08/11/2016

ALC Q3 results: no clouds in sight?

ALC Q3 results: no clouds in sight?

Are Air Lease Corporation’s (ALC) most recent quarterly results an illustration of why investors have not tired of seeking a foothold in aircraft leasing?  Californian aircraft lessor ALC, which bases its business model primarily on direct purchases of new aircraft from OEMs and placing them on leases with operators, announced its earnings on November 3 for the nine months ending September 30, 2016.


Following on the heels of a ratings upgrade to BBB by S&P in October 2016, the company showed a 17% rise in revenues relative to the same period last year and an improved EBITDA margin of 93.1%.  It also posted an internal-record-busting pre-tax cash ROE of 17.8% for the trailing twelve months ended September 30, 2016, and an across-the-board improvement, to one degree or another, in all major credit metrics.  The firm has increased its unencumbered asset base and brought its liquidity position to $2.9 billion.

The Ishka view is that the company’s performance demonstrates that its business model is well-suited to the upswing part of the industry cycle.  Given its order book, ALC is well-positioned to take advantage of preference for new aircraft by airlines in China and Asia in general, where it has 47% of its fleet (by net book value); disciplined support of its investment grade has clearly allowed it to align its capital-raising needs with investor demand for aviation assets.  It remains to be seen if the medium to long term, concerns over the macroeconomic landscape in China will translate into pressure on profitability and demand for new aircraft from the local airlines.


Ratings bump translates into cheaper debt


ALC has been successful in capitalising on continuing investor appetite for aviation assets, with two of its bond issuances with cumulative value of $850 million entering the markets in August 2016; a further $500 million issuance closed in October.  The ratings bump has already allowed the company to achieve more attractive financing terms. ALC locked in a 20bps decrease in the pricing of its unsecured revolving facility first launched earlier in the year and a 5bps cut to the associated facility fee.  The share of fixed-rate debt in the company’s funding mix increased to 86% from 72% in the previous reporting period, with unsecured debt reaching 92% of total debt.  The leverage ratio, at 2.6x, remains largely on par with the peer group, even as the company continues to target 2.5:1 as a matter of strategy.

 

Downturn, what downturn?

In contrast to more cautious voices elsewhere in the industry, the ALC management presented a mostly positive picture of the company’s expectations with regard to current and future demand for narrow- and wide-body aircraft (which it describes as “solid”), direction of lease rates and the state of aircraft finance (“very constructive tone”).  

Following the sale of seven aircraft and purchase of six aircraft in Q3 2016, ALC now owns a fleet of 244 aircraft and additionally manages 33 aircraft, some of those on behalf of Blackbird Capital (a JV it formed in cooperation with Napier Park Global Capital and in which it owns a 9.5% equity stake). 

Its order book contains 372 aircraft, of which 60% are scheduled to be delivered over the next four years; the book is dominated by orders for A320/A321neo (approx. 41% of the total, by number of aircraft) and 737-8/9MAX (ca. 31.7%).

ALC states its strategy is to maintain a varied mix of new narrow- and wide-body types without “a cluster” or “concentration” and to pursue long-term placements with good credits and on favourable lease terms, with lower numbers of aircraft available for ad hoc opportunities.

The company has a strong pipeline of forward lease placements, with 91% of the new aircraft placed through 2018 and 82% through 2019.   ALC says it may opportunistically offset anticipated delays in the 2017 delivery of up to eight Pratt & Whitney powered A320/321neo (out of 14 aircraft in the family scheduled for delivery that year).  ALC says its efforts to maintain a mix of narrow- and wide-body types in its fleet and order book is a strategic decision and admits no concern over the supposedly soft state of the market for wide-body (twin-aisle) aircraft.

It describes its twin-aisle aircraft as being slated primarily for the replacement of old-generation aircraft currently operated by airlines; the company sees “very robust demand” for wide-bodies, both having completed and currently pursuing campaigns for 787s, A350s and A330neos, with 42 new wide-body aircraft already pre-leased on long-term leases for future deliveries.

 

ALC’s targets Asian carriers


ALC’s high levels of forward placements are driven partly by strong appetite for leased aircraft in China, according to the firm. The company has 23.6% of its aircraft (by net book value) leased to Chinese carriers, and another 23.4% in other Asian countries.

Other drivers of demand for delivery slots are “higher than expected global passenger traffic growth” (specifically as handled by low-cost- and ultra-low-cost-carriers) and profitability at most of the company’s lessees.  ALC also sees an increase in large lease placements with some of its lessees taking multiple aircraft in one transaction. Vietnam Airlines agreed to lease up to 12 aircraft with the firm.
 

Heard on the call


ALC’s CEO, John Plueger, view of lease rates is “maybe a little bit of downward pressure for the best credits at the bottom.  Maybe a little more variability, but we are not seeing -- in the leases we are writing, we are not seeing any significant movement.”

The company maintains its view of the economic life of aircraft as based on depreciation of “3.4% per year, 25-year life, so 15% residual,” according to ALC founder, Steve Hazy.

 

The Ishka View



ALC’s strategy of direct orders appears to be paying off as it boasts a record set of results and an enviable Q3 performance. With a young fleet and healthy order book the lessor has been able take advantage of Asian demand for new aircraft.

As mentioned its disciplined support of its investment grade has clearly allowed it to align its capital-raising needs with investor demand for aviation assets.

It remains to be seen what the duration of the low fuel price environment may be, and what effect that may, or may not, have on demand for new aircraft beyond the next two or three years. Any business model that is heavily dependent on new deliveries from OEMs may be under pressure if the low fuel price environment persists and purchases of newer, more fuel-efficient aircraft are deferred.  However, ALC has managed to mitigate this risk by placing 91% of its new aircraft through 2018 and 82% through 2019.  In addition the firm has a healthy capital structure and substantial cash reserves to withstand any substantial volatility within the aviation leasing space.

The firm’s high concentration of its fleet in Asia, which accounts for 47% of its fleet (by net book value), does raises questions over whether the lessor's performance may be susceptible to adverse economic developments in that region.
 

Photo Alex Adkins

 

 

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