AL - Air Lease Corporation

[Ross812]

I recently purchased some Air Lease and the member rjstc asked me to start a thread about the holding so here goes. Please excuse the brevity; I am just throwing together some notes instead of spending too much time writing a thesis.

 

"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

-Warren Buffett

 

Airlines are indeed terrible businesses, but the business of owning air planes much better. Aircraft leasing benefit from economies of scale. Large lease companies can negotiate better pricing from aircraft manufacturers, attain financing at more favorable rates than small airlines, and they have international channels to move aircraft around the world as regional demand changes. The adage: “If it flies, floats, or f****, rent it” plays right into the business plan.

 

Here is an overview of the business from http://crankyflier.com/2012/01/16/everything-you-wanted-to-know-about-the-world-of-aircraft-leasing-guest-post/

 

The aircraft leasing business is an integral part of the aviation world, yet the travelling public knows relatively little about it. Currently about 38% of the world’s commercial fleet is leased. This figure is expected to grow to over 40% in just the next few years.

 

Ireland, you may be surprised to find out, is a bit of a hub for aircraft leasing. Nine out of the top 10 leasing firms in the world operate here. This is due to a few factors. We have favorable corporation tax rates and tax treaties that allow leasing companies to be competitive. In addition to this, there is a big pool of aviation expertise in our country. One of the first major players in the aviation leasing industry was Guinness Peat Aviation. After its dramatic demise, several companies rose from the ashes and ever since, Ireland has been a major player in global leasing.

 

But first, why do airlines need to lease planes – can they not just buy them, you might ask? Well yes they can, but owning your own aircraft can present problems.

 

Price

 

Aircraft are not cheap. You only need to look at the list prices of Airbus and Boeing to see just how pricey they can be. Therefore some airlines might not be able to afford aircraft, or in a bid to keep their balance sheets looking healthy might not want to have such large outlays. Leasing allows airlines a relatively cheap way of getting aircraft, as there isn’t the same extent of expenditure, and it stops their balance sheets from looking too asset heavy, tying up capital. Also from an operational point of view, it allows airlines access to newer planes and more fuel efficient aircraft. Cranky Air might be able to buy a 737-200 on the market, but could afford to lease a newer 737-800.

 

Economic uncertainty

 

The last few years have been a good example of why leasing planes can be a better alternative than owning them outright. When demand is unstable, the more flexibility you have in your fleet levels, the better.

 

Take for example Cranky Air, based in Long Beach. They buy 5 aircraft from Comac, yet owing to a major corporation opening a plant nearby they now have enough demand to have 8 aircraft in service

 

– this is where a leasing company can be the airline’s best friend. They can step in and relatively cheaply (relative to buying an aircraft) provide them with aircraft to cater for the spike in demand.

Conversely, let’s say the largest employer in Long Beach were to shut up shop and Cranky Air now only needs 3 aircraft for the next two seasons. If they own the 5 aircraft they would find themselves in a major problem, trying to fill the aircraft or lease them out. However if their fleet was composed of a few leased aircraft, they could arrange for the early return of the aircraft, and with some penalty payments, address their capacity issues.

 

Here’s the view from the lessor’s perspective.

 

Risk

 

When dealing with a potential new customer, there will always be risk analysis done on the airline. Do they have a good safety record or have there been any incidents in their past? What are the chances they might not pay us? If a customer is risky, there are mechanisms to protect yourself as a lessor. This would be done by getting guarantees or large deposits that you can access in the event of default by the airline. If they are too big a gamble as an operator – don’t put your aircraft in there in the first place.

 

Maintenance

 

Long leases are better for the lessor than shorter ones. The fewer changeovers an aircraft does during its life the better! When an aircraft comes off lease with Cranky Air, in an all business class configuration (owing to a misplaced opinion that an all business class Long Beach – Topeka route was a guaranteed success), and we want to place the aircraft with a new operator, Concierge Air, who want it in an all economy lay-out, reconfiguring the aircraft comes at a huge cost to us. Lessors try to avoid bespoke aircraft lay-outs like this, a colleague of mine refers to them as “Aircraft with a sushi-bar and split galley.”

 

Other considerations are maximum takeoff weights (MTOWs), repainting the aircraft, and inflight entertainment systems. So if we can place the aircraft in 2 ten year leases, rather than four 5 year leases – this is incredibly beneficial to the leasing entity. Like commercial airlines, our planes don’t make money when they are sitting on the ground, so we also try and keep lead-in times between leases to an absolute minimum. Ideally, we like to have a new customer lined up for an aircraft before it even comes off lease with the previous operator. In an ideal world you would look to find a customer who wants the aircraft in its current configuration, but that isn’t always possible.

 

Legal

 

From a legal perspective an aircraft needs to be placed with airlines that aren’t surrounded by red-tape. Certain jurisdictions are typically avoided, as the red-tape to get the aircraft on lease and out at the end of the lease is too onerous and costly. For example, sometimes you see airlines across the world operating aircraft that are on the Irish register (EI-XXX), as their own national registers might be a nightmare to deal with.

