AER - AerCap Holdings

[writser]

But given that they are the largest aircraft leasing company in the world, who is going to acquire them?

Valid point. EV of AerCap is ~38b. Aircastle was ~7.5b. Would be a big deal. And there is already quite a bit of leverage, probably difficult for PE to lever this thing up even more. On the other hand: is EV really the correct way to look at this? Lots of limited recourse debt with airplanes as collateral. In terms of market cap AerCap isn't that big. I don't think it is an impossible takeover and maybe it is easier than we think. Still, even if they get acquired, the upside isn't super spectacular, given where it is trading. I arrived at 40% while using a higher multiple than the other deals. I don't think a take-over should be a major part of your thesis.

 

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.

Again, agreed. Of course you don't compound at 15% p.a. by doing some risk-free lending without leverage. Lots of things can go wrong, especially with earnings in the short term. Recession risk, interest rate risk, ... Still, the business model makes sense to me, they seem to execute well and return capital to shareholders. Low double-digit RoE, profitable every year since 2005, trades at a discount to book and the assets on the balance sheet aren't complete bullshit. Simple idea, clear thesis. I can see why Einhorn would invest in this - especially taking into account the universe of things he can actually invest in given his AUM.

 

On the other hand, I see this compounding at 10% - 15% p.a. with possibly some upside in multiple expansion. And you take on some risks. Maybe I'm too arrogant but I think that's below my hurdle rate. Of course I spent only an hour on this and now pretend to be an expert so take my view with a grain of salt.

[Nelg]

Anyone have any good aircraft leasing 101 materials (other than the Greenlight presentation)?

 

I'm interested in how the industry has evolved over the last few decades...specifically, who were the largest/most profitable competitors over a long period of time, why they were large/profitable, how/why some of these failed, etc.

 

Just finished reading the book Michael O'Leary: A Life in Full Flight, where the author touches a bit on how the Ryan family's Guinness Peat Aviation (now part of GE) went from hero to zero in a short period of time. I'd like to understand the economics and history of the industry more before looking at the valuation metrics.

[Jurgis]

But given that they are the largest aircraft leasing company in the world, who is going to acquire them?

 

BRK.  8)

[chesko182]

Anyone have any good aircraft leasing 101 materials (other than the Greenlight presentation)?

 

I'm interested in how the industry has evolved over the last few decades...specifically, who were the largest/most profitable competitors over a long period of time, why they were large/profitable, how/why some of these failed, etc.

 

Just finished reading the book Michael O'Leary: A Life in Full Flight, where the author touches a bit on how the Ryan family's Guinness Peat Aviation (now part of GE) went from hero to zero in a short period of time. I'd like to understand the economics and history of the industry more before looking at the valuation metrics.

 

I recently read Crash Landing: An Inside Account of the Fall of GPA  https://www.amazon.com/Crash-Landing-Inside-Account-Fall/dp/0717146421

which covers the history of the beginnings of the air leasing industry, specifically Guinness Peat Aviation which was the pioneer. It gives a pretty good overview of what the industry was like then and a lot of the problems they faced (many of them being self-inflicted such as poor underwriting)

[Sunrider]

But given that they are the largest aircraft leasing company in the world, who is going to acquire them?

 

BRK.  8)

 

Anyone with a structurally low cost of funding and a need for yield?

[petec]

But given that they are the largest aircraft leasing company in the world, who is going to acquire them?

 

BRK.  8)

 

ATCO ;)

[ValuePadawan]

I think ATCO will have its hands full with the APR acquisition and will play in the industries it knows maritime and energy it would have to be a hell of a bargain for them to go into aviation leasing.

[petec]

I think ATCO will have its hands full with the APR acquisition and will play in the industries it knows maritime and energy it would have to be a hell of a bargain for them to go into aviation leasing.

 

I wasn’t being serious - Aercap is far too big for Atlas and there’s no way Aercap would sell at this price.

 

I’m not sure Atlas would have an issue getting into aircraft leasing, especially if they could bring a decent management team on board. But it would have to be something smaller, like Chorus.

[Spekulatius]

This stock follows the storied tradition to selling of substantially when there is any sort of stress (like late 2015 or late 2018). This looks like a repeat and might see the 30’s. It’s a levered bet on aircraft demand and airlines basically. Should be fine, except for the most dire scenarios I think.

[Lakesider]

This stock follows the storied tradition to selling of substantially when there is any sort of stress (like late 2015 or late 2018). This looks like a repeat and might see the 30’s. It’s a levered bet on aircraft demand and airlines basically. Should be fine, except for the most dire scenarios I think.

