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AerCap: A Rough Gem For The Long Term

Jun. 01, 2020 1:00 PM ETAerCap Holdings N.V. (AER)23 Comments


  • AerCap is certainly going to feel the pain for the current downturn, but has shock absorbers to weather the storm.
  • No liquidity concerns despite lease payments being deferred.
  • Lessor positioned to play pivotal role in recovery of air travel market.
  • Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Get started today »

In late February, the markets started an unprecedented entry into a bear market. The financial impacts of the corona outbreak are not quite clear yet, nor is the recovery profile, but we are now seeing markets having recovered 32% from their 52-week lows and 20% off their highs while the Dow Jones is crossing the 50-day moving average at the time of writing. Those seem to be positive indicators, even though I still think there is a lot of uncertainty.

Source: AerCap

The travel industry has been hit particularly hard; airline names have lost 60% of their value while names such as Boeing (BA) and Airbus (OTCPK:EADSY) have lost 60 to 70 percent of their value with the side note that Boeing jumped considerably from its 52-week lows. In this report, I want to have a look between one of the companies that forms the link between jet makers and airline customers and has seen its share prices collapse by as much as 84% measured from high to low and is still trading 63% off its 52-week highs. That company is AerCap (NYSE:AER). In this report, I want to have a look at what risks AerCap is facing, but also why the 60% drop the company suffered might be overdone.

Note: This report was published to subscribers of The Aerospace Forum in early-May.

A simple but rewarding business model

AerCap has a simple business model, the company buys aircraft from Boeing, Airbus and Embraer (ERJ) financed with a combination of cash and debt and leases those aircraft to airlines to collect a basic lease rent plus a maintenance rent. Another source of revenue is the sales of aircraft on which the company usually books a gain compared to the book value of the aircraft. The business model is quite straightforward, but it

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This article was written by

Dhierin Bechai profile picture

Dhierin-Perkash Bechai is an aerospace, defense and airline analyst.

Dhierin runs the investing group The Aerospace Forum, whose goal is to discover investment opportunities in the aerospace, defense and airline industry. With a background in aerospace engineering, he provides analysis of a complex industry with significant growth prospects, and offers context to developments as they occur, describing how they might affect investment theses. His investing ideas are driven by data informed analysis. The investing group also provides direct access to data analytics monitors. Learn more.

Analyst’s Disclosure: I am/we are long AER, BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (23)

donio profile picture
why do they took 4200 million debt? is the big hit yet to come?
Well done Dhierin! Good in-depth and unbiased analysis, the kind of work we should see more of at SA!

One question is, do you also think "recovery in the marketplace will take 2-3 years to get back to 2019 levels." or if at all? AER may not get back to 66+ if C-19 seriously changes how we all live, work and travel, hence gradually reducing the mid to long term demand of air travel ...
Amazing company, extremely well managed. However if a few large carriers fall over, they will default as well. And this, unfortunately, is not unrealistic in the present context.
In addition they trippled in last weeks, so a correction is also possible.
They have twice as much cash today than they need for the next 12months, why are they going to default?
01 Jun. 2020
Isn’t the problem with AER that they are so highly leveraged, that as soon as they start to feel pressure on their two main sources of revenue, lease payments and aircraft sales, their whole business case disappears?
Dhierin Bechai profile picture
Not really. They can refinance debt if needed and use their revolver.
01 Jun. 2020
I just know that significant leverage and a business failing to make the margins they need to achieve, normally only ends up one way, and it’s not usually pretty.
Robbert Manders profile picture
I don't think you get it, Dhierin. The problem with businesses like this one is that when you see that pressure, lenders lose confidence, sending interest rates higher. Higher interest rates make the debt more difficult to service, plunging the company into a vicious cycle.
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