In the business of buying, leasing, and eventually selling multimillion-dollar machines, the ability to buy and sell at the right time can be as crucial as leasing the machine for a profit during the holding period. In the case of AerCap Holdings (NYSE: AER ) , the management team has consistently done an excellent job of acquiring planes through alternative methods rather than paying high prices directly to airplane manufactures and selling the planes at profits before they become outdated and difficult to unload.
Due to key mergers and acquisitions over the years, AerCap Holdings has built itself up to one of the largest airplane leasing firms in the world. The company currently owns or manages 368 aircraft with an average age of 5.3 years and a lease term of 6.6 years. Not only has management been successful at plane trading, but it also was successful in buying debt at a discount and repurchasing shares substantially below book value.
Buyback earnings surge
The Q2 2013 results were a prime example of the benefits of a management team open to make all decisions based on improving earnings per share and shareholder value. The adjusted earnings per share soared 39% to $0.59, from $0.43 in the prior year, due to the significant buyback completed during 2012. The adjusted net income only grew by 13%, and even more noteworthy is that revenue declined by 2% during that period. So based on a 2% decline in revenue, the management team was able to drive net income higher and earnings per share substantially higher.
AerCap completed a buyback of 10 million shares in August 2012 at $12.00 and another 8 million shares in December 2012 for prices of around $12.80. Another sign of the benefits of accretive deals was the roughly $21 million gain from purchasing secured loans at a discount back in 2012.
Instead of tying itself up with substantial speculative purchase deals over multiple years from Airbus and Boeing, AerCap has made the strategic decision to wait for airlines that need to unload airplanes in a purchase and leaseback agreement. These deals are not guaranteed, but due to the size and financial flexibility required, AerCap is set up nicely to accept them when they open up. With a limited number of corporations able to accept these large-scale deals, AerCap can obtain extremely attractive yields on in-demand aircraft with existing leases. A couple of recent examples include American Airlines (UNKNOWN: AAMRQ.DL ) and LATAM Airlines Group (NYSE: LFL ) .
Regarding LATAM Airlines, the company entered into a deal to purchase and lease back 25 widebody aircraft for $2.6 billion. During the second quarter, 10 aircraft were purchased and delivered to the customer.
In the case of American Airlines, the company entered into a purchase and leaseback arrangement for 35 aircraft. Though the deal had the possibility of making American Airlines a sizable customer and hence a major risk, management worked out a deal to sell an 80% ownership interest in eight planes to an affiliate of Guggenheim Partners. The deal generated roughly $0.10 in profits already with more expected from management fees and servicing the aircraft.
In fact, the CEO outlines how the company has sold 260 owned and managed aircraft at an average age of 13.2 years for a realized gain of $310 million. On average, the company has old each aircraft for a profit of $1.7 million.
Reasons for leasing
Numerous reasons exist for leasing planes, but a primary factor is that airlines do not have capital nor the balance sheet to be tied up with aircraft. An airline is able to commit to the planes it wants for the time it wants. Not to mention, a lease is a lot easier to break than a loan.
In the case of LATAM, the leading Latin American airline has been busy integrating the merger with TAM and has been dealing with a weak Latin American market. The original plans of sizable fleet commitments are being reduced by 22 planes for the period between 2013 and 2015, and include the sale and leaseback of the 25 aircraft with AerCap. The deal includes 10 A330s in the existing fleet that have an average age of four years.
American Airlines is in the process of exiting bankruptcy and potentially merging with US Airways, yet the airline maintains plans for the historical order it placed for 550 planes back in July 2011. Those deals guaranteed that the airline would obtain access to the modern planes needed with the likelihood that it would eventually find a leasing source for at least part of the order. That partner, for less than 10% of the order totals, just happens to be AerCap. Investors shouldn't be surprised to see American agree to further deals as the new planes are delivered.
The need to modernize aircraft fleets will lead to strong demand for the modern and efficient fleet owned by AerCap Holdings. As long as the management team continues to skillfully acquire and dispose of aircraft, this stock will continue to be one of the better bargains in the industry.
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