Royal Bank of Scotland (RBS) is in the process of selling its aircraft leasing business to Sumitomo Mitsui at x0.86 book value. AIG (AIG) last September planned to IPO its aircraft leasing business, International Lease Finance Corporation; the IPO was pulled due to poor market conditions, but could come back. This activity should lead to greater examination of the aircraft leasing sector.
There are three listed companies that focus primarily on leasing aircraft, rather than aircraft engines. There is nothing wrong with leasing engines per se, but I focus here on the aircraft-focused companies for comparability.
Last week I wrote about Aircastle (AYR), and I was asked to take a look at others in the sector. Here I do that comparison between Aircastle, Fly Leasing (FLY) and Air Lease Corp (AL), based on their most recent filings:
|Ticker||Market cap||Fleet age||Lease term remaining||Fleet yield||Interest rate|
|FLY (p/f)||$0.3B||8.3 years||3.7 years||12.9%||6.1%|
|AYR||$1.0B||10.8 years||5.0 years||12.2%||7.2%|
|AL||$2.5B||3.6 years||6.3 years||11.2%||3.0%|
Aside from the need to use pro-forma numbers to adjust for a recent fleet acquisition that has grown the company 80%, the Fly Leasing numbers are relatively straightforward. The other thing to note is FLY owns 15% stake in a service company, BBAM, that is worth approximately $72M on 15x it's most recent earnings. FLY has an older fleet with some room to reduce interest costs. The main concern is that it's outstanding lease term is relatively low, and this leads to near-term risk in terms of failure to renew leases or having to renew them at reduced rates. Fly leasing pays a 6.1% dividend and trades at 0.73x book.
As discussed in my previous article, Aircastle is relatively uncomplicated, and the fleet is older than ideal. But there is room for savings on interest costs that should come through in 2012, and yield is good -- perhaps because the asset base is now relatively depreciated, though this is a medium-term risk, as Airbus and Boeing increasingly market more fuel efficient models. Aircastle pays a 4.4% dividend and trades at 0.82x book.
Air Lease IPO'd recently and is ramping up very fast. Fleet size has grown, and is expected to almost double this year and triple by 2015. If you are bullish on aircraft prices, this is good news, as Air Lease has significant contracts in place to purchase. This fast growth also makes Air Lease's numbers confusing -- both the yield and interest rate are depressed because its aircraft and debt are growing each quarter; hence yields and interest rates appear lower than they would be in steady state. Air Lease has by far the youngest fleet, and given its acquisitive plans, the aging of the fleet will be slowed. Air Lease does not pay a dividend, and trades at 1.3x book, though it's book value is changing rapidly as its fleet expands.
Aircraft leasing is an attractive sector with good returns. More attention on the sector due to M&A and IPOs would be welcome.
Air Lease is the least attractive of the 3 because of the lack of dividend and very aggressive growth plans that add a level of risk. Aircastle and Fly Leasing are similar; Fly Leasing has an attractive yield and its 15% BBAM stake could be a source of hidden upside. The main risk is the relatively short duration of its remaining lease terms. It has demonstrated its commitment to shareholder returns through both the dividend yield and buybacks. The recent fleet expansion presents slight risk until the pro forma numbers are delivered as expected.
Aircastle should benefit from interest savings in 2012, though the age of the fleet is a concern. Like Fly Leasing, it has demonstrated shareholder friendly actions through its dividend and buybacks.
Avoid Air Lease, as its valuation on a relative basis is not compelling, and its aggressive acquisition strategy is a source of risk through reduced flexibility.
Consider both Aircastle and Fly Leasing as ways to invest in aircraft leasing. The risk/reward on Fly Leasing is somewhat higher relative to Aircastle if you are willing to brave the upcoming lease negotiations given the short term of existing leases, the value in Fly leasing is demonstrated by its higher discount to book.
If you have sufficient funds, split capital across Aircastle and Fly Leasing to reduce specific company risk and to get exposure to a value-oriented and shareholder-friendly sector.