Plane Lessors Headed to the Desert
May 13th, 2008
By Vitaliy Katsenelson, CFA
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 low 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, 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.
Add to del.icio.us | Digg this storyEntry Filed under: Analysis & Research
RSS 
Send Email
2 Comments Add your own
1. pm | May 14th, 2008 at 9:07 am
what do you think about the fact that most airlines operate inefficient old generation machines while those leasing companies mainly own the best product available in the market?
wouldn’t this mean that in the long run the weakest players will go out of business, old fleet will be gradually retired, while the arbitration play, which you discribed, will be available for years to come until this macro process (newer generation replacing old) is gradually advancing? the key questions are how long this transition will take and what will happen to the price of assets in the meantime… currently all leasing companies have hidden assets in the form of discrepancy between book value and market price…
i am still considering this opportunity, it could be a good chance to double in 3-5 years with a limited downside (value of planes). typical deal is 1/3 equity + 2/3 debt, which means that market believes that ~ a half of 1/3 will have to be written off (~ decline in share price from IPO)…
2. John Galt | May 14th, 2008 at 2:11 pm
You are failing to consider that there are two types of aircraft. Those being newer fuel efficient jets and older non-fuel efficient jets. The older jets are killing US legacy carriers because their fuel burn and cost to operate are significantly higher then the newer generation planes.
As AMR and others are parking the older jets, the demand for newer fuel efficient jets is increasing dramatically. Boeing and Airbus have 4+ year backlogs and we all know about the delays they are having in delivering these planes. There is virtually no new supply of fuel efficient jets coming online.
The publicly traded airline leasing companies’ portfolios are predominantly made up of newer jets which are increasing in value due to the increased demand and stagnant supply. Worldwide demand for air travel is increasing dramatically due to the growth in middle class in China, India, and the Middle East. This is similar to the super cycle we are seeing in metals as a completely new source of demand is hitting a formerly cyclical industry with fixed supply.
Also keep in mind that a company like Aircastle has under 10% of their fleet leased in the US. Carriers outside of the US have not been hurt as much by rising fuel costs because their currencies haven’t depreciated as much as the dollar. The customers are stronger then US legacy carriers and even if there was a default, it takes approx 60 days for an aircraft to be repo’d, re-fitted/painted and placed with a new airline. This would hardly be a devastating event and is somewhat common in the leasing industry.
Right now, airline leasing companies are being painted with the financing and airline brush which explains the stock price weakness. Eventually the market will understand that they are misunderstood and are actually part of a huge global aerospace boom with readily available financing and growth opportunities.
-JG
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed