AerCap is betting on itself, with plans to continue purchasing back stock through the third quarter this year.

The lessor is buying itself up at a discount because it offers a better value proposition than aircraft purchases today, AerCap chief executive Aengus Kelly tells FlightGlobal.

"It comes down to capital allocation and the choices available to you," Kelly says. "It's your shareholders' money and you have to redeploy it to maximise the benefit to your shareholders, within risk limits. The choices you have are to pay down debt, buy aircraft, buy another company or buy your own company."

On 3 May, AerCap disclosed that its board of directors had approved a new share-repurchase programme, which authorises total repurchases of up to $200 million through 30 September. On 14 May, AerCap's stock was trading at a price-to-book-value ratio of 0.94.

With an orderbook for over 400 aircraft – 76% of which are new-technology narrowbodies – AerCap will pursue growth as it takes delivery of new equipment from the OEMs as well as investing in shares.

Kelly says the lessor can acquire aircraft cheaper from the OEMs and therefore is not currently active in the sale-and-leaseback market. In fact, the last time AerCap closed a sale-and-leaseback was five years ago.

Over the past 36 months, the Dublin-based lessor has bought back about one-third of the company while simultaneously reducing leverage since its purchase of ILFC in 2013. Since 2014, AerCap has paid down nearly $9 billion in debt.

"Most companies that buy back that much of their company have to increase leverage," says Kelly. "We reduced it significantly."

AerCap continues to be a net seller of aircraft. From 2015 through 2017, the company sold 291 aircraft and purchased a total of 142, its annual report shows.

"Any leasing company can pick out a few airplanes that they can sell at a premium to book value," says Kelly. "But if I sell prime assets, the quality of the fleet has deteriorated."

Over the past few years, AerCap has discarded older equipment or more niche aircraft types. If both owned and managed aircraft are taken into account, over 25% of its sales were widebodies and the average age of the aircraft sold during the past three years is about 17 years, Flight Fleets Analyzer indicates.

"It can't be a great buyers' market and a great sellers' market; the two can't co-exist," Kelly says. "There's no amount of spreadsheet gymnastics that can convince me that if I can sell an asset at a high price I can buy it at a low price in the same spot market."

As chief executive, Kelly has focused on the best value he can deliver at a given time. When AerCap purchased ILFC, it traded cheaper than forward orders or sale-and-leasebacks. At the moment, it's his own stock that offers best value.

"The reality is that Gus has been a master of the aircraft cycle," says one investment banker. "He bought a distressed ILFC in 2013 at a big discount to book value, de-levered for a couple of years, and when many aircraft leasing assets started to trade at a premium to book, Gus focused on his own stock and bought it back at a discount.

"I am sure that Gus was frustrated that he couldn't grow his fleet year in and year out; but you can't do that and be disciplined and play the cycle."

With the repurchases of its stock, AerCap is signalling to the market that the company believes it is undervalued and that eventually investors will reward it with a premium to book valuation for its healthy performance.

"You have to give AerCap, Gus and his board a lot of credit for playing a really long game," adds the investment banker.

Source: Cirium Dashboard