 

The airline industry is unpredictable by its nature and despite all these checks, sometimes leases do not work out. The lessee might not maintain your aircraft as agreed, or simply not pay. If this happens you could negotiate with the airline for an early return, or if the relationship becomes hostile, you can use national/international authorities to seize the aircraft in a friendly jurisdiction who will be receptive to your plight. This could be done by an airport authority or someone like Eurocontrol, who may also be owed fees for the use of the same aircraft. It is typically easier to negotiate a compromise as seizing aircraft can get litigious and can restrict the use of the plane until it is all settled. A country’s aviation authority might not take kindly to you barging in and taking planes back, hence they could make your life hell trying to get the aircraft off the local register or drag you through the local courts.

 

In the future, it will become more likely that the planes you fly on will be leased as this area of the aviation world grows. Next time you fly, consider for a moment that you could potentially be on board a hired aircraft.

 

Aircraft lease growth:

 

http://media.economist.com/sites/default/files/imagecache/290-width/20120121_WOC445.gif

 

What has been going on with the airline leasing industry following the credit crisis?

 

http://www.nytimes.com/2009/10/06/business/global/06lease.html?pagewanted=all&_r=0

 

In summary, cheap and available credit is the life blood of the aircraft leasing industry. Many leasing companies went out of business/were sold and are still struggling, but the industry is starting to pick up with cheap credit available to qualified borrowers and growing demand for air travel. To take advantage of the industry comeback there is a great opportunity to partner with Steven Udvar-Hazy  the founder and CEO (Gio is going to like this) of Air Lease Corporation (AL). Udvar-Hazy created the aircraft leasing industry in 1973 when he founded the International Leasing and Finance Corporation. ILFC grew from a $1M dollar initial investment to a 1.3 billion dollar company bought by AIG in 1990. The company continued to grow and was valued by AIG at 8.1 billion in 2009 (That is a 28.4% annual compounded growth rate). Udvar-Hazy stayed on as CEO until 2010 when his bid for the company was turned down and he set out to start AL.

 

ALC=AL is #5 right now and has a lot of room to grow. Look at their order book. Look down at their aircraft placement.

 

 

Air Lease Corporation (ALC, NYSE: AL) is an aircraft leasing company founded in 2010 and headed by Steven Udvar-Házy.[2] ALC hopes to capitalize on air travel growth from airlines in high-growth markets such as Asia, the Pacific Rim, Latin America, the Middle East and Eastern Europe. As of the end of 2010, Air Lease said it owned 40 Airbus and Boeing aircraft and had agreed to buy four used aircraft, within a year, and 144 new aircraft by 2017. The plans were expanded, however, and as of June 2011, the projected order is for 234 more aircraft, to be acquired over the 10-year period from 2011-2021.[3] The airplanes are being ordered from Boeing (BA), Airbus (EADS), Embraer and ATR.

Essentially, Udvar-Hazy started Air Lease Corporation to compete with ILFC after AIG went through their restructuring and put ILFC on fire sale to the highest bidder (recently bought by a Chinese firm for 4.x Billion). Undvar-Hazy hired away ILFC’s management and is using his influence and the key executives from the premier aircraft leasing firm he founded in 1973 to pick up where AIG dropped the ball.

 

Some Graphs:

 

 

 

Overview of TBV by region and aircraft type:

 

 

 

New orders and leases (growth is transparent):

 

 

And some solvency ratios (management is targeting a Debt to Equity of 2.5 so they have some room to expand their leverage. This is still under D/E of 4.0 which is typical for the industry):

 

 

A great article about Steven Udvar-Hazy:

 

http://www.bloomberg.com/news/2012-10-04/jet-lease-billionaire-udvar-hazy-takes-on-aig-hand-that-fed-him.html

 

I did see the AIG Lawsuit. Here is what AL has to say from the Annual Report:

 

On April 24, 2012, the Company was named as a defendant in a complaint filed in Superior Court of the State of California for the County of Los Angeles by American International Group, Inc. and ILFC. The complaint also names as defendants certain executive officers and employees of the Company. The complaint was amended on November 30, 2012 and on January 18, 2013. Among other things, the suit alleges breach of fiduciary duty, misappropriation of trade secrets, the wrongful recruitment of ILFC employees, and the wrongful diversion of potential ILFC leasing opportunities. The complaint seeks an unspecified amount of damages and injunctive relief. The Company believes that it has meritorious defenses to these claims and intends to defend this matter vigorously.

 

Udvar-Hazy interests are aligned with shareholders as he owns 4,806,355 approximately 5% of the company:

 

http://www.sec.gov/Archives/edgar/data/1244781/000117911013003973/xslF345X03/edgar.xml

 

Also a few other great firms with stellar track records have significant stakes in the company as well:

 

Wilbur Ross-  4,250,000 shares

 

Leonard Green Partners – 6,944,444 shares. For those who have never heard of these guys:

http://www.leonardgreen.com/Portfolio.htm

 

Various Horizon-Kinetics Funds. Here is what they have to say:

 

Air Lease Corp.

Air Lease is the second coming of Steven Udvar-Hazy. In 1973, Mr. Udvar-Hazy co-founded what became International Lease Finance Corp. (“ILFC”), and in doing so established a new industry: leasing commercial aircraft to airline companies. He was successful both in concept and execution. ILFC, which is the world’s largest aircraft lessor, was sold to American International Group (“AIG”) in 1990 for $1.3 billion. Mr. Udvar-Hazy remained CEO of ILFC until 2009, and retired from AIG in February 2010. By April 2011, he had engineered the IPO of a new aircraft lessor, Air Lease, bringing with him ILFC’s senior officers, who had worked for him there since 2002.