 

Agreed, I picked some up Christmas Eve 2018. This time I might get some call options.

[Scunny Bunny]

I love this company and management. However.... despite the contracted revenue, there are always issues in a stressed environment with defaults and airlines wanting to defer.  This is especially tricky at present.  As soon as COVID-19 came on the scene, I dumped all my AER even though it was my second largest long position.  Why? The market always overreacts in the short term, as it did in late-2018 when credit spreads blew out (a little).  It took a brief period but that is starting to happen again.  The company will probably step up the buyback but they will need to exercise some caution.  I want to come back to AER but will bide my time because of the direct impact of this particular situation and the reaction of speculators to it.  The 30's are not an impossibility, stupid though that will be.

[Guest roark33]

I think this is one of those situations where you find out who is swimming naked when the tide goes out.  Lots of "value" guys have gotten into these lessors without fully understanding risks.  The downside is a double barrel because when their customers give back the keys, the secondary market for sale or re-leasing will dry up and that is exactly when you need it. 

[petec]

I think this is one of those situations where you find out who is swimming naked when the tide goes out.  Lots of "value" guys have gotten into these lessors without fully understanding risks.  The downside is a double barrel because when their customers give back the keys, the secondary market for sale or re-leasing will dry up and that is exactly when you need it.

 

While I totally agree with the theory, Aercap may be one of the last to suffer. It’s fleet is predominately young and new technology (the last aircraft airlines will dump, not the first) and the average lease lasts 7 years. Others will suffer more than they do, which may create opportunities.

 

I don’t own this. One lessor (ATCO) is enough.

[bizaro86]

New/new technology planes are less likely to be grounded.

 

They are also lose less by being grounded. Say a plane has a 25 year life (rough estimate). A 24 year old plane facing a 1 year soft market has lost 100% of its value.

 

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

That's simplistic of course, but I think the general idea is sound.

[elliott]

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

The thing is, how many will you have grounded "for a year"? For, even though they may not lose much in terms of value, they are not generating any income, but they are generating expenses - the debt lessors use to buy the aircraft does not get grounded.

 

Also, as for the newer planes being less likely to be grounded, isnt price at least as important? ie, an aircraft 10Y old is certainly not the latest technology, it may consume more etc, but if the lease cost is such that it makes for that and more...

[petec]

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

The thing is, how many will you have grounded "for a year"? For, even though they may not lose much in terms of value, they are not generating any income, but they are generating expenses - the debt lessors use to buy the aircraft does not get grounded.

 

Also, as for the newer planes being less likely to be grounded, isnt price at least as important? ie, an aircraft 10Y old is certainly not the latest technology, it may consume more etc, but if the lease cost is such that it makes for that and more...

 

If they weren’t more efficient on an all-inclusive basis, nobody would be buying them.

[bizaro86]

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

The thing is, how many will you have grounded "for a year"? For, even though they may not lose much in terms of value, they are not generating any income, but they are generating expenses - the debt lessors use to buy the aircraft does not get grounded.

 

Also, as for the newer planes being less likely to be grounded, isnt price at least as important? ie, an aircraft 10Y old is certainly not the latest technology, it may consume more etc, but if the lease cost is such that it makes for that and more...

 

The only planes that will sit from AER's perspective are ones where the carrier goes bankrupt. If they stop flying the planes but keep paying (because of contractual obligation) that actually helps AER because when they get the plane back it will have less cycles. When parking planes temporarily, non-bankrupt airlines tend to park their owned planes and continue flying the leased ones.

 

Now, some airlines will go bankrupt, and AER will be stuck with their planes, just as some planes will come off lease. But the newer planes will burn through less of their remaining lifespan while parked.

 

Also, a big discount on a short lease is more compelling on a new plane than an old one.

 

A 50% discount on a 2 year lease is 30% off your total cost of ownership if the capital cost is 60% and op cost is 40%.

 

On an old plane where maybe op cost is 80% and capital cost is 20%, a 50% discount on the lease is only a 10% reduction in total cost of ownership.

 

Again, I dont know the exact ratios, but the relationship will hold at any ratio. Thay means newer planes are more likely to get picked up sooner, keeping AER's payments made.

[elliott]

those are very good points, bizaro86. thanks!

[Spekulatius]

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

The thing is, how many will you have grounded "for a year"? For, even though they may not lose much in terms of value, they are not generating any income, but they are generating expenses - the debt lessors use to buy the aircraft does not get grounded.

 

Also, as for the newer planes being less likely to be grounded, isnt price at least as important? ie, an aircraft 10Y old is certainly not the latest technology, it may consume more etc, but if the lease cost is such that it makes for that and more...

