Why Aircraft Leasing Firms Like AerCap Holdings N.V. (NYSE:AER) Hold Interest?
The aircraft leasing space is dominated by two big firms. One is General Electric Company (NYSE:GE)’s GE Capital Aviation Services and the other is AerCap Holdings N.V. (NYSE:AER). The shares of the firms involved in it are getting attractive now. There are enough reasons for it. One is undoubtedly the weak oil price, due to which air travel becomes much more competitive. That makes more people opt for air travel. Also, the comments of First Pacific Advisors’ Managing Partner, Steven Romick, assumed importance. He believes that the industry is in fine shape currently. The airline companies are planning capacity additions suggesting a potential increase in aircraft leasing.
Lessor Of Planes
According to Romick, aircraft leasing is nothing but leasing of planes to the airline carriers throughout the globe. For over four decades the industry has been in operation. AerCap Holdings N.V. (NYSE:AER) and General Electric Company (NYSE:GE) are very well aware of the industry’s intricacies. During this period, there were different points of time where one could have invested in aircraft leasing stocks at discounted valuations through the public equities. These stocks were also no exception to that. The airline and the aircraft leasing industry danced to the tune of the economic conditions directly. As a result, there was always a period of recession followed by a period of growth.
That resulted in selling of distressed debt instruments, as well as the equipment trust certificates. At least once in a decade, both the recession and the growth period are happening, if the past is of any indication. Romick said that he was a witness to the 1980s International Lease Finance equity, 1990’s equipment trust certificates and the 2000’s International Lease Finance debt. He said that, in all the cases, the securities price in the trading platform justified the kind of risk that was attached in owning a leveraged business. The reason was that it was a financing division of the cyclical industry of airlines that is directly linked with the economic conditions.
The aircraft leasing industry does not face the uncertainties currently that it once faced due to several factors, like rising fuel costs, operational expenditures, and the threat of interest rate hikes. The airline sector itself witnessed a full circle to have settled down now. That was preceded by a consolidation process and restructuring, following the financial crisis in the year 2008.
Romick thinks that AerCap Holdings N.V. (NYSE:AER) and General Electric Company (NYSE:GE) shares have traded cheaply earlier due to mid-cycle earnings rather than the current scenario. That was due to these firms’ airline customers having to bear the brunt of over-leveraging, recession, excess capacity, and price wars. However, the aircraft leasing and air-carrier industries are in better shape now. One of the reasons is that lessors are able to demand higher than normal lease rates. At the same time, they also have a lower than average debt cost due to prolonged lower interest rates and weak oil prices. These factors are undoubtedly contributing to high spreads, as well as net interest margins, on a historical basis.
Net interest margin (NIM) for aircraft leasing companies grew to 10.9% at the end of 2014, from a little over 9.0% in 2008. The NIM was threatening to reach the 8% level in the year 2011 and 2013. Of course, there is no doubt that the value of the lessor’s planes commands a premium during good times and vice-versa in bad times.
Purchase Of Aircraft
AerCap Holdings N.V. (NYSE:AER) seems to believe that the time has come for placing more orders for airplanes. According to Romick, values of commercial jets are still below the peak witnessed in 2007. That means that planes are not as expensive as they were in the past. However, the prices of planes are certainly above their lows.
The aircraft leasing firm has taken note of the different airline companies’ intentions to boost their capacity. Therefore, the lessor sees opportunities to lease more aircraft. Also, the weak oil price boosts air travel in the developing markets too. Recently, Bloomberg reported that AerCap Holdings N.V. (NYSE:AER) has placed orders for 100 737 MAX 8 aircraft with Boeing Co (NYSE:BA). The $10.7 billion list price order was announced during the recently concluded Paris Air Show. The company indicated that the orders will help replace some of the aging models in its fleet. Before the order, the company had more than 1,300 owned, as well as managed aircraft, catering to about 200 customers spread over 90 countries. On the other hand, General Electric Company (NYSE:GE)’s GE Capital Aviation Services has more than 1,570 owned and serviced aircraft and caters to 230 customers across 75 countries.
Air Passenger Growth
International Air Transport Association (IATA) said that until May of the current year, the revenue passenger kilometer (RPK) witnessed 6.3% growth. Similarly, the available seat kilometer (ASK) recorded a 5.9% uptick until the month of May for the five-month period. Both RPK and ASK growth is driven by the International division. Passenger load factor (PLF) was 79.0% driven by domestic. Emerging markets, like India, are witnessing growth in air travel driven mainly by weak oil price. Only the African region witnessed a downtick.
General Electric Company (NYSE:GE)’s GE Capital Aviation Services is not a listed one. Therefore, there is no separate price target announced by analysts. However, in the case of AerCap Holdings N.V. (NYSE:AER) shares, analysts’ price targets range between $46 and $65. The consensus of the price objective among the eight analysts is $54.4.
On the whole, the aircraft leasing industry is well-placed currently. AerCap Holdings N.V. (NYSE:AER) and General Electric Company (NYSE:GE)’s GE Capital Aviation Services are bound to take advantage of the conditions. There are enough opportunities for growth. That means enough potential for upside rewards too. However, the industry is prone to have a cyclical effect. Therefore, those who are willing to go through the cyclical effect can venture into it.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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