AerCap (NYSE:NYSE:AER) has been one of the companies I marked as a buy, a risky one, but still a nice buy if you believe in the long term trajectory of the air travel market and the role that aircraft lessors could be playing in that market. At the time of writing, shares of AerCap are up 135% since I marked AerCap a buy. So, things are playing out nicely.
In this report, I will be analyzing the lessor's Q4 2020 performance to see how COVID-19 is affecting the company’s business with special attention for the sequential trajectory in 2020. Obviously, AerCap already provided its Q4 results a month ago but I have not seen an analysis of the results that is why I am providing an analysis now as I believe the full year results are important also when assessing the results in 2021 to see how things develop,
Revenues stabilize
Figure 1: Revenues and other income AerCap Q4 (Source: AerCap)
Basic lease rents came in quite a bit lower at $885 million year-over-year but marking a very modest sequential decline of $12 million. That can partially be explained by a $117 million pressure during the quarter because for some lessees the revenues is being accounted for when the cash comes in rather than the accrued accounting method. I believe you can consider this stabilization of the basic lease rents. Year-over-year the decline in Q4 basic lease rents was 17% driven by lease terminations, lease restructuring, bankruptcies and a switch to cash accounting. For the full year, basic lease rents declined by 13% and while that is a double digit decline, it is one that is not completely unexpected. Around $310 million or 60% of the basic lease rent revenue was driven by some payments being accounted for as they occur.
Maintenance rents were $23 million lower for Q4 compared to last year due to lower end of lease compensations. When leases end, the aircraft is supposed to be handed to the lessor in a certain stage. If the aircraft is in an extremely good condition, the lessor should pay the lessee, and when the state of the aircraft is less than agreed on previously, the lessee should pay the lessor. For the full year because lease terminations ending abruptly, there still were maintenance rents due or reserves that the lessor has now recognized as revenue. Gains on assets were lower, driven by mix and volume. There's not a lot to add to that. Overall, the year-over-year decline in revenues was 18% up from 14% in the last quarter. Sequentially, revenues were stable which is a good sign in my view and for the full year the revenues came down by 9% showing that the leasing business is shielded relatively well.
Another positive was that lease deferrals increased by just $5 million to $490 million and it seems AerCap still expects the aggregated lease deferrals to come in lower than the initial expected range of $700 million to $800 million.
Figure 2: Income AerCap 2020 (Source: AerCap)
In the third quarter of 2020, asset impairments drove costs higher as a fleet review showed the need for those adjustments to be made to the books. In Q4 2020 comparable impairments remained absent, but there was a “different” $27 million asset impairment related to lease terminations and aircraft sales. The bigger adjustment was the $117 million cash accounting charge as results were corrected for airlines entering into cash accounting from the traditional accrual accounting method. Furthermore there was a $76 million loss on debt extinguishment to account for the difference between fair value and carrying value of the debt when the debt is recalled before the majority date. That's not necessarily a negative thing as debt can be paid off due to a strong a cash position or opportunities to refinance at attractive terms.
The loss on investment is merely the result of revaluing the shares in Norwegian (OTCPK:NWARF) that AerCap had in its possession and was offset maintenance revenues as leases on some Norwegian aircraft ended.
Earnings were heavily impacted, but the bottom line still showed a small profit for the quarter which marks a significant improvement from Q3 2020 when AerCap booked a $850 loss driven by impairment charges on flight equipment.
For the full year, revenues declined by 9% while earnings excluding one-off items declined by 7.4%. Obviously, the charges should not be ignored but having earnings drop more or less in line with revenue is somewhat appreciable.
Operating cash flow
Figure 2: Operating cash flow AerCap 2020 (Source: AerCap)
What I'm currently eyeballing is the cash that comes in during the quarter where I am hoping to see strong sequential improvement and AerCap did not disappoint one bit there. Year-over-year, the decline is still around 30% but that is down from around 37% for the first nine months of 2020. So, the cash flow decline has been tapering over the past few quarters and cash flow has doubled compared to Q2 2020 and is up 20% quarter-over-quarter. While cash flow is still down, the cash flow profile recovery is looking strong and promising as deferrals are tapering and trade receivables are coming in.
So, we are seeing improvement there and AerCap also has a nice liquidity cushion. Capex for 2020 has been reduced from $3.9B (2019 outlook) to $1.2B. The company has $2.4B in debt maturing over the next 12 months and capex of $1.5B, which it can cover with its current cash position, 2021 operating cash of $2.4B, marking a 12.5% improvement and other committed debt. The company also has access to expected proceeds of aircraft sales, an unsecured revolver and contracted sales. So AerCap is actually in quite a nice spot.
Conclusion
AerCap came strongly out of the winter months with stable revenues when viewed sequentially. Also on an earnings level there was a significant improvement as there was no impairment charge driven by revaluing assets but merely a smaller impairment driven by lease terminations and a cash accounting charge. What I can appreciate is that the company has shown significant improvement on the sequential cash flow trajectory and there is confidence that the operating cash flow will be higher in 2021. I believe that the worst is over for the industry and that gives confidence to look at the future where AerCap is going to play an important role in supporting the recovery and it will do so with a strong liquidity position with limited risk of further impairment charges for leased assets.
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