The aviation industry is one of the strongest growth sectors globally but the puzzle for investors is how to cash in on the stock market.
Over the long run, airlines have shown they are not consistent profit growth flyers. Aircraft manufacturers have been great but the Boeing 737 Max 6 situation shows the kind of risks involved for investors.
Aircraft leasing companies could solve the puzzle. The leasing companies are essentially financiers and distributors of airplanes.
The advantages of leasing range from avoiding the need for up front capital to buy to convenience. Placing an order with a manufacturer means a two or three year wait. The leasing companies have a steady flow of purchases they can lease right away as needed. And they can return leased aircraft.
The global aircraft fleet was 14.7 per cent leased in 1990, is now 40.7 per cent on lease. Demand for new aircraft to 2030 will double the global fleet to 48,500 not counting replacement units.
The big risk with leasing companies are sudden jumps in interest rates that make leasing unattractive — an unlikely occurrence — and companies that hand back aircraft. Usually, they are re-leased within months.
Planes coming off 20-year leases are usually re-sold at a nice profit.
Today, Bizworld will briefly summarize four aircraft leasing operations.
Irish-based Aercap Holdings, priced around $44.58 US, is the world’s largest aircraft leasing company with $43.2 billion assets.
This operator has 363 aircraft from AirBus and Boeing with a few from Embraer. The fast-growing Asian market makes up 35 per cent of business.
Debt ratio of 3.3 times equity is higher than most competitors.
Los Angeles-based Air Lease Corporation, priced around $34.17 US, has $18.5 billion assets with 336 aircraft.
The company has commitments to buy $25.7 billion in aircraft on the books with Asia making up 45 per cent of its current fleet. Debt is 2.4 times equity.
Another Irish-based operator, Fly Leasing Company Limited, priced around $13.46 US, has assets of $3.7 billion with 113 aircraft flying. Asian leases are 33 per cent of business.
Debt is a high four times investor equity.
The only Canadian company in this group is Chorus Aviation, priced around $7.23. They have assets of $2.3 billion. Debt is 2.9 times equity.
Nova Scotia-based Chorus is a hybrid — operating airlines and leasing aircraft. The company flies the Jazz and Voyageur Airlines under contract to Air Canada. The contract was just extended but Chorus gave up some margin to get the long-term deal.
Aircraft leasing operations are only three years old for the company with 34 planes on lease — all of them from Canada’s Bombardier.
Canada’s big successful long-term investor Prem Watsa has poured $200 million into Chorus to expand leasing. And Air Canada took a $112 million stake in the company.
The Chorus dividend yields 6.6 per cent. Air Lease Corporation dividend yields 1.5 per cent. The others pay no dividend, preferring to plough all cash into growth.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at ronjoy@sasktel.net
