Air Lease Helps Airlines Keep Debt Low

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Entrepreneurs see dollar signs where others don't.

In the mid- to late 1960s, the aircraft industry was transitioning from propellers to jets.

Steven Udvar-Hazy was in his 20s, and he knew right away that the lofty capital investment required to purchase jet aircraft created an opportunity for a leasing business.

Hungarian-born Udvar-Hazy is one of the pioneers of the jet-leasing industry. He started International Lease Finance Corp. in 1973, which he sold toAmerican International Group ( AIG ) in 1990.

He left ILFC in 2010 and foundedAir Lease ( AL ).

He's been its CEO ever since.

Air Lease buys jets and leases them to airlines. The company also provides fleet-planning solutions to customers to help them operate more efficiently. Just like leasing a car is sometimes attractive to consumers, it's attractive to airlines because less cash or financing is required to get a deal done.

Leasing also gives airlines more fleet flexibility.

While rising fuel costs can hurt profitability at the airlines, it's not such a bad thing for Air Lease because it can spur demand.

Fuel Efficiency

"Fuel is now the single biggest expense in the industry, and the airlines know that they need modern, fuel-efficient aircraft to compete effectively," Udvar-Hazy said on the third-quarter earnings conference call.

The company had its IPO in April 2011 at $26.50. Air Lease had a rough go at first, mostly because it went public just before the S&P 500 corrected 21%.

Fast-forward to today, and Wall Street has started to embrace its growth story.

The jet-leasing industry operates in relative obscurity on Wall Street. But Air Lease showed great growth in recent quarters, and that's expected to continue.

Long term, industry fundamentals for growth and replacement of aging aircraft are working in Air Lease's favor. According to the company, global airline traffic has doubled every 15 years and is projected to grow 5.1% annually the next four years. "Passenger traffic around the world continues to show resilience in the face of economic malaise," said Air Lease President and Chief Operating Officer John Plueger. "During last summer's high season in Europe, passenger traffic was heavier than the year before, and it's projected to rise again this summer. Demand for flying remains substantial."

Air Lease gets most of its business overseas. More than 90% of its aircraft are operated internationally. Business is solid in Asia as several airlines in the region continue to expand rapidly. "China is growing at a more rapid pace than anyone else in the world," Plueger said. "As their economy develops, they're building dozens and dozens of airports. We won the three largest, most recent, single-aisle lease campaigns in China at Air China, China Southern and China Eastern. We now have 53 aircraft signed for lease with the three Chinese majors that will deliver over the next three years. Many of these aircraft are replacing aircraft that were put in in the early '90s."

Airline analyst Helane Becker from Dahlman Rose & Co. also weighed in on growth opportunities in China: "Demand for air travel is very high in China, partly due to lack of infrastructure. In addition, population growth has moved into the interior part of China, which is also fueling demand for flying."

In the third quarter, the company's aircraft in Europe made up 39% of total net book value. Asia accounted for 36%. Air Lease has a diversified customer base, with 66 airlines in 37 countries.

It also has a young fleet, with an average jet age of 3.3 years. At the end of the third quarter, the company boasted a fleet of 142 jets, about 80% narrow body and 20% wide body. All planes are leased through half of 2015, some beyond.

The average length remaining on lease is seven years.

In a low-interest rate environment, Air Lease is no stranger to issuing debt to fund the purchase of new planes. On Feb. 5, the company closed on a $400 million debt offering. The day before, Air Lease ordered 25 A350 wide-body jets from Airbus for $9 billion.

Air Lease is already a big Airbus customer, with Airbus jets making up about 40% of its fleet.Boeing ( BA ) makes up about 30%, Embraer about 20%.

Air Lease also has 12 Boeing 787 Dreamliner jets on order scheduled for delivery in 2017.

Filling Up The Skies

In terms of competition, Aircastle and AerCap also provide aircraft leasing services, but Air Lease was quick to differentiate itself.

Plueger said: "Air Lease orders planes directly from the manufacturer. What sets us apart from the competition is that we're also a fleet planner and consultant to airlines. We work with airlines to optimize their business."

Another differentiator, according to Becker, is that "Air Lease is willing to put up their own money to buy aircraft, where most of the others are not."

In the third quarter, Air Lease reported profit of 41 cents a share, up 64% from year before. Sales rose 90% to $174.9 million.

Another strong quarter of growth is expected when Air Lease reports earnings Feb. 28 after the close. The Thomson Reuters consensus estimate calls for profit of 36 cents a share, up 50% from a year earlier, with sales up 58% to $182.1 million. Full-year profit is seen rising 30% in 2012 and 39% in 2013.



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: AIG , AL , BA

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