Air Lease Corporation Drew Szilagyi Qiang (Cindy) Fu Vedvati (Vedu) Shrotre Vishal Shah April 9, 2015.

Air Lease Corporation

Drew SzilagyiQiang (Cindy) FuVedvati (Vedu) ShrotreVishal Shah

April 9, 2015

Introduction

Macroeconomic Overview

Industry Overview

Business Overview

Financial Analysis

Financial Projection

Valuation

Recommendation

Agenda

3

Current Performance

Air Lease Corporation (Ticker: AL, NYSE)

Incorporated in Delaware

Purchased: 400 shares @ 22.32 on Dec 12, 2012

Stock Price: $38.51

Position: 9.2% of all stocks, 3.7% of portfolio

Return: 72.54%

Market Cap: 3.9B

P/E (ttm): 16.05

EPS (ttm): 2.40

Beta: 1.30

Source: Yahoo Finance, AL 2014 10-K

Intro Macro Industry Business Financial Analysis

Financial Projection Valuation Recomm

endation

ABBV14.04%

ABT11.13%

AEO15.49%

AL9.19%COF

4.79%

JKHY8.25%

NHC3.79%

UNP12.91%

WBA15.70%

ZIXI4.72%

4

Business Model:

Sell aircrafts to third parties

Lease to airlines

Fleet Management

Services

Source: AL 2014 10-K , Page4

Introduction



endation

Purchase new commercial

aircrafts from aircraft

manufactures

5

Macroeconomics



endation

Source: FAA https://www.faa.gov/about/office_org/headquarters_offices/apl/aviation_forecasts/aerospace_forecasts/2015-2035/media/Forecast_Highlights.pdf; Boeing http://www.boeing.com/commercial/market/long-term-market/ IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=33

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

0

2

4

6

8

10

12

14

16

18

GDP (current US$ trillion)

U.S. carrier passenger growth over the next 20 year forecasted to be 2.0% per year

GDP is forecast to rise 3.2 percent over the next 20 years, which will drive passenger traffic to grow 5.0 percent annually

Stably increasing per capita disposable income (United States)

6

Macroeconomics



endation

Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=97

As Fed is committed to helping the American economy get back on its feet, yields are expected to stay low/ slightly higher than today through the outlook period

Domestic trips demand is increasing through the outlook period

7

Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=112568

Industry Overview



endation

Key Divers for the Industry Oil and natural gas prices: forecasted to increase over the next five years

to 2020

Interest Rate

8

Source: IBISWorld http://clients1.ibisworld.com/reports/us/iexpert/default.aspx?entid=4801

Industry Overview



endation

One in three airplanes leased, expected to rise to one in two

Profit margin of 28.0% in 2014

Forecasted annual revenue growth of 3.3%

Passenger airlines accounting for 91% of revenue in the industry in 2014

9Intro Macro Industry Business Financial Analysis


endation

Source: IBISWorld http://clients1.ibisworld.com/reports/us/industry/operatingconditions.aspx?entid=4801#RAP

Regulations

FAA (Federal Aviation Administration) Requires aircraft lessors to register all US owned or registered aircraft with

the agency Aircrafts under direct control of lessors need to obtain a “Certificate of

Airworthiness” or a ferry flight permit for the purpose of maintenance and storage

Department of Commerce and Department of Treasury Restricts the operation of US made aircrafts in certain countries May also restrict industry operator's ability to do business with specific

entities

Federal, state and local environmental health and safety regulations Relate to the discharge of materials into the air, water or ground and the

health and the safety of employees



endation

Source: AL 2014 10-K, page 4

Supply Chain

The Boeing CompanyAirbus S.A.S

ATR

200 airlines across 70 countries in Asia, the

Pacific Rim, Latin America, the Middle

East and Eastern Europe

CustomersSuppliers

Confirmed purchases: 1. 118 aircrafts from Airbus2. 27 aircrafts from Boeing3. 7 aircrafts from ATR

364 aircraft on order from all three through 2023

Financed through unsecured debt

11Source: U.S. Food and Drug Administration; IBISWorld, http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=488#KED

Revenue Source



endation

By Service Line 2014 Revenue by Geographic Region

41%

34%

11%

5%

3%5%

Asia

Europe

Central America, South America and Mexico

The Middle East and Africa

Pacific, Australia, New Zea-land

U.S. and Canada

12

Steven F. Udvar-Házy Chairman and Chief Executive Officer since 2010 Founder of Air Lease Corporation

Executive Compensation Annual cash incentive

Long-term equity incentive awards A mix of 50% RSUs that vest based on attainment of book value

goals and 50% RSUs that vest based on attainment of total stockholder return goals

65 employees by the end of 2014

Management Overview



endation

Source: Air Lease 2015 Proxy Statement, page 26-27

Performance Measures

Overall Revenue 20 %Pre-Tax Operating Margin 20 %Pre-Tax Return on Equity 20 %Dollar Value of Aircraft Added to our Fleet 20 %Strategic Objectives 20 %

