As its final results underscored, Avation PLC (LON:AVAP), the UK-quoted plane leasing specialist, is being successful in scaling up its business.
The firm rents out aircraft to airlines around the world, including Thomas Cook (LON:TCG) and Virgin, and it currently has a fleet of 38 planes.
It has been publicly listed in London for a decade.
In the 12 months to June 30 this year, it reported a 25% increase in lease revenue (the amount brought in via leasing out the aircraft) to US$71.2 million, compared to US$56.9mln in the same period last year.
Total profit after tax flew 37.6% higher to US$18.3 million compared to US$13.3mln last year. The yield to the firm from renting out the fleet was 12.3%.
Significantly, EPS (earnings per share) increased 42.5% to 34.2 cents (2015: 24.0 cents), while shareholders will welcome an interim dividend of 3.25 US cents against 3 US cents last year.
Executive chairman Jeff Chatfield said Avation's increased scale, along with keeping a tight lid on costs, had led to improved profitability, with the operating profit margin increasing to 64%.
Positioned in the market to succeed
The firm focuses on narrowbody commercial jet and turboprop aircraft, which it rents out on long term leases. Narrowbody aircraft are used by the majority of the global fleet.
For the aeroplane initiated out there (and I suspect there are many), single aisle, twin engine planes such as the Airbus 320 and the French-Italian ATR 72 600, are used by 75% of the world’s carriers for short-haul trips and the latter makes up two-thirds of the company’s fleet.
The Avation business model is rather like the one employed by property firms.
Avation, and such firms like its US rivals Airlease, Aircastle and Avolon, buy an aircraft then lease it out – the airline will then take care of all the maintenance, rather than Avation.
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 12 years of a typical contract.
Even when that lease is up, the plane can then be leased out for another 12 years, albeit at lower rate than a brand new airliner.
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 pays to the banks.
They, meanwhile, are keen to finance leasing deals because a new plane appreciates in value when it is leased out.
Passenger growth is a key...
...driver of the airline industry. Avation focuses on the Asia/Pacific and European airline markets, where both are currently experiencing growth in people flying.
The firm says it has orders for nine new turboprops with the last of these to be delivered in 2019. It has no exposure to jet aircraft.
Aiming for young fleet with long remaining term
Avation wants a fleet with a low average age and long average remaining lease term and generally tries to sell mid-life and older aircraft to redeploy capital to new assets and keep a low average fleet age.
The average aircraft fleet age at the end of September, 2016 was 3.2 years (5.4 years in 2015).
The remaining lease term as a weighted average was 7.4 years compared to 5.9 years as at September last year, while all of its 38 strong fleet was in use.
Contracted unexpired lease revenue for the fleet, as at 30 September 2016, was US$752.5 million (30 September 2015: US$550.6 million).
Additional aircraft have been purchased since the start of the 2017 financial period (June 30) and lease revenue has subsequently continued to increase.
Further aircraft deliveries are scheduled in the near term, the company said.