AerCap
is in a tight spot.
By Manuel Maurício
March 07, 2022
Russia is stealing 118 airplanes from AerCap!
This would be the headline I would write if I were a journalist. The truth is, this situation was to be expected after the West started confiscating Russian yachts and what not.
Things have been escalating so quickly in this space that it’s hard to keep track of what’s happening.
THE SHORT OF IT
A week ago, the European Union banned Russian airplanes from the European skies. Then, Russia banned all European and American airplanes from its skies.
This created a massive logistical and legal problem. Leasing companies couldn’t send their pilots to Russia to retrieve the airplanes because they weren’t allowed to enter Russian airspace. And even if the pilots could’ve flown to Russia, they couldn’t fly those airplanes back to Europe as they were leased to Russian companies. The leasing companies could break the lease while the airplanes were still in Russia, but then the airplanes wouldn’t be allowed to fly because they were Western. What a pickle!
Then, news came out that Russia would be seizing all foreign airplanes currently located in Russia.
According to some sources, foreign leasing companies own about 515 of the 777 leased aircraft in Russia. The one with the highest exposure, unfortunately, is AerCap with 118 of its airplanes leased to Russian airlines (depending on who you ask, this number can go up to 149).
On the 28th of February, AerCap issued a statement mentioning that 5% of its fleet was on lease to Russian airlines.
Now, on a 3:1 leveraged business (3 portions of debt for each portion of equity), 5% of the assets represents 20% of the equity. In AerCap’s case it’s more like 17% because the company has more assets than just the airplanes.
If this is hard for you to understand, I’ve got you covered. Here’s an illustration:
See? If the assets get impaired, the hit goes to the owners of the equity (aka shareholders) first. It’s only after the shareholders get completely wiped out that the debtors start feeling the heat.
So… as I mentioned last night on the Aercap thread (by the way, have you been to the Forum recently? You don’t know what you’re missing!), even if all of those airplanes representing 5% of the fleet are indeed in Russian soil and must be impaired (taken as a complete loss), this means that the book-value per share would be $64.
Even at a 10% discount, the share price would be $57. AerCap’s shares are currently trading for $47, a 27% discount to book value.
Is it reasonable to believe that some of those airplanes were somewhere else when the flight ban was put in place? Some sources believe that 20% of the airplanes might have been located outside of Russia.
Besides, there are deposits and insurance for these situations, especially so if the Russian State nationalizes those airplanes.
Truth be told, AerCap’s officials must be going crazy trying to figure out all of the implications of these bans and confiscations. And I can see how insurance companies might be trying to avoid payment at all costs. I would say that a legal battle is likely to be brewing.
CONCLUSION
There’s no other way to put it, AerCap is in a bit of a pickle right now.
Add to all of this the fact that fuel prices have been skyrocketing in a time when airlines were just getting out of a global pandemic and you get the perfect scenario for further bankruptcies.
I actually believe that the best outcome for AerCap would be a nationalization of those airplanes. That way it could claim the insurance money and use it to buyback shares at depressed prices.
The situation is fluid and it’s hard to predict what will happen in the short term. In the long term, I don’t think there is any doubt that we’ll all be flying more, not less. I know I do. I’m already planning my trips a year in advance. I don’t think I’m the only one wanting to “get out”.
AerCap will be kept in the Portfolio for now. The company will be posting results later this month and that’s when I expect to get more clarity on what they’re seeing and doing. In the meantime, you’ve got the Forum for more updates.
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