AerCap's Long-Term Arbitrage Play Will Benefit Shareholders

During aviation leasing giant AerCap's (NYSE: AER) third-quarter earnings conference call last week, management shared an interesting statistic that caught my eye. CEO Aengus Kelly noted that the company had realized an 8% gain on its sold aircraft during the quarter, and that this has been a consistent margin over the last 13 to 14 years. This has resulted in an average gain on equity on sold aircraft of 30% over the same period.

The company is able to achieve a 30% return on equity on sold planes because its equity component in aircraft purchases is 25%; AerCap borrows the rest. Kelly provided a simple illustration: "And so when we give you a number, if we say we sell an airplane at an 8% margin and it was on the books for $100 million, that means we sold it at $108 million. However, because the equity component is $25 million, we're levered [borrowed] three to one, so in our $100 million [figure], $25 million is equity."

In other words, the $8 million of gain on sale in such a transaction, divided by $25 million in equity, results in a 32% return on equity.

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Source Fool.com