AER - AerCap Holdings

[manuelbean]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

I Edward, thank you very much for your reply. So you are saying that, if the company is able to pay its debt obligations, even with negative equity, shareholders would be ok? Is there any other document besides the Annual Report where I can find the covenants?

And why did you say that AER has liquidity for 2 years ? Are you including a massive decrease in expenses?

On a different note, how would this nee Aercap be valued? By the PE?

 

Petec, interesting. Why can't it buy new planes?

 

Thank you guys

 

[petec]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

I Edward, thank you very much for your reply. So you are saying that, if the company is able to pay its debt obligations, even with negative equity, shareholders would be ok? Is there any other document besides the Annual Report where I can find the covenants?

And why did you say that AER has liquidity for 2 years ? Are you including a massive decrease in expenses?

On a different note, how would this nee Aercap be valued? By the PE?

 

Petec, interesting. Why can't it buy new planes?

 

Thank you guys

 

Think about it this way. If you own Aercap stock it’s like owning a house with a mortgage. Your assets are planes and the contracts leasing them to airlines and you’ve borrowed say 70% against those assets.

 

Now, say the value of the assets falls 35%. You now have negative equity. If you decide to buy another plane (house), you won’t have any money for the down payment (equity). Think the bank is going to give you a mortgage?

 

On the other side of the coin, you put $100 in to start MacDonald’s. It grows like a weed and you pay yourself so much in dividends that there’s negative equity*. You go to the bank for a loan. The bank sees all the cash the business is generating and falls over itself to lend to you.

 

*this is a gross oversimplification of the accounting but hopefully it makes the point.

 

 

[Castanza]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

I Edward, thank you very much for your reply. So you are saying that, if the company is able to pay its debt obligations, even with negative equity, shareholders would be ok? Is there any other document besides the Annual Report where I can find the covenants?

And why did you say that AER has liquidity for 2 years ? Are you including a massive decrease in expenses?

On a different note, how would this nee Aercap be valued? By the PE?

 

Petec, interesting. Why can't it buy new planes?

 

Thank you guys

 

Think about it this way. If you own Aercap stock it’s like owning a house with a mortgage. Your assets are planes and the contracts leasing them to airlines and you’ve borrowed say 70% against those assets.

 

Now, say the value of the assets falls 35%. You now have negative equity. If you decide to buy another plane (house), you won’t have any money for the down payment (equity). Think the bank is going to give you a mortgage?

 

On the other side of the coin, you put $100 in to start MacDonald’s. It grows like a weed and you pay yourself so much in dividends that there’s negative equity*. You go to the bank for a loan. The bank sees all the cash the business is generating and falls over itself to lend to you.

 

*this is a gross oversimplification of the accounting but hopefully it makes the point.

 

Who would be assessing the value of these planes? Worst case scenario if nobody is buying or leasing how can you properly asses value?

[Peregrine]

IMO, people look at things too much from a book value or liquidation value perspective. If you think a company's a going concern, then book value doesn't really mean much.

[petec]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

I Edward, thank you very much for your reply. So you are saying that, if the company is able to pay its debt obligations, even with negative equity, shareholders would be ok? Is there any other document besides the Annual Report where I can find the covenants?

And why did you say that AER has liquidity for 2 years ? Are you including a massive decrease in expenses?

On a different note, how would this nee Aercap be valued? By the PE?

 

Petec, interesting. Why can't it buy new planes?

 

Thank you guys

 

Think about it this way. If you own Aercap stock it’s like owning a house with a mortgage. Your assets are planes and the contracts leasing them to airlines and you’ve borrowed say 70% against those assets.

 

Now, say the value of the assets falls 35%. You now have negative equity. If you decide to buy another plane (house), you won’t have any money for the down payment (equity). Think the bank is going to give you a mortgage?

 

On the other side of the coin, you put $100 in to start MacDonald’s. It grows like a weed and you pay yourself so much in dividends that there’s negative equity*. You go to the bank for a loan. The bank sees all the cash the business is generating and falls over itself to lend to you.

