For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What Air Lease does
As the name would imply, Air Lease is a relatively new leasing company, founded in 2010, that focuses on acquiring planes and leasing them to commercial airline companies. The company's founder and CEO is Stephen Udvar-Hazy, the former CEO of AIG's (NYSE:AIG) plane leasing subsidiary, International Lease Financial Corporation, or ILFC, which recently sold an 80.1% stake to an investing consortium for $4.23 billion.
In its most recent quarter, Air Lease reported a 90% increase in revenue, a 103% spike in net income, and a 59% jump in cash provided by operations. Do, however, take these figures with a grain of salt because, as a new company, Air Lease is relying heavily on debt to finance its fleet expansion. Air Lease ended the quarter with $2.5 billion in unsecured debt with available liquidity of $1.47 billion as it added 40 planes to its fleet, a nearly 40% increase, over the year-ago period.
Considering how profitable plane leasing has become, there's no shortage of competitors for this recent start-up. The aforementioned ILFC and General Electric's (NYSE:GE) Capital Aviation Services, or GECAS, division are by far the largest.
As my Foolish colleague Rich Smith pointed out, ILFC has been on a money-losing streak, so AIG might be thrilled to see this division go even if it did take a loss on its investment. GECAS, on the other hand, had a fleet of 1,725 planes as of the end of 2011 and produced an operating profit of $1.2 billion. Another big plus for GECAS is that 17% of its revenue came from rapidly growing emerging market Middle Eastern and African countries in 2011.
In addition to large players such as ILFC and GECAS, Air Lease faces off against leasing companies similar to its size in Aircastle (NYSE:AYR) and FLY Leasing (NYSE:FLY). Aircastle's most recent quarter ended in a loss primarily because of age-related routine maintenance costs for some of its older planes. FLY Leasing, which I recently profiled as an attractive buy candidate, focuses on medium-to-long-term contracts in order to curb large revenue fluctuations, but also boasts the smallest fleet of the publicly traded leasing group.
After carefully reviewing the prospects for Air Lease, I've decided to place a CAPScall of outperform on the company.
The downside is painfully evident: $2.5 billion in unsecured debt in big blaring letters! If you can manage to get over its need to go deeply into debt in order to fuel its growth, then you'll see the potential for incredible growth.
I've pretty much never seen a more optimal time for plane leasing companies to succeed. Fleets that are older require a lot of maintenance and can lead to large one-time charges. On the flipside, newer, more fuel-efficient planes are expensive, and most airlines don't have the capital to perform a swap-out on their entire fleet. Leasing, however, makes a lot of sense for most airline companies that want better fuel efficiency and lower maintenance costs than they're currently getting from their aging fleets, but don't want to pony up billions right now to replace their oldest planes.
Air Lease makes the most intriguing buy because its fleet is hands down the newest, averaging only 3.4 years in age. GECAS' fleet averages close to eight years old; Aircastle has 15 planes in its fleet that required maintenance this quarter with an average age of 21 years; and FLY Leasing's average fleet age is nine years. Furthermore, Air Lease's average lease term is currently seven years, as compared to approximately 4.9 years for Aircastle, and 3.1 years for FLY Leasing.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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