AerCap Flags a New $500 Million Share Repurchase – Buyback Wednesdays

 

AerCap is the global leader in aviation leasing with a fleet value of  $34.7 billion. There is a notable upward trend in aircraft leasing, with approximately 48% of the global commercial aircraft under lease agreements. The company had a record third quarter in terms of leasing extension rates, which were as high as 80%!

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Key Insights

• AerCap has an attractive portfolio of over 1,700 aircraft, approximately 1,000 engines and over 300 helicopters, and an order book of 380 of the most in-demand aircraft in the world.
• New technology aircraft comprise 69% of its aircraft fleet.
• The global air travel industry has rebounded post-pandemic, providing strong demand for AerCap’s leases.
• Leased aircraft have tripled over the past 20 years.
• AerCap repurchased approximately 20 million shares and leased, purchased and sold 219 assets in Q3 2023.
• The positive impact of share repurchases as well as the strong underlying performance of the operational business, has led to annualized book value per share growth of 18% over the last six quarters.
• The company revised its full-year earnings guidance upwards twice this year.

AerCap, headquartered in Dublin, Ireland, specializes in offering a diverse portfolio of assets for lease, including narrow-body and widebody aircraft, regional jets, freighters, engines, and helicopters. The company’s core strategy revolves around acquiring sought-after aviation assets, ensuring efficient financing, and employing interest rate hedging when deemed advantageous. It became the largest aviation leasing company in the world following the acquisition of International Lease Finance Corporation (ILFC) in 2014 and GE Capital Aviation Services (GECAS) from General Electric in 2021.

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The company’s operations faced disruptions in the last three years, attributed to a combination of factors. These include the halt in air travel caused by the COVID-19 pandemic and challenges arising from the Russia-Ukraine conflict, which hindered the company’s ability to repossess airplanes leased to Russian airlines.

Global Travel Trends

Global air travel has experienced a rapid resurgence following the COVID-19 pandemic. Nevertheless, worldwide travel remains 12% below the levels seen in 2019. High aircraft lease extension rates of around 80% this quarter clearly indicate demand is growing. Widebody lease extension rates were over 90%.

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AerCap Leases

AerCap employs a methodical approach to lease management, ensuring that it avoids excessive single-year re-leasing risks. When the company acquires an aircraft, it typically secures financing through debt, with maturities spanning from 5 to 12 years, aligning with leases of similar durations. This strategy enables a balanced correlation between lease income and debt repayments.

Valuation

AerCap shares are trading at a substantial discount to the sector median with forward P/E of 6.57 and forward EV/EBITDA of 8.46. This undervaluation is likely due to concerns about higher interest rates increasing its financing costs.

Profitability and Growth

AerCap shows robust profitability with a high gross margin of 55.54% and strong net income margin of 33.77%. The gross margin is in line with its peer Air Lease Corporation (AL) but the net margin is much higher. The company’s return on equity of 15.86% is double that of AL’s return on equity of 7.78%.

Cash Flow and Debt

AerCap has $2.66 billion in cash and short-term investments as of September 2023, which is double compared to what it had in September 2022. The company’s current assets are also twice its current liabilities.

Long-term debt has increased considerably from $28.5 billion in March 2021 to $47.5 billion in September 2023. This is mainly because of the GECAS acquisition in 2021 and the fact that AerCap has been acquiring aircraft.

AerCap’s 6-K filing stated that, as of September 30, 2023, the company’s existing sources of liquidity were sufficient to operate its business and cover approximately 1.7x of its debt maturities and capital requirements for the next 12 months.

Share Repurchases

After pausing buybacks due to the pandemic, the leasing giant repurchased a significant number of shares this year, the highest it has done in any year so far. It has reduced its share count by 35.7 million shares during the course of this year and it is notable that it financed these repurchases without borrowing money. The shares were repurchased at an average price of $58.03, a discount of around 26% to current book value. These repurchases have allowed the company to mitigate the impact of the overhang from GE sales which has reduced its stake in AerCap from 45% at the beginning of the year to approximately 14% today. AerCap also repurchased approximately 28 million shares from GE for a total of around $1.6 billion.