It takes a lot of money to operate an airline. You can spend
billions of dollars building up a fleet of aircraft, then spend
billions more every year just to keep the planes fueled up.
Because it takes a lot of money, airlines need ready access to
financing. The problem is, banks aren't keen to lend money to
airlines with a spotty financial record -- especially given the
fickle nature of the airline industry, which can quickly turn
sour when the economy turns south.
Airlines that don't make the cut at the lending table can
still build up their fleets through lease agreements, however.
According to industry estimates, the leasing industry accounts
for around 40% of the $100 billion spent each year on new
Global demand for leasing services is so great that the
industry includes scores of players of all stripes and sizes.
One of the top players isAir Lease Corp. (
), which provides leasing services for narrow body, wide body and
Air Lease buys its own planes and then leases them to airline
customers. At the end of 2013 it had 79 customers in 47
countries. More than 90% of its business comes from outside the
U.S. and Canada.
Although Air Lease was founded in 2010 and went public the
next year, its management team has been in the business for
Founder and CEO Steven Udvar-Hazy is credited with inventing
the airline leasing business in 1973 when he co-founded
International Lease Finance Corp., or ILFC. Air Lease President
and Chief Operating Officer John Plueger is a seasoned industry
veteran who also logged time at ILFC.
Air Lease's management team is a big reason that the company
has seen revenue more than double over the past two years and its
stock price rise nearly 40% since its initial public offering in
April 2011, analysts say.
"It's not just a financing business -- they are so much more
than that," said Jason Arnold, analyst at RBC Capital Markets.
"Steve Hazy and John Plueger know airplanes inside and out. They
get the product that the airlines need and are able to construct
attractive financing packages. Their experience and expertise are
key positive factors in the business' success."
Air Lease is also one of the rare leasing companies that
actually buy the planes directly from manufacturers such asBoeing
) and Airbus.
Many competitors operate a lease-back model where airlines buy
the aircraft they need and then sell those aircraft to leasing
companies, which then lease the planes back to the airlines.
"The biggest advantage for Air Lease is that they buy aircraft
for their own book," said Helane Becker, analyst at Cowen &
By buying its own aircraft, she says, Air Lease has more
control over the negotiation process on the purchasing end -- as
well as the sales end.
"Air Lease negotiates with Boeing or Airbus and says, 'We'll
take on X number of aircraft over the next few years,'" Becker
said. "They can then go to Air India or another airline and say,
'We have these planes coming, would you like to take an order for
it?' It gives Air Lease greater control and visibility."
Air Lease had a fleet of 193 aircraft at the end of 2013. On a
fourth-quarter conference call with analysts, Plueger said the
company's average fleet age "remained very low, at 3.7 years,
with a long average of 7.1 years remaining on its leases."
"We concluded the year with one of the largest order books in
our industry, having 327 aircraft on order now, delivering
through 2023," Plueger added. "Having concluded all new aircraft
placements in 2014 and '15, our focus now turns to 2016, where
we'll begin transitioning towards strong order book of new
During the conference call, Udvar-Hazy also cited data from
the International Air Transport Association (IATA) showing that
global passenger traffic for 2013 increased 5.2%. That was in
line with the average annual growth rates for the past 30
"This statistic is overwhelmingly positive for the health of
the airline industry, and we have now seen several consecutive
years of overall global airline profitability," Udvar-Hazy
In an e-mail to IBD, Ryan McKenna, an Air Lease vice
president, said demand for new aircraft to replace aging planes
"remains very robust. We continue to work closely with airlines
as they develop fleet plans to modernize their aircraft
Air Lease's own financial returns reflect the industry's
strength. In 2013, its quarterly sales growth never dipped below
23%, while its earnings per share growth never fell below
The company earned 55 cents a share during the 2013 fourth
quarter, a 45% gain from a year earlier and above consensus
estimates. Revenue grew 28% to $242.9 million.
Air Lease shares touched a record high of 38.15 on March 21
and traded near 37 on Monday.
"Certainly, industry trends are beneficial, including the fact
that leasing is gaining market share as a percentage of overall
aircraft finance," analyst Arnold said. "There are also a lot of
aircraft being delivered by Boeing and Airbus, which has been
very supportive of Air Lease's business."
Analysts polled by Thomson Reuters expect earnings of 51 cents
a share for Air Lease's first quarter, up from 38 cents a year
earlier. They expect revenue to rise 25% to $240.3 million.
In addition to privately held aircraft leasing firms -- there
are about 100 of those, Becker says -- Air Lease also competes
againstGeneral Electric 's (
) Capital Aviation Services, which ranks No. 1 in the sector.
Other publicly traded rivals includeAircastle (
) andFly Leasing (
Air Lease also competes againstAerCap Holdings (AER), a Dutch
company about to get a whole lot bigger when it closes its buyout
ofAmerican International Group 's (AIG) ILFC, Udvar-Hazy's former
company. That $5.4 billion deal, announced in December, will more
than triple the AerCap fleet to nearly 1,400 planes, putting it
second behind the GE unit. The deal is expected to close this
Air Lease will likely eye acquisition opportunities of its
own, though on a smaller scale, according to Arnold.
In a note, JPMorgan analyst Jamie Baker said the company might
keep an eye on financial institutions looking to sell their own
In addition, Air Lease will look for opportunities to build
its fleet by swooping in to get planes that airlines don't want.
"If an airline decides it only needs 20 planes instead of 30, Air
Lease sits at the front of the line in terms of getting those
extra planes," Arnold said.