AerCap Holdings N.V. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; filed March 9, 2018. This is an annual report, not a standalone fourth-quarter filing, and does not provide clear Q4-only results. Financial statements are audited and prepared under U.S. GAAP.
Business context
AerCap leases, finances, sells and manages commercial aircraft and engines. At year-end it owned 980 aircraft, managed 113 and had 438 new aircraft on order. Its owned fleet had a 99.1% weighted-average utilization rate; 954 owned aircraft were on lease. The portfolio served approximately 200 customers in about 80 countries.
Financial performance and condition
| Metric | FY 2017 / year-end | Comparison |
|---|---|---|
| Total revenue and other income | $5.04 billion | Down 2% from $5.15 billion |
| Lease revenue | $4.71 billion | Down 3% from $4.87 billion |
| Income attributable to AerCap | $1.08 billion | Up 3% from $1.05 billion |
| Diluted EPS | $6.43 | Up from $5.52 |
| Operating cash flow | $3.14 billion | Down from $3.38 billion |
| Net cash used in investing | $3.43 billion | Compared with $1.33 billion used |
| Net interest spread (non-GAAP) | $3.10 billion; 9.0% annualized | Down 6% and from 9.5% |
| Total assets | $42.04 billion | Up from $41.62 billion |
| Debt, balance-sheet carrying value | $28.42 billion | Up from $27.72 billion |
| Unrestricted cash / restricted cash | $1.66 billion / $364 million | Unrestricted cash down from $2.04 billion |
Revenue trends were mixed: basic lease rents fell 5% to $4.19 billion, reflecting aircraft sales and lower rates on re-leases and extensions, partly offset by acquisitions. Maintenance rents and other receipts rose 10% to $520 million, while net gains on asset sales increased 65% to $229 million. Other income fell 35% to $95 million, partly because 2016 included insurance proceeds and a note repayment gain. Net income margin, calculated as GAAP net income divided by total revenue and other income, was approximately 21.4%, versus 20.2% in 2016.
Interest expense rose 2% to $1.11 billion; average cost of debt increased to 3.9% from 3.7%, while average debt outstanding declined. Asset impairment charges were $61 million, down from $82 million. The effective tax rate declined to 13.3% from 14.5%.
Material changes and capital allocation
- AerCap repurchased 23.7 million shares for approximately $1.1 billion, averaging $47.39 per share. Outstanding shares fell to 153.0 million from 176.2 million; diluted EPS benefited from the lower share count.
- Aircraft purchases and prepayments were significant: 58 aircraft were purchased, and cash paid for flight equipment and prepayments totaled approximately $5.23 billion. The company also reported approximately $2.4 billion of sales of older and mid-life aircraft.
- Year-end owned aircraft fell to 980 from 1,022, while weighted-average fleet age improved to 6.8 years from 7.4 years.
- AeroTurbine restructuring expenses fell to $14.6 million from $53.4 million. The Goodyear operations were sold and the AeroTurbine revolving credit facility was repaid and terminated.
Liquidity, debt and commitments
Management reported $12.8 billion of liquidity sources for the following 12 months, including $6.7 billion of undrawn credit lines, $1.7 billion of unrestricted cash, estimated operating cash flow and contracted asset-sale proceeds. It stated these sources covered at least 1.2 times debt maturities and contracted capital requirements over that period. The company raised approximately $12.6 billion of financing during 2017 and remained in compliance with debt covenants at year-end.
Principal debt was approximately $28.3 billion, or about 67% of total assets; adjusted debt-to-equity was 2.8 to 1. Aircraft purchase commitments totaled $24.3 billion, including 438 new aircraft on order, with $6.1 billion scheduled for 2018. The company expects to finance deliveries through operating cash flow, committed facilities, capital markets and other borrowing, and may sell assets if financing is unavailable. Contractual obligations totaled $60.0 billion, including estimated interest and aircraft purchase obligations.
Outlook, risks and contingencies
- Management described global air-travel demand and airline profitability as strong, and expected demand for leased aircraft to remain robust. It cited IATA’s 2018 forecast of 6% passenger-traffic growth and $38.4 billion of aggregate airline net profit; these are industry forecasts, not AerCap-specific guidance.
- Key exposures include substantial debt and aircraft purchase commitments; access to financing and interest-rate movements; lessee defaults, restructurings and repossession costs; aircraft residual values, lease rates and impairment; and aircraft demand, competition and manufacturer delivery or production risks.
- Geographic and customer risks include emerging-market exposure, with approximately 57% of lease revenue from emerging-market countries, and regional concentrations including Russia. China represented 13.8% of 2017 lease revenue. No single lessee exceeded 10% of revenue.
- A 1 percentage-point interest-rate increase was estimated to reduce annual pretax income by approximately $25 million, after considering derivatives and floating-rate lease income. Approximately 31% of principal debt was floating-rate.
- U.S. tax reform enacted in December 2017 prompted reassessment of deferred taxes and approximately $22 million of tax expense. Future effects of tax-law changes, treaty eligibility and international tax initiatives remain uncertain.
- VASP litigation remained pending in Brazil; a court ruled in October 2017 that VASP had suffered no damages, but appeals remained possible and any ultimate damages could not be reasonably estimated. AerCap also disclosed Transbrasil and Yemen Airways litigation. Management said reasonably possible aggregate losses in cases it could estimate were immaterial; outcomes remain uncertain.
- Four residual-value guarantees remained outstanding at year-end, with maximum aggregate potential payments of approximately $66.5 million before offsets; no loss provision was recorded. Other replacement-rental guarantees also remained outstanding. AerCap disclosed maximum exposure of $227.8 million to loss in non-consolidated variable-interest entities, including debt guarantees.
Most important facts for investors to verify
- Whether the reported $12.8 billion of liquidity, including projected operating cash flow and asset-sale proceeds, remains adequate against near-term maturities and aircraft commitments.
- Delivery timing, financing costs and lease placements for the 438-aircraft order backlog and $24.3 billion of purchase obligations.
- Whether lease yields and net spread stabilize after lower basic rents and the decline in annualized net spread to 9.0%.
- Debt maturity, covenant and floating-rate exposure, including the sensitivity to higher interest rates.
- Developments in aircraft impairments, lessee credit quality, guarantee exposures and material litigation, particularly VASP.
- Effects of U.S. tax reform and other tax changes on cash taxes, deferred-tax balances and the effective tax rate.