Air Lease Corp - Short Position


ALC is an aircraft lessor that is very well liked by the investment community, with 12/13 analysts on Reuters giving Buy ratings. Analysts like that aircraft leasing is a structurally growing sector which they believe has stable yields and stable growth for ALC. Yet our industry contacts reveal that the Street is completely missing a game-changer for the industry: the entry and growth of Chinese lessors. In addition, western institutions like pension funds and insurance companies are entering the market. These new players have significantly lower costs of capital than ALC, and are forcing lease rate factors down. In a world where interest rates are close to zero, aircraft leasing still often earns double-digit yields, and this is now changing. The swarm of new money has also significantly increased the supply of planes. Given the cyclicality of the airline leasing industry, this is likely to lead to major impairments and even lower lease rate factors at the next downturn, which may already be beginning. Lastly, leases to Chinese government owned airlines account for ~20% of ALC’s revenues, and these carriers may choose to switch to the Chinese government owned lessors in the future. As one industry source told us when we asked how ALC could stay competitive versus the new players: “Good question … How do you make money when nobody is making any money?”