Plane Lessors Are Headed to the Desert

This article in Forbes about aircraft leasing companies names some publicly traded stocks that appear cheap: Genesis Lease (GLS), AerCap (AER), and Aircastle (AYR). But that cheapness may be a bit deceiving.

Plane leasing looks like a great business. Despite U.S. and global economies facing a slowdown and oil prices making all time highs, demand for planes is still very strong.

However, the more I think about it, the more I realize that this business cannot escape the fate that mirrors its customers - the airlines. I could be wrong, but this business doesn’t really have a sustainable competitive advantage. It’s basically just an arbitrage business: a lessor needs to be able to borrow at a lower rate than airlines and lease planes to an airlines at a rate greater or equal to what they could borrow. Airlines get to keep planes off the balance sheet and show high return on capital, but may try to renege on the lease when times get tough (many did that after 9/11).

I think this is where things get dicey. A global slowdown and a recession will do what it does every time: send airlines in a place so frequently visited by them - bankruptcy. They’ll renege on the leases and leasing companies will get their planes back. But unless they decided to start flying those planes themselves, demand will not be there. Planes will make their usual pilgrimage to the desert.

Comments

[Ernest S. A...:]

Like any other business, aircraft leasing depends on the quality of decisions made, including which aircraft to buy, which airlines to lease to, and the anticipated residual values.

The poor results in the United States, while a significant sector of the market, does not mean that international airlines will perform as poorly as those here. Growth in emerging countries, namely China and India has been spectacular, and will continue as these economies mature and air travel replaces rail for the majority of the populations.

One must pick and choose carefully - the right aircraft that are likely to remain green, not being late adopters of technologies facing near-term replacement, and which aircraft to remove from your portfolio on a timely basis while residuals are strong.

Historically, the airlines have been a cyclical business, and while record high fuel prices are depressing earnings, global growth in the industry will continue. That growth will need aircraft, and people to finance them.

Will some aircraft lessors get into trouble, and find that some aircraft hit the desert? Perhaps for older fleets, but the demand for the newest and most fuel efficient aircraft is such that they can quickly be re-leased internationally.

It is easy to be caught up in the woes of the US airline industry, most of which lacks the financial wherewithal for long-term viability, and ignore the underlying demand and global growth.

Ernest S. Arvai
CEO
The Arvai Group, Inc.

2008 May 14 10:05 AM

[DONTGIVEUP:]

PEOPLE HAVE TO FLY AND DEMAND ALWAYS WILL BE THERE

2008 May 15 01:51 AM

[optionsgirl:]

The airlines will always need updated planes. Additionally, these lessors lease all over the world, not just the USA, so they are adding capacity in the emerging markets. Long term, probably a good investment. Short term, buy some puts if you want to take a long position...

2008 May 21 04:37 PM

[wow-me:]

wow,I find this thread so interesting,airlines are always going thru thy revolving door of bankruptcy,makes you wonder what insane mind would want to be in bed with them?
But those Irish and psudo Irish citizens dont seem to mind,as they find leasing business a jovial profession which make them stand out in a St Patrick Day parade and gets toasted in their local watering holes by comrades and secret admirers.
I will drink to that!

2008 May 27 11:40 PM

[wow-me:]

Oh,lets not forget,not all planes have to sleep under the moon and stars in the desert,some are converted to freight planes or hey,send them to Mexico or some African countries to ferry soldiers and guerillas alike .
They dont mind,it is just living dangerously another day!

2008 May 27 11:44 PM

[Enes K.:]

One other thing to keep in mind is that airlines prefer the flexibility of contracts. A buying contract may be for structured for a decade or even longer. If one leases an aircraft, which can be done for as short as a year, the airline could diminish its risk on missing out on technology coming out or wait until an aircraft has proven worthy. Do not like the results of the aircraft you leased? Don't renew. Get another one. Short term contracts will not get defaulted on (usually). Most aircraft leasors require at least a month's (and up to three) worth of lease payments to be paid down as deposit. As with GLS, they were able to get the deposit and a month's worth of lease (defaulted at the beginning of the month and had already paid for the next) for a new aircraft that should be able to go right back up.

2008 May 29 11:36 AM

[archer_id:]

Air Castle has improving numbers and 92% of its business comes from outside the US, where fuel costs are not compounded by a declining dollar. With increasing leasing revenue, the aircraft are still far from the desert.

2008 Jun 04 06:31 PM

[ACapitalist:]

Just look at what the major US airlines are taking out of service. They are all old generation 737's. A320 and MD80's. Those leasing the more modern planes should do well. The modern ones are still in high demand.

2008 Jun 05 03:33 PM