CLA – keeps airbourne

Aircraft leasing hardly looks a promising sector on the eve of a prolonged worldwide recession. Yet Jeff Chatfield, Australian boss of AIM-quoted Capital Lease Aviation (CLA), argues now is the time to take advantage of the depressed state of the market and expand, provided the necessary finance is forthcoming.

The expansion he has in mind may involve equity funding, if and when stock market conditions allow. Chatfield is clear that access to capital is one of the hurdles the company will have to jump if it is to achieve its ambitions.

Singapore-based, CLA spun out of PLUS-quoted Avation last year and leases a small, but growing portfolio of commercial aircraft to airlines in Australia, Europe and North America. These include Skywest, another AIM-quoted, Singapore-based concern, also chaired by Chatfield, which operates air services in resource-rich Western Australia. Skywest recently won a long-term contract for Fokker 100s with mining giant Rio Tinto, while less incestuously, the company has also leased one Airbus A320 to a North American carrier and two A321-200s to a European operator.

CLA, which made £1.1 million pre-tax on revenues of £1.8 million in the year to June, continues to enlarge its fleet with modern, relatively fuel-efficient planes. Chatfield’s strategy is to exploit the desire of airlines, especially the less well-capitalised ones, to have both leased and owned aircraft in their fleets and to build capacity at a time when many major leasing companies, hit by overgearing, are eager to offload aircraft at advantageous prices.

As Chatfield puts it, ‘CLA is looking to acquire additional aircraft and the current turmoil in the aviation industry may provide it with the opportunity to acquire them at attractive valuations relative to previous periods’. Between September 2007 and its June year-end, the company acquired six aircraft with a combined value of £56 million and claims these can yield an annual £7.45 million in rentals.

CLA intends to focus on obtaining the latest generation narrow-body aircraft, such as the A320 series and B737 family of aircraft, which it hopes to deploy across a wide geographic spread. With the support of two European banks, the company has so far secured most of its debt funding at around six per cent on fixed terms ‘which approach the lease terms of its aircraft’.

Last month, CLA obtained a further US$100 million (£64.7 million) finance facility from ‘a major European bank’ to fund new plane purchases. This was a full-recourse revolving facility, which the company hopes to use to help buy new-generation Airbus and Boeing aircraft, with provision for another $50 million, at a margin of 2.25 per cent over London Interbank Offered Rate, (LIBOR), recently uncomfortably high but seen as likely to ease.

Arranging this finance in the lurid financial conditions now prevailing is no mean feat. To many it might seem foolhardy, but Chatfield argues that ‘aircraft valuations are in the process of dropping to a point which is highly advantageous to buyers’.

Indeed, he suggests current conditions present ‘the best opportunity since 2001’ for long-term investors in aircraft leasing ‘to make highly attractive returns’. Aircraft leased out by CLA tend to have a lease life of five to seven years, which largely covers the initial purchase cost and leaves plenty of flying time left.

The company is likely to want an element of equity funding next year if it is to maintain the momentum of its expansion drive. House broker WH Ireland argues that, if continuing dire stock market conditions rule that out, the company will be able to scale back its investment programme and estimates CLA will end the year to next June with net tangible assets of £161million, overall net assets of £45 million and gross debt of £110 million.

Clearly, CLA shares carry a significant measure of risk in today’s conditions and investors face the possibility of a measure of dilution if the company is able to tap the stock market to fund more growth. But, if its strategy of acquiring assets cheaply to expand pays off, long-term prospects could be attractive.