Is Boeing's Battery Good News for Air Lease?

The confusion and criticism surrounding the new Dreamliner 787 from Boeing (NYSE: BA  ) is certainly not the way the airline industry wanted to begin 2013. Safety findings and technical reviews of the lithium ion batteries the company used for the first time could severely damage the perception of the heralded technology and affect future use. Should airlines around the world taxi the efficient power cells back to the terminal, investors could find opportunities in alternative ideas sweeping the industry. One such option for airlines and investors: leasing planes.

Aircraft leasing companies are a critical part of the airliner industry. They provide airlines with immediate access to the newest planes, while also providing aircraft manufacturers with strategic customers for their latest designs. Perhaps no company is in a better position to capitalize on industry fears than Air Lease (NYSE: AL  ) , which offers one of the most fuel-efficient fleets in the world.

Air who?
Air Lease has had a relatively brief life on the market and doesn't have wide analyst coverage. Aircraft leasing is an industry you might want to get familiar with, because with or without a windfall from the Dreamliner headache, there are several intriguing growth opportunities and high yields here for investors.

The company began in 2010, as the creation of aircraft leasing legend Steven Udvar-Hazy. He was part of the International Lease Finance Corporation for 37 years, serving as chairman and CEO in addition to being its co-founder. AIG bought that company in1990 for $1.3 billion, and it's valued at $5.28 billion today. With more than 30 years of jet flying experience, Udvar-Hazy has an inside track to the minds of his customers. Perhaps that's why Air Lease advises aircraft manufacturers such as Boeing, Embraer, Airbus, and ATR on new designs.

Cleared for takeoff
The new company wasted no time exploding onto the scene after going public in April 2011. As of Sept. 30, Air Lease owned 142 aircraft, up from just 102 at the end of 2011 and 40 at the end of 2010, and will grow its fleet to 153 by the time fourth-quarter results are released. The growth is far from over, however, as the company has commitments to purchase an additional 107 aircraft by 2017 and 174 more thereafter. The relative ease the company has in finding customers is also impressive:

Year

Aircraft Deliveries

Entered Into Lease

2013

32

32 [100%]

2014

27

27 [100%]

2015

26

9 [34.6%]

2016

22

0 [0%]

Post 2016

174

8 [4.6%]

Total

292

87 [29.8%]

Source: Air Lease 10-Q, September 2012.

More than 90% of the company's revenue is derived from customers outside the United States. Take a look at the location and net worth of the company's stables:

Region

Net Book Value of Fleet

% of Total Fleet

Europe

$2,267 million

38.6%

Asia/Pacific

$2,091 million

35.6%

Central/South America

$720 million

12.3%

U.S. and Canada

$464 million

7.9%

Middle East and Africa

$330 million

5.6%

Source: Air Lease 10-Q, September 2012.

Although 53.5% of the company's fleet is well positioned in emerging markets, close to 40% of the fleet is exposed to debt-ridden European countries. That kind of exposure should warrant some concern, but consider that Europe has much stricter fuel efficiency and emissions standards for aircraft. Although the EU backed down on enforcing carbon taxes on flights of international origin to avert a global trade war, it promised to reinstate such taxes if the U.N. didn't act to curb industry emissions by the end of 2013.

The company highlights the growing popularity of air lessors among investors, and these companies could enjoy a significant boost given the questions surrounding the fuel-efficient Dreamliner's batteries. Air Lease's efficient fleet, with an average age of just 3.4 years, is and will continue to be in high demand on the European continent. In fact, the company announced plans in July to purchase 75 Boeing 737 MAX 8/9 aircraft, which achieve 13% better fuel burn rates than the previous generation.

The field
Air Lease is the newest, and already the largest, publicly traded aircraft leasing company in the industry. But buying hundreds of aircraft requires a big appetite for debt, which dominates balance sheets throughout the industry. Here's how the industry stacks up:

Company

Fleet Size

Debt to Assets

Net Profit Margin (TTM)

Air Lease

142

60%

20.4%

AerCap (NYSE: AER  )

 

333*

67.1%

21.9%

Aircastle Limited (NYSE: AYR  )

157

58.4%

8.9%

Fly Leasing (NYSE: FLY  )

 

110

71%

6%

Sources: Company websites
*Includes aircraft on order.

The high amounts of debt are exactly what prevent airlines from owning all of their aircraft outright, especially for airlines in emerging markets with limited access to capital. Air Lease and AerCap, which expect to grow tremendously in the next several years, give shareholders the opportunity for share gains. Slower-growing Aircastle and Fly Leasing, which have both experienced quarterly losses in the past 12 months, return comfortable gains to shareholders with dividend yields of 5.1% and 6.7%, respectively. Are huge payouts or lucrative growth opportunities better? Judge for yourself, but remember that with slowing growth comes shrinking dividends:

Company

PEG Ratio

Air Lease

0.47

AerCap

0.84

Aircastle Limited

(4.29)

Fly Leasing

(1.67)

Note: PEG ratio calculated using average analyst five-year growth estimate.

Once again, Air Lease ascends to the top of the list, with a PEG of just 0.47 and a projected annual growth rate of more than 40% for the next five years. AerCap has plenty of room to run as well. The company's large fleet, focus on growth, and price-to-book ratio of 0.80 suggest investors may be overlooking a great opportunity.

Foolish bottom line
The way I see it, investors have the chance to see amazing gains in share prices with Air Lease and AerCap. As the companies mature and growth slows, investors will enjoy sizable dividends, which will be abnormally high for early investors.

Knowing what we know today, I'm initiating a CAPScall for Air Lease to outperform the S&P 500 over the next five years. The company has beaten analyst earnings expectations in three of the past four quarters, averaging a beat of 6%. I'll also be looking to add shares to my personal portfolio in 2013. Will you be joining me? Let me know in the comments section below.

With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multitrillion-dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of The Fool's best industrial industry minds have collaborated to provide investors with the key, must know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.


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