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Air Lease: Well-Positioned for Robust Growth

May 18, 2014 | About:
Faisal Humayun

Faisal Humayun

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On May 12, 2014, Air Lease (AL) reached a fleet size of 200 aircraft. This is just another achievement for the aircraft leasing company based in Los Angeles. This article discusses the key reasons to remain bullish on the company for the long-term.

Company Overview

The main business of Air Lease is to provide airlines worldwide with operating leases on new aircraft deliveries from its direct orders with Boeing, Airbus, Embraer, and ATR. As of May 2014, Air Lease had a fleet of 200 aircraft with another 327 aircraft scheduled for delivery over the next 10 years.

For the year ended December 2013, Air Lease clocked a turnover of $859 million, representing a 31% increase in turnover as compared of December 2012. For the period ended December 2013, the company also recorded a strong EBITDA of $786 million and an operating cash flow of $654 million.

Key Investment Positives

Strong Rental Backlog

Air Lease has a robust rental backlog for the fleet in operation. As of December 2013, the total future rental on non-cancellable operating leases was $6.2 billion. This includes a rental backlog of $883 million for 2014 and $840 million for 2015.

In other words, Air Lease has a strong revenue and cash flow visibility coming from the leased aircraft. This ensures that the company’s operating cash flows will remain robust in the years to come. More importantly, as new aircraft get delivered, the revenue and cash flow visibility will only increase. Investors can therefore expect gradually increasing cash flow from strong counterparties.

Robust Growth Pipeline

Over the next five years, Air Lease is expecting delivery of 145 aircraft (after delivery of four aircraft in 2014). Overall, Air Lease has a pipeline of 327 aircraft to be delivered over the next ten years. With the current lease backlog of $6.2 billion for 200 aircraft, it is likely that backlog will nearly double over the next five years with the delivery of another 145 aircraft.

In other words, the cash flow visibility over the next five years is robust and the company is likely to exhibit the growth it has been delivering in the recent past. I must mention here that the delivery of the new aircraft over the next ten years also requires a capital investment of around $27 billion.

This should not be a matter of concern as strong operating cash flows will support investment. Also, leased aircraft will not find it difficult to get financed.

From that perspective, all the 31 aircraft for delivery in 2014 have been leased out and 97% of the aircraft for delivery in 2015 have been leased out. This data underscores the global demand for aircraft and this should continue, primarily from the emerging markets.

Robust EBITDA and Cash Flow

I mentioned about the robust growth in EBITDA and cash flow earlier. This section will look at the numbers along with the debt to investigate on the company’s financial flexibility.

For the year ended December 2013, Air Lease clocked an EBITDA of $786 million, which has increased from $290 million in December 2011. This represents an EBITDA CAGR of 64.6% in the last two years.

Also, the operating cash flow has increased from $267 million in 2011 to $654 million in 2013 representing a operating cash flow CAGR of 56%.

I believe that this growth will continue as new aircraft are leased and this will support the financing of new aircraft. In terms of leverage, Air Lease had a debt to EBITDA of 7.4 and a net debt to EBITDA of 7.1.

While the leverage seems high, the interest coverage is comfortable and debt servicing should not be a worry. For the year ended December 2013, Air Lease had an EBITDA interest coverage ratio of 4.2 and an operating cash flow interest coverage ratio of 3.5.

Risk Factors

With a very robust lease rental inflow backlog, the only risk is related to a significant slowdown in the global economy. This can lower the lease rentals and also the lease demand. I however believe that the probability of this outcome is low with growth bottoming out in emerging markets and the developed markets showing more economic resilience.

Another risk, related to the first, is the leveraged backed growth for Air Lease. In a good economic scenario, debt servicing is not a concern. However, in an downturn, the operating cash flow might be negatively impacted putting pressure on the company with a relatively high degree of leverage.

Conclusion

Since its inception, Air Lease has exhibited strong growth and the growth is reflective of an efficient management team. The current lease backlog ensures steady cash inflow for Air Lease and the new aircraft pipeline ensures that robust revenue, EBITDA and cash flow growth will continue. Investors can consider this stock with a long-term perspective. Air Lease is certainly not expensive with a forward five year expected PEG of 0.57.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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