Record Passenger Traffic Will Support Strong Aircraft Leasing Demand Through 2026

Key Takeaways

• Strong passenger traffic and aircraft demand are driving higher lease rates and revenue growth, benefiting Air Lease's profitability.
  
• Fully booked order book and improved financial strategy will enhance future revenue streams and financial flexibility.
  
• Litigation and operational disruptions, interest rates, and reduced exposure to high-yield leases could impact Air Lease's financial stability and profitability.

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.

• Air Lease is benefiting from record passenger traffic and high demand for commercial aircraft, which is expected to lead to higher lease rates and increased revenue over the next several years.
  
• The company anticipates higher lease extensions and lease rate factors, particularly for wide-body aircraft, positioning it well for future growth and improving profitability.
  
• Air Lease's aircraft order book is fully placed through 2026, providing a strong future revenue stream from lease agreements on new, attractive aircraft types.
  
• The company plans to achieve a target debt-to-equity ratio of 2.5:1 by the end of 2025, which is expected to enhance financial flexibility and improve net margins by reducing interest expenses.
  
• Air Lease expects a steady upward trajectory in fleet lease yields, driven by the expiration of lower-yielding COVID-era leases, thus improving revenue and potentially returning to mid-teen adjusted pretax ROEs in the next 2-3 years.

Air Lease Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air Lease's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 19.7% in 3 years time.
• Analysts expect earnings to reach $654.6 million (and earnings per share of $6.11) by about April 2028, up from $372.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 13.9x today. This future PE is lower than the current PE for the US Trade Distributors industry at 19.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Air Lease Future Earnings Per Share Growth

Risks

• The ongoing litigation concerning Air Lease's Russia fleet insurance claims presents a risk, as it could impact the company's financial stability and insurance recovery revenues.
  
• Disruptions in aircraft productions, particularly with Boeing, could impact future deliveries and consequently affect Air Lease's revenue from leasing new aircraft, potentially limiting growth in revenues.
  
• Elevated interest rates for a prolonged period could suppress Air Lease's net margins as the increase in lease rates may not fully offset higher borrowing costs, impacting earnings.
  
• Reduction in Air Lease's exposure to Chinese leases, which were among the most profitable, could negatively affect future net margins and overall profitability due to reduced high-yielding assets.
  
• Lower end-of-lease revenue compared to prior periods might indicate potential challenges in maintaining superior revenue levels, especially if lease extensions or re-leasings do not achieve higher rates as anticipated.

Valuation

• The analysts have a consensus price target of $54.857 for Air Lease based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $67.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $654.6 million, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 8.2%.
• Given the current share price of $46.38, the analyst price target of $54.86 is 15.5% higher.
• 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.