WeightingComponent

13

Key characteristics

Source components separately for new aircrafts

Enters lease agreement 18-36 months in advance of delivery

Own aircrafts only for 1st third of its life

WAL of aircraft fleet is 3.5 years

WAL of remaining operating lease term is 7.3 years



endation

14

Operational Characteristics

Fully leased for

current year

High concentration in narrow-

body

95% international

revenue



endation

15

Risk Factors

High concentration in

a specific country in a geographic

region

Aircraft ModelsConcen-tration

Finding a good price for

selling old aircrafts

Interest Rates

Lessee defaults

Source: AL 2014 10-K, page 14-33



endation

16

Source: Yahoo Finance

Stock Performance Comparison vs. Competitors & S&P 500



endation



endation

Source: Team analysis

Porter’s Five Forces

Moderate• Large Customer Size

High• High Concentration

amongst Suppliers

High • Large Initial Investment • High Maintenance Costs• Regulations from Federal

Aviation Administration Moderate• Fierce Competition

Bargaining Power of Customers

Rivalry

Threat of SubstitutesBargaining Power of Suppliers

Barriers to Entry

0

1

2

3

4

5

Low• Few substitutes in

the Market

18

SWOT ANALYSIS

Strengths- Highly diversified product - portfolio- High number of ANDA approvals

Strengths- Geographically diversified customers

Weaknesses- Thin supplier base- Volatility due to oil price

Opportunities- Recovering economy drives

up demand for air travel- Increasing interest rate

makes leasing more attractive

Threats- Possible increase in interest

rate makes borrowing more expensive



endation

19

Financial Analysis - Ratios

Source: 2014 10-K, Team analysis

2011 2012 2013 20140%

100%

200%

300%

400%

500%

600%

Revenue Growth

2011 2012 2013 20140%

50%

100%

150%

200%

250%

Net Income Growth

• Company has transitioned from it’s growth stage and now has a declining revenues growth with steady profit margin

Profitability 2010 2011 2012 2013 2014

Net profit margin -89.2% 15.8% 20.1% 22.2% 24.4%

Return on asset 0.0% 3.7% 5.1% 5.2% 5.3%

Return on equity -4.2% 3.1% 5.9% 7.8% 9.7%



endation

20





endation

2010 2011 2012 2013 2014

Return on Equity = -4.2% 3.1% 5.9% 7.8% 9.7%

Tax burden (NI/Pretax Income) 85% 64% 65% 65% 65%

x Interest burden (Pretax income/EBIT) 664% 59% 58% 60% 64%

x Operating margin(EBIT/Sales) -16% 42% 54% 57% 59%

x Asset turnover (Sales/asset) 0.03 0.09 0.10 0.10 0.10

x Leverage (Asset/Equity) 1.86 2.19 2.78 3.44 3.80

2011 2012 2013 2014

Greenblatt ratio 1 (EBIT/Tangible Assets) 3.1% 5.4% 5.9% 6.5%

Greenblatt ratio 2 (EBIT/EV) 3.0% 5.6% 5.5% 6.2%

Dupont analysis

Greenblatt Ratios

21

Financial Analysis - Capital Structure

71% debt financed 68% of debt is Unsecured Senior Notes, used to finance aircraft

purchases 3.64% composite cost of funds, 4.00% average fixed debt cost All aircrafts are leased as Operating leases



endation

22



Solvency Ratios



endation

Financial leverage 2010 2011 2012 2013 2014

Long-term debt to asset 40.1% 50.4% 59.6% 62.7% 62.3%

Interest Coverage Ratio -0.01 1.92 1.89 1.99 2.16

Solvency Ratio -0.04 0.06 0.08 0.08 0.09

Activity 2010 2011 2012 2013 2014

Total asset turnover 0.03 0.09 0.10 0.10 0.10

Fixed asset turnover 0.04 0.11 0.12 0.12 0.12

Activity Ratios

• High and steady debt levels coupled with improving interest coverage ratio

• Steady turnover ratios

23

Financial Projections – Revenue Assumptions




endation

Fleet Size Assumptions 2015 2016 2017 2018 2019

Incremental Fleet Purchases 40 32 27 33 49

Additional Purchase agreements not entered into yet

2 4 4 4

Total Incremental Fleet purchases 40 34 31 37 53

Current Lease Commitments 100% 78% 56% 36% 10%

Expected % of Fleet leased 100% 95% 95% 95% 95%

Fleet Leased 40 33 30 36 51

Less: Termination of lease contracts 5 12 15 7 32

Fleet Size 248 269 284 313 332

16.4% 8.5% 5.6% 10.2% 6.1%Growth

Revenue Growth Assumptions 2015 2016 2017 2018 2019

Revenue from rental of flight equipment / Plane 5,089 5,191 5,295 5,401 5,509

% Growth 1.0% 2.0% 2.0% 2.0% 2.0%

Revenue from rental of flight equipment (thousands) 1,262,166 1,396,424 1,503,777 1,690,478 1,828,957

% Growth 27% 11% 8% 12% 8%

24

Financial Projections – Balance Sheet Assumptions



endation

Team Analysis

Capital Expenditure 2015 2016 2017 2018 2019

Purchase Cost per plane

59,546

72,352

70,635

88,466

81,604

Flight equipment subject to operating leases

9,832,421

12,214,278

14,674,259

16,863,935

20,137,166

Add: Additions to fleet (already contracted)

