AerCap ramps up share repurchasing as acquisitions take a backseat
Dutch lessor AerCap is actively buying stock under its USD 50m share repurchase programme, as newly appointed CEO Aengus Kelly tightens the company's funding structure amid uncertainty in the global economy. Having reduced the average age of its 335-aircraft fleet to 5.4 years, the lessor is tempering asset acquisitions in order to focus on shareholder returns, Kelly told Aviation Exchange.
Proceeds from the sale of aircraft teardown subsidiary AeroTurbine, bought by ILFC earlier this month for USD 228m, have yet to be earmarked for specific transactions, but the windfall could be used for further share repurchases. "We are not here for growth for growth's sake. We are here to increase shareholder value," the CEO said. "When we look at an asset acquisition opportunity it has to be a better deal than buying back our own shares."
Despite the economic headwinds, AerCap last month entered into a purchase-leaseback agreement with American Airlines to deliver up to 35 Boeing 737-800s by 2014. AerCap's entry price compensated for the risk of Chapter 11 default, Kelly said, and the lessor will continue to be "opportunistic" when pursuing selected acquisitions.
"You want to make sure that your balance sheet is in a position not only to survive, if there is a downturn or a soft-patch, but to thrive," he explained. "It's being flexible and nimble and [having] the ability to move quickly that's critical."
Kelly continued: "In the case of the American transaction clearly there are significant risks associated with doing a large number of aircraft with any one airline. But when those risks are mitigated to a level that's acceptable to you, and the rewards on the pricing are at a good level, then you need to take advantage of that situation." He predicted that, in the event of bankruptcy, American would be likely to offload its fuel-inefficient, older aircraft rather than ditch AerCap's new 737 NGs.
With downside management at the forefront of his mind, the CEO said AerCap's funding facilities have been structured to take advantage of distress in the market. The lessor increased its balance sheet from USD 4bn to USD 9bn over the course of 2009/10 – a period when "all of our major competitors stood still because they were paralysed by the absence of available funding due to ... their debt covenants".
By contrast, the USD 775m revolving debt warehouse facility which AerCap extended by two years in June is effectively covenant-free. "A lot of my competitors' debt facilities have loan-to-value tests, and in a downturn they will get hit if the appraisers mark down the airplanes," Kelly noted. "It's covenants like that that can lead to significant difficulties for leasing companies, because it puts a strain on cashflows at the worst possible time."
AerCap's long-dated maturities also allow the company to weather volatile periods, and hedging with interest rate caps – rather than swaps or fixed-rate debts – shields the firm from higher borrowing costs, while exposing it to lower ones.
The decision to offload AeroTurbine was down to its success at disassembling most of AerCap's older fleet, Kelly said. "At the time we bought AeroTurbine we were like a mini version of ILFC, where a good percentage of our aircraft were approaching 20 years of age," he recalled. "Now we have less than 3% of our portfolio over 15 years of age – so AeroTurbine was very effective in dealing with our portfolio of older planes, and we no longer have the feedstock of aircraft to provide it."
Maintaining a modern, fuel-efficient fleet remains central to AerCap's strategy, the CEO affirmed, with a portfolio of 150 to 200 planes being the "absolute minimum" required to ensure a sufficiently diversified customer base. Kelly said that older aircraft assets which deliver a high yield in the short-term "can be a fool's gold".
Commenting on the challenges facing air finance providers, the CEO insisted that the sector's "Achilles' Heel" is its niche nature. "Where you have depth of liquidity you don't become as cyclical or as volatile as industries like ours where you don't," he said. "[In aviation] you only have a handful of lenders who can write USD 500m cheques, whereas if you look at autos and residentials you have maybe a thousand lenders who can do that."
AerCap issued its Q2 earnings update last week, unveiling net income of USD 72.8m excluding mark-to-market of interest rate caps, share-based compensation and the one-off charge relating to the buyout of the Genesis Lease portfolio.
The company signed new lease agreements for 16 aircraft in the quarter, while it delivered seven planes. Kelly did not elaborate on the pace of the share buyback scheme, though in a given day the company is limited to purchasing 25% of the average trading volume over the past four weeks – equivalent to about 125,000 shares. With the lessor's stock price having fallen 33% since February, he quipped: "The cheapest aircraft in the world today are available by buying AerCap's shares."
