AL

Publicly traded companies mentioned herein: AerCap Holdings NV (AER), Airbus SE (AIR FP), Air Lease Corp (AL), American International Group Inc (AIG), Avolon Holdings Limited (Private Co w/ Public Debt), Boeing Co (BA), China Eastern Airlines Corp Ltd (CEA; 670 KH), China Southern Airlines Co Ltd (ZNH; 1055 HK), CIT Group Inc (CIT), Delta Airlines Inc (DAL), General Electric Co (GE), Hawaiian Holdings Inc (HA), HNA Investment Group Co Ltd (000616 CH), Icelandair Group hf (ICEAIR IR), Jet Airways India Ltd (JETIN IN), Norwegian Air Shuttle ASA (NAS NO)

Highlights

The presenter is short shares of the second largest aircraft leasing company, Air Lease Corp (AL). He believes it has been overearning during the “best cycle for airlines and traffic that has ever been seen (in no small part driven by low jet fuel prices).” At $40, the risk/reward appears to favor bears. In his opinion, AL has been going out on the risk curve in terms of its customers base to maintain net interest margin (NIM), and once the excessive gains on the sale of older planes stops (a recent phenomenon driven by favorable industry dynamics), earnings should decline. At the same time, China has made it clear that it wants to see more lessors in the market, and hundreds of new leasing companies have “popped up all around the world” to chase what have been attractive yields (including hedge funds, major banks, etc.). If the value of old planes drops and yields on new leases declines, leaving AL with just the NIM, earnings could come in closer to $3/share in 2019 and book value (BV) would fall. In this scenario, there could be downside to the high $20s.