AerCap Holdings N.V.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

AerCap Holdings N.V. is the world’s largest independent aircraft leasing company, managing a diverse portfolio of aircraft and engines and offering associated services to airlines globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

AerCap’s primary business model centers on acquiring and leasing aircraft to airlines around the world, capitalizing on the global demand for air travel.

Business Overview

AerCap Holdings N.V. (AER), headquartered in the Netherlands, is a leading global aircraft leasing company. It is involved in acquiring, leasing, managing and selling aircraft and engines. The company manages a vast portfolio of aircraft and engines, which it leases to a diversified set of airlines worldwide. The business model is designed to create value through the long-term operation of aircraft assets, benefiting from the recurring revenue stream generated by lease agreements with airline partners. In addition to leasing, AerCap also provides services such as asset management, aircraft trading, and engine maintenance.

  • Revenue Distribution: AerCap generates revenue primarily from leasing aircraft to airlines (as seen by operating lease revenue which make up 95-97% of total revenue). These leases are typically structured for several years, providing a fairly predictable revenue stream. The company is exposed to a wide variety of airlines, and geographical location. In order to avoid risk and diversify revenues, the company focuses on having a diversified client and geographical base. In order to diversify revenues further, the company has expanded into acquiring, leasing, selling and managing engines and other related assets.
  • Industry Trends: The aviation industry has seen several major shifts in the past decade. The pandemic had a major impact on the aviation industry, disrupting the global airline markets. However, recovery is underway, and there is increasing demand for air travel, driving demand for air-leasing. One key trend to keep note of is also airlines are becoming increasingly interested in more efficient and modern planes.

This means, that companies with older fleets might be at a disadvantage and struggle to find demand.

    Another key trend to keep note of is that there is an increase in global demand for regional travel and cargo transport. These trends will greatly benefit companies that have a diversified fleet and cater to both passenger and cargo airlines. 
    Finally, airlines are becoming increasingly focused on improving their sustainability profile by reducing carbon emissions. This means, that there is also an increase in demand for new generation aircraft that are fuel efficient. *    **Margins:** AerCap’s operating margins are relatively stable, ranging from the high-teens to the low-twenties percentage over the last few years. This is heavily dependent on the mix of airlines and leased assets in their portfolio, and in different countries and regions, as well as the terms for the lease. *   **Competitive Landscape:** The aircraft leasing industry is dominated by a few key players, such as AerCap and Avolon, as well as major airlines that own their fleet. Consolidation within this market is common, as companies seek to achieve scale and lower costs. This makes it more challenging for smaller firms to compete. The airline industry is also prone to disruption, as evidenced by recent bankruptcies of some major airlines. *   **What Makes the Company Different:** AerCap is the largest independent company focused on aircraft leasing. The scale of its business allows it to generate superior returns on invested capital, while also having increased purchasing power. The size of the business also allows it to have great bargaining power and leverage against airline clients, thereby increasing profit margins. Furthermore, AerCap also generates a good deal of business from managing, selling and trading aircraft, increasing revenue and opportunities. *   **Recent Developments:** AerCap recently completed the acquisition of GECAS (GE Capital Aviation Services), a significant milestone that solidified its dominance in the market. The integration of GECAS into AerCap is expected to create economies of scale and additional synergies. In 2022 they announced the completion of their integration. The transaction seems to have been completed successfully, however, that also means they now must also deal with the increased risk associated with such a larger portfolio of assets, such as increased risk on revenue and exposure to credit defaults from airlines. The company has also been expanding in the high-growth area of engines. However, in the most recent filings and earning calls it has noted the impact of inflation on the business, especially related to input prices and fuel costs.  *     **Financial Details:** The company's income and cash flow are heavily influenced by economic circumstances, interest rates, and airline profitability.

The company is very capital intensive and requires constant debt or equity issuance to keep it going.

During the past two years, the company's financials have been significantly affected by the ongoing Ukrainian conflict, which has created uncertainty around international travel and supply chain. Another major challenge the company faces is inflation, which is affecting aircraft values and airline profitability, meaning that they are less able to lease aircraft, or their creditworthiness may become a risk. However, the business has shown resilience and a return to profitability, however, that has also included increases in the overall revenue and margins for the company as well.

