Tokyo Picker

Eye on Plane Leasing Sector

I think you're misunderstanding the way this business works. As the fuel price goes up, the sufferers are not these guys, but the airlines who own older, less fuel efficient airplanes. Those older airplanes tend more to be owned by airlines. The newer airplanes are owned more by these lessors. When the pressure gets too much, the airlines go under. The shareholders/lenders of the airline are stuck with the old airplanes (as well as the legacy pension costs, etc). The lessors can easily get back their planes, even in the US (thanks to section 1110 of the bankruptcy code), and lease them to the younger, stronger airlines, thus creating a virtuous cycle.

Obviously there is a frictional cost to this repossession and releasing, which can be quite substantial - the planes may be idle for a few months, although that is not happening yet. That's why, if you look at the history of operating leasing in the last 20 years, operating lessors with short-term lease-specific debt and hair trigger covenants (e.g. GPA) go under, whereas operating lessors with higher credit and more stable sources of funding (e.eg. GECAS and ILFC) survive. Obviously the backing that GECAS and ILFC have is not as valuable anymore. But the trick in picking winners here remains looking closely at the terms of their debt . If they are stable on that, they will make a lot of money. Provided that they do not try to buy cheap by buying older generation aircraft - that is a quick and easy form of suicide these days.


On Apr 17 01:02 PM DSX Lover wrote:

> These things have come down, because they are heavy leveraged and
> keep missing the numbers. AYR and GLS have missed earnings the last
> 2 quarters. I won't be surprised if GLS misses again next week. FLY
> is the worst, borrowing in excess of Free Cash Flow to pay for the
> dividend. AYR and GLS have paid huge dividends above EPS because
> they been able to utilize the large depreciation expense, and easily
> available Finance from commercial paper to finance a large percentage
> of the fleet. Now the Financing is not that easy, and creditors are
> requiring lower debts on Net Asset Value of the Planes, which will
> contract the Dividend. AYR had to cut the dividend over 50%, and
> I assume that GLS will do so in the near term as well. I would wait
> until GLS reports before jumping in, AYR is interesting in the $10-$11
> level with a 10% Dividend being supported by a dividend payout of
> 60% of EPS. Unlike the Shipping sector, where charterer's have to
> ship an excess of in demand for commodities, and Ship charter contracts
> are not dependent on fuel prices, the Air Leasing companies clients,
> are not as stable because the high fuel prices is putting bankruptcy
> pressure is smaller unprofitable airlines, making the business more
> risky, despite long-term leasing agreements with the airlines.