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AerCap Is The Best Vehicle To Invest In Aircraft Leasing Growth

May 04, 2020 5:30 PM ETAerCap Holdings N.V. (AER)AL35 Comments


  • The aircraft-leasing industry will grow in next 20 years as air traffic continues to grow and airlines need more aircrafts to meet the growing demand.
  • Only the largest lessors with market share and deep pocket will survive COVID-19.
  • AER not only beats AL on fleet size, but also outperforms the latter on profitability as measured by rental yield and lease cashflow IRR.
  • AER is trading at deep discount, which creates a large margin of error.
  • AER is the best vehicle to invest in aircraft leasing growth.

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My thesis is straightforward: AerCap (NYSE:AER) is well-positioned to survive COVID-19 and will reap the fruits of air traffic boom in the next 20 years. Compared to Air Lease (AL), it generates high rental yield and high rate of return from lease cashflow. Moreover, it's trading at such a deep discount that the margin of error is comfortable enough for a compelling investment case.

Great Leap Forward In The Last 20 Years

According to IATA, the number of airline passengers worldwide grew from 1.5 billion in 2000 to more than 4.2 billion in 2019 - a threefold increase in mere 20 years. Passenger number alone doesn't capture the full picture of growth in air traffic. Over the same period, commercial airlines not only carried more passengers, but also brought them to destinations further away. A common metric used in the airline industry is revenue passenger kilometres or miles (( RPKs or RPMs)), which multiply the number of passengers carried by distance flown. From 2000 to 2019, global RPKs grew from 1,250 billion to over 8,600 billion - a sevenfold jump.

RPK/GDP growthThe growth in air traffic mimics that in economic growth. Over the past two decades, the growth in airline RPKs bears a strong correlation with global GDP growth. The growth in air traffic also led to an explosive demand for commercial aircrafts. In 2000, global commercial aircrafts delivered to airlines were worth about $50 billion. By 2019, that figure rose to $120 billion.

In the same period, the aircraft-leasing industry experienced similar leap forward. In

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Professional investor with hedge fund and CFO background. Focused on long/short equity, especially in deep value and special situations. Follower of Ben Graham and Warren Buffett.

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Comments (35)

Having accumulated a position over the last 2 months (ave cost @22$) I’m struggling to work out when to sell. I probably should have pulled the trigger this morning. With extremely limited growth on the horizon what’s a fair P/E ratio? With annual EPS of 8$/share perhaps 32$ is as high as it’ll go. I don’t think you can apply a historical PE of 7 to the company at the moment.
BVPS is $73+, depends on holding period. I think its good value today on 1-3yr view.
But the book value is anyone’s guess right now. Hypothetically if they went bust right now, there wouldn’t be anyone to buy the planes so book value is irrelevant?
The Sceptical Capitalist profile picture
@worc0670 I beg to differ. If AER goes bust tomorrow and its 1,000+ aircrafts are up for sale, it would be a wet dream for its rivals. BOC Aviation, the world's 5th largest lessor, just got a $2bn credit line to buy up aircrafts, most likely from airlines and other lessors in distress.
Little, Einstein profile picture
OK let's see.
And Embraer SA
happ8714 profile picture
Lease yield is a function of age. In other words if a plane is very old, the lease yield would be very high. AER has a older fleet than AL and this factor likely made most of the difference in lease yield and the higher net interest margin.

The question, which is the better company of the two big public companies was one I debated internally. I choose AL because I thought the management better, and I liked the newer fleet and less leverage. Also I thought their internal partnerships and larger order size would enable them to grow faster. The big advantage of AER is they buy back stock, where as AL pays a modest dividend and does not buy back stock.

The issue today is how do these companies gets around the covid stop of business.

Both will survive. I was hoping for some insight into the current crises. We all hope things will return to normal but that isn't assured.
Curious on the management part, why do you prefer AL's?
happ8714 profile picture
Udvar-Hazy is the reason. He founded the airline leasing business and from the CC seems to be more likable at least to me. I made my decision in 2015-16 when I started my position. I have owned both over time.

It's clear to me that AER is moving towards the things that I judged made AL the superior investment such as a lower leverage and a newer fleet. Now an issue I'd like to hear AL address is Kelly claim that he has the better fleet. Maybe he does? I'd like to hear AL response to that claim.

Yet I think AL and AER are more like V and MA. Both have tail winds and they trade similarly. The issue that's important for both of these companies is the next 18 months. Getting over the Covid crises and seeing what happens to demand. Other issues such as AL larger order book, AER buying back stock are less relevant in the short run. Both will trade similarly. In time, in normal times, the size difference of AER to AL will diminish.

The short run here is the real issue to me. Thanks for covering this industry. I'm happy for any insights you may have.

I agree on Hazy experience and they've built a great company but I don't think they've done anything outstanding.

I think their orderbook is too large relative to their size, their disclosures are weakest in the industry and the impairments taken at ILFC are in no small part down to that team, though I think he might have left when they were actually taken. They wrote off $8bn in impairments there, then AerCap bought after that. I think AER has a better nose for a deal buying ILFC and the sharebuybacks over dividends.

