From its start-up just three years ago by industry legend
Steven Udvar-Hazy,Air Lease Corp. (
) has become a high flier in the commercial airline leasing
All 174 planes in its young fleet are leased to airline
customers, and most planes ordered for delivery through 2015 are
spoken for as well.
It's not the largest in the air leasing industry. That would
beGeneral Electric's (
) Capital Aviation Services andAmerican International Group's (
) International Lease Finance Corp., or ILFC, which Udvar-Hazy
co-founded in 1973.
But Air Lease is among the top five in an established group
that also includesAerCap (
) andFly Leasing (FLY). And it's gaining altitude fast. Analysts
expect revenue to hit $852 million this year, 30% higher than
last year. They also see earnings on a flight path to grow more
than 30%, after having soared 117% last year.
And that's only the start of what analysts see as a promising
business for the long haul.
"They have twice the number of planes on order than in their
portfolio now," said Credit Suisse analyst Moshe Orenbuch.
"They'll be delivered over multiple years and geared to where
they can get the best results and where there is the most
For airlines, the appeal of leasing planes rather than buying
directly from aircraft manufacturers is the ability to keep
capital costs down and fleets flexible if business conditions
International Jet Set
Air Lease is focused mostly on overseas markets, where air
travel growth is seen rising faster than in the mature U.S.
Air Lease has commitments to acquire 346 new aircraft, for
some $28.4 billion, most of them from Airbus andBoeing (BA). The
majority will be delivered after 2017. Airbus, owned by European
aerospace group EADS, is currently Air Lease's top aircraft
Many Air Lease customers are second- and third-tier airlines
that lack the resources and scale needed to land good deals
directly from aircraft manufacturers, says analyst Helane Becker
of Cowen & Co.
"Very few U.S. airlines are customers," she said.
In its 2012 annual report, Air Lease listedHawaiian Airlines
(HA),Southwest Airlines (LUV),Spirit Airlines (SAVE), Sun Country
andUnited Airlines (UAL) as U.S. airlines with which it has
In the last five months alone, Air Lease announced small
orders from, among others, Ukraine International Airlines,
Georgian Airways, Air Berlin, Jet Time in Denmark, Monarch
Airlines in the U.K, and Etihad Airways in Abu Dhabi, United Arab
Earlier, Air Lease won bulk orders from three Chinese air
carriers, with many of the planes slated to replace aging
aircraft in use since the early 1990s.
Management has stated in filings that airlines in some
emerging markets have fewer financing sources, enabling Air Lease
to get higher lease rates than those in more mature markets. But
it also leases to larger carriers outside the U.S. such as Air
France, British Airways, KLM and Korean Air.
Air Lease's own financing costs for aircraft are relatively
low -- in the mid-3% range, Wells Fargo analyst Gary Liebowitz
said in a research note, "but could trend higher as longer-term
fixed-rate debt is added."
He noted that Air Lease's annualized portfolio yield of 11.65%
was only slightly higher than AerCap's and Fly Leasing's despite
having a younger fleet -- "an impressive achievement."
One of the big reasons aircraft manufacturers such as Airbus
and Boeing are willing to sell to and collaborate with Air Lease
is their trust in the man who pilots the company, CEO
Udvar-Hazy is credited with inventing the airline leasing
business in the early 1970s, when airlines were transitioning
from props to jets. As airlines faced much higher costs of adding
jets to their fleets, Udvar-Hazy stepped in to help by providing
a pay-as-you-go leasing solution.
He built ILFC into one of the world's largest airline leasing
companies. He sold it to insurance giant AIG in 1990 and stayed
on until 2010, which is when he left to start Air Lease.
By that time AIG had been reeling from a slowdown in air
demand and plenty of other woes related to fallout from the
Udvar-Hazy took Air Lease public in April 2011, raising $802.5
million. The management team includes seasoned executives from
ILFC. One of them is its president, John Plueger. The team is
valued for its expertise in matching planes to an airline's
business needs. In some cases they even take part in the design
process of a new plane.
But for all its growth and expected future growth, Air Lease
was trading Wednesday only about a dollar above its IPO price of
"The company has tripled in size in the last year and a half
and the stock is where it was 18 months ago," said Becker. "So I
think the market is missing the opportunity here."
Second Quarter Stats
Financial results for the second quarter were impressive.
Revenue grew 31% over the prior year to $207.9 million, net
income jumped 53% to nearly $43 million, or 46% on a per-share
basis, to 41 cents.
The numbers capped a quarter in which Air Lease became one of
the launch customers for Boeing's new 787-10 Dreamliner. At the
Paris Air Show in June, it was announced that Air Lease would buy
30 of the 787-10 aircraft, and three more 787-9 prior versions to
A series of mechanical glitches have marred Boeing's
Dreamliner launch. But Air Lease spokesman Ryan McKenna says
kinks are natural for a major rollout and the firm expects issues
to be ironed out well before it starts taking deliveries of the
787-9s in 2017 and the 787-10s in 2019.
Selling mostly overseas should have its advantages as demand
for global air travel rises.
The International Air Transport Association, or IATA, said
global passenger traffic results in August showed "a
strengthening of the healthy demand trend of the last few
Flying Takes Off
Worldwide demand -- air traffic measured in revenue passenger
kilometers -- rose 6.8% in August vs. a year earlier while
capacity grew at a slower pace of 5.6%, pushing the load factor
to match the record high of 83.4% set in July 2011.
Asia-Pacific carriers logged an 8.6% demand gain, the stronger
performance among the three biggest regions of the world. IATA
noted that China's economy seems to be improving from recent
pressures and that capacity was up 6.3% in August over the prior
year and the load factor rose 1.7 percentage points to 81.6%.
China's domestic traffic jumped 13.7% in August vs. the
year-ago period while capacity expansion of 13.6% almost matched
Even European carriers did well. Their international traffic
demand climbed 5.4% in August on "modest economic improvements
and rising consumer confidence," IATA said. That's good news for
Air Lease -- Europe accounted for 37.2% of its aircraft
portfolio's book value in Q2, second behind Asia-Pacific.
The future of bigger rival ILFC, meanwhile, is up in the air.
AIG has indicated it would like to sell the business or possibly
spin it off in an initial public offering. A Chinese consortium
was interested but nothing concrete so far has come of it.