Take a SWOT at Air Lease

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is easy to get overwhelmed when researching a potential investment. What really matters to the long term prospects for an investment, and what's just noise?  Remember, when you buy shares in a company you own a piece of that company – not just a three to five-letter ticker on the other end of your brokerage account login page. A great way to organize your research is to perform a SWOT analysis. Today we take a look at aircraft leasing company Air Lease (NYSE: AL).

Strengths

  1. Large barriers to entry. Not just anyone can start an airline or leasing company and acquire a massive stable of aircraft overnight. For instance, Air Lease plans to spend up to $16.7 billion purchasing new aircraft between now and 2020 – and that number gets larger every year.
  2. Efficiency. Air Lease sports the youngest and most fuel-efficient fleet in the world. In July the company agreed to purchase 75 737 MAX 8/9 aircraft from Boeing (NYSE: BA), which achieve 13% better fuel burn rates over the prior generation.
  3. Full steam ahead. As of June 30, 2012, the company had entered into agreements to purchase 294 new aircraft by 2020, which would bring their total to 396 aircraft - easily more than their closest competitors. 
  4. Growing, and growing, and... Revenues for 2Q 2012 were up 109.5% over the prior year quarter. Compared to the end of 2011 the first six months of 2012 saw fleet size increase 34%, average lease terms increase to 7.0 years from 6.6 years, and average fleet age decrease to 3.3 years from 3.6 years.
  5. Clear path forward. It is easy to buy hundreds of aircraft with money you don’t have when over 80% of your total projected 2016 fleet is already leased (they have leased 47 aircraft they don’t even have yet!) That demand should make the company feel relatively comfortable creating budgets for the next several years.

Weaknesses

  1. Large amounts of debt. Growing quickly in a capital intensive industry isn’t easy. As of June 30, 2012, Air Lease had over $4 billion in total debt and a 59.4% debt to assets ratio. That is in line with industry averages, but it could limit the company’s options should headwinds appear.
  2. After 2016 is up in the air. Of the 294 aircraft the company plans to purchase through the end of the decade, 174 are allocated for purchase after 2016, including 100 on a single order from Boeing. Any short term blows to growth could significantly alter Air Lease’s long term future.
  3. Attempting to grow in slow-growth environment. With so much of the world economy struggling to get back in the swing of things, how easily can Air Lease continue to grow?

Opportunities

  1. Demand is through the stratosphere. The company ended 2011 with all 102 aircraft it owned entered into lease agreements with 55 different airlines in 33 countries. That’s up from just 40 aircraft, 25 airlines, and 15 countries at the end of 2010.
  2. Emerging markets. Air Lease has focused on penetrating emerging markets, which generally contain airlines with fewer financing options. Thus, the company can negotiate more favorable lease terms than it could in more mature markets.  Nearly 49% of their total fleet (based on net book value) is located in Asia, Latin and South America, Africa, and the Middle East.
  3. Risk mitigation. Healthy profit margins are relatively easy to achieve when you require your lessee to pay for all aircraft maintenance,  insurance, taxes, operating expenses, crews, airport charges, and just about everything else in legalese jargon. All the company has to do (ahem) is lease out their aircraft.
  4. Rising fuel costs. The more money airlines have to spend on fuel costs the less money they will have to buy new aircraft, which will make leasing an attractive option.
  5. Emissions regulations. While this will add to flight costs for airlines, Air Lease's focus on fuel efficient aircraft could be a boon for business. It could go either way.
  6. Stabilizing airline industry. The bankruptcies and consolidations that rocked the industry in the early 2000’s are becoming more distant with each passing year. The leasing industry is poised to piggyback on the upswing.

Threats

  1. Competition is rampant. Leasing aircraft is nothing new. As a result, Air Lease must compete with more entrenched players, such as AerCap Holdings N.V. (NYSE: AER) and Fly Leasing Ltd (NYSE: FLY). Despite being the new kid on the block, Air Lease already owns a larger market cap and more assets than many of its rivals. 
  2. Fine print. The 2011 annual report states: "The full cost of an aircraft is not recovered over the term of the initial lease." That isn’t too difficult to believe when looking at the hefty price tag of a new aircraft – it is one of the incentives airline companies have to lease aircraft in the first place. Just be cautious and keep up with industry trends. Remember, quarterly reports are unaudited.
  3. Exposure to Europe. A full 42% (based on net book value) of their aircraft are leased to European airlines, which generated 45.6% of 2011 revenue. Emissions regulations, austerity, and Recession 2.0 have the potential to be a worst case scenario.
  4. Big aircraft are all the rage. The 787 Dreamliner recently made its inaugural commercial flight for United to much fanfare (and delays). Many other airlines plan to do the same. Will airlines gradually downsize their fleets by upsizing their aircraft?

Foolish bottom line

The lack of historical data for Air Lease (founded in 2010) makes comparing current results to any benchmark somewhat difficult. However, that also means it could be flying under the radar of analysts. I see a great growth opportunity ahead, but am not willing to jump in just yet. I have set a CAPScall limit to begin at $20.50 per share and could certainly start a position in 2013. I will be sure to disclose any future position in the comments section below.

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