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Aircraft Demand Is Flying High
10/18/2007 12:00 am EST
Jon Markman, editor of Jon Markman’s Strategic Advantage, finds an aircraft leasing company that’s benefiting from the boom in global commerce.
Global commerce is making the world smaller, increasing the amount of people who are traveling, whether for business or pleasure, and allowing emerging markets to modernize.
To meet these demands, more aircraft are needed to transport passengers and cargo to far-away places. And our commercial aircraft lessor, Aircastle (NYSE: AYR), is just the company to benefit from the rising demand for more aircraft.
How tight is the market? Order books at Boeing and Airbus stretch to 2012. Of course, this rising demand for more aircraft can be traced to the large boom in global commercial air travel, which has helped successfully incubate a plethora of new airlines based in emerging markets such as East Asia and the Middle East—areas newly enriched by the recent boom in commodity prices.
With aircraft in great demand and supply tight, you would think that there are great opportunities for investment in aircraft lessors like Aircastle. And you'd be right.
Unfortunately, investors didn't see this over the summer, and the company took a bit of a hit. During the credit crisis, investors shied away from all flavors of asset-backed securities, including the aircraft-backed debt that Aircastle sells to help fund its purchases. It is likely that, within this context, Aircastle's management decided to pull the trigger a little early on another infusion of equity capital.
Although Aircastle really didn't need to revisit the capital markets until 2008—with a $1-billion debt securitization issue expected around mid-year—upcoming pre-order payments for new aircraft probably forced their hand to hold another equity offering; otherwise, the company could have risked losing their valuable order slots due to financing difficulties.
The order slots that I am referring to are the 15 new A330 air freighters that Aircastle has placed with Airbus. The new planes are set for delivery in 2010 and 2011, but Airbus will begin levying payments on them soon. These types of payments usually come due about two years prior to the delivery of the aircraft, which means that Aircastle should start receiving big bills from Airbus in the next few months.
The [$635 million it raised in its] recent secondary offering should cover the costs of at least the first two payments to Airbus.
Now that the market for asset-backed securities has cooled significantly, and with this most recent equity infusion sating the demand from the Airbus order, Aircastle can use the proceeds from next year's debt securitization on other acquisitions as it continues to grow its fleet of aircraft, which now stands at 69.
The current dip is giving you a great opportunity to add to you AYR positions or start a new one. So, before shares really take flight, I recommend that you get on board now. Continue to buy AYR for my $50 target. (It closed below $32 Wednesday—Editor.)
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