Avation Targets 10% Fleet Growth as Aircraft Supply Crunch Boosts Leasing Demand

Key Points

• Avation targets roughly 10% annual fleet growth through the decade, supported by 13 firm ATR orders and 19 purchase options. Management expects to return to 48 aircraft by 2030, potentially reaching that goal by mid-2029 through additional secondary-market purchases.
• Aircraft supply constraints are boosting leasing demand, particularly for Avation’s turboprop-focused portfolio. Management expects shortages involving manufacturers, engines, certification and components to persist through the end of the decade.
• Avation strengthened its finances, reducing net debt to $523 million, fixing 97% of its debt and securing a committed, undrawn $100 million warehouse facility. Despite a market capitalization well below its reported net tangible asset value, the company plans to favor share and debt buybacks over issuing discounted equity.

Avation LON: AVAP outlined plans to expand its aircraft-leasing fleet while capitalizing on what management described as a prolonged imbalance between airline demand and aircraft supply during Noble Capital Markets’ Virtual Equity Conference.

Tim Bacchus, Avation’s Director of Investor Relations, said aircraft manufacturers Boeing and Airbus have been unable to meet strong post-pandemic airline demand, creating favorable conditions for lessors that already own aircraft or hold manufacturer delivery positions. He said the supply constraints could persist through the end of the decade, citing original equipment manufacturer supply-chain issues, engine reliability concerns, certification delays and shortages of components.

“If you actually have an aircraft right now, as the lessors do, you are in a very good sweet spot,” Bacchus said.

ATR Order Book Supports Growth Plan

Avation has 13 aircraft on firm order from regional turboprop manufacturer ATR, along with 19 purchase options that extend through 2034. Bacchus said the firm order book supports at least a 10% compound annual growth rate for the fleet through the end of the decade.

The company had 33 aircraft, 16 airline customers and operations across 16 countries as of June 30. Its portfolio was approximately 30% turboprops, 60% narrow-body aircraft and 10% wide-body aircraft. Avation’s emphasis on turboprops gives it a less competitive niche and supports higher lease yields, according to Bacchus.

He said ATR is the only manufacturer of regional turboprop aircraft and Avation is one of three lessors with an ATR order book. ATR produces roughly 40 to 50 aircraft per year, while its forecast calls for demand for 100 new aircraft annually, Bacchus said.

Avation expects to take delivery of about four ATR aircraft in the coming year. Under its base plan, the company expects to return to its pre-pandemic fleet size of 48 aircraft by 2030. If it can acquire an additional two aircraft annually in the secondary market at acceptable economics, it could reach that level by mid-2029, management said.

Results, Capital Management and Funding

Bacchus said operating profit rose 38% in the most recently reported fiscal year, with the company returning to profitability despite some non-cash items. Avation increased its dividend by 50% and reported a 20% increase in net asset value per share. About 12 percentage points of the NAV-per-share increase came from share repurchases, while the remainder reflected profitability and other factors.

The company has bought back about 20% of its shares over the past two fiscal years and has also repurchased bonds. It spent $29 million on share buybacks and bond repurchases during the year, Bacchus said.

• Net debt declined to $523 million from $604 million.
• Unrestricted cash increased about 9%, according to management.
• Avation fixed 97% of its debt, including debt fixed in May.
• The company has a $300 million bond maturing in 2031.
• It recently secured a committed, undrawn $100 million warehouse facility with a Japanese bank, which can be increased to $150 million.

Avation targets a debt-to-equity ratio below 3 times. Bacchus said the ratio could rise to 2.6 times with use of the warehouse facility.

Portfolio Activity and airBaltic Exposure

During the year, Avation completed nine transactions, including two new deliveries and five aircraft transitions to three new customers. It sold a Boeing 777 for a $4 million accounting gain; Bacchus said the transaction generated about $30 million of cash after debt repayment. The company also extended the lease on one Airbus wide-body aircraft.

Avation recently added Finnair as a customer after transitioning two aircraft from an airline that had entered rehabilitation or administration. Bacchus characterized the move as an improvement in the company’s customer credit profile.

Management also addressed airBaltic’s Chapter 11 filing in mid-September. Avation has four aircraft leased to the carrier, which Bacchus said represent a larger-than-proportional exposure because they are bigger-ticket assets than its ATR fleet. However, he said Avation holds security deposits and maintenance reserves that it believes would cover more than the time needed to remarket aircraft if necessary.

Bacchus said airBaltic may return 18 aircraft from a fleet of roughly 54, implying that Avation’s exposure could translate to one or two aircraft. While he could not say whether replacement rental rates would exceed existing rates in absolute dollars, he said the company could potentially re-lease aircraft at higher yields, to stronger credits or on longer lease terms.

Management Cites Discount to Asset Value

Bacchus said Avation is one of four remaining publicly listed aircraft lessors globally and is the only one among those peers that has not recovered its pre-COVID valuation, according to management. He said Avation’s market capitalization was around $110 million to $115 million, compared with $185 million of net tangible asset value excluding purchase rights.

Management attributed part of the valuation discount to Avation’s smaller scale, London listing and historically limited investor-relations resources. Bacchus said the company does not intend to issue equity while its shares trade at a substantial discount to NAV, instead favoring repurchases of shares and debt when management sees value.

“We just need to keep producing good results and executing the plan,” Bacchus said. “We expect that that gap will close.”

About Avation (LON:AVAP)

Avation PLC is a specialist commercial passenger aircraft leasing company owning a fleet of commercial aircraft which it leases to airlines across the world.

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