EADSY - Air Lease Corporation: Should Continue To Trade Choppy And In A Tight Range

Summary

• Air Lease Corporation is enjoying a rebound from pent-up demand from COVID-19, but still faces some hurdles in the year ahead.
• How to look at the upside from here in the near and long term.
• A look at how the recession, inflation and higher interest rates may impact the performance of the company in the remainder of 2022 and heading into 2023.

Air Lease Corporation ( AL ), while still feeling some of the impact associated with COVID-19, especially in the Chinese market, has been fairly resilient, especially having to write off $802.4 million on 27 aircraft leased to Russian Airlines.

The main issue there was management initially stated there was no reason to write off assets, which provided support to its share price earlier in 2022. Not long after that, the share price crashed to a 52-week low of $29.75 before jumping to a little over $41.00 per share before pulling back again to about $30.00 per share on Sept. 26. Since then, it has made another upward move to about $35.00 per share, where it stands as I write.

The point there is it has traded very choppy over the last year, while gradually declining; that is likely to continue going forward.

In this article, we'll look at Air Lease Corporation's latest earnings numbers , whether its recent rebound is sustainable, and how things look in light of the weakening economic conditions and rising interest rates.

Latest numbers

AL reported $561 million in revenue in the quarter , up 7 percent year-over-year, while diluted earnings per share was $0.90 per share.

Much of the improvement came from a decline in the impact of restructuring and the growth of its fleet. But the writing off of Russian aircraft in Q1 continues to weigh on the company, as the loss of revenues from those planes offset the performance of AL in the reporting period.

One positive note on Air Lease's operating expenses is, while interest expenses were up 7 percent year-over-year because of a boost in its average debt balances, it was able to mitigate higher interest rates because of the fixed-rate strategy it uses to fund the business, consequently, its composite funding rate was up marginally, increasing from 2.82 percent last year in the same reporting period, to $2.85 percent this year.

At the same time, insurance premiums paid in the quarter climbed by $4 million, along with an increase in expenses associated with "aircraft transition."

As for its balance sheet , the company has liquidity of $6.7 billion in the quarter, and an "unencumbered asset base of 27 billion." With a forward order book of $26 billion, the company continues to look fairly solid, especially in light of the limitations connected to deliveries from Airbus ([[EADSF]], [[EADSY]]) and Boeing (BA).

The good news is, demand remains strong. The bad news is, the company is not able to take full advantage of that because of lack of aircraft to meet the level of demand. But within Air Lease's existing fleet, it'll be able to perform at a high level.

Demand and challenges ahead

The company noted that demand has been increasing strongly in some markets, led by the Asian market, with growth in Japan up 112 percent year-over-year and India up 55 percent, As expected, China was lower, but still climbed by 45 percent over the previous year, in spite of its zero-Covid policy.

The company stated domestic volumes are now within about 10 percent to 15 percent of 2019 volume levels in the majority of markets. At the global level, overall traffic remains down 30 percent from 2019, suggesting significant room for improvement going forward.

In the South American market, the company expects that market to perform in the near term, led by Brazil, which is already surpassing 2019 levels. While the pent-up demand for travel is well understood, the big question is how long that demand will remain in place if the global economy continues to face headwinds, and interest rates continue to climb in light of growing inflation. In other words, demand is one thing, the ability for prospective customers to pay for that desire to travel is another.

So far, consumers have continued to be willing to pay for travel-related experiences, but that could change as costs continue to rise for the remainder of 2022, and at least through the first half of 2023, in my opinion. I draw that conclusion from my belief that the Federal Reserve has at least another couple of interest rate hikes coming in the near term, as well as similar hikes by central banks in other countries. That could easy dampen consumer sentiment and cause consumers to tighten up spending.

Share price expectations

On a historical basis, AL has been trading in a predictable range over the last ten years, with a floor of around $25.50 (with the exception of immediately after the pandemic crisis), and a triple top over that time of approximately $49.00 per share. I don't expect that will change over the next couple of years, based upon the size of AL's fleet, as it waits to grow its fleet in the midst of delayed deliveries.

The share price of AL has traded in a choppy pattern over the last decade, as well as during the last year. That should continue on for the foreseeable future.

As for the next year or two, I expect the share price of the company to remain choppy and volatile. It's about $6.00 per share, up from its 52-week low, but should struggle to return to its 52-week high of $50.99. Over the last year, once its share price approached the $45.00 and a little higher, Air Lease has struggled to retain that level, and has pulled back each time to lower lows. A lot of that was related to writing off the Russian aircraft, but it has struggled to regain momentum since then.

Conclusion

The company does have a nice backlog, and while not being able to grow its fleet at the levels it wants, still has over 400 aircraft in its fleet at this time. Assuming market demand doesn't turn against it, Air Lease has the capability of at least finding support for the remainder of 2022, and possibly through 2023.

As mentioned, macroeconomic conditions remain challenging, and even though current demand remains strong, I do have concerns over how long that'll last if the Federal Reserve and other central banks boost interest rates beyond what the market things it'll do.

Under that scenario, there's a strong chance consumers will pull back because of rising costs. And if the recession goes deeper for longer, there is no doubt in my mind AL will struggle during that time.

Over the longer term, once consumer sentiment improves, Air Lease Corporation has positioned itself for decent growth as it adds to its fleet and demand returns to the market for a sustainable period of time.

Either way, AL has performed in a choppy fashion for over the last decade, and it's going to take time to return to, or surpass, its previous highs.

The question going forward will be whether or not Air Lease will continue to raise its dividend, or even if it may have to cut it some.

With its strong balance sheet, Air Lease could continue to increase rates in the weak economic environment, but it isn't going to do that at the expense of positioning itself for long-term growth by growing its fleet and entering new deals.

I expect Air Lease Corporation to continue to trade choppy for a prolonged period of time, with lower highs and slightly higher lows.

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