 

The basis for this new venture appears to be the reluctance of AIG to invest in the business. The two largest aircraft lessors are owned by diversified financial companies, the 2nd being GE Capital, which, like other major finance companies, is shrinking its balance sheets. Yet, this is occurring at what seems to be an opportune moment to allocate additional capital to the business:

 

− On a secular basis, airlines continue to increase their use of leasing. The proportion of aircraft fleets leased was about 0% in 1973, about 20% 25 years later in 1998, and 35% 12 years later in 2010. Leasing permits airlines to deploy their insufficient capital elsewhere, to more readily expand and diversify their fleets, and is a particularly helpful mechanism for new, rapidly expanding low-cost airlines such as abound in emerging economies.

 

− The airline industry is expanding. Historically, passenger traffic has increased on a 1:1 basis with world GDP growth, but most of that growth has been coming from emerging economies. Asia/Pacific traffic, for instance, which was 17% of world traffic in 1990, was 29% in 2010. Therefore, market size expansion in the next decade should be greater than in the decade prior.

 

− As mentioned, some of the largest aircraft lessors, like ILFC, are policy constrained with regard to expanding their capital base.

 

− The cost of capital, which is to say interest rates, has never been as low.

 

Accordingly, Mr. Udvar-Hazy is entering a market that is growing in overall size, for which penetration of this particular service is also expanding, in which major competitors are constrained, and for which expansion capital is cheap. Certainly, he knows how to build such a business.  The worldwide commercial aircraft inventory is a far more stable figure than one might infer, given the cyclicality in passenger traffic. Inventory has trended up even during downturns, as orders placed during a preceding cyclical upturn in traffic are ultimately delivered. Borrowing from ILFC’s financial statements for reference, revenues and earnings of that company increased sequentially between 2005 and 2009, even through the financial crisis and the decline in passenger traffic during 2008 and 2009. Neither, compared with most finance companies, do aircraft lessors use a great deal of leverage; ILFC’s debt to equity ratio in 2009 was 3.5x, and its interest coverage ratio was also 3.5x.

 

Leases are typically net leases, under terms that require the lessee to pay all operating expenses, including insurance and maintenance, and to return the aircraft in a condition that conforms to a detailed set of qualitative criteria.

 

With $2.2 billion of equity capital raised in the IPO and a prior private placement, and $1.8 billion of borrowings, Air Lease has so far acquired $3.4 billion of planes, which numbered 79 as of September 30th. It has contracted to purchase another 126 aircraft between year-end 2011 and 2015, plus another 95 thereafter. It is in an early expansion phase.

 

As to valuation, current earnings cannot be used; they are not yet at normalized levels, since the current balance sheet can support a greater amount of operating assets than are yet in place. However, our position was established at only about 5% to 10% above book value and about 20% below the stock’s closing price on the day of its IPO last April.

 

I know this was a confusing and long post. I wanted to get the idea out there and start talking about valuation. I recently started a 1% position.

 

 

 

 

[jay21]

Thanks for the new idea.

 

I am thinking about this as a spread based business (is that right or wrong?), so the advantages would be cost.  In terms of funding cost, can they compete with GE?  What do their liabilities look like?  Also, you mentioned scale.  Are there big differences in margins amongst different sized companies?

 

 

[17thstcapital]

Thanks for sharing.  I haven't done as much work on Air Lease but I have a large position in one of its competitors - Aircastle (AYR).  I really like being involved in this industry - the combination of the secular trend towards aircraft leasing and the improved profitability of airlines makes me think that all aircraft leasing companies will do well over the next few years.  The low borrowing costs will help as well. 

 

Quick pitch on AYR if anyone cares: there you get ~5% dividend yield and you're buying at a substantial discount to book value (~$21/sh).  EV/EBITDA is a reasonable ~6x.  The portfolio yields an impressive 14%. Heavy insider ownership and the company is buying back stock. Balance sheet is in excellent shape.  I don't know why it trades so cheap to Air Lease but I'm sure there's a good reason.

 

[jay21]

Thanks for the new idea.

 

I am thinking about this as a spread based business (is that right or wrong?), so the advantages would be cost.  In terms of funding cost, can they compete with GE?  What do their liabilities look like?  Also, you mentioned scale.  Are there big differences in margins amongst different sized companies?

 

Also, will these guys securitize their leases?  From the airlines perspective, economically how does this compare to EETCs and other aircraft financing choices?

[premfan]

Interesting business model. Thanks for the idea. How do you factor in depreciation and maintenance on the aircrafts? I dont see how you can model eps where maintenance and depreciation is an unknown variable.

[Cunninghamew]

Thanks for the new idea.

 

I am thinking about this as a spread based business (is that right or wrong?), so the advantages would be cost.  In terms of funding cost, can they compete with GE?  What do their liabilities look like?  Also, you mentioned scale.  Are there big differences in margins amongst different sized companies?

