Risk Reward with AerCap Holdings
AerCap Holdings NV (NYSE:AER) is the global leader in aircraft leasing. The company acquires commercial aircraft and leases them to its airline customers worldwide. Its portfolio consists of more than 1,700 owned, managed and on order aircraft, with ~300 customers in 80 countries. AerCap's fleet consists of a mix of narrow-body and wide-body aircraft, engines, and materials.
Acquisitions and Revenue
Over the years, AerCap has made various acquisitions to expand its portfolio and footprint in the industry. One of the notable ones was the acquisition of International Lease Finance Corporation (ILFC) from American International Group (AIG) in 2014 and GE Capital Aviation Services (GECAS) in 2021, making it by far the largest aircraft lessor globally. All of this generated $7.2 billion in revenue over the last twelve months and is served by just 641 employees. Thats over $11 million per employee on the top line and $2.9 million on the bottom line.
Global Customers
The United States and China together account for around half of AerCap's business. The global nature of its customer base provides diversification, but global tensions could impact future revenues, which could make it hard to pay debts and operate profitably.
In the United States, AerCap leases aircraft to many major airlines including American, Delta, United, Southwest and others. The US accounts for the largest share of AerCap's lease revenue. In China, AerCap has major airline customers such as China Southern, Hainan Airlines and Xiamen Airlines. China is AerCap's second largest market.
Other Key Markets
The other key markets include India, Australia, Japan, Thailand and Indonesia with major airline customers include Air India, Qantas, ANA, AirAsia and Garuda. Leading European airline customers include Lufthansa, International Airlines Group, Air France-KLM and Ryanair. Europe accounts for around 20% of AerCap's lease revenue with Latin American bringing in the rest with leases going to LATAM, Avianca and Azul Airlines among others.
The Aircraft Leasing Industry
Overall, by facilitating the needs of airline fleet, the air leasing industry plays an indispensable role in broadly supporting global air travel and mobility at competitive prices. It enables the world's aviation infrastructure.
For the air industry as a whole, it's been a wild ride as Warren Buffett (Trades, Portfolio) could tell you.
"The airline business from the time of Wilbur and Orville Wright through 1991 made zero money, net. If capitalists had been present at Kitty Hawk when the Wright brothers' plane first took off, they should have shot it down."
Fast forward to 2017, and Buffett has this to say.
I like airlines because they just got a bad century out of the way. I think there have been almost 100 airline bankruptcies. I mean, that is a lot, he said. Its been a disaster for capital.
Impact of COVID-19 on the Industry
The aviation industry, including aircraft leasing companies like AerCap, faced significant headwinds due to the COVID-19 pandemic. Travel restrictions and a downturn in demand for air travel severely impacted airlines, which in turn affected lessors. However, as air travel began its recovery, leasing companies played a crucial role in helping airlines manage their fleets and financial health.
Leasing companies purchase planes from manufacturers and lease them out to airlines, providing carriers access without huge capital outlays. This allows airlines to expand and contract their fleets based on demand, rather than be stuck with owned planes. Lessors upgrade their portfolios regularly, enabling airlines to operate new, more fuel efficient aircraft. This benefits flyers. From a financial standpoint, airlines can tap into leasing company's large capital reserves and financing capacity to fund growth. Leasing enables airlines to concentrate on competing and providing air transportation services and by supporting airline profitability and efficiency, leasing helps enable lower ticket prices.
AerCap's Competitive Advantages
Aircraft are expensive assets. Starting an aircraft leasing company requires significant capital to purchase planes and maintain them. Financing can also be challenging, especially as new companies do not have a proven track record in the industry. The aviation industry is known for its cyclicality, influenced by global economic conditions, geopolitical events, fuel prices, and other factors. New entrants need to be prepared to navigate downturns and understand the industry's complex dynamics.
With 50+ years in the business, AerCap has cultivated close relationships and partnerships with airlines across the globe. This helps win lease deals. AerCap has built solid relationships with leading aircraft manufacturers like Boeing and Airbus. This ensures that they have access to the latest aircraft models and can secure favorable pricing and delivery slots. AerCap has one of the largest and most diverse fleets in the aircraft leasing industry. This scale allows them to serve a wide range of airline customers around the world and offers flexibility in lease terms, fleet management, and servicing various market needs.
Additional Services
In addition to leasing, AerCap offers services like aircraft management and sales, providing a holistic solution to airlines and enhancing customer stickiness. Understanding the intricacies of different aircraft types, their performance metrics, fuel efficiency, and suitability for various airline routes and demands is crucial. In other words, its really hard for any company to compete with AerCap, much less a new one entering the industry.
Addressing AerCap's Debt Situation
The $46 billion in debt could crush shareholders in the end, but only time will tell. The massive hurdles to entry including high capital requirements, regulatory barriers, technical expertise, and relationships make new entrants rare to this market. That's good news when talking about longevity.
Despite a sizable amount of net debt, the company has around $19 billion worth of liquidity and 1.4x coverage for the next twelve months with secured debt to total assets of 14%. The companys attractive long lease terms lead to stable and predictable revenues and cash flows, which are the norm for this kind of business. Aircrafts are not cheap, but they are necessary to modern life. The biggest risks come from technological innovation that would make air travel unnecessary. Thus, its not likely that humans will stop flying around the planet. As long as its profitable for AerCap and its clients, then the symbiotic relationship will continue.
Future Potential of AerCap
AerCap Holdings NV (NYSE:AER) is showing promising progress on the financial front. The acquisition of GE Capital Aviation Services (GECAS) has significantly boosted its revenue streams despite the major debt load it came with. Its almost assured that more aircraft will take to the skies, which means there will continue to be a surge in maintenance rents and other income. End-of-lease incomes have gone up at AerCap and asset sales are thriving because of increased transactions and a more advantageous mix of assets.
From a financial standpoint, the $46 billion in long-term debt will have to be paid down; however, the interest rate was likely very favorable versus what is available today. That means any competitor would probably need to spend a lot more to get similar results. The company's profitability is also on an upward trajectory. The surge in lease agreements has positively impacted operating leverage. Although there's been a nominal rise in selling, general, and administrative expenses, their proportion in relation to lease incomes has seen a decrease. AerCap generates over $5 billion in cash from operations on 56% gross margins, pushing 25% of top line revenue to the bottom line. That puts earnings per share in the $7.50 to $8.00 range for each of the next couple of years.
The bottom line is that AerCap is a solid business that will be around in 20 years and will likely be more profitable than it is today.
This article first appeared on GuruFocus.
