Air Lease Corporation (AL, Financial) has moved sideways to lower in the last year with the stock declining by 15.9% during this period.
In particular, Air Lease stock has been weak as market participants are concerned that weak economic growth in Asia Pacific will translate into weaker leasing activity for Air Lease. However, the concern is overdone and the correction in the stock is a good opportunity for long-term investors to consider exposure to the stock.
China’s GDP growth was above 8% for more than two decades and even if China grows at 5%, I don’t see that as a worry as long as the country’s banking system remains strong. Therefore, 5% growth is likely to be the new normal, and it does not necessarily imply that the leasing industry will take a big hit. China’s air travel is ever increasing, and I expect the trend to continue. Further, China and India with 2.5 billion of the world’s population will drive significant growth for the leasing industry in the next five to 10 years. Even when the U.S. was on a growth path, there were phases of recession and depression, but the long-term trend remained on the upside. I expect the same for China and India.
A good example of the point comes from 2008-09 when airline passenger traffic declined after the financial crisis. However, it did not take long for passenger traffic to trend higher again. Another point worth noting here is that, in the long term, China’s slowdown is likely to be offset by higher GDP growth in India.
Air Lease has 31, 30 and 39 aircraft for delivery in 2016, 2017 and 2018. This might seem as a concern considering the current slowdown in emerging Asia. However, considering the fact that 84% of the company’s aircraft for delivery through 2018 have been leased, the slowdown concern seems exaggerated. In the next three to five years, all aircraft for delivery will be leased well in advance even with the slowdown in consideration.
A direct implication of this point is that, as new aircraft are delivered, the company’s cash flow will improve and credit metrics will remain strong even with increasing debt. For air leasing companies, credit metrics need to be watched closely as growth is leverage backed. On that front, Air Lease is likely to remain well positioned in the coming years.
From a credit perspective, Air Lease has $8.8 billion in minimum future lease rentals with $7.7 billion in debt as of December 2015. Therefore, with contracted cash flow to debt of 115%, I don’t see current level of debt as a worry for investors.
Air Lease has strong fundamentals indicated by BBB- rating from Standard & Poor's, and I expect the company’s fundamentals to remain strong in the next three to five years. While slowdown in Asia is a concern in the near term, investors should use this weakness as an opportunity to buy themes related to Asia for the long term. Air Lease, with a stable cash flow model and with a big growth pipeline for the coming years, is worth considering at current levels.
Disclosure: No positions in the stock.