 

*this is a gross oversimplification of the accounting but hopefully it makes the point.

 

Who would be assessing the value of these planes? Worst case scenario if nobody is buying or leasing how can you properly asses value?

 

Well in that case lenders definitely ain’t gonna play ;)

[johnny]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

OK, I think there's about $35B worth of airplanes on the balance sheet. What would you say is the appropriate valuation of all of these leases, given the counterparties are universally insolvent? Because if it isn't >$35B, I'm still right. And if it is >$35B, I would have to imagine your portfolio is 100% AER calls at a strike of like $100?

 

If you want to actually "go beyond the balance sheet", everything we're talking about is a zero. The planes are completely underwater, and the leases are worth absolute dogshit in any circumstance. The off-balance sheet "asset" this company has is its structural position in a complicated chain of contracts and counterparties where both ends are likely to receive a cascade of international bailouts that will be too rushed to include sufficient optimizations to remove AER shareholders from the list of beneficiaries.

 

That's what we're buying with Aercap right now: like the malls, it's a bailout prediction market at this point.

[Castanza]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

OK, I think there's about $35B worth of airplanes on the balance sheet. What would you say is the appropriate valuation of all of these leases, given the counterparties are universally insolvent? Because if it isn't >$35B, I'm still right. And if it is >$35B, I would have to imagine your portfolio is 100% AER calls at a strike of like $100?

 

If you want to actually "go beyond the balance sheet", everything we're talking about is a zero. The planes are completely underwater, and the leases are worth absolute dogshit in any circumstance. The off-balance sheet "asset" this company has is its structural position in a complicated chain of contracts and counterparties where both ends are likely to receive a cascade of international bailouts that will be too rushed to include sufficient optimizations to remove AER shareholders from the list of beneficiaries.

 

That's what we're buying with Aercap right now: like the malls, it's a bailout prediction market at this point.

 

How many of the contracts are for companies that are heavily subsidized by the state? I can see contract issues for US carriers, but is it unrealistic to assume international entities will continue to pay the contract?

[manuelbean]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

It's as if you are looking at a bank, but instead of the mortgage value outstanding you would see the value of the houses that secure the mortgage. The value of the house can vary wildly while the mortgage can still be whole.

 

Another example is the difference between SLG which always has its properties leased for at least 10 years ahead, compared with what would happen if it had only short term leases. The leases provide tremendous value in times like today that the assets by themselves do not.

 

As for the idea of liquidation based on negative equity, there are no debt covenants that provide for mark to market. So no. An event of default has to happen first - i.e. AerCap no paying debt and interest on schedule. Probably not happening for at least 2-3 years even with zero revenues based on their current payment schedule and liquidity sources.

I Edward, thank you very much for your reply. So you are saying that, if the company is able to pay its debt obligations, even with negative equity, shareholders would be ok? Is there any other document besides the Annual Report where I can find the covenants?

And why did you say that AER has liquidity for 2 years ? Are you including a massive decrease in expenses?

On a different note, how would this nee Aercap be valued? By the PE?

 

Petec, interesting. Why can't it buy new planes?

 

Thank you guys

 

Think about it this way. If you own Aercap stock it’s like owning a house with a mortgage. Your assets are planes and the contracts leasing them to airlines and you’ve borrowed say 70% against those assets.

 

Now, say the value of the assets falls 35%. You now have negative equity. If you decide to buy another plane (house), you won’t have any money for the down payment (equity). Think the bank is going to give you a mortgage?

 

On the other side of the coin, you put $100 in to start MacDonald’s. It grows like a weed and you pay yourself so much in dividends that there’s negative equity*. You go to the bank for a loan. The bank sees all the cash the business is generating and falls over itself to lend to you.

 

*this is a gross oversimplification of the accounting but hopefully it makes the point.

 

Who would be assessing the value of these planes? Worst case scenario if nobody is buying or leasing how can you properly asses value?