 

I looked at this company awhile back and unfortuantely never did anything. Here were some of my notes that tangentally answer some of your questions. Keep in mind these notes are from Q3 12. Cost of funds was 3.97% with a weighted average life of 5.9 years and 60% unsecured. The company tries to match timing of debt issuance with use of proceeds and also match the debt maturity with the underlying leases. They also had an $830 mm revolver at L+1.75%.  I believe a lot if not most of their leases are triple net leases.

 

This is not related to your point, but if my memory serves me correct GE is hampered and having a hard time / isnt trying to grow their leasing biz. I think the main competitors are Japanese. Furthermore, AL has the youngest fleet with the longest lease terms of the publicly traded companies. Having a young fleet (that is more fuel efficient) is a big competitive advantage, bc the number one concern for airlines is fuel costs. When I was looking the average ages of their fleet was 3.4 yers.

 

Sorry I realize those were random bullets

[Ross812]

Interesting business model. Thanks for the idea. How do you factor in depreciation and maintenance on the aircrafts? I dont see how you can model eps where maintenance and depreciation is an unknown variable.

 

2012 AR:

 

Flight equipment

 

Flight equipment under operating lease is stated at cost less accumulated depreciation. Purchases, major additions and

modifications, and interest on deposits during the construction phase are capitalized. We generally depreciate passenger

aircraft on a straight-line basis over a 25-year life from the date of manufacture to a 15% residual value. Changes in the

assumption of useful lives or residual values for aircraft could have a significant impact on our results of operations and

financial condition. At the time flight equipment is retired or sold, the cost and accumulated depreciation are removed from  the related accounts and the difference, net of proceeds, is recorded as a gain or loss.

 

Our management team evaluates on a quarterly basis the need to perform an impairment test whenever facts or

circumstances indicate a potential impairment has occurred. An assessment is performed whenever events or changes in

circumstances indicate that the carrying amount of an aircraft may not be recoverable. Recoverability of an aircraft’s

carrying amount is measured by comparing the carrying amount of the aircraft to future undiscounted net cash flows

expected to be generated by the aircraft. The undiscounted cash flows consist of cash flows from currently contracted

leases, future projected lease rates and estimated residual or scrap values for each aircraft. We develop assumptions used in  the recoverability analysis based on our knowledge of active lease contracts, current and future expectations of the global  demand for a particular aircraft type, and historical experience in the aircraft leasing market and aviation industry, as well  as information received from third-party industry sources. The factors considered in estimating the undiscounted cash flows  are affected by changes in future periods due to changes in contracted lease rates, economic conditions, technology and airline demand for a particular aircraft type. In the event that an aircraft does not meet the recoverability test, the aircraft will be recorded at fair value in accordance with our Fair Value Policy, resulting in an impairment charge. Deterioration of future lease rates and the residual values of our aircraft could result in impairment charges which could have a significant impact on our results of operations and financial condition. To date, we have not recorded any impairment charges.

 

We record flight equipment at fair value if we determine the carrying value may not be recoverable. We principally use the income approach to measure the fair value of aircraft. The income approach is based on the present value of cash flows from contractual lease agreements and projected future lease payments, including contingent rentals, net of expenses, which extend to the end of the aircraft’s economic life in its highest and best use configuration, as well as a disposition value based on expectations of market participants. These valuations are considered Level 3 valuations, as the valuations contain significant non-observable inputs.

 

Straight line depreciation from purchase to 15% terminal value after 25 years.

 

Major maintenance is planned and budgeted for ahead of time. Routine maintenance is handled by the customer under the terms of the net lease. Damage is payed for by insurance. See lease revenue on page 37 and 38 of the 2012 annual report. 

[premfan]

Interesting business model. Thanks for the idea. How do you factor in depreciation and maintenance on the aircrafts? I dont see how you can model eps where maintenance and depreciation is an unknown variable.

 

2012 AR:

 

Flight equipment

 

Flight equipment under operating lease is stated at cost less accumulated depreciation. Purchases, major additions and

modifications, and interest on deposits during the construction phase are capitalized. We generally depreciate passenger

aircraft on a straight-line basis over a 25-year life from the date of manufacture to a 15% residual value. Changes in the

assumption of useful lives or residual values for aircraft could have a significant impact on our results of operations and

financial condition. At the time flight equipment is retired or sold, the cost and accumulated depreciation are removed from  the related accounts and the difference, net of proceeds, is recorded as a gain or loss.

 

Our management team evaluates on a quarterly basis the need to perform an impairment test whenever facts or

circumstances indicate a potential impairment has occurred. An assessment is performed whenever events or changes in

circumstances indicate that the carrying amount of an aircraft may not be recoverable. Recoverability of an aircraft’s

carrying amount is measured by comparing the carrying amount of the aircraft to future undiscounted net cash flows

expected to be generated by the aircraft. The undiscounted cash flows consist of cash flows from currently contracted

leases, future projected lease rates and estimated residual or scrap values for each aircraft. We develop assumptions used in  the recoverability analysis based on our knowledge of active lease contracts, current and future expectations of the global  demand for a particular aircraft type, and historical experience in the aircraft leasing market and aviation industry, as well  as information received from third-party industry sources. The factors considered in estimating the undiscounted cash flows  are affected by changes in future periods due to changes in contracted lease rates, economic conditions, technology and airline demand for a particular aircraft type. In the event that an aircraft does not meet the recoverability test, the aircraft will be recorded at fair value in accordance with our Fair Value Policy, resulting in an impairment charge. Deterioration of future lease rates and the residual values of our aircraft could result in impairment charges which could have a significant impact on our results of operations and financial condition. To date, we have not recorded any impairment charges.

