Avation PLC (LON:AVAP), the commercial passenger aircraft leasing company, has announced unaudited results for the six months ended 31 December 2022.
Financial Highlights
· Revenue and other income reduced to US$55.3 million (2021: US$60.1 million);
· Operating profit increased to US$ 35.0 million (2021: US$18.8 million);
· Profit before tax of US$6.7 million (2021: Loss before tax US$15.9 million);
· Net indebtedness reduced by US$46.0 million to US$746.9 million (30 June 2022: US$792.9 million); and
· Net asset value per share increased 5.2% to £2.82 (30 June 2022: £2.68);
Operational Highlights
· Two ATR 72-600 turboprop aircraft were sold during the period;
· One ATR 72-600 aircraft was repossessed from an airline in Myanmar;
· One off-lease ATR 72-500 started a lease with a new airline customer in Nepal;
· Avation received a creditors’ distribution of US$3.4 million from Virgin Australia;
· Two Airbus A220-300 aircraft were re-financed with fixed rate long-term loans, reducing Avation’s exposure to interest rate changes;
Outlook
Avation is focussed on the execution of lease deliveries and sale agreements for the remaining off-lease aircraft in the fleet in the second half-year period and managing the overall cost of debt. The airline industry is continuing its recovery from the lows seen during the COVID-19 pandemic. Global domestic air travel in December 2022 as reported by IATA, has recovered to around 79.9% of December 2019 passenger numbers while international travel, while lagging, has recovered to around 75.1% of December 2019 levels.
The Company believes that airlines will require significant numbers of leased aircraft in the short to medium term due to the large number of older aircraft that have been retired as a result of the COVID-19 pandemic, and the impact of the pandemic on airline balance sheets, reducing their ability to purchase aircraft directly.
The Company’s future strategy will focus on leasing modern, low CO2 emissions, fuel-efficient aircraft. Avation is supportive of the aviation industry’s goal of becoming more sustainable through a transition to new technology more fuel-efficient aircraft engines and the use of sustainable aviation fuel to reduce CO2 emissions.
The Company will cautiously position itself for a return to organic self-funded growth through deliveries from its orderbook, opportunistic aircraft trading and may convert ATR purchase rights to firm orders should attractive lease opportunities arise.”
Executive Chairman, Jeff Chatfield, said:
“During the six months ended 31 December 2022 Avation reduced the number of off-lease aircraft in the fleet from six to four. In addition, the sale of a Boeing 737-800 in February 2023 has further reduced the number of off-lease aircraft to three. A key strategic aim for Avation over the coming months is to conclude sales or lease agreements for all remaining off-lease aircraft and we are pleased to announce that we have recently concluded a lease agreement with a new airline customer for one of the three remaining aircraft.
Avation has continued to de-lever its balance sheet, achieving a reduction to 62.9% in the ratio of net debt to total assets as at 31 December 2022. A significant portion of the cashflow generated by the fleet has been directed towards repayments of debt. Scheduled loan repayments for the 2023 calendar year, amounting to around US$57 million, exceed the expected depreciation of the fleet over the same period.
A bond repurchase tender was concluded in February, resulting in the repurchase and retirement of US$7.1m of Avation Capital S.A. 8.25%/9.0% unsecured notes. The Company may pursue other liability management exercises from time to time with the aim of further reducing the cost and/or outstanding amount of unsecured debt in issue. The Company has retained Citibank as a strategic adviser for potential future debt reduction exercises.
After the recovery from the COVID-19 pandemic, Avation plans to re-grow its business in an organic prudent and sensible manner. We will target organic growth, which includes the placement of the remaining off-lease aircraft and leasing the two ATR aircraft we have on order for delivery in 2024. We have paid all pre-delivery payments due for the two ordered ATR aircraft and believe that the balance due on delivery of the aircraft can be funded with senior secured debt.
We note that most of our peer leasing companies have suffered large losses due to the seizure of aircraft leased to Russian airlines. Avation was fortunate in that it did not have any exposure to Russian airlines. Our policy is, and has always been, to only lease planes in jurisdictions where we are confident that we can arrange repossession, if ever required.
The Company has taken steps to reduce overheads by reducing headcount and actively managing legal expenses and other expenditure. The Company has an in-house technical team and management was pleased that the overall cost of managing the transition of one Boeing 737-800 was less than anticipated.
Few aircraft were built during the COVID-19 pandemic so lessors that own them have seen positive developments in valuations. As an owner we have managed to move, sell, service and, most importantly, transition aircraft.
We are reasonably confident that the Company will be able to place its remaining inventory of off-lease aircraft and arrange leases for the two new aircraft ordered for delivery in 2024.”
