AerCap (AER) – An Unconventional Quality Business

Generational supply/demand imbalance creating tailwinds

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AerCap Holdings (AER) Thesis

Now let’s give some details about the stock we will be discussing for paid subscribers: AerCap (NYSE: AER). Here are some highlights:

• AER trades at an 8.8x forward P/E, and despite an accelerating book value per share growth profile, the company trades at 1x forward P/B.

• The aircraft industry is in a deep supply and demand imbalance, with the deficit of airplanes likely to persist for at least the next five years. This could arguably be the best cycle for aircraft lessors that has ever existed.

• The AER story features an interesting equity multiple arbitrage opportunity, whereby the company is selling older aircraft at large gains on book value, and using these proceeds to aggressively buy back stock which is trading at a significantly lower book multiple. Last year, the company repurchased ~18% of its market capitalization. We believe this strategy will underpin strong book value per share (BVPS) growth, with BVPS growing at ~27% year-over-year in 1Q24.

Friend of the firm, David Steinthal, the Chief Investment Officer of L1 Capital International, penned an excellent writeup of AER in his June 2024 quarterly letter which alerted us to the opportunity. David is a sharp investor who knows the business inside out and we have but a small fraction of the knowledge on the business that he does. Special thanks go to David for his help in getting us up to speed on AER.

Business Overview

AerCap is the largest aircraft lessor in the world. They own and manage 1,717 aircraft (1,534 of which are owned by AER, the remainder are managed), over 1,000 engines, and more than 300 helicopters[1]. The company has ~300 customers around the world.

Here are some quick details on AER:

• AER listed in 2006 on the NYSE. The company is headquartered in Dublin.

• The company is the world’s largest owner of commercial aircraft, the world's largest Airbus A320neo Family lessor, and the world's largest 787 owner.

• The weighted average utilization rate for AER’s owned aircraft was 98% during FY23. Aside from the pandemic period when the utilization rate dipped to 94% in FY21, AER’s utilization rate has never fallen below 98% in the past 15 years. In 4Q19 it got to as high as 99.8%! This gives us confidence that there is room for AER’s utilization rate to creep higher from current levels.

• The average age of AER’s owned fleet is 7.4 years (weighted by book value). This is a relatively young fleet, and the company has recently emerged from a fleet refresh cycle that saw it invest in new technology aircraft. New technology aircraft represent 71% of AER’s aircraft fleet. These are newer, more fuel-efficient aircraft that are the most in-demand aircraft by airline customers, and thus are easier to lease out. This new technology mix will grow, given that new technology aircraft represent more than 90% of AER’s 327 unit order book. The company is anticipating new technology aircraft to comprise ~75% of its fleet by the end of 2024¹, placing it very well competitively against other lessors who have failed to rejuvenate their asset bases to the same extent.

Source: Company filings

• Aircraft lessors have been gaining share of the global aircraft fleet. In 2003, 30% of the global fleet was leased. This has moved up to 50% in 2023, and three-quarters of the incremental aircraft supply over the last five years has been aircraft on operating leases.

Source: Company filings

How does AER make money?

AER owns a fleet of aircraft that it leases out to customers. The company makes money by taking a spread between what they rent their aircraft out for and the cost of funding (i.e., how much interest they’re paying on their debt, as well as the cost of equity).

As the world’s largest aircraft lessor, AER benefits from a scale advantage due to the following reasons: