AerCap has reported strong demand for aircraft assets as it reported its highest ever gain on assets sales in its second quarter results.
The world’s largest aircraft lessor reported a net gain on sale of assets of $166 million in the quarter ending June 30, 2023, which relates to 52 assets sold for $818 million. This is a significant increase when compared to the $35 million net gain made in the same period in 2022, relating to 29 assets sold for $386 million.
AerCap sold 17 aircraft, 29 engines and 13 helicopters during the period with a margin on asset sales of 25%.
AerCap’s net income for the second quarter of 2023 was $493 million, or $2.12 per share, with adjusted net income at $596 million, or $2.56 per share. Total revenue for the quarter jumped by 15% to $1.924bn, with total lease revenue up by 10% to $1.717bn driven by higher lease rates, an increase in power-by-the-hour lease rates due to higher utilisation rates and the gain on sales.
In the investor call on July 31, Aengus Kelly, chief executive of AerCap, said that demand for sales had never been higher and that the company was seeing high margins across the board for all assets, adding that all the 17 aircraft sold in the period were current technology units with around 40% of those sales going to airlines. Historically sales to airlines, Kelly said have been less that 20% but since the pandemic it has been as high as 50%. Kelly called this a “persistent trend” given the operating environment.
During the call, AerCap chief financial officer, Peter Juhas, emphasised the increase in margins on sold assets.
“We are seeing strong margins pretty much across the board for everything that we were selling,” he said, adding that the 52 sold assets number included “a fair number of “older assets and older aircraft” that the company is seeing “strong demand” for given the current environment. Kelly confirmed that the older aircraft being sold to airlines include “18 and 19 year old airplanes”.
Kelly emphasised the continued impact of the supply-demand imbalance in the production rates by the aircraft and engine manufacturers that was increasing demand for leasing aircraft, while the continued issues with new technology engine types was driving up demand for spare engine leases and sales. The AerCap team doesn’t expect that imbalance to be corrected for several years and that the fixes for the engine issues will take years to implement. Responding to an analyst question on US airline concerns on overcapacity, Kelly noted that US airlines have been the biggest buyers of its aircraft opining that even they don’t believe the OEM delivery schedules will be met. “Those concerns about overcapacity [are] based on schedule delivery dates. If I was a betting man, I wouldn't bet too much on those aircraft arriving on schedule,” said Kelly.
This current market dynamic, Kelly says, will keep demand for leased aircraft high even with a recession in the US and Europe given the growth of traffic in South East Asia and China. Sustained demand points to a heightened need for lift from lessors, so as a result of the market dynamic and of the back of a very healthy quarter for the company, AerCap has raised its earnings per share estimate for the full year from $7.00-$7.50 per share excluding gains on sales to $8.50-$9.00.
As of June 30, 2023, AerCap's portfolio consisted of 3,467 aircraft, engines and helicopters that were owned, on order or managed. The average age of the company's owned aircraft fleet as of June 30, 2023 was 7.3 years (4.3 years for new technology aircraft, 13.8 years for current technology aircraft) and the average remaining contracted lease term was 7.2 years.
AerCap has authorised another share repurchase programme for a total of $500 million by the end of the year. At year end, AerCap will have repurchased $1.5bn of its own shares where it continues to see considerable value.
Kelly explained: “We have continued to take advantage of the dislocation between private market professional aircraft purchasers and the value implied in our fleet by the public equity market. The book equity from the assets we sold in the second quarter was $176 million. We generated $166 million in gains on sale by selling the aircraft above book value. In addition, we generated a further $65 million in equity from repurchasing, approximately 300 million of shares at an 18% discount to AerCap’s book value. This meant we more than doubled our equity value by selling aircraft above book value and buying shares below book value, all the while improving the overall quality of our portfolio.”
AerCap’s leverage ratio declined to 2.51x during the second quarter – well below its 2.7x target leaving room for further share repurchases or investments in the future.