-- Aircraft lessors could be impacted by a projected slowdown in airline capacity deployment globally amid elevated jet fuel prices triggered by the Middle East conflict, Deutsche Bank said Monday.
Energy prices have soared following the US-Israel war with Iran that has disrupted shipments through the Strait of Hormuz, the world's most important chokepoint for crude flows.
The conflict, which paused following a ceasefire between the US and Iran and later between Israel and Lebanon, has pushed jet fuel prices past $4 a gallon, according to Deutsche Bank.
"While aircraft lessors are not directly impacted (by high fuel prices) like airlines with higher operating costs, they are indirectly affected by changes in supply and demand for aircraft," Deutsche Bank analyst Shannon Doherty said in a note to clients Monday. "We cannot ignore the fact that surging jet fuel prices will lead to a slowing of global airline capacity deployment, with groundings a possibility among the financially weakest operators."
Last week, American Airlines (AAL) and United Airlines (UAL) lowered their full-year earnings projections. United Airlines said at the time it faced headwinds in the first quarter, including a $340 million increase in fuel expense, compared with a year earlier.
Qatar Airways recently contacted lessors to potentially defer or reduce rental payments, Deutsche Bank said Monday. If other airlines request similar favors and aircraft lessors opt to provide that relief, new terms will likely be net present value-positive over the longer term for lessors, according to the note.
A premium multiple to AerCap Holdings' (AER) book value is "justified" given its diversified asset fleet earning mid-double-digit return on equity, Doherty said. An undersupply of aircraft assets is "structural" and is expected to last through the end of the decade, the brokerage wrote.
"AerCap represents one of the best ways to play this theme given the high demand for aircraft, its large orderbook, durable earnings, and high visibility into future cash flows given the long duration nature of its lease contracts," Doherty said.
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