IB Net Payout Yields Model

Airplane Lessors: AerCap Leads

The airplane leasing sector has been promising for a while now as emerging markets expand air traffic and airlines with weak balance sheets look to cut cash outlays for new planes. Its also a much better way to play this trend then to own a airline as they typically struggle to make profits with the fierce competition in the sector yet every time we turn around another company wants to open an airline. Owning one seems like a status symbol similar to a sports franchise except airlines almost always lose value.

Airplane lessors on the other hand are typically very profitable. The airplanes typically hold their values and during a period where both Boeing (BA) and Airbus struggle to get new versions out, the planes on hand remain in high demand. Its also an attractive investment because the leases are typically for 5-7 years providing for a consistent return.

Unfortunately though the stock prices are not nearly as consistent. Fears of bankruptcies in the industry (leases can be canceled) combined with fears of airplanes losing value causing loans to default drove the lessor stocks of AerCap (AER), Aircastle (AYR), Babcock & Brown Air (FLY), and Genesis Lease (GLS) to extreme lows down as much as 90%. Not that these companies weren't impacted by the global melt down, but for the most part they had limited long term impacts. Just about all of their combined planes are now leased which is remarkable at a time when most sectors are happy with stable revenues down 30-40%. AER just reported lease revenues up 18%. Alot of the increase is because of new planes, but the fact that they were able to report steady lease rates and an increase in planes leased is amazing. Investors though haven't agreed.

Stone Fox Capital has long been invested in GLS being that the seasoned management team at GLS is suppose to be the best in the business. GLS recently reported a new lease deal and that all of their planes have been leased. Impressive, but they have been very conservative during this global recession period. Though it seemed prudent during the crisis, its actually turning out to be a negative for investors as AER is investing nearly $2B this year on new planes. Planes they are putting to work at high spreads. Evidently the global market has been a lot stronger then typical of recessions. Emerging markets are seeing strong demand and the global recession seems long over now as countries like France, Germany, and now Japan have emerged from the slump to join China, India, and Indonesia to name a few fast growers. This puts companies that have been adding planes ahead of the game. GLS is waiting for the depressed values that never happened.

All of the airplane leasing stocks trade at sub 8 forward PEs making the sector very attractive considering the growing trend to lease planes. AER trades at a sub 4 forward PE presumably because they have the highest risk if the market was to turn south again. At this point, AER if anything seems like a solid bet to exceed estimates for 2010 that factor in very little growth yet AER is adding a ton of planes to its portfolio (41 in 2009 or roughly 20% growth). As we exit 2009, it wouldn't surprise us for AER to trade at the highest PE north of 10 on earnings that could easily exceed the $2.09 expected in 2009.

Highlights from the AER Q2 report highlighting why we like AER at this point in the cycle:
  • Lease revenue for the second quarter 2009 was $169.8 million, compared to $144.4 million for the same period in 2008, an increase of 18%.
  • Net spread, the difference between basic lease rents and interest expense excluding the impact from the mark-to-market of interest rate caps, was $112.6 million in second quarter 2009 compared to $93.1 million in second quarter 2008, an increase of 21%. This measure reflects the increase in leasing income.
  • Committed purchases of aviation assets delivered or scheduled for delivery in 2009 are $1.8 billion, of which $0.8 billion closed in the first half year of 2009.
  • Klaus Heinemann, CEO of AerCap, commented: "Our net spread, which is our industry's key measure of lease rental income after interest expense, increased by 21 percent in second quarter 2009 as compared to the same period in 2008, while we were managing our portfolio through the worst recession since World War II. Our cash position reached nearly $350 million on June 30, 2009 representing over 50 percent of our current market capitalization." Klaus Heinemann added: "We achieved our key goal for the first half of 2009; all of our aircraft orders to be delivered in 2009 through 2011 are placed with airline clients with committed financing arranged. AerCap has strong growth prospects as one of the leading players in the global aircraft operating lease market with financial resources and a commitment to participate in the anticipated market recovery during 2010."
  • Signed 5 lease agreements and 21 LOIs for new planes with an average term of 133 months or 11 years.


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