Airline stocks are flying high on Monday thanks to an encouraging development in the race to find a COVID-19 vaccine, and they are taking a lot of companies that rely on airlines for revenue along for the ride.
AerCap, Fly Leasing, and Air Lease are all in the business of buying airplanes and leasing them to airline customers. It's a good business when airlines are growing and planes are in high-demand, but a tough one in the current environment.
The lessors carry a lot of debt, and investors in the early days of the pandemic were worried the companies would fall into default if airlines returned planes or were unable to pay their bills. AerCap, for example, as of June 30 had deferred more than $400 million in lease payments for airline customers.
But the worst-case scenarios never materialized, as the lessors had the liquidity in place to survive the drop in revenue. And with Pfizer's news Monday that its COVID-19 vaccine candidate appears to work even better than the company had hoped, investors are optimistic the worst is over for airlines. If so, that's good news for AerCap, Fly Leasing, and Air Lease.
I've been arguing for months that companies like AerCap, down as much as 75% in the early days of the pandemic, are oversold and offer an attractive way to invest in an eventual aviation turnaround. Even after Monday's strong rally the stocks are still down big on the year, and still look attractive for patient long-term holders.
Investors in the early days of the pandemic underestimated the staying power of these companies, as well as how much available liquidity they had to use in the event of a crisis.
AerCap, still off 42% for the year, is the best value among the leasing stocks thanks to its relatively young fleet that can more easily be placed elsewhere if airlines decide to terminate leases. AerCap also had $12 billion in total liquidity as of June 30, and only about $2 billion of its massive $30 billion in total debt comes due before 2023.
Investors need to be careful not to get ahead of themselves on this Pfizer news: Even if the vaccine is as good as advertised it will take years for air traffic to return to pre-pandemic levels, and airlines will be ill positioned to aggressively add to their fleets once travel does return. The lessors can't really soar until the airlines are back, so it could be a turbulent few years for the company.
But for those who believe long-term demand for air travel will recover, air lessors are a good way to invest without taking on the risk tied with any one individual airline. The closer we are to normal, the more these stocks should climb higher, as illustrated by the big jump made Monday on the vaccine news.