AerCap Holdings (AER 1.86%) is withdrawing from the Russian market due to geopolitical tensions, a move that is likely to be costly to the company's bottom line. Shares of the aircraft leasing company fell more than 15% on Monday morning as investors digested what the move will mean for the business.
AerCap is in the business of buying planes directly from manufacturers and leasing them to airlines. When times are good, AerCap is a great way to invest in growing travel demand without having to tie your fortunes to any one airline, but the model does come with risk. It is a highly leveraged business, and needs the leases on its planes to pay down its debt.
The business is greatly complicated by Russia's invasion of Ukraine. The conflict has forced airlines to scale back flying in the region, meaning for the near term at least, they need fewer aircraft. And as AerCap's native Ireland and much of the rest of the western world sanction Russia over the invasion, the company is pulling the plug on leasing activity in the country.
AerCap has 152 planes leased to airlines in Russia and Ukraine with a combined value of more than $2 billion, according to consulting firm IBA Group. In a statement announcing its withdraw from Russia, the company said Russia accounts for about 5% of its fleet in terms of net book value.
AerCap is by far the world's largest aircraft leaser thanks to its 2021 deal to acquire GE Capital Aviation Services from General Electric (GE 0.57%). The deal gave it significant size and scale advantages and geographic diversity, but that scale unfortunately means it is also the most exposed lessor to the Russian market.
Shares of GE, which because of the deal owns 46% of AerCap, fell about 2% on Monday morning. Air Lease (AL 2.29%), a smaller leasing rival, was down 9%.
Given the severity of the crisis and AerCap's exposure to it, the sell-off on Monday makes sense. But for long-term investors, this is a buying opportunity. While AerCap will certainly face a financial hit, the company proved during the pandemic crisis that its balance sheet is strong.
Many of those aircraft that it must repossess are relatively young and fuel efficient, and though AerCap might face some near-term challenges when trying to repossess the planes over time, the company should be able to place them with other customers.
In short, this should be a speed bump for AerCap and not a permanent hit. The scale and geographic diversity it acquired when it bought the GE portfolio, while meaning it takes an oversize hit today, should still serve the company well in the years to come.