Business Context and Reporting Period
Company: AerCap Holdings N.V.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: AerCap is an integrated global aviation company specializing in aircraft and engine leasing, trading, and parts sales. The company operates a portfolio of owned and managed aircraft and engines, providing lifecycle management services including maintenance, remarketing, and disassembly. As of December 31, 2010, AerCap owned 271 aircraft and 95 engines, and managed 50 aircraft.
Key Financial Metrics
| Metric | 2010 (in millions) | 2009 (in millions) |
|---|---|---|
| Total Revenues | $1,834.5 | $1,003.3 |
| Net Income (GAAP) | $236.8 | $206.4 |
| Net Income Attributable to AerCap | $207.6 | $165.2 |
| Earnings Per Share (Basic & Diluted) | $1.81 | $1.94 |
| Operating Cash Flow | $582.4 | $399.2 |
| Total Assets | $9,600.6 | $6,769.5 |
| Total Debt | $6,566.2 | $4,846.7 |
| Shareholders' Equity | $2,211.4 | $1,258.0 |
Revenue Breakdown (2010): Lease revenue was $960.8 million (up 47.7% from 2009), and Sales revenue was $850.0 million (up 161.7% from 2009). The increase in sales revenue was driven by the sale of 16 aircraft and 16 engines.
Interest Expense: Interest on debt totaled $240.3 million in 2010, a 160.9% increase from 2009, primarily due to higher average debt balances and mark-to-market charges on derivatives.
Material Changes vs. Prior Period
- Genesis Acquisition: On March 25, 2010, AerCap completed an all-share acquisition of Genesis Lease Limited, adding 53 aircraft to the portfolio and significantly increasing lease revenue and asset base.
- Waha Transaction: On November 11, 2010, AerCap issued approximately 29.8 million new shares to Waha Capital PJSC. In exchange, AerCap received $105 million in cash, Waha's 50% interest in the joint venture AerVenture, a 40% interest in Waha's 12-aircraft portfolio, and a 50% interest in four CRJ aircraft.
- Asset Growth: Total assets increased 42% to $9.6 billion, driven by the acquisition of $2.6 billion in aviation assets (55 aircraft and 16 engines) and the Genesis transaction.
- Impairment Charges: Asset impairment charges decreased to $14.4 million in 2010 from $32.6 million in 2009. The 2010 impairment related to specific discrete factors including a repossessed A320 and an intangible lease premium write-off.
- Lessee Defaults: In 2010, two lessees defaulted on six aircraft, resulting in approximately $16.7 million in costs related to lost revenue and technical expenses.
Guidance, Outlook, and Risks
Outlook and Liquidity: AerCap expects to fund future growth through internally generated cash flows, committed debt facilities, and capital market transactions. As of December 31, 2010, the company had $1.3 billion in committed undrawn credit facilities. The company has significant forward purchase commitments for 34 aircraft (including 12 A330s, 7 A320s, and 10 Boeing 737s) requiring additional funding for pre-delivery and final payments.
Key Risks and Contingencies:
- Lessee Credit Risk: 52.4% of 2010 revenues came from the aviation industry. The company faces risks related to lessee defaults, bankruptcies, and the ability of airlines to meet lease obligations, particularly in emerging markets where 59.8% of the aircraft portfolio is leased.
- Re-leasing Risk: Between 2011 and 2013, leases accounting for 28.9% of 2010 lease revenues are scheduled to expire. Failure to re-lease these assets on favorable terms could impact revenue and margins.
- Interest Rate Risk: The company has significant floating rate debt ($5.0 billion as of Dec 31, 2010). A 1% increase in interest rates would increase annualized interest expense by approximately $40.5 million.
- Asset Value and Impairment: The company monitors older aircraft (over 15 years) for impairment. While no impairment was recognized for these assets in 2010, further deterioration in the global economic environment could trigger future write-downs.
- Regulatory and Environmental: New emissions regulations (e.g., EU Emissions Trading Scheme) and noise restrictions could reduce the value and lease rates of older, less fuel-efficient aircraft.
Investor Verification Checklist
- Debt Maturity Profile: Verify the schedule of debt maturities and the sufficiency of committed credit facilities to meet forward purchase obligations for 2011 and 2012.
- Lease Expirations: Review the specific terms and market conditions for the 28.9% of lease revenue expiring between 2011 and 2013 to assess re-leasing risks.
- Lessee Concentration: Confirm the creditworthiness of major lessees, particularly Aeroflot (10.0% of lease revenue) and TUI Aviation (7.4%), and monitor exposure to emerging markets.
- Asset Valuation: Assess the residual value assumptions for the 6.0% of the fleet older than 15 years and the potential for future impairment charges.
- Interest Rate Hedging: Evaluate the effectiveness of the company's interest rate caps and swaps in mitigating the impact of rising rates on the $5.0 billion floating rate debt.
- PFIC Status: Monitor the company's determination regarding Passive Foreign Investment Company (PFIC) status for U.S. tax purposes, as this remains uncertain.