AerCap (NYSE:AER) reported record earnings per share in its second-quarter 2019 score card released on Tuesday before the markets opened for trading. The world's largest owner-lessor of aircraft coupled higher lease revenue with expenditure reductions in key line items to produce an appreciable jump in net earnings. Shareholders rewarded the leasing giant with an 8% bump in shares in the Tuesday trading session.

As we dive into the quarter's details below, note that all comparative numbers are presented against those of the prior-year quarter.

AerCap: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $1.28 billion $1.19 billion 7.6%
Net income $331.5 million $254.2 million 30.4%
Diluted earnings per share $2.42 $1.70 42.4%

Data source: AerCap. 

What happened at AerCap this quarter?

Detail of an airplane engine and wing at a terminal gate

Image source: Getty Images.

  • Lease revenue increased by roughly 5% to $1.19 billion. Management attributed the higher revenue to the delivery of newer-technology aircraft during the quarter, which bumped up average lease assets by $2.7 billion to $37.6 billion. 
  • The company's gain on sale of assets improved by nearly 53% to $78.2 million. AerCap sold 22 aircraft for $502.4 million, versus 30 aircraft sold in the prior-year quarter for proceeds of $737.7 million.
  • Net interest margin, which the company defines as the difference between basic lease rents and interest expense on debt (i.e., the dollar spread between core revenue and financing cost), improved by 3% to $754.5 million. 
  • Leasing expenses dropped by nearly 37% to $65.2 million, due to decreased maintenance rights expense and reduced "other lease costs" resulting from lease terminations.
  • Selling, general, and administrative expenses decreased by 24% due to lower compensation expense. 
  • AerCap's average remaining lease term now stands at 7.4 years -- one of the longest in the aircraft leasing industry. 
  • The company achieved 99.4% fleet utilization during the quarter and has placed approximately 90% of its order book through 2021.
  • The average age of AerCap's fleet dipped from 6.6 years to 6.2 years at quarter-end, the result of purchases of new-technology aircraft and the sales of current-technology aircraft mentioned above. AerCap claimed 1,373 owned, managed, or on-order aircraft as of June 30, 2019.
  • The company updated its exposure to delays in Boeing's 737 MAX program due to recent regulatory actions. AerCap had delivered five MAX aircraft to a customer for lease before the Federal Aviation Authority's grounding of the MAX in March 2019. The company has an additional 95 MAX aircraft on order from Boeing, which will be subject to delays until Boeing resumes delivery of program aircraft.
  • AerCap repurchased $169 million of its own shares during the quarter, bringing its total year-to-date repurchase activity to $337 million.

What management had to say

During AerCap's earnings conference call, CEO Aengus Kelly provided a rationale behind the organization's preference in recent years for new-technology aircraft, as opposed to the current-technology market, which perhaps exhibits broader customer demand:

Today our portfolio is 53% new-technology aircraft. This is the highest percentage of any major aircraft lessor in the world. And just as importantly, for the last 8 years, AerCap has avoided ordering any end of line current-technology aircraft. This barbell approach means we only acquire certain variances of new technology aircraft such as [Airbus'] A320neo and [Boeing's] 787-9, not end of line current technology aircraft. [I]n our view, this is the best way to maximize long-term returns for our shareholders. This is actually a contrarian view, as many investors and some rating agencies look purely at the average age of a fleet, rather than the components behind it to measure fleet quality.

A continuing value proposition based on share price

AerCap's practice of selling older, current-technology planes while investing in new-technology models is being undertaken while the company's stock continues to trade at a discount to book value. Thus, while it enhances the quality of its asset portfolio, AerCap sees inherent value in repurchasing its own shares at a discount on the open market. The company's $337 million of shares repurchased so far this year were bought at an average discount of 29% to book value. In June, AerCap's board authorized another $200 million in the organization's share repurchase program.

Even after Tuesday's price appreciation, AerCap's stock still trades at a discount of 18% to book value. This is an ongoing opportunity recognized by both the company and long-term investors who are able to weather the cyclicality of the aircraft leasing industry.