Air Lease Flies High On Growing Orders, Big Profits

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From its start-up just three years ago by industry legend Steven Udvar-Hazy,Air Lease Corp. ( AL ) has become a high flier in the commercial airline leasing business.

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 ( GE ) Capital Aviation Services andAmerican International Group's ( AIG ) 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 ( AER ),Aircastle ( AYR ) 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 demand."

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 change.

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. market.

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 supplier.

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 placed aircraft.

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 Emirates.

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.

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 financial crisis.

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 $26.50.

"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 total 15.

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 months."

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 demand growth.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AER , AIG , AL , AYR , GE

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