 

We record flight equipment at fair value if we determine the carrying value may not be recoverable. We principally use the income approach to measure the fair value of aircraft. The income approach is based on the present value of cash flows from contractual lease agreements and projected future lease payments, including contingent rentals, net of expenses, which extend to the end of the aircraft’s economic life in its highest and best use configuration, as well as a disposition value based on expectations of market participants. These valuations are considered Level 3 valuations, as the valuations contain significant non-observable inputs.

 

Straight line depreciation from purchase to 15% terminal value after 25 years.

 

Major maintenance is planned and budgeted for ahead of time. Routine maintenance is handled by the customer under the terms of the net lease. Damage is payed for by insurance. See lease revenue on page 37 and 38 of the 2012 annual report.

 

Thanks for info. The airplane leasing business seems ideal in a low rate world. A couple more questions before i do some more work. Besides cost of financing is their any other competitive advantage for a airplane leasing company? Cunningham mentioned that a younger fleet would be a competitive advantage. It looks like aircastle has older fleets on average yet for the last three years it has yielded a 14 percent return and has a 99 percent ultilization rate.

[fenris]

Quick pitch on AYR if anyone cares: there you get ~5% dividend yield and you're buying at a substantial discount to book value (~$21/sh).  EV/EBITDA is a reasonable ~6x.  The portfolio yields an impressive 14%. Heavy insider ownership and the company is buying back stock. Balance sheet is in excellent shape.  I don't know why it trades so cheap to Air Lease but I'm sure there's a good reason.

Older fleet, more exposure to widebody planes (riskier), more exposure to freight (riskier) and had to take write-downs on plane values ie. book value may be overstated. It may still be good value but it has a different risk profile than ie. AL.

 

 

[Ross812]

Thanks for info. The airplane leasing business seems ideal in a low rate world. A couple more questions before i do some more work. Besides cost of financing is their any other competitive advantage for a airplane leasing company? Cunningham mentioned that a younger fleet would be a competitive advantage. It looks like aircastle has older fleets on average yet for the last three years it has yielded a 14 percent return and has a 99 percent ultilization rate.

 

The young fleet and in demand plane models are a huge competitive advantage. Southwest is not interested in leasing 737-300's when they can lease 800's that carry more people and are cheaper to operate. The industry is in turmoil right now. ILFC was just sold by AIG to a Chinese firm and just underwent a brain drain as all the top management when to AL. GECAS is tied to GE Capital which is still trying to right itself after the recession and is not pursuing opportunities to gain new lease clients in Emerging markets. Those are really Air Lease's primary competitors. Companies like Air Castle do not have the inventory to pursue the same caliber of clients as AL.

 

AL is borrowing money at good to fair rates right now from an Australian Bank (can't remember the name off the top of my head). The company is well capitalized, has a healthy balance sheet, and is making money. At the top of managements agenda is getting a favorable investment grade rating from Moody's and Fitch. They have stated they have all the boxes checked except for 3 years of operating history. This is their third year in business and management expects an investment grade rating by the end of year according to the conference call.

 

I view management as the best competitive advantage AL holds. Remember, Steven Udvar-Hazy invented the aircraft leasing business and ran the most successful company in the industry for 36 years. He and all of his top management are now in place at AL. ILFC has sued AL for poaching employees and clients as they are legitimately worried watching their old management winning clients. AL actually established their headquarters on the same street in Los Angeles as ILFC! This is the equivalent of Buffett retiring from Berkshire and starting another Omaha based holding company, then hiring Munger and his investment team at the new firm to follow the Berkshire business model minus the mistakes he identified at Berkshire along the way. Would you invest in Buffett's new firm?

[jay21]

Thanks for the new idea.

 

I am thinking about this as a spread based business (is that right or wrong?), so the advantages would be cost.  In terms of funding cost, can they compete with GE?  What do their liabilities look like?  Also, you mentioned scale.  Are there big differences in margins amongst different sized companies?

 

Also, will these guys securitize their leases?  From the airlines perspective, economically how does this compare to EETCs and other aircraft financing choices?

 

I still don't understand how this business could be a high ROE business (and if its a normal ROE business that would make growth neither positive or negative, but neutral). A high ROE would be the result of:

 

1. high lease payments

2. low interest payments or costs

3. lots of leverage

 

If it's #1, I would assume they are taking on lots of credit risk.  Who is leasing from them?  What is the customer concentration?  Are they leasing only to higher risk airlines? 

 

If it's #2, that's great.  Maybe this is where their advantage is.  Like I said maybe they have scale and can get their costs down.  Although, I highly doubt they have a funding advantage.  It's probably worth studying their mix of debt vs. peers as well (e.g., secured vs. unsecured, recourse vs. non recourse, duration, etc.)

 

If it's #3, that's obviously not good.

 

I am pretty impressed by the 28% CAGR, which I wouldn't think this business could earn.  Did they receive any capital injections along the way? 

