Aercap
Q2 2021
By Manuel Maurício
August 17, 2021
Aercap’s results came out recently.
To get a better feeling for the current state of the industry, I’ve read both Aercap’s and Airlease’s earnings call transcripts.
If you’re new to Aercap and Air Lease, you can read my previous write-ups here and here.
Ignoring the obvious differences between the two companies, both are saying that the industry is rapidly getting back up on its feet.
Especially the domestic, short flights.
Not so much the long-haul international flights.
Take China for example. Domestic traffic has rebounded to levels higher than in 2019, right before the pandemic.
And international flights will slowly follow.
The European Union has opened up non-essential travel to Americans, and the American Government should follow suit soon.
The North Atlantic route is the busiest in the World so when it comes back to normal, it will give a big boost for long-haul carriers and, consequentially, to Aercap.
This improved situation has led to higher leasing activity for Aercap.
During the second quarter, the company leased 51 aircraft, down from the record 60 in the prior quarter, but still a great number.
Especially when we consider the amount of widebodies that were leased (harder to lease than narrowbodies).
INCOME STATEMENT
As a result of the improved industry conditions, the revenue has been trending up.
Aercap still maintains some carriers on cash accounting, meaning that Aercap isn’t recognizing the revenue coming from these carriers on a “normal” straight-line basis, but only when the cash comes in.
This is just to say that, as things get back to normal, we should be seeing the revenue go up nicely.
And as the revenue goes up, so do the profits.
Note on analyzing data:
I’ve used the adjusted Net Income here, which doesn’t account for extraordinary costs relating to the merger with GECAS.
The other day, a subscriber asked me if I use the reported earnings or the adjusted earnings for my analyses.
I told him that, if we’re talking about a one-time event such as the merger with GECAS or, say, the $5 billion that the EU fined Facebook with, I adjust the profits as those costs don’t represent the underlying nature of the business.
Now, if we’re talking about a one-time cost that occurs every year, then I don’t adjust for it as it’s not really a one-time cost.
LIQUIDITY AND BALANCE SHEET
During the quarter, the collection rate went up from 84% to 87% leading to a decrease of 10% in the net deferral balance from $514 million in March to $463 million.
This is still high (38% of revenue), and Air Lease has always been better from this point of view, but as the world gets vaccinated and air travel increases, we should be seeing this go down for both companies.
From a liquidity standpoint, the company now has a sources-to-uses coverage of 1,7x, still above its target of 1,5x (the higher the better), and a record low leverage ratio of 2,4x (the lower the better).
CONCLUSION
One other thing that caught my eye during the conference call was a question about future capital allocation.
Superior capital allocation is the main reason why I prefer Aercap over Airlease.
When asked about buybacks, Gus mentioned that, before the GECAS acquisition, they were focused on improving their credit rating and they were on the verge of being upgraded by Moody’s.
A better credit rating leads to lower financing costs, one of the biggest competitive advantages in this business.
Then the pandemic happened, but they still held on to their credit rating.
Gus said that his focus right now was on completing the acquisition, getting the better rating, and then buying back shares (if the price is right). It looks like the best way to go about it.
Aercap’s current book value per share is $73 and the stock price is at $55, meaning that the stock is trading at a 24% discount. Still cheap.
Aercap will be kept in the Portfolio.
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