Financial Summary
| US$ ‘000s | Six months ended 31 December, | |
| 2022 | 2021 | |
| Revenue | 46,287 | 57,903 |
| Other income | 9,024 | 2,186 |
| 55,311 | 60,089 | |
| Operating profit | 35,010 | 18,800 |
| Profit/(loss) before tax | 6,689 | (15,863) |
| Profit/(loss) after tax | 8,332 | (15,271) |
| EPS (basic and diluted) | 12.00c | (21.98c) |
| US$ ‘000s | 31 December 2022 | 30 June2022 |
| Fleet assets (1) | 936,300 | 987,995 |
| Total assets | 1,187,077 | 1,217,020 |
| Cash and bank balances (2) | 111,446 | 119,171 |
| Unrestricted cash and cash equivalents | 32,120 | 35,267 |
| Net asset value per share (USUS$) (3) | US$3.42 | US$3.27 |
| Net asset value per share (GBP) (4) | £2.82 | £2.68 |
1. Fleet assets are defined as property, plant and equipment plus assets held for sale plus finance lease receivables.
2. Cash and bank balances as at 31 December 2022 comprise cash and cash equivalents of US$32.1 million (30 June 2022: US$35.3 million) and restricted cash balances of US$79.3 million (30 June 2022: US$83.9 million).
3. Net asset value per share is total equity divided by the total number of shares in issue, excluding treasury shares.
4. Based on GBP:USD exchange rate as at 31 December 2022 of 1.21 (30 June 2022:1.22).
Aircraft Fleet
| Aircraft Type | 31 December 2022 | 30 June 2022 |
| Boeing 777-300ER | 1 | 1 |
| Airbus A330-300 | 1 | 1 |
| Airbus A321-200 | 6 | 6 |
| Boeing 737-800NG | 1 | 1 |
| Airbus A320-200 | 2 | 2 |
| Airbus A220-300 | 5 | 5 |
| ATR 72-600 | 16 | 18 |
| ATR 72-500 | 5 | 5 |
| Total | 37 | 39 |
At 31 December 2022, Avation’s fleet comprised 37 aircraft, including five aircraft on finance lease. Avation serves 16 customers in 13 countries. The weighted average age of the fleet is 6.1 years (30 June 2022: 5.6 years) and the weighted average remaining lease term is 5.4 years (30 June 2022: 5.7 years).
Two ATR 72-600 aircraft were sold during the period. Turboprop and narrowbody aircraft make up 82% of fleet assets as at 31 December 2022. Fleet assets have decreased 5.2% to US$936.3 million (30 June 2022: US$988.0 million). As at the date of this report, Avation has three off-lease aircraft. We aim to agree new leases or sales of these remaining off-lease aircraft by 30 June 2023.
Avation has orders for two new ATR 72-600 aircraft and purchase rights for a further 28 aircraft as at 30 June 2022. The order-book and purchase rights provide a pathway to organic fleet growth.
Avation has no exposure to Russia or any Russian airline. Avation is currently not aware of any sanctions resulting from Russia’s invasion of Ukraine that will impact the Company.
Debt summary
| US$ ‘000s | 31 December 2022 | 30 June 2022 |
| Current loans and borrowings | 57,153 | 63,900 |
| Non-current loans and borrowings | 721,826 | 764,230 |
| Total loans and borrowings | 778,979 | 828,130 |
| Unrestricted cash and bank balances | 32,120 | 35,267 |
| Net indebtedness (1) | 746,859 | 792,863 |
| Net debt to total assets (2) | 62.9% | 65.1% |
| Weighted average cost of secured debt (3) | 4.5% | 4.0% |
| Weighted average cost of total debt (4) | 6.1% | 5.7% |
1. Net indebtedness is defined as loans and borrowings less unrestricted cash and bank balances.
2. Net debt to assets is defined as net indebtedness divided by total assets.
3. Weighted average cost of secured debt is the weighted average interest rate for secured loans and borrowings at period end.
4. Weighted average cost of total debt is the weighted average interest rate for total loans and borrowings at period end.
During the period net indebtedness was reduced by 5.8% to US$746.9 million (30 June 2022: US$792.9 million). Two aircraft previously financed under the Group’s floating rate warehouse loan facility were re-financed with long-term fixed rate debt, reducing exposure to changes in interest rates.
The weighted average cost of total debt has increased to 6.1% as at 31 December 2022 (30 June 2022: 5.7%) due to repayments of lower cost secured loans in the period. The weighted average cost of secured debt also increased to 4.5% at 31 December 2022 (30 June 2022: 4.0%).
At the end of the financial period, Avation’s net debt to total assets ratio improved to 62.9% (30 June 2022: 65.1%). As at 31 December 2022, 94.8% of total debt was at fixed or hedged interest rates (30 June 2022: 90.0%). The ratio of unsecured debt to total debt was 38.6% (30 June 2022: 35.8%).