 

 

[Cunninghamew]

Regarding returns:  AL has a newer fleet and I believe a lower cost of funds than AYR, so you should expect it to be able to garner better lease rates and earn a higher spread. This is obviously the market's expectation as AL trades at a higher multiple of book than AYR. A quick check on the web indicates AYR has done anywhere from 13% to mid 2%. I realize this is just anecdotal evidence, but its a date point.

 

Before people make an investment in AL (which I have not) I think they need to get comfortable with the depreciation rate. I think AL tries to dispose of planes after about 15 years, but there is a big question mark around the useful life of planes. There was an interview with Udar discussing this. I will try to find it.

[Ross812]

Thanks for the new idea.

 

I am thinking about this as a spread based business (is that right or wrong?), so the advantages would be cost.  In terms of funding cost, can they compete with GE?  What do their liabilities look like?  Also, you mentioned scale.  Are there big differences in margins amongst different sized companies?

 

Also, will these guys securitize their leases?  From the airlines perspective, economically how does this compare to EETCs and other aircraft financing choices?

 

I still don't understand how this business could be a high ROE business (and if its a normal ROE business that would make growth neither positive or negative, but neutral). A high ROE would be the result of:

 

1. high lease payments

2. low interest payments or costs

3. lots of leverage

 

If it's #1, I would assume they are taking on lots of credit risk.  Who is leasing from them?  What is the customer concentration?  Are they leasing only to higher risk airlines? 

 

If it's #2, that's great.  Maybe this is where their advantage is.  Like I said maybe they have scale and can get their costs down.  Although, I highly doubt they have a funding advantage.  It's probably worth studying their mix of debt vs. peers as well (e.g., secured vs. unsecured, recourse vs. non recourse, duration, etc.)

 

If it's #3, that's obviously not good.

 

I am pretty impressed by the 28% CAGR, which I wouldn't think this business could earn.  Did they receive any capital injections along the way?

 

 

It is a combination of all three.

 

#1 - They are leasing to airlines in emerging markets for better rates than they can get in the developed world. Emerging market airlines and young airlines cannot buy planes because they cannot afford the credit and they do have a higher credit risk. Though there is a risk of default, a global leasing business can repossess an aircraft from a company that cannot pay it's bills and move the plane to a paying customer. A failed lease contract does not hurt the asset as with a failed home loan or mortgage reit.

 

#2 - AL has a funding advantage to many of the smaller aircraft leassors due to the company's connections (i.e. management, partners 'Leonard Green' with deep pockets). They should soon have an investment grade rating which will allow them to gain additional cheap financing.

 

#3 - The company is targeting a Debt to Equity ratio of 2.5 according to their last conference call. IFLC was running at D to E of 4.0 before the financial collapse and was identified as too risky this go around by management. ILFC has since reduced leverage to around 2.5. Air Lease's business plan is to use lower leverage to go after higher paying (and more likely to cancel) clients and take advantage of the companies ability to borrow money more cheaply than the customers they serve.

 

 

[king888]

Can some of big low-cost carrier that has huge aircraft on order becoming a new threat for aircraft leasing companies ?

 

 

 

The Lion Air Group has a massive 600 aircraft on outstanding order following its landmark order for 234 A320 family aircraft, which was signed on 18-Mar-2013

 

The group also has the option of placing some of the 600 aircraft it has on outstanding order with airlines outside Lion through its new leasing subsidiary

http://centreforaviation.com/analysis/indonesias-lion-air-group-has-the-growth-opportunities-to-support-the-600-aircraft-on-order-101674

 

 

[fenris]

The key risk and opportunity for AL is the enormous order book. They have plane deliveries scheduled for years out which means they have to both place these planes with customers and secure the funding and may be vulnerable to stress in capital markets.

[Ross812]

Can some of big low-cost carrier that has huge aircraft on order becoming a new threat for aircraft leasing companies ?

 

 

 

The Lion Air Group has a massive 600 aircraft on outstanding order following its landmark order for 234 A320 family aircraft, which was signed on 18-Mar-2013

 

The group also has the option of placing some of the 600 aircraft it has on outstanding order with airlines outside Lion through its new leasing subsidiary

http://centreforaviation.com/analysis/indonesias-lion-air-group-has-the-growth-opportunities-to-support-the-600-aircraft-on-order-101674

 

I suppose it is possible, but they are operating under different business models with the same type of assets. This is similar to saying: Budget rent-a-car has so many vehicles, if they start leasing vehicles will they hurt new car dealerships? or Apple has a lot of cash, what if they start their own phone service and cut out the telcos? I don't really see this as a possibility. Medium to large airlines are not in the business of leasing new aircrafts to their smaller competitors. They certainly would not lease their new, lower operating cost air planes available from a dedicated lessor like Air Lease or ILFC.

[Cunninghamew]

The key risk and opportunity for AL is the enormous order book. They have plane deliveries scheduled for years out which means they have to both place these planes with customers and secure the funding and may be vulnerable to stress in capital markets.

 

From their Q3 12 call: "Order book is designed to match the industry's demand for aircraft... we try to place airplanes with as much lead time as possible... 2012, 2013, and 2014 deliveries have been 100% placed and we are focused on 2015."

