Avation PLC (LSE: AVAP), the commercial passenger aircraft leasing company, announces preliminary unaudited financial results for the year ended 30 June 2020.

Key Financial Results

  •   Revenue increased 14% to a record $135.3 million;
  •   Unrealised gain on aircraft purchase rights of $27.1 million recognised;
  •   Cash and bank balances increased 7% to $114.6 million;

  Impairment losses of $35.5 million recognised, reflecting the COVID-19 pandemic, industry and customer disruption;

  •   Profit before taxation decreased 43% to $14.6 million, in challenging conditions; and

  Net cash from operating activities increased 20% to $88.5 million.

Operational Highlights

  •   Two aircraft were repossessed from Thomas Cook and transitioned to VietJet;
  •   Three new ATR72-600 aircraft were acquired during the year;
  •   Three Fokker 100 aircraft were transferred to the lessee on completion of finance leases;

  First ever commercial aircraft financed with a Green loan – recognised by Airline Economics as “Deal of the Year for Innovation”; and

  Ongoing management of exposure to Virgin Australia administration with transition of five of 13 aircraft on lease to date.

COVID-19 Strategy

  •   The Company has implemented a strategy to preserve liquidity and cashflow;
  •   Short-term rent deferrals totalling approximately $13.1 million granted to airline customers;

  Loan repayment deferrals totalling approximately $24.4 million obtained from secured lenders; and

  The Company has elected to temporarily pause capital expenditure and dividends.

Executive Chairman, Jeff Chatfield, said:

“Avation has posted a satisfactory result in a volatile environment. Avation is profitable in a challenging time for both the airline and aircraft leasing sector.

“At the outset of the COVID-19 pandemic Avation instituted a programme of support for its airline customers by agreeing to defer payment of a portion of their rent in the short-term. The cashflow impact of this support programme has been mitigated by adjusting the amortisation profiles of related financings with the agreement of lenders. Since the start of the pandemic the Company has also reduced administration costs and has instituted a temporary pause on capital expenditure with the goal of preserving liquidity.

“The Company believes that airlines will require significant number of leased aircraft in the post pandemic phase due to the vast number of older aircraft that have been retired and the impact of the pandemic on airline balance sheets, reducing their ability to purchase aircraft directly. This supports the Company strategy of being focussed on relatively new and popular commercial aircraft types.

“The Company is fortunate that some of its largest customers are in countries where there has been a brief or manageable impact from the pandemic. We are now observing a return to service of certain customers including VietJet, airBaltic, EVA Air and Mandarin Airlines which combined represent of the order of 60% of Avation’s future unearned contracted leasing revenue.

“Avation is optimistic about the long-term opportunity for airline travel particularly the turboprop and narrow-body aircraft sectors. The Company will position itself for a return to growth through opportunistic purchases and delivery of its orderbook in a post pandemic environment ”

Aircraft Fleet

At June 30, Avation’s fleet comprised 48 aircraft, including seven aircraft on finance lease. The weighted average age of the fleet is 4.1 years (2019: 3.4 years) and the weighted average remaining lease term is 6.9 years (2019: 7.5 years).

Fleet assets decreased 2% to $1,242.2 million (2019: $1,269.7 million). Three ATR72-600 aircraft were added to the fleet in the period. Three Fokker 100 aircraft were transferred to the lessee airline upon completion of their finance leases. Narrowbody aircraft make up 47.5% of the fleet as at 30 June 2020.

Avation has orders for eight additional ATR 72-600 aircraft and has purchase rights for a further 25 aircraft.

Airline Customers in Administration (update as of 23 October 2020)

Avation had two airline customers (Virgin Australia and Braathens) subject to insolvency administrations as of the end of the reporting period.

Virgin Australia

Avation had a total of 13 aircraft on lease to Virgin Australia when it entered administration. These included six ATR72-500 aircraft, five ATR72-600 aircraft and two Fokker 100 jet aircraft. Since the commencement of administration, Avation has entered into new lease arrangements for five of these aircraft, including finance leases for the sale of the two Fokker 100 aircraft, operating leases for two ATR72-500s with a new airline customer in Australia and a five year operating lease for an ATR72-500 aircraft with a new airline customer in Asia.

The three remaining ATR72-500s have been returned to Avation and are now undergoing maintenance in preparation for re-marketing for lease or sale. The Administrator has also commenced the return of the five ATR72-600 aircraft. Avation is now seeking to reposition or sell a total of eight ATR72 aircraft. The total secured debt outstanding against these eight aircraft amounts to US$30.7 million.

The majority of the Company’s claim against Virgin Australia consists of outstanding rent and end-of-lease return maintenance compensation. Avation’s preliminary proof of debt claim against Virgin Australia amounts to US$74.7 million. On 25 August 2020, the Administrator released a report to creditors which provided guidance that the estimated return to unsecured creditors will be 9%-13% of the amount owed with payment expected prior to 30 June 2021.

