Air Lease Corp (AL), Southwest Airlines Co. (LUV): Another Way to Invest in the Airline Industry

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Airline-related companies have enjoyed investors’ favor this year. The iShares Dow Jones Transportation Average ETF (IYT) has outperformed the S&P 500 by rallying 20% on a year-to-date basis, while the S&P has rallied 15%, and it is trading in uncharted territories. In the airline industry, carriers and aircraft manufacturers capture most of the analysts’ attention. However, aircraft lessors play a key role in the operation of most airlines.

Air Lease Corp (NYSE:AL)

Air Lease Corp (NYSE:AL) has received minimal attention, but it may bring further capital appreciation to its shareholders because carriers are switching towards leasing aircraft as opposed to buying them, and the company has shown solid growth.

Fundamental analysis

Air Lease Corp (NYSE:AL) leases aircraft to several airlines around the globe. Major carriers that use Air Lease’s services include Air France, British Airways, Emirates, Korean Air, Qantas, Aeromexico, Southwest Airlines Co. (NYSE:LUV), and Spirit Airlines Incorporated (NASDAQ:SAVE) among others.

The company is trading at a trailing P/E of 23.44 and a forward P/E of 13.45, and its price-to-earnings-to-growth ratio is 0.70. Its balance sheet carries a sizable amount of debt, with a debt ratio of 1.88, and it offers an insignificant dividend payment of 0.33%. Although the company may not seem appealing at first glance, recent press releases indicate aggressive growth strategies, and the company may be considered to increase exposure to the airline industry.

Recent developments

According to its most recent quarterly earnings report released on May 9, the company showed impressive growth. The company’s revenue increased 45% for the three months ended March 31, 2013, to $191.99 million from $132.5 million for the same period in 2012. Its net income increased 49% from $26.9 million in 1Q2012 to $39.9 million in 1Q2013. This resulted in a 46% increase in its diluted earnings per share from $0.26 to $0.38.

During this period, the company acquired seven aircraft to expand its fleet to 162 aircraft, spread across 71 airlines in 41 countries. Five Airbus A319/320/321 for short hauls and two Airbus A330-200/300 for long hauls were acquired. The Asia Pacific carriers represent 39.2% of the fleet concentration, most of them being Chinese carriers. Therefore, the weakening of the yen should not be a concern to Air Lease because the company only leases its aircraft to SkyMark, a minor Japanese airline.

Future growth

From a forward looking view, airlines’ sentiment towards leasing aircraft has changed, as it is a more favorable strategy. Airlines immerse in debt if a new aircraft needs to be purchased, and the interest rates are usually not in the best interest of the carrier. For this reason, carriers opt for leasing aircraft, as it offers a more sustainable solution to their needs, and its debt does not grow.

Also, most airlines are seeing increasing passenger traffic according to their most recent monthly traffic reports. Hence, the demand for leased aircraft should remain strong in the near future, which would position Air Lease for net income growth.

Moreover, the demand is starting to pick up already. The company released several press releases in April which point towards growth in the interim. The following table summarizes the new leasing agreements by Air Lease Corp (NYSE:AL).

Carrier Aircraft Type Number of Aircraft Delivery Date Leasing Years Link
Transavia B 737-800 2 2015 and 2016 Unknown here
NAS Air A A320-200 3 Mid 2015 6 here
Sichuan Airlines A A330-300 1 12 here
Aerolineas Argentinas B 737-800 6 Late 2014 12 here
Ethiophian B 777-300 2 Mid 2015 12 here
KLM B 777-300 1 Beginning 2015 Long Term here
Korean Air B 777-300 2 Late 2014 Long Term here

Summary of Air Lease Corp (NYSE:AL) leasing agreements reported in April 2013. In the Aircraft type column, A represents Airbus and B represents The Boeing Company (NYSE:BA).

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