Ukraine War Weighs on Otherwise Strong Q1 for AerCap

 - May 17, 2022, 10:41 AM

The conflict in Ukraine resulted in a $2 billion loss for AerCap in the first quarter of this year, even as the world’s largest aircraft lessor benefitted from a strong rebound in traffic resulting from the lifting of Covid travel restrictions. AerCap registered a pre-tax charge of $2.7 billion due to related aircraft and engine write-offs and impairment during the quarter after the lessor recognized a total loss of all its remaining equipment in Russia.

Before Russia’s invasion of Ukraine, AerCap had 135 aircraft and 14 engines on lease with Russian airlines, accounting for some 5 percent of its fleet by book value at the end of last year. Since then, it managed to recover 22 aircraft and three engines outside of Russia.

During the company’s Tuesday earnings call with analysts, AerCap CEO Aengus Kelly said the lessor would pursue all insurance claims with Western and Russian banks. The company’s claims totaled some $3.5 billion as of February 24, but the timing and amount of any recoveries remain uncertain, said AerCap. The company had received no insurance payouts associated with the Russian fleet as of the end of the quarter.

Despite the losses stemming from Russia, Kelly conveyed an optimistic outlook for AerCap’s financial situation and characterized its merger with GE Capital Aviation Services last year as a major contributor to its revenues and net earnings of $540 million after adjustments for charges related mainly to the Ukraine conflict.

In fact, first-quarter cash flow from operating activities totaled $1.3 billion, more than three times higher than in the first quarter of 2021. During the first quarter, the company executed 157 transactions, consisting of 102 lease agreements, 25 purchases, and 30 sales.

“But for the impact of Russia, this was a strong underlying quarter for the company,” said Kelly.

“There has been a strong rebound in traffic on a global scale as an ever-increasing number of countries removed the last of the Covid-related travel restrictions and welcome foreign travelers.”

Kelly added that AerCap has seen a corresponding increase in demand for aircraft sales. Unfortunately, a shortage of supply of both narrowbody and now widebody aircraft will continue to weigh on the industry, as deliveries of 737 Maxes remain suppressed and 787s nonexistent for Boeing, and supply chain constraints threaten Airbus’s ability to increase rates on A320neos and A330s.

Not having delivered 787s for 15 months due to various production quality problems, fixes for which the FAA still needs to approve, Boeing expects to resume deliveries of that model series sometime this year. However, said Kelly, it will take “years” to unwind Boeing’s 787 inventory and return to what he called even modest levels of production. Additionally, Boeing has delayed the first 777X delivery by at least another year, to 2025.

Production of A330neos, meanwhile, will likely not exceed three per month “for quite some time” due to supplier constraints, he added. As airlines retired a “significant number” of widebodies during the pandemic, creating more pressure on supply, explained Kelly.

As a result of the supply constraints and undercurrents such as increasing interest rates, AerCap expects lease rates to rise, particularly for widebodies. “What you’re seeing here is, on the widebody side it hasn’t been as in focus because people have been so focused on the recovery of the narrowbody market, which obviously led our way out of Covid but now we are beginning to see it on the widebody side,” said Kelly. “Like on the narrowbody side it’s being led by the best asset in the class, which is the Boeing 787, and we are seeing a significant uptick relative to where we were on that aircraft type…The airlines are starting to realize that there is a coming squeeze on widebody capacity. We all know what the issues are on the 787, but Airbus also has its supply limitations as well. So what will happen as our widebodies come up—the 787s, the A330neos—we’re certainly endeavoring to push rentals up as they come up for reset, be that on extension or off a new order.”