Financial Analysis
Revenue
| US$ ‘000s | Six months ended 31 December, | |
| 2022 | 2021 | |
| Lease rental revenue | 42,608 | 48,531 |
| Less: amortisation of lease incentive assets | (612) | (769) |
| 41,996 | 47,762 | |
| Interest income from finance leases | 1,171 | 1,406 |
| Maintenance reserves revenue | 3,120 | 4,461 |
| End of lease compensation revenue | – | 4,274 |
| 46,287 | 57,903 |
Lease rental revenue decreased by 12.2% from US$48.5 million in the six months ended 31 December 2021 to US$42.6 million in the six months ended 31 December 2022. The decrease was principally due to the reduction in the number of aircraft in the fleet from 42 at 31 December 2021 to 37 at 31 December 2022.
Interest income from finance leases decreased by 16.7% from US$1.4 million in the six months ended 31 December 2021 to US$1.2 million in the six months ended 31 December 2022. The decrease was principally due to the reduction in the number of aircraft leased on finance leases from 6 at 31 December 2021 to 5 at 31 December 2022.
Other income
| US$ ‘000s | Six months ended 31 December, | |
| 2022 | 2021 | |
| Fees for late payment | 390 | 1,419 |
| Deposit released | – | 200 |
| Lease maintenance contribution provision released | 1,942 | – |
| Foreign currency exchange gain | 3,481 | 240 |
| Claim recovery | 3,166 | – |
| Others | 45 | 327 |
| 9,024 | 2,186 |
A provision for lease maintenance contributions was released due to changes to the terms and conditions for maintenance in three lease agreements during the period.
Foreign currency exchange gains arose principally from the release of deferred hedged foreign currency exchange gains on two Euro loans that were refinanced during the period.
The claim recovery recognised in other income in the six months ended 31 December 2022 is the balance of a distribution paid to creditors of Virgin Australia in excess of amounts allocated to trade receivables.
Administrative expenses
| US$ ‘000s | Six months ended 31 December, | |
| 2022 | 2021 | |
| Staff costs | 2,868 | 3,780 |
| Other administrative expenses | 1,591 | 1,275 |
| 4,459 | 5,055 |
Staff costs reduced by 24.1% from US$3.8 million in the six months ended 31 December 2021 to US$2.9 million in the six months ended 31 December 2022 principally due to reduced headcount, lower bonus payments and lower charges for employee share warrants.
Other administrative expenses increased by 24.8% from US$1.3 million in the six months ended 31 December 2021 to US$1.6 million in the six months ended 31 December 2022 principally due to increased marketing related travel expenses.
Finance income
| US$ ‘000s | Six months ended 31 December, | |
| 2022 | 2021 | |
| Interest income | 853 | 45 |
| Fair value gain on financial derivatives | 44 | – |
| Finance income from discounting non-current deposits to fair value | 304 | 285 |
| Gain on repurchase of unsecured notes | 486 | – |
| Gain on early full repayment of borrowings | 1,657 | – |
| 3,344 | 330 |
Interest income increased in the six months ended 31 December 2022 due to an improved interest rate environment for depositors. The group has transferred funds into term deposit accounts to take advantage of increased deposit interest rates.
Avation generated a gain of US$0.5 million on the repurchase of US$4.4 million of Avation Capital S.A. 8.25%/9.0% unsecured notes at a discount in July 2022.
A gain of US$1.7 million on early full repayment of borrowings arose when two loans were refinanced in November 2022.
Finance expenses
| US$ ‘000s | Six months ended 31 December | |
| 2022 | 2021 | |
| Interest expense on secured borrowings | 10,742 | 12,600 |
| Interest expense on unsecured notes | 15,504 | 15,473 |
| Amortisation of loan transaction costs | 669 | 1,644 |
| Amortisation of IFRS 9 gain on debt modification | 4,342 | 3,638 |
| Amortisation of interest expense on non-current borrowings | 283 | 280 |
| Finance charges on early full repayment of borrowings | – | 726 |
| Others | 125 | 632 |
| 31,665 | 34,993 |
Interest expense on secured borrowings reduced by 14.7% to US$10.7 million in the six months ended 31 December 2022 from US$12.6 million in the six months ended 31 December 2021 as a result of repayments of secured loans. Secured borrowings have been paid down by US$113.4 million from US$591.4 million at 31 December 2021 to US$478.0 million at 31 December 2022.
Interest expense on unsecured notes includes US$4.3 million of non-cash interest paid in kind by increasing the face value of Avation Capital S.A. 8.25%/9.0% unsecured notes.
Amortisation of IFRS 9 gain on debt modification of US$4.3 million represents the non-cash accretion in the book value of Avation Capital S.A. 8.25%/9.0% unsecured notes resulting from the accounting treatment of the extension and changes to the terms of the notes agreed with noteholders in March 2021. The extension was accounted for as a substantial modification of a debt instrument in accordance with IFRS 9. The face value of Avation Capital S.A. 8.25%/9.0% unsecured notes outstanding as of 31 December 2022 is US$348.0 million.