 

The only planes that will sit from AER's perspective are ones where the carrier goes bankrupt. If they stop flying the planes but keep paying (because of contractual obligation) that actually helps AER because when they get the plane back it will have less cycles. When parking planes temporarily, non-bankrupt airlines tend to park their owned planes and continue flying the leased ones.

 

Now, some airlines will go bankrupt, and AER will be stuck with their planes, just as some planes will come off lease. But the newer planes will burn through less of their remaining lifespan while parked.

 

Also, a big discount on a short lease is more compelling on a new plane than an old one.

 

A 50% discount on a 2 year lease is 30% off your total cost of ownership if the capital cost is 60% and op cost is 40%.

 

On an old plane where maybe op cost is 80% and capital cost is 20%, a 50% discount on the lease is only a 10% reduction in total cost of ownership.

 

Again, I dont know the exact ratios, but the relationship will hold at any ratio. Thay means newer planes are more likely to get picked up sooner, keeping AER's payments made.

 

My concern with the aircraft leasing business is they if there is an oversupply for airplane, airlines will dump planes coming of lease to keep their wholly owned planes running to save the lease payments. This makes sense, even if a wholly owned plane is older, as right now kerosine is dirt cheap. I think this optionality is why some airlines lease part of their aircraft fleet.

[bizaro86]

A 1 year old plane is less likely to sit, but even if it does it has lost a low single digit percentage of its NPV lost from sitting for a year waiting for a new lease.

 

The thing is, how many will you have grounded "for a year"? For, even though they may not lose much in terms of value, they are not generating any income, but they are generating expenses - the debt lessors use to buy the aircraft does not get grounded.

 

Also, as for the newer planes being less likely to be grounded, isnt price at least as important? ie, an aircraft 10Y old is certainly not the latest technology, it may consume more etc, but if the lease cost is such that it makes for that and more...

 

The only planes that will sit from AER's perspective are ones where the carrier goes bankrupt. If they stop flying the planes but keep paying (because of contractual obligation) that actually helps AER because when they get the plane back it will have less cycles. When parking planes temporarily, non-bankrupt airlines tend to park their owned planes and continue flying the leased ones.

 

Now, some airlines will go bankrupt, and AER will be stuck with their planes, just as some planes will come off lease. But the newer planes will burn through less of their remaining lifespan while parked.

 

Also, a big discount on a short lease is more compelling on a new plane than an old one.

 

A 50% discount on a 2 year lease is 30% off your total cost of ownership if the capital cost is 60% and op cost is 40%.

 

On an old plane where maybe op cost is 80% and capital cost is 20%, a 50% discount on the lease is only a 10% reduction in total cost of ownership.

 

Again, I dont know the exact ratios, but the relationship will hold at any ratio. Thay means newer planes are more likely to get picked up sooner, keeping AER's payments made.

 

My concern with the aircraft leasing business is they if there is an oversupply for airplane, airlines will dump planes coming of lease to keep their wholly owned planes running to save the lease payments. This makes sense, even if a wholly owned plane is older, as right now kerosine is dirt cheap. I think this optionality is why some airlines lease part of their aircraft fleet.

 

Absolutely. For Aercap, this depends at least somewhat on how long you think a bear market for aircraft will last. Their last earnings presentation noted that 97% of lease rents are contracted through 2022. That means this year and next have minimal expiries, so most of what they get back will probably be from bankruptcies.

 

Massively lower oil prices should at least help to defer the wave of airline bankruptcies that is probably coming, which will help them get less planes back in the next 2 years as well.

 

 

[Guest roark33]

The other thing helping AER is the deferral of the Max airplanes.  If those come back into the supply, that is going to be additional supply....in a large amount.

[Lakesider]

The other thing helping AER is the deferral of the Max airplanes.  If those come back into the supply, that is going to be additional supply....in a large amount.

 

The Airlines wouldn't have know that MAX planes wouldn't be operational though and would have expected deliveries as normal,  AERCAP still have had no issues placing their planes in the past. The reputation of the MAX has been damaged now which could damage future demand.

[saleen998]

Interestingly enough, at $41 the stock is now trading at a steeper discount to BV (43%) than it did in either December 2018 or February 2016.

[johnny]

Brrruuuutal drop today; I thought Kelly's presentation at the JPM Morgan Cyber Conference yesterday was pretty compelling. What am I missing here?

[Gregmal]

Brrruuuutal drop today; I thought Kelly's presentation at the JPM Morgan Cyber Conference yesterday was pretty compelling. What am I missing here?

 

All stocks are going to be worthless. Anyone with debt is fucked. Or at least thats the message Ive been getting lately.