2,381,857

2,315,276

1,907,137

2,919,369

3,998,600

Add: Additions to fleet (assumption)

-

144,705

282,539

353,863

326,416

Total Flight equipment subject to operating lease

12,214,278

14,674,259

16,863,935

20,137,166

24,462,183

Financing the Capital Expenditure 2015 2016 2017 2018 2019

Debt Financing

6,714,362

8,305,709

9,978,496

11,467,476

13,693,273

Add: Debt Issued

1,762,905

2,543,469

2,904,399

3,768,504

4,603,744

Less: Debt Obligation

(171,558)

(870,682)

(1,415,419)

(1,542,706)

(1,173,489)

Debt outstanding at year end

8,305,709

9,978,496

11,467,476

13,693,273

17,123,528

% of Fleet size 68% 68% 68% 68% 70%

25

Financial Projections – Income Statement Assumptions



endation

26

Valuation – Residual Income Method



endation

ValuationResidual Income Model

2014 2015 2016 2017 2018 2019 Terminal

Beginning Common Stock Equity 2,523,434$ 2,772,062$ 3,117,723$ 3,481,422$ 3,851,691$ 4,263,466$

Plus: Net Income 255,998 350,129 370,729 378,221 421,652 425,175

Plus: Stock Issuances: 944 - - - - -

Plus: Stock-Based Comp 16,048 13,039 11,506 10,960 11,206 12,242

Less: Common Dividends (13,284) (17,506) (18,536) (18,911) (21,083) (21,259)

Ending Common Stock Equity 2,772,062$ 3,117,723$ 3,481,422$ 3,851,691$ 4,263,466$ 4,679,625$

Net Income 350,129 370,729 378,221 421,652 425,175

Less : Equity Charge 257,598 289,719 323,516 357,924 396,188

Plus: Depreciation - - - - - -

Modified Residual Income 92,532 81,010 54,705 63,728 28,987 319,733

PV of Residual Income 82,771$ 64,821$ 39,155$ 40,802$ 16,601$ 183,114$

Cost of Equity 9.3%

Business Risk Premium 2.5%

Discount Rate 11.8%

Terminal Growth Rate 2.5%

Current Value from Common Share Equity 2,772,062

Residual Income from Yr 2015-2019 244,149

Terminal Residual Income After 2019 183,114

Present Value of Equity 3,199,325$

Diluted Common Share Outstanding 110,193

Implied Share Price 29.03$

Cost of Equity

Risk Free rate 2.80%

Equity Risk premium 5.00%

Adjusted Beta 1.30

Cost of equity CAPM 9.29%

27

Valuation - Comparable Analysis



endation

Comparable Companies Analysis

($ in thousands except per share data)

Current Enterprise Value / Price / Market Cap/

Share LTM LTM LTM

Company Ticker Price Sales EBIT EPS BV EBT

Air Lease Corp AL $37.99 9.8x 16.8x 16.0x 1.4x 9.9x

AerCap Holdings AER $42.34 10.6x 20.3x 9.9x 1.2x 8.5x

FLY Leasing Limited FLY $15.73 8.2x 18.1x 11.2x 0.8x 14.7x

Aircastle LTD AYR $19.70 6.8x 12.0x 17.9x 1.1x 8.1x

Avolon Holdings Ltd AVOL $21.50 10.2x 19.7x 18.5x 1.2x 16.1x

Mean 9.0x 17.5x 14.4x 1.1x 11.9x

Median 9.2x 18.9x 14.6x 1.2x 11.6x

High 10.6x 20.3x 18.5x 1.2x 16.1x

Low 6.8x 12.0x 9.9x 0.8x 8.1x

Comparable Companies Valuation

Implied Multiples Implied Share Price

Metric Statistics Low Median High Low Median High Weights

EV/LTM Sales $1,050,493 6.8x 9.2x 10.6x $6.46 $29.34 $42.69 15%

P/BV 0.8x 1.2x 1.2x $21.71 $31.21 $32.56 20%

P/E 9.9x 14.6x 18.5x $23.56 $34.63 $44.03 15%

M/EBT 8.1x 11.6x 16.1x $29.02 $41.56 $57.68 50%

Average Valuation $36.62

28

Source: Bloomberg

Technical Analysis



endation

29

Valuation Summary



endation

Graham Valuation

EPS 2.38 Growth 2.50 Value $ 32.13

Valuation Summary

Residual Income Model $ 29.03 Benjamin Graham $ 32.13 Comparable Method $ 36.62 Average Price $ 32.59 Current Market price $ 38.51

30

Recommendation

HOLD

Plans to increase fleet size coupled

with ability to convert purchases

into leases

ROE almost equals Cost of Equity

Approaching maturity

Anticipated rise in interest rates is a

double-edged sword



endation

Air Lease Corporation Drew Szilagyi Qiang (Cindy) Fu Vedvati (Vedu) Shrotre Vishal Shah April 9, 2015.

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ibisworld http

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