Rarely does one company have multiple advantages over its competitors like Air Lease (AL) does. It has the most experienced management team who practically invented the aircraft leasing model, asserts Doug Gerlach, growth stock expert and editor of Investor Advisory Service.
Air Lease also has the lowest cost of funds and lowest overhead in the industry. These pluses have been overshadowed by the catastrophic impact of the Covid pandemic on the global travel industry. If recovery in U.S. domestic travel is any guide, people yearn to venture out and overseas travel should recover.
Air Lease Corp. was formed in February, 2010 by Steven Udvar-Házy, the man who created industry-giant International Lease Finance Corp. (ILFC) in the 1970s. Including Executive Chairman Udvar-Házy and CEO John Plueger, eight of Air Lease’s ten top executives come from ILFC. The entire company has about 120 employees. We believe the Air Lease team knows its industry better than anyone else.
Aircraft leasing companies buy planes, then lease them to airlines around the world. Why would airlines lease rather than buy? It’s about return on capital, the desire to maintain a good balance sheet, and access to aircraft which must be ordered years in advance. Air Lease’s debt is rated investment grade and has the highest rating of any stand-alone aircraft lessor.
The volatile nature of the airline industry suggests that equity capital is also very expensive. If this is true in the United States, with fairly easy and cheap access to capital, imagine how much more difficult aircraft financing must be outside of well-developed markets.
Just 7% of Air Lease’s planes (measured by book value) are in the U.S. and Canada. About 44% are in Asia/Pacific (14% in China), 32% in Europe, 6% in Latin America, and 11% in the Middle East and Africa.
As of June 30, Air Lease owned 182 Airbus planes and 172 Boeing aircraft. The company has orders for 338 additional aircraft. About 93% of planes scheduled for delivery through 2022 and 80% through 2023 have been placed under long-term leases with customers. A clause in leases protects Air Lease with interest adjustments in case rates rise before delivery.
The appetite for travel should return as the Covid pandemic subsides, and someone must own the planes. Fuel savings, noise restrictions, and comfort should also push modernization of airline fleets. We believe Air Lease is the best positioned lessor with the newest fleet, lowest overhead, lowest cost of funds in the industry, and best management team.
Based on its order book and a recovery in the health of global airlines, we believe Air Lease can grow its sales by 16% and profits by 24% annually over the next five years, resulting in EPS as high as $10.
If the high P/E of 11.4 applies, the stock price could reach $114. The potential annual return exceeds 23% including a modest 1.5% dividend yield. We see a downside risk of 32% to $29, the average low of the last five years.