Agree both very good though, but AER has always traded weaker so im probably in the minority.
So you're using book value multiple, but the actual market value of the planes will decline as a result of COVID, so book value may not be the most accurate metric to judge the value of the company. Why not use a multiple of NAV instead?
How would that differ?
NAV is based on market value
They would both be similarly impacted, so relatively speaking it wouldn't show you much.
I suspect that currently a vast majority of their lease customers are NOT making the monthly cash payments. The next 10Q will be telling. Rapidly depreciating assets sitting on the tarmac(re; overcapacity) is NOT a sustainable business model for airlines nor lessors. Nor are 60% load factors due to reconfigured seats maps for social distancing. I grant you that a scientific breakthrough will reward your thesis. We all hope so. Take a look at ERA another intriguing possibility in aviation leasing. That investment thesis requires a rebound in oil.
Turns out not as bad...
Really ? If the majors are not flying, won't leasing revenue take a big hit? Also, with unemployment at 20% at year end, private charters will be hard to justify.
Neither company does private Jets
Solid comparison but you really didn't address the elephant in the room. Anyone interested in these two companies has to grapple with the impact of COVID on the airline business, both in terms of immediate financial impact and long term impact on airline growth. Leasors are more insulated than their customers but still have tremendous second hand exposure. I am long both of these names and think they will weather the storm, but there are substantial risks. One advantage Air Lease has is less near-term debt maturity
peregrine01 profile picture
AER's existing liquidity on hand with even 0 lease revenue is something like 2 years. They also have plenty of unencumbered assets to borrow against to generate even more liquidity. Of course, even in this environment, airlines are still playing some form of rent. AER mgmt mentioned in latest call that agreed to lease deferrals so far amounted to 13% of annual lease revenue - far better than what many might think.
Illuminati Investments profile picture
Interesting idea, I've been looking at this as a "safer" way to play the airlines.

However, wouldn't new companies just entering this business be at a huge advantage because they could buy cheaply from the existing oversupply of planes?

Or could they still not assemble a fleet as cheaply as AER's is selling for now?
The Sceptical Capitalist profile picture
@Illuminati Investments Good question. Aircraft leasing is a highly leveraged business. Aircraft acquisition is typically financed anywhere between 50%~80% by debt and collateralized/cross-collateralized with the lessor's aircraft portfolio. A big problem for new players is access to debt financing due to lack of assets to leverage on. This would be a problem under normal market condition, let alone this day and age. The new player would have to heavily rely on equity financing to acquire a large portfolio - we're talking about tens of billions of dollars of equity capital at a minimum to reach AerCap's scale. That's why I believe the most likely buyers of "surplus" aircrafts would be an incumbent like AerCap. So you're right - a new player won't be able to assemble a fleet as cheaply as AerCap due to leverage or rather the lack thereof.
OlafDanielson profile picture
AER AL work assuming lease payments continue, which despite planes sitting in the desert etc, they generally are, but as companies file Bankruptcy, those leases will be the first to go and yes, AER , AL etc will be taking back aircraft. While there was a shortage, especially with the 737 Max grounded, it seemed like that was easy. Now, however, I don't see these companies having an easy time re-leasing stuff, AND the secondhand price of aircraft is going to go down in the supply equation.....is it going to get bad enough that the financing to plane price goes upside down? IDK, don't think anybody knows.... South African Air is toast, I didn't read what Norwegian did, most all of the European/ Asian low cost carriers are a bit shaky on a good day, some of the European flag carriers seem shaky, but will Sweden (et al) let SAS go under? South America...GOL? IDK....in US, who can even survive? Even little Hawaiian with what looked like a bulletproof balance sheet now, one wonders, their earnings report wasn't ominous, although it was bad ....but what are used 717s worth? Even what are their NEOs worth if demand stays 20-25% of normal in a year? So the debtholders take over American or which ever, DAL, SW, UAL, how much of the routes are they going to cut in BK court? Especially international? Will the US government step in and just take over one of them? If the tail-risk happens and full liquidation is forced, Figure if all 4 of the big boys go down plus ALK and HA, US Government takes over and assume they would what reorganize the US route structure into just one or two flag carriers? I would guess a Conrail situation. Unfathomable, yes, beyond the realm...not now. Buffet sees it, so what is the chance 10%----70%, I don't know, in such a scenario, AER/ AL are dead.

I think very risky money here. We let our ACY go in January before the sale, no longer Long AER (December) and carried no airline stocks past 2019, last positions ALK and HA, I like my chances a casino better then in this space long or short, Black anyone, or maybe red?

Good luck, be safe
The Sceptical Capitalist profile picture
@OlafD I'm with you on the bleak future of the airline industry in the foreseeable future. Many airlines won't survive Covid-19; many aircrafts will be repossessed and idling in storage. Where I'm more optimistic is the global demand for air travel, which will rebound once the pandemic is over. If 100 airlines fold tomorrow, I'm confident 100 new ones will pop up to fill the vacuum - it's a question of supply and demand; people need to travel.
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