Aircraft-leasing pioneer looks at the short haul for the long haul

Sometimes, things are even better the second time around. That’s what Steven Udvar-Hazy is hoping.

Nearly 40 years after co-founding International Lease Finance Corp. and pioneering its successful model of buying airplanes and leasing them to airlines, Udvar-Hazy left the company and launched a rival, Air Lease Corp.

Udvar-Hazy co-founded International Lease in 1973. That company was acquired by insurance giant American International Group Inc. in 1990, and Udvar-Hazy stayed on until 2010, when he left the company to form Air Lease.

He opened office space in the same neighborhood, Century City, as his former company and took some of its top talent with him.

Udvar-Hazy became one of the wealthiest men in the Los Angeles area when he sold the company to AIG. An airline industry icon, he donated $66 million to help build the Smithsonian National Air and Space Museum annex.

From the start, Air Lease focused on buying newer models of Boeing 737s and Airbus A320s, which are more fuel-efficient and complement shorter flights.

The company believes that short-haul flights are key to success in the United States and emerging markets in Asia, Africa, Latin America and the Middle East.

The latest

Air Lease reported second-quarter sales numbers that met or outpaced analysts’ expectations.

The company’s revenue for the second three months this year was $208 million, a 31% increase from $158 million during the same period last year. It earned $43 million for the quarter, up 53% from last year’s second quarter.

Udvar-Hazy was upbeat about Air Lease and the airline industry when he discussed the company’s strong second-quarter earnings earlier this month.

“The growth in overall global passenger traffic remains at or above our expectations, and we continue to see steady demand for our aircraft,” Udvar-Hazy said.

Accomplishments

This company has grown at an astonishing pace. Its fleet has swelled, and so have its profits.

By the end of June, Air Lease owned 174 aircraft, operated by 78 airlines in 44 countries worldwide.

Revenue grew to $656 million last year, a staggering improvement from $58 million in 2010. The company reported $132 million of profit last year.

This year, the company started paying a dividend, albeit a small one, 2.5 cents per share.

Challenges

Several factors that Air Lease does not control could severely affect its business.

The company derives revenue from leasing aircraft to airline companies, so its future depends on the success of the always turbulent airline industry. The potential for rising interest rates also is a concern.

“If access to the capital markets is limited, it would affect the company’s ability to expand its fleet and limit future growth,” Helane Becker, an analyst with Cowen & Co., said recently.

Competition also is an issue. International Lease remains one of the biggest names in the game, with about 1,000 aircraft at the end of 2012 — or nearly six times as many as Air Lease has.

In its annual report, International Lease told investors that its company gets several benefits because of its size, including the ability to negotiate early delivery dates, attractive borrowing terms and discounted prices.

It boasted that it has a long history with many of its airline clients, including relationships of at least a decade with each of its top 10 clients.

In the end, Air Lease’s success depends largely on Udvar-Hazy and his standing as the godfather of the airline leasing business.

Analyst views

Ten analysts suggest buying Air Lease’s stock, four recommend holding it and none say investors should sell. On average, analysts believe Air Lease’s stock will be trading for $34.55 a share 12 months from now.

“Air Lease continues to execute on its plan and has positioned itself to benefit from global re-fleeting,” said Becker, the Cowen & Co. analyst.

Scott Valentin, an analyst with FBR Capital Markets & Co., said, “With its experienced management, Air Lease, we believe, is well positioned to build an attractive portfolio of new, fuel-efficient aircraft and grow into one of the largest aircraft lessors.”

Valentin also said, “The management team, as pioneers in aircraft lease financing, will use its long standing relationships with manufacturers, airlines and finance providers to facilitate the rapid procurement and deployment of assets.”

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