13/03/2017

Lessors continue to generate stable ROIC

Lessors continue to generate stable ROIC

Return on Invested Capital (ROIC) is a critical financial metric for assessing capital intensive businesses like aircraft leasing. Ishka looks at the ROIC generated by the four major listed lessors and analyses at how things have evolved during the last six years.

With the exception of FLY Leasing the public lessors have offered a consistent return on invested capital (ROIC) of between 5.1% to 6.9% over the last five years. ROIC is a critical financial metric for assessing capital-intensive businesses like aircraft leasing. AerCap and Aircastle have been the top performers over the last six years with an ROIC of 5.9% and 6.9% in 2016 respectively.

While ALC’s ROIC have ben consistent over the last six years and boasted an ROIC of 5.4% in 2016 Fly Leasing has been an outlier with profitable, but volatile, returns ranging between 2.9% to 8.9% since 2011.

The Ishka View is that ROIC provides an interesting benchmark with which to assess aircraft lessors. Ultimately the ROIC proves that even with the consistent threat of aircraft impairments lessors have been consistent performers.

 

 

Among the four listed lessors, Air Lease Corporation (ALC) is only one to have experienced an improvement in its ROIC during the period of analysis. It is the youngest lessor among the group having been established in 2010. The lessor’s strategy is to operate young aircraft acquiring them directly from aircraft manufacturers and trading them when they near the end of the first third of their expected 25 year economic useful lives. As such, it is not exposed to impairment risk unlike the other three lessors. All the other three lessors in the analysis have several mid-life and even older aircraft in their portfolio and as a result have recorded sizeable impairment charges during the last four-five years. Nevertheless, ALC’s ROIC still lags behind AerCap and Aircastle with the both the latter posting an ROIC several basis points higher than ALC. All three firms: AerCap, FLY and Aircastle have been capitalising on the robust secondary market and have sold a number aircraft, mostly older mid-life aircraft, in-order to de-risk their portfolio.

 

The Ishka View


Aircraft lessors have grown substantially in terms of both size and importance during the last five years and are expected to continue doing so in 2017. With speculative deliveries as a share of lessors’ overall fleet growth expected to increase and a growing demand for sale leasebacks, lessors will be in need of capital to finance their deliveries and aircraft purchases. Bank debt and capital markets are forecasted to be important sources of financing for lessors going ahead and with the use of innovative structures enabling capital market funds to be deployed as a source of equity, lessor ROIC will be a closely watched metric by investors. Among the four lessors analysed by Ishka, only FLY Leasing seems to be experiencing some kind of weakness in terms of the returns it generated every year on its invested capital. Even AerCap’s ROIC has experienced a falling trend, however, it still remains robust relative to ALC which is probably the healthiest lessor in the group in terms of fundamental performance. All these lessors have been actively de-risking their portfolio and inducting younger aircraft which are expected to offer stable returns for longer periods. It remains to be seen how tangibly the lessors manage to improve or even maintain their ROIC performance. In principal, de-risking should reduce impairment risk and possibly improve earnings and therefore Ishka remains optimistic of these lessors’ ROIC performance going ahead.
 
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