Plane Lessors Headed to the Desert

 This article in Forbes about aircraft leasing companies names some publicly traded stocks that appear cheap: Genesis Lease (GLS), AerCap (AER), and Aircastle (AYR). But that cheapness may be a bit deceiving. Plane leasing looks like a great business. Despite U.S. and global economies facing a slowdown and oil prices making all time highs, demand for planes is still very strong.…

 This article in Forbes about aircraft leasing companies names some publicly traded stocks that appear cheap: Genesis Lease (GLS), AerCap (AER), and Aircastle (AYR). But that cheapness may be a bit deceiving.

Plane leasing looks like a great business. Despite U.S. and global economies facing a slowdown and oil prices making all time highs, demand for planes is still very strong.

However, the more I think about it, the more I realize that this business cannot escape the fate that mirrors its customers – the airlines. I could be wrong, but this business doesn’t really have a sustainable competitive advantage. It’s basically just an arbitrage business: a lessor needs to be able to borrow at a low rate than airlines and lease planes to an airlines at a rate greater or equal to what they could borrow. Airlines get to keep planes off the balance sheet, show high return on capital, but may try to renege on the lease when times get tough (many did that after 9/11).

I think this is where things get dicey. A global slowdown and a recession will do what it does every time: send airlines in a place so frequently visited by them – bankruptcy. They’ll renege on the leases and leasing companies will get their planes back. But unless they decided to start flying those planes themselves, demand will not be there. Planes will make their usual pilgrimage to the desert.

Please read the following important disclosure here.

Related Articles

Why I No Longer Mind Losing an Argument

Why I No Longer Mind Losing an Argument

Reflecting on my experience with Dale Carnegie's book, I share how it transformed my approach to criticism and debate, and why I no longer mind losing an argument.

How do I get any research done since I travel a lot?

I get asked at times: How do I get any research done since I travel a lot? To answer this question, I need to explain how we do research.
The Growing Pains of Maturity

The Growing Pains of Maturity

Many times, we bought because they were in their “junior year”; this is what made them undervalued. Our research led us to the conclusion that their difficulties were transitory and that as they matured the market would revalue them.
What is the Value of Apple? How do we evaluate risk?

What is the Value of Apple? How do we evaluate risk?

Today I will share the Q&A section of the letter. Every time I am almost finished with the client letter, I ask clients to send me any questions they have about their portfolio or other topics. I answer these questions in the Q&A section.

Leave a Comment