AER - AerCap Holdings

[Lakesider]

Announced another 200M in buybacks for the quarter. Added today at a nice ~20% discount to the bookvalue.

 

Average fleet age has dropped quite a bit this quarter, selling some older aircraft for a gain yet again. Looks like no issues placing the surge in new deliveries due.

[walkie518]

Announced another 200M in buybacks for the quarter. Added today at a nice ~20% discount to the bookvalue.

 

Average fleet age has dropped quite a bit this quarter, selling some older aircraft for a gain yet again. Looks like no issues placing the surge in new deliveries due.

I don't really get this one...seems like no one cares, it's the same story: increasing book value, trading at a discount to book, and selling planes at 5% premium to mark. 

 

Is it the Waha sales overhang?

[CLM5]

This just got very interesting....

[Lakesider]

This was cheap at $50.

[walkie518]

The Last 747: Airlines Dump the Jumbo Jet, Transforming International Travel https://www.wsj.com/articles/the-last-747-airlines-dump-the-jumbo-jet-transforming-international-travel-11546059601

[John Hjorth]

Seeking Alpha - Author : IP Banking Research [December 28^th 2018] : AerCap Holdings: Cheap But What Are The Risks?.

[rogermunibond]

Aercap and Air Lease don't want GECAS.  Buffett has avoided this financing sector as he says it's too hard to predict airline demand and doesn't want to get stuck with airplanes no one wants.

 

https://www.wsj.com/articles/ges-capital-dilemma-keep-or-sell-jet-leasing-business-11548846000

[Cardboard]

But, he bought all these airlines stocks saying that capacity issues of the past are now under control.

 

I think he would be interested depending on price. After all, he bought XTRA lease way back which is also fairly cyclical or trucking. An enormous advantage that he has is cost of financing which is very important in leasing.

 

Cardboard

[walkie518]

But, he bought all these airlines stocks saying that capacity issues of the past are now under control.

 

I think he would be interested depending on price. After all, he bought XTRA lease way back which is also fairly cyclical or trucking. An enormous advantage that he has is cost of financing which is very important in leasing.

 

Cardboard

by this logic, wouldn't it make sense for AER mgmt to work on a go-private strategy?

[rogermunibond]

But, he bought all these airlines stocks saying that capacity issues of the past are now under control.

 

I think he would be interested depending on price. After all, he bought XTRA lease way back which is also fairly cyclical or trucking. An enormous advantage that he has is cost of financing which is very important in leasing.

 

Cardboard

 

I think a lot of the Aercap, Air Lease, and GECAS leases are to non-US airline/freight operators especially for long-haul flights, 787s, A350s etc.  IIRC Buffett was especially worried about 747s and other long-haul airplanes that became quite costly to operate when fuel prices rose.

[johnny]

On Buffett: I only remember (and can find) a thirty second blow-off from one of the annual meeting Q&As a few years back. Is there something more substantive that anybody has handy?

[bizaro86]

But, he bought all these airlines stocks saying that capacity issues of the past are now under control.

 

I think he would be interested depending on price. After all, he bought XTRA lease way back which is also fairly cyclical or trucking. An enormous advantage that he has is cost of financing which is very important in leasing.

 

Cardboard

 

The capacity controls for the airlines aren't  a shortage of planes, it's a shortage of slots/gates at important airports. If you want to start a new airline, it is easy to get airplanes (trade money for them, the market is liquid). If you want to get gates/slots at La Guardia, Love Field, JFK, DCA, LHR etc you will either not get them or pay an incumbent through the nose.

 

That protects the airlines from new entrants, but the lessors are less protected. New entrants to that business can buy new planes from Boeing/Airbus. They might have to wait (which gives existing owners maybe a temporary moat).

 

I think if you're looking for Berkshire analogies, I think airplane leasing is more like reinsurance. You can make a  lot of money in an occasional hard market, but mostly it's a P/B of around 1 or less business.

 

 

 

 

 

[rogermunibond]

I think Buffett's complaint was ILFC and maybe GECAS using 1-5 yr debt or commercial paper rolling it over and using their parent AAA for funding versus say Aercap which has a more matched term structure for their debt and their assets.

[Packer16]

IMO the right way to look at these leasers is as portfolio of airline bonds with price increases.  On average, these bonds with price increases should have appreciated as the economics of the airline have gotten better but they have not.  The other risk leasers take on is residual risk.  I would think that if the airlines are healthier that this would decline also.  IMO the analogy to re-insurance is incorrect.  You can see the differences in the RoEs of each group of players over time.  The airline leaser RoEs have gone up & are in the low (AER) to upper teens (AL) but the RoEs of re-insurance firms are in the single digits or negative and declining.  With re-insurance the historical barrier was getting capital to a market after a cat (it took years as a new entity had to be set up & approved) but this barrier has been removed as there are mechanisms to get capital to the insurance markets with weeks.  The key to airline leaser investing is underwriting of the counterparties & the residual risk the leaser is taking on.  The value add to the airlines is the removal of the residual risk.  Since airlines have alot of other risks to manage, it is worth it to them the offload the residual risk to someone else.  I would not be surprised if Buffet does not like GECS due to poor underwriting, high residual risk & financing duration mismatch risk, just like he likes certain banks due to the underwriting.

 

Packer

[adhital]

shouldn’t this deserve to trade at least at 1BV = $65+? And one day it might? Valuation says 1.5BV is fair. should this be punished just because LT asset financed by, perhaps, ST borrowing? Any other compelling reasons for this discount?

