AerCap Holdings N.V. — 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018, compared primarily with fiscal 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP; dollar amounts are U.S. dollars.
Business context
AerCap is a global aircraft lessor. At year-end it owned 962 aircraft, managed 96 aircraft, and had 363 new aircraft on order. Owned-fleet utilization was 98.9%; its 200 customers operated in approximately 80 countries. The weighted-average age of its owned fleet was 6.3 years.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue and other income | $4.800bn | $5.037bn | Down 4.7% |
| Lease revenue | $4.537bn | $4.714bn | Down 3.7% |
| Basic lease rents | $4.146bn | $4.194bn | Down 1.2% |
| Income before tax and equity-method earnings | $1.151bn | $1.236bn | Down 6.9% |
| Net income attributable to AerCap | $1.016bn | $1.076bn | Down 5.6% |
| Diluted EPS | $6.83 | $6.43 | Up 6.2%, primarily due to share repurchases |
| Operating cash flow | $2.840bn | $3.140bn | Down $300m |
| Cash used in investing activities | $4.053bn | $3.392bn | Primarily aircraft purchases and pre-delivery payments |
- Net spread (non-GAAP): $2.966bn, versus $3.096bn in 2017. Annualized net spread was 8.4% versus 9.0%; annualized net spread less depreciation and amortization was 3.2% versus 3.0%.
- Costs and tax: Interest expense rose 6% to $1.174bn; average cost of debt increased to 4.1% from 3.9%. Depreciation and amortization declined 3% to $1.679bn; impairment charges declined to $44.2m from $61.3m. The effective tax rate was 12.5%, compared with 13.3%.
- Balance sheet: Total assets were $43.209bn and total equity $8.881bn. Debt was $29.508bn on the balance sheet; principal debt was approximately $29.5bn, or about 68% of total assets. Adjusted debt-to-equity was 2.86x, up from 2.77x.
- Liquidity: Unrestricted cash was $1.204bn, restricted cash $211m, and undrawn revolving and term loan facilities approximately $8.1bn, subject to conditions and covenants. AerCap reported $10.0bn of available liquidity and $13.2bn of total sources including estimated next-12-month operating cash flows; management said these sources covered at least 1.4x of debt maturities and contracted capital requirements over that period.
- Capital allocation and fleet: AerCap purchased 76 new aircraft and sold 91 owned aircraft. Share repurchases totaled $726.6m for 13.9m shares; 16m shares were cancelled during the year. Book value per ordinary share, excluding unvested restricted stock, rose 10% to $62.95.
Material changes versus 2017
- Lease revenue, basic rents, total revenue, net income and operating cash flow all declined. AerCap attributed lower basic rents mainly to aircraft sales and lower rates on re-leases and extensions, partly offset by aircraft acquisitions.
- Maintenance rents and other receipts fell 25% to $391.5m, mainly because of lower end-of-lease compensation and fewer early-termination receipts. Net gains on asset sales fell 12% to $201.3m.
- Interest expense increased as both average debt cost and average debt outstanding rose. Lower leasing expenses and SG&A partly offset the revenue and interest-cost pressure.
- Diluted EPS increased despite lower attributable net income, largely because of the reduction in weighted-average shares from significant buybacks.
- Year-end cash and cash equivalents declined to $1.204bn from $1.660bn, while debt increased to $29.508bn from $28.421bn.
Outlook, risks and unusual items
- Outlook: Management expected demand for leased aircraft to remain strong. It cited IATA’s 2019 forecasts of 6.0% passenger-traffic growth and $35.5bn of aggregate airline net profit; these are industry forecasts, not AerCap earnings guidance. AerCap reported that 74 of 84 aircraft with leases expiring in 2019 had been re-leased, extended, designated for sale or part-out as of March 5, 2019.
- Aircraft purchase commitments: AerCap had 363 aircraft on order through 2023, with approximately $18.46bn of purchase obligations and $2.3bn of non-refundable deposits at year-end. The company expects to fund deliveries with debt and other financing, operating cash flow, and potentially asset sales.
- Leverage and funding risks: The business requires substantial capital and ongoing access to debt and capital markets. Debt agreements include financial tests and operating restrictions; a failure to comply could trigger defaults or cross-defaults. Refinancing may be more costly or unavailable. Approximately 32% of principal debt was floating rate; management estimated a 1% rate increase would reduce annual pretax income by less than $10m after considering hedges and other offsets. LIBOR-linked contracts also face benchmark-transition uncertainty after 2021.
- Portfolio and customer risks: Aircraft residual values and lease rates may fall due to oversupply, new technology, fuel or regulatory changes, or weaker airline economics. Lessee defaults, restructurings, maintenance shortfalls and repossession difficulties can reduce cash flows and increase costs. Approximately 58% of 2018 lease revenue came from emerging markets; China represented 14.1% of lease revenue. No individual lessee accounted for more than 10%.
- Older aircraft and impairment: AerCap had 177 owned aircraft aged 15 years or older, representing approximately 6% of flight equipment and lease-related assets and liabilities. All passed the year-end recoverability test; impairment estimates remain sensitive to lease-rate, maintenance and residual-value assumptions.
- Legal and guarantee exposures: The VASP dispute in Brazil remains unresolved; the company said ultimate damages, if any, could not be reasonably estimated and that recovery by VASP was not considered probable. A separate Transbrasil indemnity claim remained pending after prior penalty and fee claims were dismissed. Two asset-value guarantees had a stated maximum potential commitment of $31.8m, with no liability recorded; replacement-rental guarantees had maximum undiscounted payments of $10.5m and a recorded liability of $2.3m.
- Other developments: AerCap recorded no restructuring expense in 2018 as the AeroTurbine downsizing charges had largely ended. The company reported that its disclosure controls and internal control over financial reporting were effective at year-end; the 2018 financial statements received an unqualified audit opinion.
- Subsequent events: In January 2019, AerCap issued $1.1bn of senior notes for general corporate purposes. In February 2019, the board authorized a further $200m share-repurchase program.
Most important facts for investors to verify
- Review the full debt maturity schedule, covenant headroom, conditions on the $8.1bn undrawn facilities, and funding plans for aircraft purchase commitments.
- Assess whether lower lease rates on extensions and re-leases, maintenance receipts, asset-sale gains and other non-recurring items affect the sustainability of earnings and cash flow.
- Check aircraft and lessee concentration, especially China and emerging markets, lease expirations, off-lease aircraft, and the performance of the older fleet.
- Examine assumptions behind aircraft residual values and impairment testing, as well as the status and potential exposure of the VASP and Transbrasil matters and outstanding guarantees.
- Consider the effects of interest rates, hedging, LIBOR replacement terms, and future tax or regulatory changes on financing costs and cash generation.