The aircraft that it leases weren’t the only things that were flying high for Avation (LON:AVAP), which unveiled its half yearly results Friday.
A robust financial showing meant the company could hike the dividend 49% to 3 cents a share backed by a bumper US$69.7mln cash.
Revenues for the 6 months to December 31 jumped 14.4% to a record level of US$31.5mln, while pre-tax profits fell to US$5.6mln.
The reason for this was straightforward – Avation made a gain disposing of two aircraft last year, while it generated a loss from disposals this time around.
Interest expenses added US$4.1mln to finance expenses.
The company’s fleet now numbers 34, four aircraft were added during the period with a fifth added in January 2016. At year end, all aircraft owned were 100% utilised.
Richard Wolanski, finance director, said the company is expecting to add more before the end of the financial year in June.
He added the firm is “looking at potential planes from other letters,” as well as “sale and lease contracts,” for planes already out on loan.
Its customers include firms such as Virgin Australia, Flybe and Thomas Cook Airlines.
Avation has a very specific niche – single aisle, twin engine planes such as the Airbus 320 and the French-Italian ATR 72 600, used by 75% of the world’s carriers for short-haul trips. The latter makes up two-thirds of the company’s fleet.
Companies such as Avation, and its American rivals Airlease, Aircastle and Avolon, will acquire an aircraft then lease it on – the airline will then take care of all the maintenance.
The skill comes in sourcing the finance, the right aircraft and mitigating the risks involved with the transaction.
The company’s borrowing’s to fund purchases topped US$479mln, though net debt was US$409mln.
While the loan-to-value ratio crept up above 76%, the company revealed it is borrowing at exceptionally competitive rates with a weighted average cost of debt of 4.3% (down from 4.4%).
Avation’s future revenue from unexpired leases on the current fleet of 29 aircraft totals US$404mln.
It said it will lease eight of the aircraft due to be delivered before June next year that will add a further US$196mln to that total.
The model, when stripped down, is a little like the template used by property firms.
Avation finances its acquisitions using 75% senior, secured bank debt. A typical plane might be leased on the basis of repaying back to Avation around 144% of the acquisition price over the 12 years of a contract.
They can then be leased out for another 12 years, albeit at lower rate than a brand-spanking-new airliner.
Somewhat counter-intuitively though (and a quirk of depreciation rates versus lease income), the older models yield more than the new inventory.
Avation mitigates the risk posed by a sharp rise in interest rates by borrowing over the term of the lease, rather than over two or three years and constantly refinancing. That way it always knows it will receive more in lease payments than it shells out to the banks.
The banks, meanwhile, are keen to finance leasing deals because a new plane appreciates in value when it is leased out.
Shares were up slightly to 133p today.