Aercap
Q1 2021
By Manuel Maurício
May 07, 2021
If you’re new to this story, I’d recommend reading my previous write-ups. If you’re not in the mood for it, I’ll summarize:
Aercap is the best in its class, it was cheap prior to the pandemic, then Mr. Market got one hell of a scare with the virus, and it got even cheaper. That’s when I bought it for the Portfolio. Then the price recovered to “less cheap” levels (but still cheap), I understood that there was an important part of the story that I was missing (how the debt markets work and the potential bubble there), I wasn’t comfortable with Aercap being such a big part of the Portfolio, I sold half of my stake, and then, out of thin air, Aercap decided to buy GECAS, the largest air lessor in the world. Wuff! I need to catch my breath.
The first quarter numbers came out last week, so let’s check them.
Income Statement
As the world recovers from the pandemic, the revenue is slowly but steadily creeping up to previous levels.
And the profits have pretty much recovered almost completely.
Again, this happens because the leases on the airplanes are the first thing that the airlines pay. Without the airplanes, there’s no business.
In the first quarter, the company leased 60 aircraft (12 in the previous Q). This is the most the company has ever leased. This is interesting. Add to it the fact that most of them were widebodies, which are usually less in demand. This means that the market is still working.
In fact, the company has all of its airplanes fully booked until 2023, and it has continued to sell airplanes for a profit, more precisely 9 aircraft with an average age of 18 years old for $84M and a profit of $5M. I don’t understand why Mr. Market keeps putting Aercap in the same bag as the airlines. It’s clearly a much better business.
THE STATE OF AVIATION AROUND THE WORLD
On the conference call Gus, the CEO, gave a colorful perspective of the current state of air travel around the world.
The USA are seeing demand for air travel of around 65% of pre-pandemic levels, and in some countries of Asia (China, Russia, South Korea, Vietnam), air travel is higher than pre-pandemic. Say what?!?
In Europe “the environment remains relatively week”. Only Greece and Turkey are at levels of more than 50%. This I can confirm. I just came from The Netherlands and the Schiphol airport, usually a crowded place, was empty.
Balance Sheet
Turning now to the balance sheet, the deferral balance has gone up by $29 million which is almost negligible (but higher than the growth of $5 million in the prior quarter). At the height of the pandemic the CFO expected the total deferred balance to reach $800M and it’s currently at $568M, so things didn’t get as bad as he expected.
When asked about the lease rates for the planes that are being leased right now, Gus said that most are put on variable lease rates (called power-by-the-hour – tied to the utilization of the aircraft) for the next 12 months and after that period they’ll switch to fixed-rate, obviously at lower rates than pre-pandemic. This is was to be expected.
For a few years the rates will be lower so that Aercap can place the planes, and then they gradually increase the rates. The worst thing for Aercap is to have an AOG – Aircraft on Ground, so this is the best possible outcome.
The planes coming from the orderbook are a different story. They don’t have to negotiate anything right now.
The company has a sources to uses ratio of 1.7x, still above the 1.5x limit which is good, but it’s important to keep an eye on this ratio as it has come down from 2.3x in the prior quarter.
As has been the case throughout the pandemic, the debt markets are still alive and well. In January, the company raised $1B with a coupon of 1.75%, the lowest in the company’s history!!! This goes to show the appetite for debt we’re seeing nowadays and my concern regarding the debt markets.
CONCLUSION
Things haven’t changed from my last write-up. Although I’m not a fan of the mega acquisition, I’ve decided to give the benefit of the doubt to Aengus Kelly as he has shown time and time again that he is one of the best CEO’s and capital allocators out there. Regarding my issue with the debt markets, I’ll keep schooling myself and I’ll be writing about it when I feel I’ve got something important to say.
Aercap will be kept in the Portfolio.
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