Why Shares Of Air Lease Corp. (AL) May Be Worth Watching?

(RTTNews) - Shares of Air Lease Corp. (AL) are 17% of their 52-week high of $50.7. With a diversified global customer base exceeding 90 airline customers in more than 50 countries, the commercial aircraft lessor seems well-positioned to benefit from a strong order book, robust asset base, domain expertise of the founder, consistent revenue growth, upbeat long-term industry fundamentals, such as growing passenger traffic, craft replacement demand, as well as increasing role played by lessors in air travel.

A growing preference among Airlines to lease aircraft vs. owning is driving up the role of lessors in air travel. In 2017, about 39% of world fleet was leased vs. just 0.5% in 1970. This incredible growth stems from reasons such as less stress on cash and financing, fleet flexibility options, and elimination of residual value risk. Residual value is the estimated value of a fixed asset at the end of its lease or at the end of its useful life. A lessor uses this metric to determine lease payments. A premium lessor like Air Lease seems well-poised to capitalize from this paradigm shift in the last few decades.

Replacement demand or the need for new aircraft to replace existing aged, less-efficient airplane is an important growth driver for Air Lease. But, age is not the sole reason why airlines would replace a craft. The aircraft's flight hours, pressurization cycles undergone by the craft and increased maintenance requirements may also play a key role in replacement decision. In view of the above factors, Air Lease targets aircraft for replacement starting at 8 years, although aircraft may have an expected useful life span of 25 years.

A lot of research goes into aircraft acquisition at Air Lease. The company follows a strategy of procuring young, fuel-efficient, latest-technology aircraft, which it can own for the first one-third period of the craft's useful life, to maximize residual values and minimize the risk of obsolescence.

Steven Udvar-Hazy, Air Lease Corp.'s founder and chairman, is not nicknamed "godfather of aircraft leasing' for no reason. Touted as a key champion of the design of Boeing's 787 Dreamliner, his opinions are said to influence product-shaping decisions at Boeing and Airbus.

While placing new aircraft orders directly with manufacturers, the company drives cost advantages by negotiating for high quality products and competitive pricing, while strategically targeting the replacement of aging aircraft with modern technology aircraft. For new aircraft deliveries, the company sources components separately, instead of buying the components from the airframe manufacturers, in a bid to achieve lower pricing. Through these strategies, the company tries to keep aircraft acquisition costs low, while meeting customer configuration requirements.

At March 31, 2018, Air Lease had a fleet of 253 owned and 49 managed aircraft, with an average fleet age of 3.9 years and remaining least term of 6.7 years on a weighted-average basis. Single-aisle craft accounted for 77% of the fleet, and Twin-aisle for 23%.

According to Boeing Current Market Outlook 2017-2036, demand in the commercial aviation market is expected to more than double over the next two decades, leading to a doubling of jet airplanes fleet to 47k. To support this fleet growth, Boeing forecasts a need for more than 41,000 new deliveries for growth and replacement over the next 20 years, with Single-aisle airplanes comprising more than 70% of the new deliveries. Boeing forecasts that airlines may need more than 29,500 new Single-aisle airplanes over the next 20 years, stimulating growth for low-cost carriers. All this bodes well for Air Lease.

Air travel has been resilient, despite the 9/11 attack, gulf wars, crude shocks and recession Global passenger traffic grew 7.6% in 2017, with Asia-Pacific recording the highest growth. Passenger volume is expected to grow 3.7% globally in the next 5 years, yet another catalyst for Air Lease.

The company focuses on financing the business on an unsecured basis. Borrowers usually require very high credit ratings to be approved for unsecured loans. Air Lease has grown unencumbered assets to $14.4 billion at end of March 31, 2018 from $6.5 billion in 2013, which it says, provides a solid foundation for its investment grade credit ratings. Unencumbered assets represent assets that are not pledged as collateral and free from creditor claims or liens. Air Lease has investment grade credit ratings from three agencies.

Based on a strong order book, the company expects to double its fleet size in five years. Typically, the company places an aircraft, 18-36 months prior to delivery and currently is 100% placed through 2019, and 81% placed through 2020 on long-term leases. The company ended the first quarter of 2018 with $23.5 billion in committed minimum future rental payments, while signing an order for 8 additional Boeing 737-8 MAX aircraft with deliveries beginning in 2020 through 2022.

In the past 5 years, fleet expansion has led to consistent revenue growth from $859 million in 2013 to $1.52 billion in 2017. Analysts are modeling $1.69 billion for 2018, representing 11.1% growth from 2017 levels.

The company is slated to report second quarter earnings on August 9, 2018. Analysts are modeling earnings of $1.06 per share, up 15% from year-ago EPS of 92 cents, and revenues of $400.84 million, representing an increase of 5.2% from last year's $380.96 million. We believe, the company is likely to beat EPS estimates for the second quarter.