Air Lease (AL, Financial) has been on my investment radar for a while, and the company continues to impress in terms of growth.
The positives for the stock continue with the company reporting strong results for the third quarter.
With the company's business model involving leasing of aircraft to airlines globally, the most important revenue driver to discuss is the visibility coming from lease rentals in the coming years. From that perspective, Air Lease is well positioned with $8.9 billion in contracted minimum rentals that implies 6.9 years of weighted average lease term. The lease rentals will ensure that revenue, EBITDA and cash flow remain robust in the years to come.
While stable revenues will come, the next important point is growth in the company’s fleet and its implications. Air Lease has a robust order book for aircraft with seven aircraft for delivery in the remainder of 2016, 34 in 2017, 44 in 2018 and 60 aircraft for delivery in 2019. As new aircraft are delivered, revenue and EBITDA will see sustained growth, and the stock is likely to trend higher.
The important point to mention here is that Air Lease has 91% of the order book on long-term lease for aircraft delivering through 2018 and 82% placed through 2019. In other words, as the aircraft are delivered in the next two or three years, they will immediately start generating revenue and cash flows.
The reasons to emphasize this point are as follows:
- With almost all aircraft to be delivered in the near term on long-term lease, the industry scenario looks robust and an increasing number of airlines are opting for leased aircraft rather than owning the aircraft.
- For Air Lease, growth is primarily backed by leverage and as new aircraft are delivered, the company will be using a higher proportion of debt to fund the purchase. However, with aircraft on long-term lease, debt financing will be relatively easy.
- As of September Air Lease had a total weighted average fleet age of 3.7 years. With aircraft delivery on a sustained basis even beyond 2020, the company’s average aircraft age will continue to decline. This is a positive as modern aircraft fleet is likely to command a higher duration of lease, which improves the cash flow visibility.
I want to get back to the company’s debt, which stood at $8.6 billion in September. While debt to equity is at 2.6, the company’s contracted cash flow to debt is at 115%, and this implies comfortable debt coverage. Importantly, EBITDA is likely to remain robust and I don’t see debt servicing as a concern for Air Lease. The BBB rating from Standard & Poor's with a “Stable” outlook underscores my point that debt is not a concern in the near term as well as in the long term.
However, I would like to point out here that Air Lease has an aggressive new aircraft delivery schedule for the next five to seven years, and this implies that dividends might not come for shareholders. That is likely to be offset by aggressive growth and stock upside on the back of sustained cash flow growth.
Another factor that is worth mentioning from a credit perspective is the fact that Air Lease took delivery of six new aircraft in the third quarter, and for the same period, the company sold seven aircraft. Therefore, sale of aircraft that are relatively oil is another source of cash inflow that backs new aircraft financing (besides debt and cash flows).
Overall, Air Lease is well positioned for sustained growth, and I am bullish on the airlines sector for the long term. I expect the company’s leverage to remain manageable and with swelling cash flows, the stock is likely to trend higher.
Disclosure: No positions in the stock.
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