If you haven't been following the aviation industry closely over the last few years, you may have missed AerCap's (AER +1.02%) $30 billion acquisition of GE Capital Aviation Services that closed at the end of 2021. In this segment of Backstage Pass, recorded on Dec. 17, Fool contributors Toby Bordelon, Lou Whiteman, and Jason Hall discuss the behemoth deal and what it means for the future of AerCap, the largest aircraft leasing provider in the world.
Toby Bordelon: We're going to circle back to Lou now. Lou it's going to talk about, I don't think I followed this one very closely, Lou. Tell us what's going on.
Lou Whiteman: You weren't alone but Toby, let me tell you, this was the deal of the year and it flew under the radar, pardon the pun, aviation. But this is one that investors should know about because it is very rare in this day and age that regulators allow two companies to merge to create a force that just should not be allowed, with too much power in an industry. That's exactly what happened here.
This is the arcane little world of aviation finance. What these companies do is they buy planes directly from Boeing and Airbus, and they lease them back to the airlines. The airlines like it because it allows them to be a more asset-light approach.
Take a lot of this debt off the balance sheet. They like it before COVID. Nowadays after the last year-and-a-half with the airlines taking on billions in debt and their balance sheets are in just travesties. They have to buy planes this way.
This is a huge and growing market, AerCap and GECAS, these were the two largest players in the industry. I'm not kidding you, combined from this point forward, if Boeing or Airbus wants to launch a new aircraft, the first call they are going to make is to AerCap.
They are going to ask AerCap, would you buy this plane? If they say no, the plane probably won't get built. That is how much power they have. AerCap's fleet went from 1,000 planes to 2,000 -- 200 customers worldwide. GE retains a 46% stake.
This is part of all the chaos going on at GE where they had to sell the good assets to pay down the debt. This was a very good asset. This flies under the radar in part because people fixate on the debt and it's part of the model. This is a company with a $14 billion market cap but $28 billion in debt. Debt almost twice its market cap.
They also have $26 billion in unencumbered assets. The stock lost almost 80% because people were figuring, oh, no, COVID, airlines won't pay their bills. AerCap is going to go under. AerCap flew through that as the biggest shock of the system you can have.
This is a gorilla of the industry. AER is the ticker. This is a stock that people really should know. If more people understood this industry, regulators would have not allowed this deal to go through. [laughs]
Bordelon: That was my big question, Lou, when you were talking about the power they have, how did this get through?
Whiteman: I really believe it is an arcane enough industry. If you ever want, we could do a whole separate show. Actually this industry was founded by Guinness. I kid you not.
Bordelon: The beer or the record book?
Whiteman: The beer.
Bordelon: The beer. Seriously.
Whiteman: Aer Lingus bought a 747 right before the trouble started, realized they're never going to be able to get tourists from the United States. They needed to figure out what to do with this airplane.
A finance guy at Guinness said, I bet you I can lease this out to Malaysia. They turned it into a business, it was originally called Guinness Peat. Every company in this industry is based in Ireland.
The president of this company is named Angus. That's all you need to know, but everybody in this industry is just from one little section of Dublin. It's a little crazy industry no one knows about.
But I tell you, I followed the airlines a lot. I like the airlines, but I hate, they're terrible stocks. If you believe in a long-term travel recovery, if you believe in a growing world, middle-class and more mobility in the future, but you're scared to bet on an individual airline.
Take a hard look at AerCap because AerCap with its 200 customers worldwide, they benefit from aviation without taking single operator risks. This was the deal of the year and you all are wrong.
Jason Hall: Lou, I love it because I think what people don't realize is like you'd have to think about like Simon Property Group and its 20 largest competitors merging, and that's the scale.
Whiteman: Nobody else has a 1,000 planes in their fleet. They have 900 spare engines. Engines costs as much as a plane. They have 900 engines that they have notes on.
All of this is new equipment, young technology. If Southwest goes bankrupt tomorrow, they can take their planes and go somewhere else because they have planes that are in demand. This is a very well-run company. You have to be because there's a lot of debt in t this business.
Hall: How long is Boeing's backlog? If somebody wants a plane today.
Whiteman: Well, it depends on how badly you want it today because they had a bad couple years.
Hall: You get my point?
Whiteman: Yes.
Hall: That demand exists and AerCap is there to feed it, if they get slack inventory.
Whiteman: AerCap is the largest customer for both of these guys by a long shot.
Hall: Love it.