 

The airplanes are appraised by independent appraisers, (Ascend, Avita, etc). These guys give 2 valuations: Base Values and Market Values. What counts for the balance sheet are the Base Values which are determined by the long term value of the assets which shouldn't vary much over time. (the market value varies much more than the Base value). Each appraiser has its own valuation method and they don't disclose them. 

 

Then the lessor will "battle" with its own auditor in order to justify why the carrying value should be different from the Appraiser value (if the company thinks for some reason that the value of those airplanes is actually different). So, let's say that the Appraiser suggests a 5% impairment, the company can still lower that to 3% or 2% if it can make a strong case for it.

 

 

 

 

 

[manuelbean]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

OK, I think there's about $35B worth of airplanes on the balance sheet. What would you say is the appropriate valuation of all of these leases, given the counterparties are universally insolvent? Because if it isn't >$35B, I'm still right. And if it is >$35B, I would have to imagine your portfolio is 100% AER calls at a strike of like $100?

 

If you want to actually "go beyond the balance sheet", everything we're talking about is a zero. The planes are completely underwater, and the leases are worth absolute dogshit in any circumstance. The off-balance sheet "asset" this company has is its structural position in a complicated chain of contracts and counterparties where both ends are likely to receive a cascade of international bailouts that will be too rushed to include sufficient optimizations to remove AER shareholders from the list of beneficiaries.

 

That's what we're buying with Aercap right now: like the malls, it's a bailout prediction market at this point.

 

How many of the contracts are for companies that are heavily subsidized by the state? I can see contract issues for US carriers, but is it unrealistic to assume international entities will continue to pay the contract?

 

Jeremy makes some interesting assumptions on that here https://rapercapital.com/2020/03/09/hard-hats-on-buy-aer-short-boc-aviation/

[Peregrine]

I don't understand why so many are using possible market values in an unprecedented distressed environment for commercial aircraft to try to estimate AerCap's equity. They have ample liquidity plus unencumbered assets to last well over the next year assuming even 0 rents being paid so they're not liquidating at these supposed values.

 

The question you really have to ask here is: will air travel recover and come back at some point? If the answer's yes, then AerCap is clearly a going concern and should be valued as such. And if it doesn't, then I think we have far worse problems than debating what AerCap's equity is worth.

[johnny]

"at some point" is a bit wiggly. I think the real question is are we waiting a year or two to hit the previous numbers (like you say, Aercap is probably okay here) or is it more like 5-10 years? The problem isn't this is not just a fundamental economic analysis. What matters is what Airline CEOs (and their financial backers) think. A big part of the AER bull case is that airlines are going to continue paying rent for grounded airplanes because they want to make sure they're well positioned to maintain/gain market share when theres a recovery in a year or two. What happens if something changes this general expectation in the industry (or, increasingly relevant, in the government)?

 

Every day that I watch our governmental response to this thing, my confidence that it'll all be history a year from now goes down. And I have to imagine the same is true for lenders, CEOs, senators.

[Peregrine]

"at some point" is a bit wiggly. I think the real question is are we waiting a year or two to hit the previous numbers (like you say, Aercap is probably okay here) or is it more like 5-10 years? The problem isn't this is not just a fundamental economic analysis. What matters is what Airline CEOs (and their financial backers) think. A big part of the AER bull case is that airlines are going to continue paying rent for grounded airplanes because they want to make sure they're well positioned to maintain/gain market share when theres a recovery in a year or two. What happens if something changes this general expectation in the industry (or, increasingly relevant, in the government)?

 

Every day that I watch our governmental response to this thing, my confidence that it'll all be history a year from now goes down. And I have to imagine the same is true for lenders, CEOs, senators.

 

I don't think anyone is thinking air travel gets back to normal in a year's time but I have high confidence that it grows over the long-term and AerCap has enough liquidity and unencumbered assets to get well past the next two years even assuming a highly distressed environment.

[Castanza]

The most valuable asset of AerCap is the fleet. That is represented, in its entirety, on the balance sheet. Any lender knows this and will be extremely sensitive to any change in the apparent value of those assets, since the assets are themselves priced in the market based on their expected cash generation. Book value becomes a reasonable proxy for future EBITDA, or the probability of it.

