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 (
) in 1990.
He left ILFC in 2010 and foundedAir Lease (
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
"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
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
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
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
Air Lease is already a big Airbus customer, with Airbus jets
making up about 40% of its fleet.Boeing (
) 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
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
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.