[fenris]

The key risk and opportunity for AL is the enormous order book. They have plane deliveries scheduled for years out which means they have to both place these planes with customers and secure the funding and may be vulnerable to stress in capital markets.

From their Q3 12 call: "Order book is designed to match the industry's demand for aircraft... we try to place airplanes with as much lead time as possible... 2012, 2013, and 2014 deliveries have been 100% placed and we are focused on 2015."

I'm not saying they're doing a bad job at managing this risk, but it is a risk. I'm not sure to what extent airlines can get out of these agreements. And by extension: under what conditions AL can cancel their orders if either the airlines cancel on them or if they can't line up the funding at the right cost (and how much value is tied up in deposits which they would lose).

 

If you forecast demand and place firm orders to aggressively grow, you are making a bet. Could be a very profitable bet. But it has a different risk profile from an existing fleet.

[Ross812]

The key risk and opportunity for AL is the enormous order book. They have plane deliveries scheduled for years out which means they have to both place these planes with customers and secure the funding and may be vulnerable to stress in capital markets.

From their Q3 12 call: "Order book is designed to match the industry's demand for aircraft... we try to place airplanes with as much lead time as possible... 2012, 2013, and 2014 deliveries have been 100% placed and we are focused on 2015."

I'm not saying they're doing a bad job at managing this risk, but it is a risk. I'm not sure to what extent airlines can get out of these agreements. And by extension: under what conditions AL can cancel their orders if either the airlines cancel on them or if they can't line up the funding at the right cost (and how much value is tied up in deposits which they would lose).

 

If you forecast demand and place firm orders to aggressively grow, you are making a bet. Could be a very profitable bet. But it has a different risk profile from an existing fleet.

 

I agree with you that Air Lease is making a bet. Udvar obviously sees an opportunity to fill a void in the market left by their competitors. There is execution risk in their plan, but so far they have been executing to perfection. The decision to invest in this company comes down to this:

 

If the market continues in the direction it has since 2010 and their are no catastrophies significantly impacting global flight loads, AL should be a home run. The business model is proven; the CEO, management, and board all know how to make money in this business. An investment in AL is saying Udvar and his management team can still compete in a market they invented, and out perform the new management and owners of their old company.

 

The risk profile is higher for the new company, but there are advantages for the company too. AL can go after customers unavailable to IFLC and GECAS, and has the youngest fleet (in the highest demand) of any company in the industry. AL is already leasing 737-800's to South West Airlines which is a huge client that typically leases from ILFC. It really seems that Udvar-Hazy started Air Lease with a chip on his shoulder after his company was sold for a fire sale price to the Chinese. I think he fully intends to drink ILFC's milkshake to borrow a phrase from 'There will be Blood'.

[Packer16]

An interesting idea.  I have 2 questions.  First, does AL have the financing lined up for the orderbook?  If not, is it not vulnerable to a financing crunch?  This happened to some of the container ship leasors who still are trying to recover.  Given the guys are at the bottom of the food chain, do you have any insight into the creditworthiness of the customers?  One aspect of SSW that provided some safety was all their leasees where AAA or AA rated?  Also, given the pricing versus the comps (10.0 x EBITDA versus less than 6.0x for AYR and FLY) how did you get comfortable that management is not already priced into the valuation.

 

Packer

[JEast]

Put this guy in the 'on deck' space for any big pull back as there are currently 'as good' companies at better prices around currently.

 

Cheers

JEast

[Phaceliacapital]

Aircastle Announces Sale Of Common Shares To Marubeni Corporation

STAMFORD, Conn., June 6, 2013 /PRNewswire/ -- Aircastle Limited (NYSE: AYR) ("Aircastle") announced today that it has entered into a definitive agreement with Marubeni Corporation ("Marubeni") providing for the issuance of approximately 15.25% of the Company's common shares, after giving effect to the issuance, at a price of $17.00 per share, for gross proceeds of approximately $209 million.  The closing of the issuance is expected to occur during the second or third quarter of 2013, subject to customary closing conditions.

 

Ron Wainshal, CEO of Aircastle, commented, "We are delighted to welcome Marubeni, one of Japan's leading trading companies, as a strategic, long-term oriented shareholder.  With this equity investment, Aircastle will be well positioned to take advantage of exciting growth opportunities and to leverage Marubeni's global presence and network to expand into new markets, business opportunities and funding sources."

 

In connection with the transaction, Aircastle and Marubeni also entered into a shareholder agreement that will become effective upon the completion of the issuance.  At such time, Marubeni will have the right to designate two directors for appointment to Aircastle's board of directors.  The shareholder agreement also contains certain provisions relating to Marubeni's and its affiliates' ability to transfer and acquire Aircastle's securities.

 

This press release does not constitute an offer to sell or the solicitation of an offer to buy any of the common shares nor does it constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful.

