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Why Shares of AerCap Climbed in May

By Lou Whiteman – Jun 2, 2020 at 4:01PM

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Investors are growing confident that the aircraft lessor can weather the pandemic-induced travel slowdown.

What happened

Shares of AerCap Holdings (AER -1.65%) gained 14.7% in May, according to data provided by S&P Global Market Intelligence, as investors are slowly gaining confidence that the aircraft leasing company will survive the COVID-19 travel slowdown.

So what

AerCap is one of a handful of companies that buy planes directly from manufacturers and lease them to airlines. The model has become increasingly popular in recent years as carriers try to take debt off their balance sheets.

But with the pandemic reducing travel demand by 95% or more, those airlines suddenly need a lot fewer aircraft. Investors reacted in the early days of the pandemic by sending shares of AerCap and other lessors tumbling.

A plane flying over the clouds.

Image source: Getty Images.

In May, AerCap made its case that investors were overreacting, and the argument went over well on Wall Street. The company's first-quarter earnings surpassed estimates, and although leasing rents and net interest margin were down year over year, the business did not collapse as some have feared.

The company is not standing still. AerCap has reduced full-year capital expenditures by $2.3 billion in part by reworking its new-plane delivery schedule, and it says that all of the planes it takes delivery on between now and December 2021 are already leased. Late in May, it said it had negotiated the deferral of 37 aircraft originally set to be delivered in 2021 and 2022 to later years, giving it added flexibility if the travel slowdown extends well past the pandemic.

AerCap is also granting lease deferrals of two to three months to try to help its customers through the crisis, which will affect 2020 revenue but hopefully limit the number of airline bankruptcies it has to work through in the quarters to come.

Now what

AerCap shares were down 75% year to date in mid-March, and even after a solid May, the stock is still down nearly 50% in 2020.

At the end of the first quarter, the company had more than $11 billion in available liquidity and more than $28 billion in unencumbered assets it could borrow against if needed. Its portfolio is made up mostly of newer and more fuel-efficient planes that should be easier to place with a new operator should airline bankruptcies happen.

Due to the nature of its business, AerCap is affected by the pandemic, but is in no danger of failing. It looks like a lower-risk way to invest in an eventual travel recovery for those worried about buying into airlines.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends AerCap Holdings. The Motley Fool has a disclosure policy.

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