Wednesday morning, AMR Corp (AMR), the parent company of American Airlines, announced the greatly anticipated orders for 460 planes and options for 465 more. While the market focused on the shift of a US airline from a Boeing (BA)-only focus to Airbus, everybody seems to have missed the announcement last week that American Airlines was going to sell/lease back up to 35 Boeing planes with AerCap Holdings (AER).
Clearly it's justified to focus on not only the historical size of the order from American (some estimates are close to $40B) but also the shift in plane manufacturers. While the analysts call the order a split, the additional options clearly favor Airbus in a major way. If all the options are taken, Airbus will receive around 65% of the orders. Considering that fact, the media was generous to BA executives to only focus on a split of the orders instead of a major shift towards Airbus.
More importantly to investors, though, the announcement includes a caveat that American will benefit from approximately $13B of committed financing provided by the manufacturers covering the first 230 deliveries. While this covers orders for many years, it only covers half of the firm orders and roughly 25% of all orders including options. Also, considering it just completed a lease back deal, one has to assume that more are to follow.
With AMR losing another $286M in Q2, it clearly can't afford to buy these planes outright. It also desparately needs these fuel-efficient planes to reduce the fuel costs that are killing the company right now, as it spent $524M more on fuel than last year. The MD-80 planes still stuck in its fleet will see a 35% reduction in fuel use when replaced, so it's a must to retire those planes quickly.
- Under the new agreements, American plans to acquire 460 narrowbody, single-aisle aircraft from the Boeing 737 and Airbus A320 families beginning in 2013 and through 2022 – the largest aircraft order in aviation history. As part of these agreements, starting in 2017 American will become the first network U.S. airline to begin taking delivery of "next generation" narrowbody aircraft that will further accelerate fuel-efficiency gains.
- These new deliveries are expected to pave the way for American to have the youngest and most fuel-efficient fleet among its U.S. airline peers in approximately five years.
- American also will benefit from approximately $13 billion of committed financing provided by the manufacturers through lease transactions that will help maximize balance sheet flexibility and reduce risk. This financing fully covers the first 230 deliveries.
- Under the agreement with Boeing, American plans to acquire a total of 200 additional aircraft from the 737 family, with options for another 100 737 family aircraft. American has the flexibility to convert the new deliveries into variants within the 737 family, including the 737-700, 737-800 and 737-900ER.
- American also will acquire a total of 260 Airbus aircraft from the A320 Family and will have 365 options and purchase rights for additional aircraft. American has the flexibility to convert its delivery positions into variants within the A320 Family, including the A319 and A321.
- The 737 and A320 families offer significant cost reduction opportunities in replacing American's older fleet. For example, Boeing and Airbus aircraft in the 737 and A320 families offer a 35 percent reduction in fuel cost per seat versus the MD-80 and a 12 percent and 15 percent fuel cost reduction per seat, respectively, versus the 757 and 767-200.
The leasing companies and especially AER remain the beneficiaries of a market where new fuel-efficient planes remain in demand and legacy airlines and emerging markets don't have the finances to buy new planes. The end option is to lease the planes from leasers such as AER or Air Lease (AL).
According to this note from FBR Capital, the AER leaseback deal with AMR adds $0.10 to 2012 estimates, making AER very attractive with the stock trading at only 60% of the company's appraised market value of $21.
FBR analyst says, "We reiterate our rating and choice of AER as our Top Pick and would be aggressive buyers at current price levels following its announcement that it has executed an agreement with American Airlines to acquire up to 35 Boeing 737-800 aircraft via sale leaseback through 2014. While accretive to EPS (an estimated $0.01 accretive in FY11 and $0.07-$0.10 accretive in FY12), we view the transaction as important as it demonstrates that AER is able to grow its portfolio with desirable aircraft despite lacking a significant OEM order book. In addition, an industry news source reported that AerCap could be in the process of selling its AeroTurbine subsidiary for a reported price of $300M, providing a source of capital. We believe these announcements taken together address investors' primary concerns regarding the shares -- lack of visible portfolio growth to drive EPS growth and absence of meaningful share repurchase authorization. With shares currently trading 0.85x its 1Q11 TBV of $14.92 and 0.60x the company’s appraised market value of about $21.00, we continue to believe AER is an attractively valued stock."
AER remains a relatively unknown $2B stock worth a look before the market takes notice -- especially while the media is snowballed into discussing the switch to Airbus instead of the arrangements with leasers like AER.
- Entered into a purchase-lease back arrangement with American Airlines to finance up to 35 Boeing 737-800 next generation aircraft, including 29 firm deliveries, scheduled to be delivered to American. Of the 29 firm deliveries, 26 are previously ordered aircraft and three are newly ordered aircraft. The arrangement also covers six Boeing 737-800 next generation aircraft subject to purchase rights that, if exercised by American, would be scheduled for delivery in 2013-14.
- Updating its previously announced fleet schedule, American has exercised an option to purchase three additional 737-800 next generation aircraft. As of July 1, American's Boeing 737-800 delivery schedule was: 2011: 15; 2012: 28; 2013: 14.
Disclosure: I am long AER.