Braathens

Avation had two ATR72-600 aircraft on lease to Braathens when it entered administration. The airline has now successfully exited administration and restarted operations. Avation has agreed new lease terms with the airline including extensions in lease duration from 10 to 12 years. The Company has also negotiated adjustments to the amortisation profiles of the related financings with the senior lender to reflect the revised lease terms. Avation is optimistic of maintaining a profitable customer relationship with Braathens in the event that airline is able to maintain the current lease terms.

Recognition of Purchase Rights

The Company holds Purchase Rights to acquire 25 additional aircraft under its contract with ATR. In December 2019, the Company changed its business model for Purchase Rights by recognising that it holds excess Purchase Rights over and above the Company’s requirement to acquire additional ATR aircraft for its fleet. The Company will seek to dispose of excess Purchase Rights from time to time when market conditions are favourable. In recognition of this change in business model, the Company recognised the Purchase Rights at fair value through profit or loss in the financial statements.

Purchase Rights for 25 ATR72-600 aircraft, represent a material source of growth for Avation and potential value for shareholders. Fair values for Purchase Rights were determined by the Company based on an independent third-party valuation of the aircraft delivery positions. The recognition of this asset on the balance sheet has generated an unrealised gain of $27.1 million. Purchase Rights are subject to revaluation through profit or loss at each future balance sheet date.

Debt summary

The weighted average cost of total debt decreased to 4.5% as at 30 June 2020 (2019: 4.6%). The weighted average cost of secured debt decreased to 3.6% at 30 June 2020 (2019: 3.7%).

At the end of the year, Avation’s debt to assets ratio was 75.7% (2019: 77.4%). At 30 June 2020, 90.7% of total debt was at fixed or hedged interest rates (2019: 92.0%). The proportion of unsecured debt to total debt was 32.3% (2019: 32.0%).

Avation will continue to source secured and unsecured debt finance to fund fleet growth with the overriding objective of lowering its weighted average cost of finance.

Avation is currently reviewing alternatives in relation to the Avation Capital S.A. 6.5% senior notes due 2021 issued under Avation’s global medium-term note programme and has retained specialist financial advisers, PJT Partners, to assist with this process.

Dividend

The Board declared an interim dividend of 2.1 US cents per share in respect of the six months ended 31 December 2019, which was paid 9 January 2020.

A dividend of 8.5 US cents per share declared in respect of the financial year ended 30 June 2019 was paid on 18 October 2019.

The Company advised in May 2020 that as part of the COVID-19 strategy to preserve liquidity there would be no further dividends for this financial period.

Market Positioning

Avation’s strategy is to target growth and diversification by adding new airline customers, while maintaining a low average aircraft age and long remaining lease term metrics. Avation focuses on new and relatively new commercial passenger aircraft on long-term leases. Avation is capable of owning, managing and leasing turboprop, narrowbody and twin-aisle aircraft and engines.

The Company’s business model involves rigorous investment criteria and has a history of delivering consistent profitability while seeking to mitigate the risks associated with the aircraft leasing sector. Avation will typically sell mid-life and older aircraft and redeploy capital to newer

The Board declared an interim dividend of 2.1 US cents per share in respect of the six months ended 31 December 2019, which was paid 9 January 2020.

A dividend of 8.5 US cents per share declared in respect of the financial year ended 30 June 2019 was paid on 18 October 2019.

assets. This approach is intended to mitigate technology change risk, operational and financial risk, support sustained growth and deliver long-term shareholder value.

Avation is an active trader of aircraft and from time to time will consider the acquisition or sale of individual or smaller portfolios of aircraft, based on prevailing market opportunities and consideration of risk and revenue concentrations.

Engine Leasing

In January 2020 Avation completed the purchase of a Pratt & Whitney PW127M aircraft engine. This acquisition represents Avation’s first investment in an individual engine for leasing. Avation entered into a short-term lease of this engine. Airlines require access to spare engines to ensure continuous operation of aircraft. This new business line is synergistic to Avation’s core aircraft leasing business.

Interim Management Statement

The Company’s continuing focus for the 2021 financial year is to preserve liquidity and maintain cashflow while the pandemic persists and the airline industry is severely impacted.

Management believes that the risks associated with its portfolio of assets have been reduced through the growth and diversification that has been achieved in recent years.

In addition to operational cash flows, funding is traditionally sourced from capital markets, asset- backed bank lending and disposal of selected aircraft. Access to acceptably priced funding is a risk, which is common to all capital-intensive businesses. Specific risks which are inherent to the aircraft leasing industry include, but are not limited to, ongoing pandemic impacts on travel, the creditworthiness of airline customers, over-production of new aircraft and market saturation, technology change, residual value risks, competition from other lessors and the risk of impairment of aircraft assets.