Air Travel Deceleration And Fleet Obsolescence Will Erode Value

Key Takeaways

• Growing regulation, supply chain issues, and increased competition threaten long-term fleet expansion, profit margins, and revenue growth.
  
• Advances in decarbonization could obsolete parts of the fleet, raising depreciation risks and potentially reducing future earnings.
  
• Global aircraft shortages and strong travel demand are driving higher lease rates, fleet utilization, and profitability for Air Lease, supported by a strong balance sheet and disciplined cost management.

Catalysts

An aircraft leasing company, engages in the purchase and leasing of commercial jet aircraft to airlines in the Asia Pacific, Europe, the Middle east, Africa, Mexico, Central America, South America, the United States, and Canada.

• Global economic stagnation, rising protectionism and growing environmental regulation could drive a long-term deceleration in air travel demand, especially in international markets, resulting in lower aircraft lease demand, shrinking Air Lease’s revenue base and curtailing fleet growth in future cycles.
  
• The company is at risk of substantial residual value and asset impairment losses as rapid advances in decarbonization technologies or new emissions restrictions could render portions of its fleet obsolete, accelerating depreciation expense and compressing future net earnings.
  
• Persistent supply chain disruptions and chronic delivery delays from Airbus and Boeing are likely to extend for years, significantly impeding Air Lease’s ability to expand its fleet as planned and constraining long-term revenue and earnings growth.
  
• Rising interest rates and tightening global credit conditions may substantially increase Air Lease's cost of capital over the long term, driving up interest expense and sharply eroding net margins despite the company’s current fixed-rate borrowings.
  
• Increasing competition from alternative sources of capital and newer market entrants in aircraft leasing will likely trigger price wars and margin compression, putting downward pressure on lease rates and limiting Air Lease's ability to sustain current profit margins and return on equity.

Air Lease Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Air Lease compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Air Lease's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 22.8% today to 18.5% in 3 years time.
• The bearish analysts expect earnings to reach $629.9 million (and earnings per share of $5.61) by about July 2028, down from $639.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the US Trade Distributors industry at 20.1x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Air Lease Future Earnings Per Share Growth

Risks

• The global demand for air travel remains robust outside North America, with airlines in Asia, Europe, and the Middle East reporting strong passenger traffic, forward bookings, and aircraft demand, which supports sustained high utilization rates and steady or rising revenue for Air Lease.
  
• Supply constraints at aircraft manufacturers like Airbus and Boeing are limiting the availability of new aircraft, causing airlines to retain and lease existing fleets for longer periods; this prolonged scarcity of aircraft supports higher lease rates and may boost Air Lease’s revenue and operating margins over the next several years.
  
• Air Lease’s balance sheet strength, bolstered by significant insurance recoveries and a record book value per share, provides increased financial flexibility and liquidity, enabling the company to pursue share repurchases, organic and inorganic growth, or increased dividends, all of which may support earnings growth and shareholder returns.
  
• The company’s portfolio is young, fleet utilization is at 100%, and lease yields are expected to trend higher for the next three to four years as lower-yield legacy leases roll off and are replaced by new leases at higher rates, directly supporting profit margins and earnings growth.
  
• Air Lease has locked in favorable forward purchase agreements with escalation caps for new aircraft and maintains largely fixed-rate borrowings, which helps mitigate cost pressures from rising interest rates or input prices, thus protecting net margins and supporting stable long-term profitability.

Valuation

• The assumed bearish price target for Air Lease is $50.99, which represents two standard deviations below the consensus price target of $63.71. This valuation is based on what can be assumed as the expectations of Air Lease's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $69.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $629.9 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $58.36, the bearish analyst price target of $50.99 is 14.5% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.