Incorrect.

 

The most valuable asset of AerCap is not the fleet but its leasing agreements which are not represented on the balance sheet. Only the value of the planes is.

 

OK, I think there's about $35B worth of airplanes on the balance sheet. What would you say is the appropriate valuation of all of these leases, given the counterparties are universally insolvent? Because if it isn't >$35B, I'm still right. And if it is >$35B, I would have to imagine your portfolio is 100% AER calls at a strike of like $100?

 

If you want to actually "go beyond the balance sheet", everything we're talking about is a zero. The planes are completely underwater, and the leases are worth absolute dogshit in any circumstance. The off-balance sheet "asset" this company has is its structural position in a complicated chain of contracts and counterparties where both ends are likely to receive a cascade of international bailouts that will be too rushed to include sufficient optimizations to remove AER shareholders from the list of beneficiaries.

 

That's what we're buying with Aercap right now: like the malls, it's a bailout prediction market at this point.

 

How many of the contracts are for companies that are heavily subsidized by the state? I can see contract issues for US carriers, but is it unrealistic to assume international entities will continue to pay the contract?

 

Jeremy makes some interesting assumptions on that here https://rapercapital.com/2020/03/09/hard-hats-on-buy-aer-short-boc-aviation/

 

Thanks, seems like a solid analysis. Gives me some things to mull over.

[Castanza]

"at some point" is a bit wiggly. I think the real question is are we waiting a year or two to hit the previous numbers (like you say, Aercap is probably okay here) or is it more like 5-10 years? The problem isn't this is not just a fundamental economic analysis. What matters is what Airline CEOs (and their financial backers) think. A big part of the AER bull case is that airlines are going to continue paying rent for grounded airplanes because they want to make sure they're well positioned to maintain/gain market share when theres a recovery in a year or two. What happens if something changes this general expectation in the industry (or, increasingly relevant, in the government)?

 

Every day that I watch our governmental response to this thing, my confidence that it'll all be history a year from now goes down. And I have to imagine the same is true for lenders, CEOs, senators.

 

I don't think anyone is thinking air travel gets back to normal in a year's time but I have high confidence that it grows over the long-term and AerCap has enough liquidity and unencumbered assets to get well past the next two years even assuming a highly distressed environment.

 

I think countries that rely heavily on tourism will bend over backwards to get people flying again. As I've already said, I know many people already taking advantage of cheap flights and booking vacations for end of summer early fall simply because they had to cancel their current ones. People still want to travel. I think leisure travel will recover much faster than business travel. This is just speculation though. So many variables to take into account. But if any bit of stability returns on a macro economic scale then I can see air travel ramping up within a 1-2 year time frame.

[elliott]

I think countries that rely heavily on tourism will bend over backwards to get people flying again. As I've already said, I know many people already taking advantage of cheap flights and booking vacations for end of summer early fall simply because they had to cancel their current ones. People still want to travel.

 

that depends on the region. I dont know if people will be so willing to travel to, say France, Italy, Spain given the presence of Covid19. Countries which probably represent quite a bit of world tourism. this may only make the recovery a little bit slower, though.

 

[whiterose]

Intra-China flights are being resumed over the last couple of weeks.

Also it seems like people (or goods?) are still flying:

https://www.flightradar24.com/

[Edward]

It is really not a very complicated situation. If I remember correctly, the company has circa 40B$ of revenue contracted. In order to default on these obligations, the airline would have not only to go bankrupt, but also to liquidate. We can have a discussion about why that is the case. Obviously most major airlines are not going to liquidate.

 

Regarding value of aircraft, given the contracted revenue picture, that is a secondary concern - much like with a bank and a mortgage, the value of the property only arises if the mortgage in not current, and remember that in this case the loan is full recourse. Meaning that the airline is still on the hook even if the planes have been repossessed. This is why only liquidation with a low liquidation value can get them off the hook for lease payments.