 

5 years CAGR

ROE ~13%

EPS ~9%

 

[chesko182]

I'm pretty sure most of their assets and liabilities are matched. They have talked about this in the past. They also have plenty of liquidity to weather any downturn, take a look at their performance during the GFC.

[chesko182]

Andrew Walker writeup on AerCap

 

http://yetanothervalueblog.com/2019/07/should-the-airplane-lessors-be-flying-higher-aer-al.html

[Spekulatius]

Andrew Walker writeup on AerCap

 

http://yetanothervalueblog.com/2019/07/should-the-airplane-lessors-be-flying-higher-aer-al.html

 

They talk about a platform value, what is the justification for it? The barriers to entry are very low.

[adhital]

Andrew Walker writeup on AerCap

 

http://yetanothervalueblog.com/2019/07/should-the-airplane-lessors-be-flying-higher-aer-al.html

 

They talk about a platform value, what is the justification for it? The barriers to entry are very low.

 

Yes, no moat to be proud of... Anyone with a decent capital , order book and perhaps industry knowledge can replicate this; however, I don't think $35 Billion could replicate AER (current assets, order book, platform, customer relations etc) in a year or perhaps two. But even without any barriers to entry,  and selling at ~25% discount to the stated book value, all while equity is earning over 12+% with not too crazy leverage and favorable demographic trend... don't you think we're being fairly compensated? Creditors are not too much worried either. But who knows..

[johnny]

Yeah, the fact that established players trade at below book value is sort of a barrier to entry, lol

 

 

EDIT: This points made below are actually presented more robustly in the link above, which I just read. You shouldn't read this if you haven't already

 

 

They've made a few claims that I find reasonable, both basically specific arguments about the benefits of scale.

 

The first is just dealflow--they have a good idea of every plane that is being moved, where it's going, what sort of numbers are being talked about, etc. Maybe I'm just jealous because I've been unable to get comfortable with the nuts and bolts of this business, but I think there's something to that.

 

The second is superior recovery abilities. They know who is distressed and are credibly ready to drop a Seal Team of jet-repomen, which is known by counterparties and probably helps make sure Aercap is treated well in marginal situations. Compare that to say, buying a stake in one of those single-plane entities that has a single A380 in Dubai--if the Emiratis ever decide they want to stop paying the lease,  the only real recourse for shareholders will be to start a forum to console each other.

 

The third is that the size of their operation enables them to extract superior pricing from these bulk new orders they've been putting in. Again, no quantification here but it makes sense to me.

[Spekulatius]

Compare that to say, buying a stake in one of those single-plane entities that has a single A380 in Dubai

 

LOL , my brother has stake in one of those with I think anA380 with Singapore airlines. The problem is not with the lease, the problem is that this airplane is a dog and once the lease is over, the residual value may be close to zero. Investors get a return of capital in the high single digits (7-8%) for 10 year or thereabouts term, but the total return very much depends on the residual value of the plane.

 

The airplane leading companies run the same risk, but are hopefully smarter about what to buy and have more options to salvage value at least in theory.

[chesko182]

https://www.genewsroom.com/press-releases/apollo-and-athene-acquire-pk-airfinance-gecas

 

"Financial details of the transaction were not disclosed, although the $3.6 billion of PK AirFinance financing receivables that were held for sale in the second quarter of 2019 are being sold at a premium to book value in this transaction."

 

Compare to AER's 0.75X book value, which it self is probably understated (considering they sell their aircraft at 5-10% premium, and they have a very valuable order book)

 

 

[chesko182]

Up nicely today as AirCastle announces its being bought for $2.4Bn. 1.2X P/B, 34% premium to the last trading day prior to Aircastle's public announcement that Aircastle was evaluating strategic alternatives

 

https://investors.aircastle.com/news-releases/news-release-details/aircastle-limited-enters-merger-agreement-affiliates-marubeni

 

this still trades at ~90% P/B... 1.2X would be equivalent to ~84 p/sh (using my est. BV for Q3)

[writser]

From the most recent Greenlight letter:

 

AerCap (AER) – Long

 

7.6x P/E on 2019 estimates, 86% of book value

 

AER leases new and mid-life airplanes to airlines globally. AER’s 99%+ utilization rate and 7.5- year average remaining lease term support a high degree of earnings visibility. Additionally, the company is well-managed and a strong capital allocator. Since we invested in the company in 2014, AER has disposed of about 500 planes to improve its fleet age, technology mix and customer concentration, while generating strong gains-on-sale consistent with its conservative carrying values. During this period, the company has delevered, bought back 42% of its shares outstanding and grown book value per share annually by 15%. The shares recovered from a 2018 sell-off and gained 55% in 2019.

 

In September and November, two smaller peers with inferior platforms and returns on equity agreed to be acquired for 111% and 117% of book value. The suspension of Boeing 737 MAX deliveries since March 2019 and the subsequent recent production halt has reduced global narrow-body deliveries by 50% and structurally strengthened the demand for (and the value of) AER’s airplanes on a multi-year basis. For the last few years, technical overhangs have increased the volatility of AER stock and generally harmed the shares. We believe these issues have been fully resolved and the company is poised for strong economic and equity performance in 2020.

 

Seems like a good summary of the company. So, now trading at ~87% of book value. Assuming a take-over at a slightly higher premium would mean ~$86 or 40% upside. On top of that they keep growing book value at a nice pace. Seems like a very decent (if maybe slightly unambitious) stock pick.

[Hielko]

But given that they are the largest aircraft leasing company in the world, who is going to acquire them? And sure, 7.5 year lease terms are nice, but airlines are often operating on the edge of bankruptcy, so in a global recession those earnings can still disappear quite easily. But yeah, based on book value and those transactions the stock is probably somewhat undervalued.