Airline Leasing Stocks Set to Fly High

Written by Luke Burgess
Posted October 24, 2018 at 4:00PM

It's a luxury that we all take for granted: At any time, day, or night, we can buy an airline ticket and fly to almost any destination in the world.

That's actually pretty incredible when you think about it. None of your ancestors could say the same thing. Only 100 years ago, aviation was only getting off the ground — pun intended. Commercial travel was just a futuristic idea to your great-grandfather.

The world's first scheduled passenger flight took off on January 1, 1914. It was a simple 21-mile trip between two Florida cities: St. Petersburg and Tampa. But it set the stage for a massive industry to come.

It wasn't until after World War II that the commercial airline industry really took off. OK, I'll stop with the puns...

The United Nations World Tourism Organization (UNWTO) estimates that there were approximately 25 million tourists in 1950. And by the early 1970s, that figure had increased tenfold.

Today, UNWTO says there are some 1.2 billion tourists each year. And estimates say this number could reach 7.8 billion by 2036.

According to Alexandre de Juniac, the International Air Transport Association (IATA) director general and CEO: "All indicators lead to growing demand for global connectivity. The world needs to prepare for a doubling of passengers in the next 20 years."

Despite long-term rising passenger trends, major airlines are often hesitant to acquire new airplanes. And that's because of their enormous costs.

The price tag of a brand-new commercial airplane off the lot can run up to $600 million. And due to concerns over market volatility and individual company circumstances, several airlines companies have switched to leasing aircraft instead of buying them...

Aircraft Leasing 101

Leasing an aircraft is similar to leasing a car, except that it can cost you anywhere from $250,000 to $500,000 per month.

Aircraft-leasing companies will sometimes lease their airplanes to investors or private individuals. But their main customers are airline operators. When airlines project more passengers than they have planes, they lease aircraft to make up the difference.

The aircraft-leasing industry will likely see sustained growth over the coming years as air traffic swells.

The global aircraft-leasing market size is expected to grow at a compound annual growth rate (CAGR) of 4.75% to 6.33% through 2023. This shows a promising picture of the aircraft leasing industry.

The 5 Fastest-Growing Markets in Terms of Annual
Additional Passengers Over the Next 20 Years
  • China: 921 million new passengers for a total of 1.5 billion.
  • U.S.: 401 million new passengers for a total of 1.1 billion.
  • India: 337 million new passengers for a total of 478 million.
  • Indonesia: 235 million new passengers for a total of 355 million.
  • Turkey: 119 million new passengers for a total of 196 million.

(Source: IATA.)

Major risks to the industry include rising fuel costs and politics. And that's particularly with trade protectionism and travel restrictions.

The decline in global energy prices since 2014 has helped airline operators increase profit margins. But an increase in global energy prices could cut into those margins.

Meanwhile, the IATA says trade protectionism and travel restrictions could mean 1.1 billion fewer passenger journeys than anticipated.

Aircraft-leasing stocks have moved mostly sideways throughout 2018. Air Lease Corporation (NYSE: AL), Aircastle Limited (NYSE: AYR), and AerCap Holdings (NYSE: AER) are down a bit year to date. And Fly Leasing Limited (NYSE: FLY) is barely higher.

But this sideways movement might be a good opportunity to acquire quality names in the industry.

Companies like AerCap and Air Lease are upgrading their fleets to keep up with commitments. Healthy credit ratings, increases in leases, and incoming cash flow from operations will likely keep these firms afloat and the aircraft-leasing industry buoyant for the coming years.

Good investing,

Luke Burgess Signature

Luke Burgess
Contributing Editor, Park Avenue Digest

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.

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