Airlines have been one of the sectors most impacted by the COVID-19 pandemic, and with travel demand expected to take years to return to prepandemic levels, there isn't much reason to get excited about aviation right now. Motley Fool contributor Lou Whiteman, appearing on Motley Fool Live, highlights a sector closely tied to the airlines that he says offers better investment opportunities right now. If you believe aviation will eventually return, these could be companies worth adding to your watch list.
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Lou Whiteman: The progress we're seeing in the fight against COVID-19 is making me even more bullish than I already was about aircraft leasing companies. These are the companies, as the name implies, they buy new planes directly from the manufacturers and they lease them back to the airlines.
It's a highly levered business, and you can understand why investors ran panicked from these companies in the early days of the pandemic. Some of these stocks are still down a lot more than the airlines. They have actually underperformed the airlines this year, and quite frankly, that's a mistake. Because sure, it isn't the ideal operating environment for these companies. AerCap Holdings (AER 1.41%) which, for my money, is the best of the bunch, they just took an impairment charge of more than $900 million in the third quarter to account for declines in the value of its planes. They've had to work out agreements with their customers. These companies have deferred millions in lease payments during the crisis. This is an industry, it's so tied to the airlines. The airlines are going to need years to recover. It's hard to imagine these stocks really flying until the airlines start to come back.
But these companies are survivors. AerCap for example, they just ended this quarter with $11 billion in total liquidity. They have 25 billion in unencumbered assets to borrow against if things get worse. They have a fleet of 1,000 planes, more than half of them are new-technology jets, the kind that are in demand even in a shrinking market. The airline companies can't recover quickly, in part because they've taken on billions in new debt. So even an uptick in revenue in the months to come, it's still not going to move the needle in terms of profitability and really returning money to shareholders.
But when the vaccine comes, we are going to see an uptake, and it's going to mean these deferrals to leasing companies are going to come down, and business for them is going to normalize. With the vaccine, I think you're going to see pent-up demand for leisure travel. Airlines are going to be scrambling to add capacity without further damaging their balance sheets. That is a market for leasing companies. You're going to lease planes, not buy them right now.
These companies, I think, are going to hear their phones ringing off the hook by middle of next year. AerCap, Air Lease (AL 1.40%), Fly Leasing (FLY), these are mispriced. They are going to benefit, assuming there is a return to aviation, and I think they are a better risk than tying your fate to any one particular airline. Don't sleep on these companies. They are way down, and they are poised to jump back as the news gets better in 2021.
