square announced its first leaseback agreement in April, along with additional debt financing from a German bank.

Established leasing players have been making moves, too -- forming joint ventures, posting strong profit growth and selling legacy equipment at a discount to capitalize on depressed prices for newer models. The leasing business stands in a small sliver of opportunity, in which aircraft are cheap, demand is picking up and banks are actually willing to lend to lessors.

"Banks are very comfortable lending against airplanes," says Fred Cromer, who took over as ILFC CFO in March. "... If the aircraft comes back to the financing party, they have the ability to take that airplane back and find a new home for it. In terms of assets, that's pretty attractive as opposed to real estate, where you just have to wait for the cycle because you can't just pack up the building and move it to a different location."

Cromer says that, despite the securitization market remaining chilly for most types of asset-backed deals, "securitizations have


been getting done for aviation-related equipment." The strong outlook for air travel has provided a glimmer of business for banks with big Wall Street divisions like

Bank of America

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JPMorgan Chase

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Morgan Stanley

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Goldman Sachs

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, who can underwrite the ABS, issue other types of debt, or enter long-term leaseback agreements even if they don't own planes in-house.

Robert McKenzie, an attorney at Arnstein & Lehr who handles aircraft deals, says buyers are also picking up planes at deep discounts with "inconceivable" borrowing rates just a point higher than Libor or the

Federal Reserve's


"People are getting a lot of plane for their money," he says.

As a result, McKenzie says "there's an entire industry starting to brew up" in which buyers with a lot of cash can acquire distressed assets for "pennies on the dollar." For instance, the recent bankruptcy filing of Mexicana Airlines has had potential aircraft buyers champing at the bit.

Meanwhile, demand has been steadily improving since late-2009, with air traffic rising at an especially hearty clip during the spring and summer. Air traffic has climbed 8% this year vs. 2009, averaging an even stronger rate of 11% over the past few months, according to the International Air Transport Association. Unsurprisingly, new orders for the aircraft leasing business have climbed from a trough of $3.2 billion in February to $5.6 billion in July - growing at an 11% clip from April to July.

Cromer says lease rates have strengthened as a result of the strengthened demand. But with scrappy start-ups entering the fray, and midsize competitors around the globe getting more aggressive - from

Bank of China's

BOC Aviation in Asia to AWAS, RBS and

Deutsche Bank

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in Europe to Macquarie in Australia and U.S. franchises like

CIT Group

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and Babcock & Brown - it's unclear whether rivals will undercut giant lessors like ILFC and GECAS.

For the time being, though, the big kahunas have been doing fairly well: Revenue at GE's GECAS division climbed 10% during the first six months of 2010 vs. the same period last year. While ILFC's profits have slowed due to write-downs on aircraft in preparation for the Macquarie sale, the firm posted record profits last year and core business results have remained strong. Amsterdam-based


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, which leases equipment and provides maintenance services, has also seen its revenue double during the first half.

In fact, things seem to be going pretty well for all parties involved. Airlines have easy access to equipment, banks have found an area where they are comfortable lending, Airbus and


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are benefiting from new orders and lessors have found a bright spot of profitability in a dismal economic scene.

"What's quite interesting to me recently is the number of new companies that have been launched," says Smith, the White & Case partner. "In the past five or six months, in what would seemingly be troubled times in the economy, people have managed to successfully launch new leasing companies with sizable equity offerings."

--Written by Lauren Tara LaCapra in New York.

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