Moat Rating: 3/5

  • Justification: AerCap benefits from economies of scale and the sheer size of its fleet, which gives it an advantage over smaller competitors. This is enhanced by the integration of GECAS, giving it a massive scope advantage. The scale and scope advantages, plus the diversified nature of their leasing operations do make their revenue fairly resilient. However, that does not mean that the business is immune to outside forces. A disruption in the aviation industry, such as the COVID-19 pandemic, could quickly devastate the company’s revenues and threaten its long-term growth. Moreover, its dependency on a high level of capital and debt means that any changes in the availability of credit and or an increase in interest rates will negatively impact the business. Moreover, the value and usefulness of its assets are tied to airlines, making them highly susceptible to volatility and disruptions in that industry. Finally, the company has an extensive network that is geographically diverse, giving it greater negotiating leverage but also making it more susceptible to geographic risks. With a moat rating of 3, the company is good and has some strengths, but it is not overwhelmingly dominant and can be easily disrupted.

Legitimate Risks to the Moat and Business Resilience

  • Airline Failures: Airline bankruptcies and restructurings can cause significant losses for AerCap, as the airline may default on their contracts. This could also reduce demand for aircraft leasing and increase supply in the market.
  • Economic Downturns: A global recession or economic downturn could decrease demand for air travel, leading to reduced lease rates and a fall in profitability for AerCap.
  • Geopolitical Instability: Political turmoil, trade wars, and other geopolitical issues can also have a huge impact on the air travel industry, and therefore impact demand for leased aircraft.
  • Technological Disruption: The introduction of new airplane technology could make older aircraft obsolete, reducing their value, and thereby affecting AerCap’s revenue and profits. This is partly mitigated by the fact that new, more efficient aircraft typically take a longer period to be made, allowing AerCap to potentially adjust its fleet ahead of time.
  • Fluctuating Interest Rates: AerCap’s extensive debt burden is heavily affected by interest rates, meaning increases in interest rates might increase debt obligations, reduce revenue, and affect the overall profitability of the company.
  • Overinvestment in Acquisitions: Although buying up competing firms can provide an advantage, the company may be paying too high of a premium on new acquisitions, which leads to lower profitability and the destruction of shareholder wealth.
  • Accounting Changes: Accounting rule changes such as how leased and intangible assets should be represented on balance sheets, could create massive changes in the companies financial statements, leading to negative surprises.

As a result of the above mentioned risks, AerCap’s reliance on debt capital could prove to be detrimental to the long-term growth of the company.

Understandability: 2/5

  • Justification: While the core concept of leasing airplanes is straightforward, AerCap’s business operations and financial structures are quite complex and require specialized knowledge to fully understand. Factors such as aircraft valuations, lease structures, debt structures, and tax accounting can be highly confusing and require an intimate knowledge of accounting, law, finance, and aviation. To further complicate things, factors such as international law, foreign exchange rates, and regulations add layers of complexity that make the company relatively difficult to understand, especially for someone with limited financial knowledge.

Balance Sheet Health: 3/5

  • Justification: AerCap’s balance sheet has some strengths but also carries a few significant weaknesses. One strength is the high level of assets owned by the company, which make up 80-90% of the balance sheet. However, the company also has very high debt levels, with the company having $37.5 billion in total debt as of Q3 2023. Moreover, a large portion of assets consist of aircraft, an asset that is highly dependent on the stability and economic fortunes of the aviation industry. AerCap also has billions of dollars worth of intangible assets and goodwill. Furthermore, as mentioned before, the company requires continuous capital issuance to stay in operation. These factors are all working against AerCap, and make its balance sheet somewhat weak. This is why the company gets a balance sheet rating of 3 out of 5, and not higher. In order to give context on the scale of AerCap’s financial standing, the company has a total book value of 31 billion USD.

The overall balance sheet shows that the company is not in financial distress but is highly leveraged. The company needs to maintain a healthy cash flow from operations and new issuances of equity and or debt to pay down their debts and liabilities. This exposes them greatly to market risks.

Recent Concerns and Problems

  • Russian Sanctions: AerCap has been impacted by the sanctions against Russia in the ongoing conflict. However, since their dealings with Russia and Russian entities, it is relatively small part of their operations (less than 5%) and management has already written down and absorbed the losses in prior reporting periods.
  • Supply Chain Issues: AerCap has been impacted by global supply chain problems, such as labor shortages, parts shortages, and higher input prices. However, management is working on mitigating the impact of supply-chain disruptions in their financials. The company has also been affected by global increases in inflation, although their contracts are usually tied to a Consumer Price Index.
  • Global Uncertainty: AerCap has also been affected by the uncertainty in the global markets, as there are still some lingering effects from the COVID-19 pandemic, and the recent financial crisis of 2023. However, AerCap has been able to raise its earnings and revenue with time, while also increasing its margins, but it faces continuing difficulties in the market.