 

Regarding liquidity. It is there probably at least until the end of 2021. Likely longer because they have plenty of unencumbered assets.

 

So the one big question is air travel demand. If it continues growing like in the past (even with some bumps), we're golden. If it suddenly goes to a secular multi year decline, life's gonna suck.

 

So to summarize - liquidity, and long term demand for planes are the key. Not reading the balance sheet thinking about short term aircraft values, that's pretty much irrelevant.

[Spekulatius]

"at some point" is a bit wiggly. I think the real question is are we waiting a year or two to hit the previous numbers (like you say, Aercap is probably okay here) or is it more like 5-10 years? The problem isn't this is not just a fundamental economic analysis. What matters is what Airline CEOs (and their financial backers) think. A big part of the AER bull case is that airlines are going to continue paying rent for grounded airplanes because they want to make sure they're well positioned to maintain/gain market share when theres a recovery in a year or two. What happens if something changes this general expectation in the industry (or, increasingly relevant, in the government)?

 

Every day that I watch our governmental response to this thing, my confidence that it'll all be history a year from now goes down. And I have to imagine the same is true for lenders, CEOs, senators.

 

I don't think anyone is thinking air travel gets back to normal in a year's time but I have high confidence that it grows over the long-term and AerCap has enough liquidity and unencumbered assets to get well past the next two years even assuming a highly distressed environment.

 

I think countries that rely heavily on tourism will bend over backwards to get people flying again. As I've already said, I know many people already taking advantage of cheap flights and booking vacations for end of summer early fall simply because they had to cancel their current ones. People still want to travel. I think leisure travel will recover much faster than business travel. This is just speculation though. So many variables to take into account. But if any bit of stability returns on a macro economic scale then I can see air travel ramping up within a 1-2 year time frame.

 

This is my guess, but I think the flights end of summer will probably not happen. I am sure the airlines like the free working capital though. My wife had quite some trouble to get refunds for flights booked for April as the airlines push rebooking , but to when and where (from our perspective?). They are very slow doing so as it eats into their working capital. Refunds take 30 days plus....

[Packer16]

It is really not a very complicated situation. If I remember correctly, the company has circa 40B$ of revenue contracted. In order to default on these obligations, the airline would have not only to go bankrupt, but also to liquidate. We can have a discussion about why that is the case. Obviously most major airlines are not going to liquidate.

 

Regarding value of aircraft, given the contracted revenue picture, that is a secondary concern - much like with a bank and a mortgage, the value of the property only arises if the mortgage in not current, and remember that in this case the loan is full recourse. Meaning that the airline is still on the hook even if the planes have been repossessed. This is why only liquidation with a low liquidation value can get them off the hook for lease payments.

 

Regarding liquidity. It is there probably at least until the end of 2021. Likely longer because they have plenty of unencumbered assets.

 

So the one big question is air travel demand. If it continues growing like in the past (even with some bumps), we're golden. If it suddenly goes to a secular multi year decline, life's gonna suck.

 

So to summarize - liquidity, and long term demand for planes are the key. Not reading the balance sheet thinking about short term aircraft values, that's pretty much irrelevant.

 

However, once the US gov’t bails out the airlines don’t contractual obligation get re-examined?  I doubt the gov’t will allow leasing firms to become whole with their dollars.  One question is how sensitive to lease payments are AER earnings?  IMO at a minimum these payments will be reduced.

 

Packer

 

 

[Edward]

Never heard of new debt cancelling out old obligations without going through a chapter 11.

 

If the government wants less leasing obligations, that would be a violation of the contract to force this. Alitalia for example went bankrupt and did not go so far as to request lower lease rates.

 

I am not aware of historic precedent of unilaterally modifying lease rates without risking losing the aircraft by the lessor, which is obviously in the right to impound them due to breach of contract, then suing the airline for the money anyway. Not a very smart strategy.

 

The net result would be losing the aircraft while generating a legal liability. It would make a lot more sense to retire old owned aircraft, then trying to sell some other owned aircraft. Defaulting on a lease is about the last thing you want to do - unless you are completely insolvent anyway. One recent example would be Air Berlin.