 

Safe Harbor

 

Certain items in this press release and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our proposed private placement of common shares and our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "may," "will," "would," "could," "should," "seeks," "estimates" and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this press release. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle's expectations include, but are not limited to, capital markets disruption or volatility, which could adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; government fiscal or tax policies; general economic and business conditions or other factors affecting demand for aircraft or aircraft values and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the Middle East or elsewhere, and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle's filings with the Securities and Exchange Commission ("SEC"), including as previously disclosed in Aircastle's 2012 Annual Report on Form 10-K, and in our other filings with the SEC, press releases and other communications. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this press release. Aircastle expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

******

 

About Aircastle Limited

Aircastle Limited is a global company that acquires, leases and sells high-utility commercial jet aircraft to airlines throughout the world. As of March 31, 2013, Aircastle's aircraft portfolio consisted of 158 aircraft leased to 66 lessees located in 36 countries.  For more information on Aircastle, please visit www.aircastle.com.

 

About Marubeni 

Marubeni is a leading Japanese trading company with more than 150 years history.  It is involved in the handling of products and provision of services in a broad range of sectors across the world, including transportation machinery.  The Company's activities also extend to power projects and infrastructure, plants and industrial machinery, finance, logistics and information industry, and real estate development and construction.  Additionally, Marubeni conducts business investment, development and management on a global level. For more information, please visit www.marubeni.com.

 

Contact:

Frank Constantinople — SVP, Investor Relations

Tel: +1-203-504-1063

fconstantinople@aircastle.com

 

The IGB Group

Leon Berman

Tel: +1-212-477-8438

lberman@igbir.com

 

SOURCE Aircastle Limited

 

[Gamecock-YT]

Aircastle Announces Sale Of Common Shares To Marubeni Corporation

STAMFORD, Conn., June 6, 2013 /PRNewswire/ -- Aircastle Limited (NYSE: AYR) ("Aircastle") announced today that it has entered into a definitive agreement with Marubeni Corporation ("Marubeni") providing for the issuance of approximately 15.25% of the Company's common shares, after giving effect to the issuance, at a price of $17.00 per share, for gross proceeds of approximately $209 million.  The closing of the issuance is expected to occur during the second or third quarter of 2013, subject to customary closing conditions.

 

Ron Wainshal, CEO of Aircastle, commented, "We are delighted to welcome Marubeni, one of Japan's leading trading companies, as a strategic, long-term oriented shareholder.  With this equity investment, Aircastle will be well positioned to take advantage of exciting growth opportunities and to leverage Marubeni's global presence and network to expand into new markets, business opportunities and funding sources."

 

In connection with the transaction, Aircastle and Marubeni also entered into a shareholder agreement that will become effective upon the completion of the issuance.  At such time, Marubeni will have the right to designate two directors for appointment to Aircastle's board of directors.  The shareholder agreement also contains certain provisions relating to Marubeni's and its affiliates' ability to transfer and acquire Aircastle's securities.

 

This press release does not constitute an offer to sell or the solicitation of an offer to buy any of the common shares nor does it constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful.

 

Safe Harbor

 

Certain items in this press release and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our proposed private placement of common shares and our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "may," "will," "would," "could," "should," "seeks," "estimates" and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this press release. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle's expectations include, but are not limited to, capital markets disruption or volatility, which could adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; government fiscal or tax policies; general economic and business conditions or other factors affecting demand for aircraft or aircraft values and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the Middle East or elsewhere, and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle's filings with the Securities and Exchange Commission ("SEC"), including as previously disclosed in Aircastle's 2012 Annual Report on Form 10-K, and in our other filings with the SEC, press releases and other communications. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this press release. Aircastle expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

 

******

 

About Aircastle Limited

Aircastle Limited is a global company that acquires, leases and sells high-utility commercial jet aircraft to airlines throughout the world. As of March 31, 2013, Aircastle's aircraft portfolio consisted of 158 aircraft leased to 66 lessees located in 36 countries.  For more information on Aircastle, please visit www.aircastle.com.

 

About Marubeni 

Marubeni is a leading Japanese trading company with more than 150 years history.  It is involved in the handling of products and provision of services in a broad range of sectors across the world, including transportation machinery.  The Company's activities also extend to power projects and infrastructure, plants and industrial machinery, finance, logistics and information industry, and real estate development and construction.  Additionally, Marubeni conducts business investment, development and management on a global level. For more information, please visit www.marubeni.com.

 

Contact:

Frank Constantinople — SVP, Investor Relations

Tel: +1-203-504-1063

fconstantinople@aircastle.com

 

The IGB Group

Leon Berman

Tel: +1-212-477-8438

lberman@igbir.com

 

SOURCE Aircastle Limited

 

 

Not sure what Aircastle has to do with Air Lease? Though I did see Air Lease did do a new stock issuance maybe last week...

 

 

[Phaceliacapital]

Ross are you still looking at at the Air lease industry?

 

If yes, do you have some thoughts concerning Atlas Air Worldwide Holdings:

 

- Recently hit 52wk low

- A lot of (relatively new) 747-8F which I think are still quite functional (exposure to written off models such as 747-200 and 757 is relatively limited). They even have some 777's

- Clients are relatively large clients (which means late notice termination of contract could be a (serious) concern

- Still have guarantued revenue of 2.3 bn (vis a vis 2013 revenue of 1.7 bn)

- 300 cash on balance and leverage that I would suspect to be manageable

 

Any comments? Thanks!

[Packer16]

At this point ATSG is the cheapest of the cargo leasors and I believe based upon still carrying spare/unused capacity.  The ATSG thread has more details.

 

Packer