Aercap
Q4 2020
By Manuel Maurício
March 03, 2021
After cutting Aercap’s stake in the Portfolio’s in half , I’m back looking at Aercap’s results:
Income Statement
The first thing that I notice is the recurrence of revenue. If we forget the pandemic for a second, Aercap’s revenue is akin to a subscription service (a capital intensive one, I know). In fact, it’s more like real estate. The big difference is that real estate tends to go up in value over time whereas airplanes lose their value over time.
In the last 2 quarters of the year the revenue went down because of COVID, obviously, but it hasn’t gone down as much as one would expect. Nothing like what’s happened to the airlines.
I’ve mentioned it before, and Gus, the CEO, mentioned it again on the earnings call, the airlines don’t need to be profitable to pay their leases. Aercap is in a much better position than the airlines.
After a big loss in the third quarter, consequence of the large impairment charge, the company showed a meager profit of $28 million dollars in the fourth quarter.
An interesting bit is that all throughout 2020 the company was selling aircrafts. In the fourth quarter they’ve sold 12 aircraft with an average age of 21 years.
For the whole year they’ve sold 46 aircraft for $613M and gains of $90M. This is impressive. It means that the selling price of the airplanes is, at least, 17% higher than the book value. This is one of the reasons why we could be making the case that Aercap should be trading at a premium to book value.
Balance Sheet
Let’s now focus on the Balance Sheet:
The deferral balance has gone up $5 million dollars to $490 million dollars, compared to an increase of $56 million dollars in the prior quarter. This means that the airlines have been paying their bills and have been asking for less deferrals.
The management says that the clients have been paying every single month, and it expects the overall amount to go down during this year. This is in stark contrast to when the CEO was expecting the total deferred amount to get to $800 million dollars.
The company has total sources of liquidity of $9 billion dollars and total uses of $3.9 billion dollars for the next 12 months. This means that the sources-to-uses coverage ratio is is now at 2.3x, which is still well above the target of 1.5x.
The debt markets have also been generous to the company. In January, Aercap issued $1 billion dollars in 5-year bonds at 1.75% interest rate. This is the lowest interest rate that the company has ever paid in its history, it’s ridiculously low. And that’s what scares me (more on this later).
Aercap has also been able to hold its investment rating (given by the credit rating agencies), which is very important to keep raising debt at low rates.
The air-leasing market is alive...
During the fourth quarter, the company signed agreements for 22 narrowbodies and 9 widebodies (widebodies are harder to lease). This is a good thing. There’s still demand for airplanes.
Already in 2021, the company signed agreements for 24 aircraft.
This means that there is a market. We don’t know the terms of these agreements, they’re likely really bad terms, but hey, it’s something. The worst thing that a lessor wants is an AOG, an Airplane-On-Ground (without a lease contract attached to it), so they will take almost any price right now. The standard practice is to lease them with short-term contracts only to re-lease them later with long-term contracts at more advantageous prices.
... but still asleep.
But there are signs that the market isn’t doing that well.
After the Norwegian Airlines went bankrupt in 2020, Aercap got some shares in return of the leases. In the meantime Aercap sold all of those shares. But it still has some airplanes leased to Norwegian.
Nine 787’s to be exact. In the prior quarter, Gus mentioned that 2 of them were already re-leased and they were looking to place the other 6. So far, not much has changed.
On this earnings call, Gus mentioned that they’ve signed some letters-of-intent, but those have yet to be converted into lease contracts. This goes to show that it hasn’t been easy to place widebodies in this environment.
What about the sale-and-leaseback market?
The sale and leaseback market is now starting to come alive.
Aercap hadn’t bought anything on the sale-and-leaseback market since 2013. Things were going well prior to the pandemic, the demand for new airplanes was high, and there were no real bargains in the sale-and-leaseback market. But that has began to change.
Aercap has finnally deployed some capital into the sale-and-lease back market. How much, I still don’t know. But I believe it hasn’t been material.
The management sees the next couple of quarters as very promising growth opportunities in this area.
Gus believes that in the post-COVID world the airlines will want to have better balance sheets, thus fewer owned airplanes and more leased airplanes. And Governments around the world will want their loans paid back. To get the much needed cash, the airlines will be selling their aircraft to the lessors and leasing them back again.
It will get even better (or worse, depending on the point of view) as the airplane manufacturers start delivering aircraft again in significant numbers. You see, Airbus and Boeing have been having their own troubles. They haven’t been delivering the aircraft that they had planned.
And, as they say, one man’s leftovers is another man’s feast. The airlines and the lessors welcome this lower level of production. But when Boeing and Airbus finally start churning airplanes, the airlines will find themselves between a rock and a hard place. That’s when the sale-and-leaseback market will heat up. And Aercap will seize the opportunity.
“No airline ever went out of business for having too few airplanes, plenty of them go out of business for having too many.” Gus Kelly, Aercap CEO
Conclusion
I still like Aercap. The management team has shown high professionalism, integrity, and above all, ability to fly through the eye of the storm (see what I did there?). I also see Aercap benefiting from all that will likely happen in the future; the competition closing doors, better terms for sale-and-leaseback agreements, etc.
As you know, a week ago I’ve cut Aercap’s stake in the Portfolio in half. The reasons for this cut, outlined here and here, were related in great part to my unfamiliarity with the unsecured debt markets. When one stops to think of it, the fact that investors are willing to lend to Aercap at 1.75% sounds a little too good to be true.
I might be overreacting here, and the lenders might believe that this is a very stable and well protected business, that the airlines don’t need to become profitable to pay their leases, etc, but I prefer to be safe than sorry.
I intend to study the debt markets in some depth going forward and I may even increase my stake in Aercap if I believe that there is little risk coming from that end. But that will take some time.
If any of the subscribers has any material on this subject, I’d be much appreciated if you could send it to me. Thank you.
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