Deferrals are nothing new in aviation leasing

Aengus Kelly of Aercap says deferrals are nothing new in aviation leasing and they are to be expected.

Some Airbus deliveries to Aercap are being accelerated from 2018 to 2017, despite a delay in deliveries of P&W-engined A320neos.

“There has been discussion in the media regarding recent deferral activity by several airlines and what if any impact this has unless or is like AerCap.

:The reason is that the manufacturers know several things. Firstly, they know air traffic will grow and every 15 years it will approximately double. Secondly, they know they have a non-investment grade customer base in the airline. And three, they know they have a huge fixed cost phase in cash.

“They know the day the airlines signs the order, there is a high likelihood that they’ll have to come back and look for help. And when they do that, the price goes up significantly. It is part of the OEM business model and their profit margin to expect deferrals.”

“The only way to hedge these risks and meet future demand is to over commit on orders. That is why we see that orders are extremely cyclical and always have been, but deliveries are very stable and have been also. Deliveries closely track the growth in air travel.

“ It is to be expected that from time to time, certain regions or carriers become oversupplied and require deferrals. Clearly from our transaction activity, however in 2016, there continues to be solid demand for aircraft on a global basis and we don’t see that changing. Like the OEM, but unlike the airline, AerCap is able to sell its product wherever in the world there is demand.

“We are not constrained by geography.

“So looking ahead to 2017, we expect to see stable levels of growth in the market and this will be supported by the 8th year in a row of aggregate airline profitability.”

We think that going forward providing just one net income number, the GAAP number, and providing this component analysis would be a better way to kind of explain what’s going on with the business result.

The first thing is that we run a hedged book, so we are not exposed to rising rates on the book of business that’s written and the vast – and any least that’s placed on forward order has an automatic adjustment for any increase in interest rates. Now as we go forward, rises in rates have historically being accompanied by rises in lease rates.

Only when we feel that there is a fair risk and reward from the manufacturers, we certainly are not here to fill their backlogs. We’re here to make money for our shareholders. And if there is an attractive transaction with the manufacturers, then that’s fine. If not, I’ve no problem not buying a single airplane from them ever again. But, it has to be something that makes money for our shareholders and if there are deals are there tomorrow that make that happen, great. And if they never come, I don’t care.”

AerCap reported:

-458 aircraft transactions executed, including 126 widebody transactions.
-99.5pc fleet utilization rate for the full year 2016.
-7.4 years average age of owned fleet and 6.4 years average remaining lease term.
-98pc of new aircraft deliveries through 2018 and 78pc through 2019 have been leased.
-Over $3 bn of sales closed in 2016.
-$9.5 bn of available liquidity.
-Adjusted debt/equity ratio of 2.7 to 1.
Upgraded to investment grade rating by Moody’s.
$49.33 book value per share. [Traded 24Feb17 at $45.35].
Repurchased 5.7m shares in the 2016 Q4 for $241m and 25m shares in 2016 for $966m.

Net income of $1,046.6m for 2016 compared with $1,178.7m for in 2015. Net income and diluted earnings per share decreased due to various items, including sales of older aircraft during 2015 and 2016, which reduced average lease assets by approximately $1.6 bn.