Airline-related companies have enjoyed investors’ favor this year. The iShares Dow Jones Transportation Average ETF (IYT) has outperformed the S&P 500 by rallying 20% on a year-to-date basis, while the S&P has rallied 15%, and it is trading in uncharted territories. In the airline industry, carriers and aircraft manufacturers capture most of the analysts’ attention. However, aircraft lessors play a key role in the operation of most airlines.
Air Lease Corp (NYSE:AL) has received minimal attention, but it may bring further capital appreciation to its shareholders because carriers are switching towards leasing aircraft as opposed to buying them, and the company has shown solid growth.
Fundamental analysis
Air Lease Corp (NYSE:AL) leases aircraft to several airlines around the globe. Major carriers that use Air Lease’s services include Air France, British Airways, Emirates, Korean Air, Qantas, Aeromexico, Southwest Airlines Co. (NYSE:LUV), and Spirit Airlines Incorporated (NASDAQ:SAVE) among others.
The company is trading at a trailing P/E of 23.44 and a forward P/E of 13.45, and its price-to-earnings-to-growth ratio is 0.70. Its balance sheet carries a sizable amount of debt, with a debt ratio of 1.88, and it offers an insignificant dividend payment of 0.33%. Although the company may not seem appealing at first glance, recent press releases indicate aggressive growth strategies, and the company may be considered to increase exposure to the airline industry.
Recent developments
According to its most recent quarterly earnings report released on May 9, the company showed impressive growth. The company’s revenue increased 45% for the three months ended March 31, 2013, to $191.99 million from $132.5 million for the same period in 2012. Its net income increased 49% from $26.9 million in 1Q2012 to $39.9 million in 1Q2013. This resulted in a 46% increase in its diluted earnings per share from $0.26 to $0.38.
During this period, the company acquired seven aircraft to expand its fleet to 162 aircraft, spread across 71 airlines in 41 countries. Five Airbus A319/320/321 for short hauls and two Airbus A330-200/300 for long hauls were acquired. The Asia Pacific carriers represent 39.2% of the fleet concentration, most of them being Chinese carriers. Therefore, the weakening of the yen should not be a concern to Air Lease because the company only leases its aircraft to SkyMark, a minor Japanese airline.
Future growth
From a forward looking view, airlines’ sentiment towards leasing aircraft has changed, as it is a more favorable strategy. Airlines immerse in debt if a new aircraft needs to be purchased, and the interest rates are usually not in the best interest of the carrier. For this reason, carriers opt for leasing aircraft, as it offers a more sustainable solution to their needs, and its debt does not grow.
Also, most airlines are seeing increasing passenger traffic according to their most recent monthly traffic reports. Hence, the demand for leased aircraft should remain strong in the near future, which would position Air Lease for net income growth.
Moreover, the demand is starting to pick up already. The company released several press releases in April which point towards growth in the interim. The following table summarizes the new leasing agreements by Air Lease Corp (NYSE:AL).
| Carrier | Aircraft Type | Number of Aircraft | Delivery Date | Leasing Years | Link |
|---|---|---|---|---|---|
| Transavia | B 737-800 | 2 | 2015 and 2016 | Unknown | here |
| NAS Air | A A320-200 | 3 | Mid 2015 | 6 | here |
| Sichuan Airlines | A A330-300 | 1 | 12 | here | |
| Aerolineas Argentinas | B 737-800 | 6 | Late 2014 | 12 | here |
| Ethiophian | B 777-300 | 2 | Mid 2015 | 12 | here |
| KLM | B 777-300 | 1 | Beginning 2015 | Long Term | here |
| Korean Air | B 777-300 | 2 | Late 2014 | Long Term | here |
Summary of Air Lease Corp (NYSE:AL) leasing agreements reported in April 2013. In the Aircraft type column, A represents Airbus and B represents The Boeing Company (NYSE:BA).
The company’s aggressive growth strategy allowed for the agreement of seven contracts with different airlines regarding the lease of 17 new aircraft. Most of the contracts were signed for periods of twelve years, which is above the current leasing term mean of 7.1 years. The company’s future revenue should increase due to strong demand for its airplanes.
Furthermore, Southwest Airlines Co. (NYSE:LUV) and Spirit Airlines Incorporated (NASDAQ:SAVE) lease aircraft from Air Lease Corp (NYSE:AL). Air Lease should increase its market share in the United States because Southwest Airlines and Spirit Airlines Incorporated (NASDAQ:SAVE) are witnessing higher demand according to their most recent monthly traffic reports.
Southwest Airlines Co. (NYSE:LUV) increased its revenue passenger miles (RPM) by 1.5% to 8.75 billion, while Spirit Airlines Incorporated (NASDAQ:SAVE) increased its RPM by 13% to 898 million. These companies are taking significant market share from major carriers, and strong demand will likely benefit Air Lease Corp (NYSE:AL) in the form of new lease contracts.
In addition, sometime in the near future, Southwest Airlines Co. (NYSE:LUV) and Spirit Airlines will have to renew their fleet to get their hands on more fuel-efficient, comfortable, and modern aircraft. The carriers will reduce their overall operation costs by leasing the aircraft from Air Lease as opposed to buying them, as it is more cost-effective for the airlines. Since these companies already have contracts with Air Lease, it is possible that they could get better leasing terms, further benefiting the carriers. I foresee a win-win situation for Air Lease and the carriers.
Airbus and Boeing benefit from new orders
The strong demand for new airplanes should also bring new orders for aircraft builders such as Airbus and The Boeing Company (NYSE:BA). The Boeing Company (NYSE:BA)’s B737-800 was preferred by Air Lease over its close competitor Airbus A320. Two advantages that the B737 has over the A320 are the increased seat capacity and better range. However, according to some reports, the A320 has gained popularity, especially in the European Market. Nevertheless, new orders from aircraft leasers will push revenues higher for Airbus and The Boeing Company (NYSE:BA)!
Foolish conclusion
The answer to the question of the headline is, as Dr. Sheldon Cooper would say, “Bazinga!!” Carriers are opting towards the leasing of new aircraft as opposed to financing them, because most of them are submerged in debt and the interest rates are not in their favor.
For this reason, Air Lease is positioned for growth going forward. The airline industry is improving its fundamentals, and passenger traffic is increasing across the map. I believe Air Lease should be considered for a long position to gain exposure to the airline industry.
The article Another Way to Invest in the Airline Industry originally appeared on Fool.com is written by Robinson Roacho.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of SPIRIT AIRLINES INC. Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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