As an airplane leasing company, most investors probably envision the stock of AerCap Holdings (NYSE:AER) trading inline with the airline industry. In fact though, it typically trades more like the financials so one should not be surprised that it currently trades below book value.
The company is one of the largest airplane-leasing firms. Currently, only Air Lease Corporation (NYSE:AL) trades with a larger market cap due its extremely fast growth from start up to the current level and a well respected management team that moved over from ILFC, a subsidiary of AIG. As AerCap finally trades closer to book value, investors face the interesting dilemma of whether this stock should trade closer to historical values of multiples of book value or if a new normal exists.
With long-term lease agreements and the ability to survive the financial crisis with minimum financial impact, the prospects appear strong for an industry that continues to benefit from the increasing demand for global travel.
New planes, long-term leases
The airplane leasing business is incredibly consistent with very long-term leases especially for the newer planes. In total, AerCap has a portfolio of 368 aircraft that it owns or manages with an owned fleet average age of 5.3 years. Due to this relatively young fleet, the company has an incredible average remaining lease term of 6.6 years. Yes, that's a very long 78 months of continuous lease payments. The major reason for the long average age is new planes immediately lease for nearly 14 years or an extremely long 166 months.
Air Lease offers a similar fleet dynamic to AerCap, but it is achieving a younger fleet age of 3.5 years by ordering new planes. The global lessor acquired 10 aircraft during Q2 via the new order book and was a launch customer for the 787-10 Dreamliner by signing a non-binding agreement for up to 33 planes. Due to consistently adding new planes, the average remaining lease term remains relatively high at 7.1 years. As with the typical companies in the sector, the customer base is diversified over 78 airlines spread among the world with a focus of nearly 40% in both Asia and Europe.all data from Q2 report-http://finance.yahoo.com/news/air-lease-corporation-announces-second-200100689.html
Fly Leasing (NYSE:FLY) offers a slightly different business model with older aircraft on shorter leases. The average age of the aircraft portfolio is weighted at 9.4 years with an average remaining lease term of 3.7 years. The company has a mixed diversification between Airbus and Boeing planes spread among 54 airline customers and 103 planes.
One of the major concerns in this industry has been the historically high level of airline bankruptcies that can lead to broken lease agreements. As heavily indebted firms, the cancellation of enough leases could lead to a financial disaster.
Global travel growth
The International Air Transport Association (IATA) released statistics showing that air travel demand jumped 5% in July. The demand growth was lead by a 5.5% uptick in emerging markets.
The report is interesting in that it shows international traffic growing the most, as businesses and consumers continue to desire to connect on a global scale. The biggest growth remains in the domestic Chinese and Russian markets where traffic climbed over 10% compared to last July. This growth rate only leads to higher demand for airplanes and right into the wheelhouse of AerCap. Emerging markets provide some of the largest customers for the airplane lessors.
The business continues to glide higher with consistent leasing fees and cash flow. The market perceives a volatile business that doesn't exist. With global demand for air travel growing at a 5% clip, the biggest risk to the sector of broken leases can typically be over come via signing up a new customer. After all, the demand for the air travel doesn't disappear if one airline goes out of business; instead it shifts to a stronger airline that will need more airplanes. Shareholders of AerCap will continue to benefit from the global demand for air travel and the consistent long-term lease payments.
Mark Holder and Stone Fox Capital Advisors owns shares of AerCap Holdings N.V.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.