It wasn't so long ago that many companies were getting into the aircraft leasing space and Wall Street was cheering them along. After all, emerging market demand was supposedly going to have customers rushing to airports and buying tickets hand over fist to travel, and airlines were going to enjoy a prolonged period of blemish-free prosperity. Along the way, established operators like AerCap (NYSE:AER), Fly Leasing (NYSE:FLY), and Aircastle (NYSE:AYR) enjoyed a solid run as the likely beneficiaries of more airlines turning to leasing and an attractive spread between lease rates and debt costs.
And then along came reality.
Weaker economic conditions in Latin America, China, and Russia have certainly had an impact on emerging market air travel demand and there are now valid concerns about the impact of a glut of widebody aircraft. What's more, the low oil prices that once looked like a boon for airlines and air travel have become a challenge in their own right as they reduce the value of more modern, more fuel-efficient aircraft for lessees.
With all that, AerCap is off about 25% from its 2015 peak and has been trading below book value for some time. There are certainly valid concerns remaining in the leasing industry - will long-term air travel demand growth projections of around 5% hold up, will higher debt costs materialize and shrink margins, will the company continue to be able to successfully turn over its fleet? Even so, I believe that AerCap could liquidate its fleet for 20% to 40% more than today's share price, and I think that underpins a value call for risk-tolerant investors.
Amid Multiple Market Worries, AerCap Holdings Seems Too Cheap