The Best Stock in the Aircraft Leasing Industry

To cut costs and keep their options open, more airlines are choosing to lease planes, rather than buy them. This strategy helps airlines avoid the expenses of actually owning jets, and gives them more freedom to change the size and makeup of their fleets as needed. In the booming aircraft leasing industry, Air Lease (NYSE: AL) looks like your best investment option, for five compelling reasons.

1. A young fleet
One of the characteristics of the aircraft leasing industry is the regular churning of aircraft. As new aircraft with higher fuel efficiency and capacity are introduced in the market, aircraft companies prefer to replace the old fleet with the new ones. A relatively younger fleet would allow the company to charge more for leasing those planes.

Air Lease's fleet has a weighted average age of 3.5 years, compared to 10.7 years for Aircastle (NYSE: AYR  ) and 5.1 years for AerCap Holdings (NYSE: AER  ) . As a result of this advantage, Air Lease is currently trading at a price-to-book value (P/BV) of 1.17, compared to 0.8 and 0.95 for Aircastle and AerCap Holdings, respectively.

2. A strong growth pipeline
Air Lease has a robust pipeline of 325 aircraft to be delivered over the next 10 years, at a cost of $23.4 billion. As these new aircraft come into operation, the resulting revenue and bottom-line growth will  likely translate into higher share value.

On the other hand, AerCap Holdings has a new aircraft pipeline of 44 aircraft with a total cost of $1.9 billion, while Aircastle does not have any new aircraft headed its way. Air Lease's more robust expansion plan gives it better odds of outperforming its peers.

3. High revenue visibility
As of the second quarter of 2013, Air Lease had an average remaining lease term of 7.1 years. This means the company has a good idea of what its revenue will look like for the next few years; unless a sharp economic downturn drives airline companies to cancel their lease contracts, Air Lease can count on that money coming in. In contrast, AerCap Holdings had a relatively higher lease term of 6.9 years, while Air Castle has a remaining lease term of only 4.7 years.

As Air Lease takes delivery of new aircraft for its fleet, and begins signing new leases for those jets, its average remaining lease term will increase, further boosting its exepected revenue and earnings. Better yet, those new aircraft will like have a higher annual lease rate than the relatively older ones. 

4. A comfortable debt position

All aircraft leasing companies have significant debt on their books, since they fund most of their purchases with debt. Aircastle scores higher its peers in terms of leverage, with a debt-to-EBITDA ratio of 5.2, compared to 6.9 and 7.3 for Air Lease and AerCap Holdings, respectively.

However, Aircastle has a higher cost of debt at 5.54%, compared to 3.53% of Air Lease and 3.6% for AerCap Holdings. As a result, the EBITDA interest coverage ratio for the company -- the ratio between the rough estimate of the cash it's bringing in and the annual cost of the paying the interest on its debt -- stands at 2.8, compared to 3.9 and 3.4 for Air Lease and AerCap Holdings respectively.

While leverage-backed growth is certainly not a negative in and of itself, Air Lease's comfortable debt position gives the company greater financial flexibility to fund its growth, compared to its peers.

5. Attractive valuations

For a company involved in the aircraft leasing industry, the best valuation parameters would be free cash flow and operating cash flow per share. The table below shows these trailing-12-month ratios for Air Lease and its competitors. 

 Metric Air Lease Aircastle AerCap
Price/FCF -18.2 -3.3 -3.8
Price/OCF 4.8 5.3 5.7

Source: Company reports.

Air Lease looks the most attractively valued in terms of Price/OCF. The Price/FCF metric per share is significantly negative for Air Lease, primarily due to its high level of investment -- it's plowing all its cash back into growing its operations. This is also positive, since its high capital expenditures are likely to translate into robust cash flows in the future.

Conclusion

The airline industry will continue to boom, and the air leasing players will be one of that trend's key beneficiaries. Air Lease's making big investments now to capitalize on that boom, and right now, it looks more appealing than its two biggest rivals.


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