Shares of aircraft lessors take off in tight market for planes

It has been a good year to own airliners—or stocks and bonds from companies that do.   

Travelers around the world are dusting off their passports and buying tickets again, nudging global passenger counts closer to pre-Covid levels. But Airbus SE and Boeing Co. have struggled to shake off their own pandemic production doldrums, limiting the supply of new jets.

That is boosting the fortunes of the aircraft-leasing industry, a group of financial firms that own about half of the world’s airliners and lease them to carriers. Investors are taking notice, driving these companies’ bond and share prices higher.

The industry’s unsecured bonds, which were among the biggest losers in Bloomberg’s broad corporate-bond index last year, are among the index’s best sectors so far in 2023. Shares of Air Lease Corp., a large publicly traded American lessor, have added 16% in 2023. The New York listing of AerCap Holdings NV, a larger Irish competitor, has gained 8.3%.

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Fueling an improved outlook for lessors have been rising lease rates, which analysts say reflect a tight market for airliners as rising demand outstrips supply. In recently signed deals, airlines have leased Boeing 737 MAX jets for more than $300,000 a month, Cowen analyst Helane Becker said, up 20% or more from deals signed during the pandemic.

In December, global passenger traffic hit 77% of the volume recorded in December 2019, just before the pandemic hit. China’s rapid reopening this year will likely accelerate the recovery. 

Meanwhile, Boeing Co. and Airbus SE have delivered 2,500 fewer aircraft than they would have if they had continued to produce at 2018 levels, estimated Joe McConnell, deputy co-chief investment officer at Castlelake LP, a privately held investment firm that leases and finances aircraft.

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Decades ago, airlines owned nearly all of their own fleets. But as the industry was deregulated in the 1970s and passenger volumes grew in regions beyond the U.S. and Europe, leasing firms found a growing role furnishing airlines with planes on demand.

Many of the leasing industry’s biggest customers are carriers in Asia, South America and Africa, but major U.S. carriers lease portions of their fleets as well. American Airlines Group Inc. was AerCap’s most important client by revenue in 2021, contributing 7.6% of its lease income.

Of the large U.S. airlines, only Southwest Airlines Co. has an investment-grade credit rating, a distinction that can help fund new-plane purchases inexpensively. Carriers sometimes find it more economical to lease their jets—typically for 12 years at a time—because financing the purchase of an airliner can be cheaper for a leasing company than for an airline with poor credit.

As some of Boeing’s and Airbus’s biggest customers, leasing companies can also angle for favorable pricing.

"If you’re a small airline and you go to Boeing or Airbus for five aircraft, you won’t get as good a deal," Ms. Becker said.

Investors fled from aircraft lessors when the pandemic hit, fearful that the global travel shutdown would crush airlines’ finances and disrupt their lease payments. In 2020, Air Lease shares fell 77% through March 18 that year, compared with a 26% drop in the broad S&P 500 and a 58% decline for S&P’s airline index.

But the industry pushed through in better shape than some traders initially feared. AerCap posted a 2020 loss after taking a $1.1 billion charge against the value of some of its fleet but returned to profitability in 2021. Air Lease stayed in the black both years and reported a pretax adjusted profit for 2022 this week.

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The industry’s resilience has heightened its appeal as an investment, said Andrew Wellington, chief investment officer at Lyrical Asset Management. AerCap is among the 33 stocks Lyrical owns in its U.S. value equity fund.

"Unlike the airlines, Air Lease and AerCap didn’t lose billions during the pandemic, they made money," Mr. Wellington said. "There’s never been a complete shutdown of air travel before, and now they’ve proved they have a durable business model."

Lyrical favors investing in leasing companies over airlines because of their relative simplicity. Weather, staffing challenges and logistics can trip up an airline’s operating results—as they did for Southwest in December—but lessors are usually insulated from day-to-day contingencies, he said.

Still, the pandemic recovery hasn’t been a straight shot. Last year, Russia’s invasion of Ukraine became lessors’ latest setback. When war broke out and sanctions ruptured business ties, more than 400 aircraft owned by Western lessors were stuck in Russia, according to research firm Cirium. Many have continued to crisscross Russia in service with domestic airlines there.

Through last year’s third quarter, AerCap has booked charges of $2.3 billion related to the conflict, and Chief Executive Aengus Kelly has cast doubt on whether more than 100 of its jets still in Russia will ever be recovered. Air Lease has written off $802.4 million worth of planes. Both are pursuing insurance claims.

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On a November call with analysts, Mr. Kelly said the conflict has demonstrated the strength of the leasing industry’s business model, arguing that spreading planes around the world reduces its exposure to regional challenges.

"We have come through Covid, the Russian aircraft write-off, and we have still hit our target debt-equity ratio ahead of schedule," Mr. Kelly said, citing a key financial metric.