Followers of the aviation industry are probably well aware that this is the week of the Paris Air Show where every aerospace manufacturer from giants The Boeing Company (NYSE:BA) and Airbus, to growing regional airplane makers Bombardier and Embraer SA (ADR) (NYSE:ERJ) come out to show off their products and collect orders from airlines and private jet operators. But jet aircraft, especially the latest widebody models, aren’t cheap, with the most expensive costing hundreds of millions of dollars each. For an airline industry that has not been historically stable, how can airlines afford to buy an entire fleet of the expensive flying machines? The answer often is they don’t; aircraft leasing companies do.
Myth of aircraft ownership
A lot of passengers expect that the plane they fly on is actually owned by the airline with the logo on the side, however this is often not the case. In a Nov. 2012 Wall Street Journal article, Delta Air Lines, Inc. (NYSE:DAL) CEO Richard Anderson commented on the benefits of owning rather than leasing aircraft, but the article noted that even Delta Air Lines, Inc. (NYSE:DAL) only owns around 75 percent of its fleet. With such high price tags, it’s no wonder airlines often lease their planes, and airplane leasing companies are happy to fill in the gap.
Airplane leasing companies generally do not make headlines in the same way airlines themselves do, largely because most of the population is not concerned with leasing a plane. But among the plane leasing companies the general population may have heard of is International Lease Finance Corp. The leasing company is best known in the context of its parent company American International Group Inc (NYSE:AIG), which took billions in government money when derivatives bets turned the company from Wall Street darling to America’s pariah company.
As part of American International Group Inc (NYSE:AIG)’s bid to repay the government, it has tried to sell ILFC numerous times but received only what it considered lowball offers, with rumors an offer would come from ILFC’s founder Steven Udvar-Hazy. Even after repaying the government, American International Group Inc (NYSE:AIG) is still interested in selling ILFC and reached a deal to sell up to 90 percent of the leasing company to a Chinese Consortium. However, the Wall Street Journal reported in late May that the consortium failed to make a deposit as part of the acquisition, bringing the deal’s completion into question.
But even as the sale of ILFC remains in doubt, ILFC founder Steven Udvar-Hazy is running a new aircraft leasing venture. Offering aircraft from The Boeing Company (NYSE:BA), Airbus, Embraer SA (ADR) (NYSE:ERJ), and ATR, Air Lease Corp (NYSE:AL) leases planes to airlines worldwide such as United Airlines, Southwest Airlines Co. (NYSE:LUV), and Air Canada. Air Lease Corp (NYSE:AL) ran an IPO in Apr 2011 and saw shares fall below the IPO price until more recently when the stock made an impressive run higher.
For those looking for a dividend along with their aircraft leasing company, Aircastle Limited (NYSE:AYR) may be their type of airplane leasing company. The current dividend yield stands at 4.6 percent, well above the 0.35 percent offered by Air Lease Corp (NYSE:AL) and the non-existent dividend for those buying American International Group Inc (NYSE:AIG) shares. Aircastle Limited (NYSE:AYR) is a smaller company than Air Lease Corp (NYSE:AL), leasing fewer planes and valued at less than half of Air Lease Corp (NYSE:AL) by market capitalization. Shares of Aircastle could see a boost over the next few years as analysts expect earnings at the company to increase, partially due to a strengthening economy increasing the demand for air travel and the airplanes that make it possible.
Actual airplane owners
Airlines are often not the ones who own the airliners in the sky, leaving that job to companies like ILFC, Air Lease Corp (NYSE:AL), and Aircastle. Investors who are bullish on an increase in air travel demand but not interested in the risks that inhabit the airline business may be interested in looking at aircraft leasing companies as an alternative investment to benefit from an economic recovery.
American International Group Inc (NYSE:AIG)’s stock has been a favorite among hedge fund managers. Have they identified the next big multi-bagger, or are the risks facing the insurance giant still too great?
The article What Do Airlines Actually Do? Part One: Ownership of Aircraft originally appeared on Fool.com.
Alexander MacLennan owns shares of Air Canada, Bombardier, and Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Alexander 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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