[Spekulatius]

Never heard of new debt cancelling out old obligations without going through a chapter 11.

 

If the government wants less leasing obligations, that would be a violation of the contract to force this. Alitalia for example went bankrupt and did not go so far as to request lower lease rates.

 

I am not aware of historic precedent of unilaterally modifying lease rates without risking losing the aircraft by the lessor, which is obviously in the right to impound them due to breach of contract, then suing the airline for the money anyway. Not a very smart strategy.

 

The net result would be losing the aircraft while generating a legal liability. It would make a lot more sense to retire old owned aircraft, then trying to sell some other owned aircraft. Defaulting on a lease is about the last thing you want to do - unless you are completely insolvent anyway. One recent example would be Air Berlin.

 

It doesn’t make sense to default on leases if you need the Aircraft to keep flying, it is quite another case, if there is tons of idle aircraft around and you can’t fly. In the latter case, it could make sense to default especially when everyone else is doing it too. It’s a bit the “Calvinball” angle that I have been pointing out in other threads that I have been pointing out which I think will make some notions about preconceived notions  how things “should” work out obsolete.

 

Regardless of the short term, I can’t really see a scenario where we don’t end up without a huge surplus of aircraft relative to demand in the medium term (2-3 years).

[Edward]

Regardless of the short term, I can’t really see a scenario where we don’t end up without a huge surplus of aircraft relative to demand in the medium term (2-3 years).

I agree, hence the importance of the lease contracts over this time frame.

 

In addition, there is a huge difference between and old Airbus 319 and an new NEO 321 when you are looking to lease. It is interesting to check out fleet compositions before discussing the relative strength/weakness of a lessor in 2-3 years if the demand isn't back in force.

[Edward]

However, once the US gov’t bails out the airlines don’t contractual obligation get re-examined?  I doubt the gov’t will allow leasing firms to become whole with their dollars.  One question is how sensitive to lease payments are AER earnings?  IMO at a minimum these payments will be reduced.

 

Packer

A few extra thoughts regarding government intervention on this level.

 

Let's say they just drop payments and refuse to pay more, defaulting on the lease. So the next thing that happens, the lessor just takes the plane. Which is bad because the company now needs to find a plane to operate as usual, because presumably all of this was done to avoid layoffs. So that's no good.

 

But ha! You no impound plane! This is the US of A here, you Irish bastards! We keep plane. Damn these pesky multinational agreements regarding leased property.

 

Well, that's going to be fun when one of the airline's planes is going to land in a foreign country, getting grounded while lawsuits proceed in a local court. Not to mention US lawsuits. Great stuff.

 

And meanwhile, Aercap collects the insurance money for government property seizure.

 

Anyway, I'm trying to come up with a realistic scenario of a major loss other than complete airline bankruptcy+liquidation and can't. Help!

[rb]

Edward, I'm not saying that your thesis is wrong. But here's a scenario from me.

 

Your arguments are all based on the fact that the lessor is very willing to take all these planes back. But what if they're not really all that eager about it. After then they're stuck with a bunch of planes and no lease revenue. A bunch of these planes will be grounded after all until aviation returns to normal levels.

 

So what if the government comes around and says well you'll have to reduce the lease rates. And if you do then we'll guarantee the leases. Why wouldn't they? If they're committed to paying the airlines' bills to keep them flying may as well do it. So now as a lessor your book goes from shitty airline credits to treasuries. That has to be pretty appealing right about now. Is there enough competence at Treasury right now to pull that sort of a deal? That remains to be seen.

[Packer16]

The other danger for an equity holder is the leverage.  If the lease payments are reduced, the equity takes the first hit as you have to pay bond holders first.  The equity is like the equity of a CLO.  Now I think the businesses will be around but the equity may not be worth much.  The key here is how much of a cash flow decline will lead to a 50%, 75% or 100% decline in cash flow for the equity.  Alternatively, these guys may have to raise more equity, if gov’t is going to be the backstop for the airlines.

 

Packer