Will Aircraft Leasing Companies Hit Turbulence?-Minyanville

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Will Aircraft Leasing Companies Hit Turbulence?

Vitaliy Katsenelson May 12, 2008 3:15 pm

Will Aircraft Leasing Companies Hit Turbulence?


		Fate too closely tied to customer base.

A recent Forbes article about aircraft leasing companies names some publically traded names that at first blush look cheap -- Genesis Lease (GLS), AerCap (AER) and Aircastle (AYR) -- but that cheapness may be a bit deceiving.

Plane leasing seems like a great business. Despite headwinds for airlines -- a slowdown in the U.S and global economy and oil prices reaching all time highs -- demand for planes is still very strong.

But the more I think about it, the more I realize this business can't escape the same fate as its airline customers. I could be wrong, but the industry doesn't really have a sustainable competitive advantage.

It's basically just an arbitrage model: As lessors, they need to be able to borrow at a low rate and lease planes to airlines at a rate greater or equal to what they could borrow. For their part, airlines get to keep planes off the balance sheet and show high return on capital, but may try to renege on the lease when times get tough.

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This is where things get dicey. A global slowdown coupled with a recession will do what it does every time: Send airlines into a place they visit frequently - bankruptcy.

Airlines will renege on the leases and the aircraft leasing companies will get their planes back. But unless they decided to start flying those planes themselves, demand won't be there.

Planes will make their usual pilgrimage to the desert.

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tags:

AER, GLS, GENESIS, AERCAP, AIRCASTLE, AIRCRAFT, LEASING, GOBAL

Comments (9)

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Lou Galbraith

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05-19-2008, 11:26 am
Your article points out some good points about airlines and recessions. However here are some additional points to consider. If you look at the airline industry over the past twenty years you will see there were many global events that k Read More

Dean Simmons

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05-19-2008, 11:46 am
I would think the airlines would look at the total cost to operate a plane. A newer plane would certainly have lower fuel costs and lower cost to maintain. But if the older plane is already paid for it is unlikely that the difference in operating cos Read More

Paul Schmitt

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05-20-2008, 11:05 am
While I agree with one comment--"demand for planes is still very strong"--I disagree with most of the rest of the article. Professional lessors build a portfolio of credit and aircraft types with an eye toward keeping their planes leased Read More

Lou Galbraith

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05-20-2008, 10:42 pm
Dean, Your point is well taken. I did some quick calculations on some airliners financials. Fuel costs represents about 30+-% of operating costs. Ownership costs (depreciation etc but not interest) were about 7+-% of operating costs. Rep Read More

Jasper Boogaard

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05-29-2008, 8:16 am
Nice to see there are people interested in this topic. At the moment I am writing my MSc graduation thesis on the impact of how the next economic recession will influence the aircraft lease company. Some of my findings concerning the above discussion Read More


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