Air Lease Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Air Lease Corporation (AL) is an aircraft leasing company that acquires new commercial aircraft and leases them to airlines worldwide.

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.

Business Overview:

Air Lease Corporation (AL) operates in the aircraft leasing industry, purchasing new commercial aircraft directly from manufacturers like Boeing and Airbus and then leasing them to airlines globally. AL does not own the aircraft, but rather leases them out to airlines for a fixed time period. The company’s revenue streams primarily consist of lease rentals and maintenance revenue, and to a lesser extent, aircraft sales. AL strategically purchases new, in-demand aircraft and provides financing to airlines who may not be able to purchase them outright.

Industry Trends:

  • Strong Demand for Air Travel: As of 2024, global air travel continues to recover, driving the demand for aircraft leasing. Airlines are actively seeking to expand fleets to meet increased passenger volumes and new demand.
  • Preference for Fuel-Efficient Aircraft: Fuel costs remain a concern, making fuel-efficient aircraft (such as the Airbus NEO family) highly sought after. Airlines continue to focus on minimizing operating costs while reducing carbon footprint.
  • Supply Chain Disruptions: The lingering effects of supply chain constraints continue, leading to delays in the deliveries of new aircraft from Boeing and Airbus and increasing the value of existing aircraft.
  • Rising Interest Rates: Rising interest rates have increased the cost of debt, making it less economical to finance growth through debt. This impacts the cost of capital for aircraft leasing.
  • Geopolitical Uncertainty: Geopolitical situations such as the war in Ukraine may impact the demand for air travel, particularly in and around certain regions.

What Makes Air Lease Corporation Different?

  • New Aircraft Focus: Unlike some leasing companies that focus on older planes, AL primarily buys new aircraft directly from manufacturers. This allows them to offer the latest technologies and maintain a more modern, efficient fleet.
  • Strong Manufacturer Relationships: AL’s strong relationships with Boeing and Airbus allow the company to secure priority delivery slots, even with supply chain disruptions.
  • Flexible Leasing Options: AL offers customized leasing agreements with a variety of terms, which meet the specific needs of different airlines. This flexibility makes them an attractive partner for a variety of carriers.
  • Global Reach: With a global network of airline customers, AL is less dependent on single regions and can offset regional fluctuations in demand.
  • Limited Direct Competition: The competition to sell these new planes is basically limited to a few major players due to the complicated nature of the leasing model.

Financial Analysis:

  • Revenues: AL’s revenues are heavily dependent on lease revenue from airlines with additional income from sales of aircraft and other services.
  • Margins: AL’s operating margins have traditionally been strong, but is facing margin compression due to increased interest rates and cost of capital.
  • Growth: Air Lease has achieved rapid growth in the past but is susceptible to cyclicality from the air travel industry and external factors.
  • Debt: The company uses large amounts of debt to fuel its operations.
  • Cash flow: Free cash flows can be lumpy and depend greatly on aircraft purchasing plans and sales.

Latest Financial Performance:

Air Lease’s Q3 2024 Results:

  • Air Lease reported diluted earnings per share of $1.16 for Q3 2024, and adjusted diluted earnings per share of $1.79, compared to a 2023 Q3 EPS of $0.84.
  • Revenues were at $691 million.
  • Lease revenue saw an increase as well as aircraft sales volume and value.

Recent Challenges

  • Rising costs and interest rates: AL’s earnings have been affected by increased interest expense and operating costs. They are actively managing their fleet and contracts to offset the impacts and reduce costs in other areas, but will continue to face these challenges.
  • Supply chain: The aircraft supply chain continues to be volatile. As of November 2024, management noted that they have seen some impact of delivery delays. These delays may cause some disruption in future earnings.
  • Geopolitical conditions: The effects of geopolitical uncertainty are still affecting airlines.
  • Lease rate increases: Management commented they are aggressively seeking to increase lease rates and believe the current lease rate increases will help offset the higher interest rates.

Management Commentary: Management is primarily focused on securing long term contracts, managing the fleet carefully and maintaining a favorable financial outlook by using its debt facilities wisely. They believe that the demand for air travel remains strong and the demand for new, fuel-efficient aircraft is especially strong.

Moat Analysis:

Based on the criteria, Air Lease appears to have a moderate, not wide, economic moat.

  • Intangible Assets: AL possesses some intangible assets in the form of long-term relationships and contracts with manufacturers and established airlines, though these are not exclusive to them, as such. These have a high durability but might be eroded if other companies can offer better incentives or pricing.

  • Switching Costs: Switching costs exist for airlines, but they are not exceptionally high for major airlines. If a newer model has many benefits, major airlines will switch providers for lower costs. However, there is a certain hurdle as the airline would need to find a new airline lessor and find ways to adjust all the aircraft it had acquired from its previous partner which could take some time.

  • Network Effect: AL’s international reach somewhat creates a network effect, because airlines may find it attractive to lease aircraft in their preferred locations, especially in times when it is difficult to purchase it. However, this moat can also be eroded as other companies can establish a wide geographical reach.
  • Cost Advantages: As opposed to being a low-cost operator, AL is able to leverage its scale and connections in the industry to purchase planes cheaper. AL also benefits as they mostly acquire newer model planes, which typically have reduced fuel costs. Given the overall nature of their operations, and all the factors, Air Lease has what would be described as a narrow economic moat. The rating is therefore: 3 / 5

Business Resilience: AL’s business is particularly vulnerable to several risks, such as economic downturns that reduce air travel, rising costs, interest rates fluctuations, and manufacturer delays, all of which can significantly impact free cash flows and profitability. However, AL has good scale, strong relationships with key players, and a diversified global client portfolio, which should help it navigate these conditions. Overall, AL is relatively resilient, despite significant risks associated with the airline industry.

Understandability Rating: The business model of Air Lease Corporation is somewhat complex as it includes aircraft leasing, asset management, and financial operations that are spread across the globe. It needs an understanding of financial markets, interest rates, aircraft technology, and aviation economics. It’s not easy to see why such a large operation is successful.

The understandability rating is: 2 / 5

Balance Sheet Health Rating:

The company’s balance sheet has a large debt load and is very leveraged. Furthermore, it has several off-balance-sheet items that adds complexity to understanding the true financial position of the company. While their current assets largely exceed their short-term liabilities, their long-term liabilities and debt obligations are substantially larger than their assets. The total liabilities are roughly 2 times larger than total assets, implying a higher risk. While this is normal and typical for companies in the industry, investors have to watch it closely. The overall credit ratings have been rated as BBB-, which is at the borderline of investment-grade. The rating is also very susceptible to the movements of the company’s operations, including their profitability as well as interest rates.

The balance sheet health is therefore: 3 / 5