Eye on Plane Leasing Sector

by: Roger Nusbaum posted on: April 16, 2008 | about stocks: CAP / FLY / GLS / WLFC    
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The plane leasing segment has gotten crushed in the last few months.

I've written about these a few times with a combination of hope and skepticism. Most of them are scheduled to pay huge dividends (in the sevens and eights before the declines).

The primary business would seem to be simple. They own and service planes and they lease them to airlines. I wrote about them for TSCM quite a while ago and back then the client rosters were very geographically diverse, but the complexity comes from the balance sheet leverage and those high yields.

One point I have tried to make (and this has been echoed by some readers) is that when something yields 8% in a 3% world there is risk -- you either understand the risk or you don't. The context that I have talked about in terms of ever buying something like this (the hydro funds in Canada would be another example) has been to go small, like maybe 2%, into something like this and know that there is risk.

There has been a dislocation in the market and it has hit a lot of these levered products very hard. For some of them it is probably justified, and some of them are just going along for the ride. The dislocation will end at some point and the ones that have just gone along for the ride will be safer relative to themselves at that point.

The plane leasers are the type of thing that if they had done better for longer they would have been more popular, more people would have owned too much (like the Canadian Trusts when they got hit a year and a half ago) and we'd be hearing more about this.

Owning one of these (to be clear I do not) is not the worst thing but owning too much might be.

Disclosure: No positions

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Roger Nusbaum

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This article has 4 comments:

  •  
    anastos
    Apr 16 04:05 PM
    In particular, FLY is hindered by some complicated taxation laws on the dividend. Even the idiot proof guide on their website totally threw me off. I keep looking at it like it will suddenly make sense....between QEF elections and Irish withholding restrictions I just gave up....
  •  
    User 179334
    Apr 16 08:07 PM
    The leasing business is perhaps more art than straight forward finance. It would be beneficial to AYR, FLY, and GLS if they would take more of the approach that the Bulk and Oil Shippers have, and use their websites to educate potential investors, about the benefits of leasing to airlines, share how their business model is working. Also comment on how they do or do not get effected by what is especially bad in the general finance market. Also, if they would explain how they took precautions, against a failing customer.
  •  
    DSX Lover
    Apr 17 01:02 PM
    These things have come down, because they are heavy leveraged and keep missing the numbers. AYR and GLS have missed earnings the last 2 quarters. I won't be surprised if GLS misses again next week. FLY is the worst, borrowing in excess of Free Cash Flow to pay for the dividend. AYR and GLS have paid huge dividends above EPS because they been able to utilize the large depreciation expense, and easily available Finance from commercial paper to finance a large percentage of the fleet. Now the Financing is not that easy, and creditors are requiring lower debts on Net Asset Value of the Planes, which will contract the Dividend. AYR had to cut the dividend over 50%, and I assume that GLS will do so in the near term as well. I would wait until GLS reports before jumping in, AYR is interesting in the $10-$11 level with a 10% Dividend being supported by a dividend payout of 60% of EPS. Unlike the Shipping sector, where charterer's have to ship an excess of in demand for commodities, and Ship charter contracts are not dependent on fuel prices, the Air Leasing companies clients, are not as stable because the high fuel prices is putting bankruptcy pressure is smaller unprofitable airlines, making the business more risky, despite long-term leasing agreements with the airlines.
  •  
    Tokyo Picker
    Jun 03 06:58 PM
    I think you're misunderstanding the way this business works. As the fuel price goes up, the sufferers are not these guys, but the airlines who own older, less fuel efficient airplanes. Those older airplanes tend more to be owned by airlines. The newer airplanes are owned more by these lessors. When the pressure gets too much, the airlines go under. The shareholders/lenders of the airline are stuck with the old airplanes (as well as the legacy pension costs, etc). The lessors can easily get back their planes, even in the US (thanks to section 1110 of the bankruptcy code), and lease them to the younger, stronger airlines, thus creating a virtuous cycle.

    Obviously there is a frictional cost to this repossession and releasing, which can be quite substantial - the planes may be idle for a few months, although that is not happening yet. That's why, if you look at the history of operating leasing in the last 20 years, operating lessors with short-term lease-specific debt and hair trigger covenants (e.g. GPA) go under, whereas operating lessors with higher credit and more stable sources of funding (e.eg. GECAS and ILFC) survive. Obviously the backing that GECAS and ILFC have is not as valuable anymore. But the trick in picking winners here remains looking closely at the terms of their debt . If they are stable on that, they will make a lot of money. Provided that they do not try to buy cheap by buying older generation aircraft - that is a quick and easy form of suicide these days.


    On Apr 17 01:02 PM DSX Lover wrote:

    > These things have come down, because they are heavy leveraged and
    > keep missing the numbers. AYR and GLS have missed earnings the last
    > 2 quarters. I won't be surprised if GLS misses again next week. FLY
    > is the worst, borrowing in excess of Free Cash Flow to pay for the
    > dividend. AYR and GLS have paid huge dividends above EPS because
    > they been able to utilize the large depreciation expense, and easily
    > available Finance from commercial paper to finance a large percentage
    > of the fleet. Now the Financing is not that easy, and creditors are
    > requiring lower debts on Net Asset Value of the Planes, which will
    > contract the Dividend. AYR had to cut the dividend over 50%, and
    > I assume that GLS will do so in the near term as well. I would wait
    > until GLS reports before jumping in, AYR is interesting in the $10-$11
    > level with a 10% Dividend being supported by a dividend payout of
    > 60% of EPS. Unlike the Shipping sector, where charterer's have to
    > ship an excess of in demand for commodities, and Ship charter contracts
    > are not dependent on fuel prices, the Air Leasing companies clients,
    > are not as stable because the high fuel prices is putting bankruptcy
    > pressure is smaller unprofitable airlines, making the business more
    > risky, despite long-term leasing agreements with the airlines.
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