Fly Leasing – NYSE:FLY

Company Background: 

Fly leasing is a small cap company in the airplanes leasing sector. It is headquartered in Dublin and it has a fleet of 84 planes and 7 engines at the moment.

Their fleet is externally managed by BBAM, the world’s third largest aircraft lease manager, which owns 23% of FLY shares.

Currently, its major geographical exposure is Asia (Malaysia 18%, India 16%, Philippines 9%, Indonesia 8%, China 6% and Thailand 3%) accounting for roughly the 60% of its book value.

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Company data (01/08/20)
Market Capitalization206.5 Mill $
Revenue FY19464.4 Mill $
EBITDA426 Mill $
Debt (03/20)2’199 Mill $

What is the business of the company:

Fly leasing makes money renting its aeroplanes and engines to airlines. It usually arranges contracts which last from 5 to 10 years. 

The aircraft leasing model works best upon the conflux of the following: access to low-cost capital, firming aircraft values, improving lease rate factors, and robust global demand for aircraft.

Fly leasing acts as a lessor of planes. It buys the planes and rent them to airlines. As its credit ratings are better than the airlines because its business is less risky than commercial airlines, it has access to cheaper finances.

The average life scheduled amortisation is 4.5 years.

Why it is an interesting company?

The air transportation industry is going through exceptional times. It has been one of the most affected sectors by the Covid-19 pandemic. Nevertheless, the share price of lessors has fallen roughly the same as the airlines. We understand the type of risk that both of them have is not the same as lessors have long-term contracts and get paid independently if the plane is used or not. The risk for lessors is the bankruptcy of the airlines. Moreover, the demand for leasing should increase as airlines will be focusing capital on paying back support. 

Fly Leasing peers have bounced back notably since April, but Fly is still close to those levels. It has less debt than its peers and no important maturities until 2022. The main problem is its exposure to Asia (where the governments are not helping airlines). However, the pandemic’ situation is much better there than in the rest of the world. It is also worthily to consider that its fleet averages 7.8 years, which is 2 years more on average than Air Lease and Aer Cap, its main competitors. 

Current situation: 

Many governments have provided significant financial assistance to airlines. However, it has happened mainly in Europe and America so far. By contrast, Asian’s governments have decided not to rescue the airlines. As a consequence, Fly Leasing’ stock has suffered more than its peers since March.

Air India is backed by the government ,and it will not have payment problems. Nevertheless, Air Asia and Philippines airlines are looking for private investors to put capital.

In the meantime, Fly leasing has granted payments deferrals to for lessees representing ~70% of their annualized rental revenue in this second quarter. They expect approximately $90 million to $95 million of rent deferrals in the second through fourth quarters. 

At the time this report is written, there is only one lessee that has gone bankrupt and gave back the (2) planes, it has been Aeromexico at the beginning of July.

Fly has no orders in the aircraft manufacturers.

Financial review: 

Since completing their major portfolio acquisition in late 2018, Fly Leasing has been the last 12 months selling aircrafts and diminishing its debts. Currently, their net debt-to-equity is 2.1 times, their lowest in history.

Earnings Trends*

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*Data from Bloomberg

Conclusion

Commercial flights have recovered from the bottom of April. Currently, we are around 65% YoY. It is expected to continue slowly recovering the 2019 levels. It can take 3-4 years regarding IATA estimations. 

However, in my opinion, all the sector presents an interesting opportunity of a turnaround in the next 12 months, and specifically Fly, as the size of the gap with its peers is not justified by the previous arguments (qualitative).

Fleet

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Debt

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