Avation PLC (LON:AVAP), the commercial passenger aircraft leasing company, has announced unaudited results for the year ended 30 June 2023.
Financial Highlights
· Revenue and other income for the year was $99.3 million, fleet assets were $898.6 million and total assets were $1,179.6 million;
· Net indebtedness reduced by 7.8% to $731.2 million (2022: $792.9 million);
· Total cash and bank balances of $116.9 million (2022: $119.2 million);
· Operating profit of $70.6 million (2022: $90.2 million);
· Profit after tax of $12.2 million (2022: $17.1 million);
· Earnings per share of 17.4 cents (2022: 24.7 cents); and
· South-East Asian airline reduces arrears by $5.1 million since 30 June 2023.
Operational Activity
· Two ATR 72-600 turboprop aircraft and a Boeing 737-800 aircraft were sold during the year;
· One ATR 72-600 aircraft was repossessed from an airline in Myanmar and subsequently commenced a new lease with an airline in Tahiti;
· One off-lease ATR 72-500 started a lease with a new airline customer in Nepal;
· Avation received a creditors distribution of $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;
· The Company entered into an agreement to sell an eleven-year-old off-lease ATR 72-600; and
· The Company entered into a lease agreement for a second eleven-year-old off-lease ATR 72-600 which is expected to commence in November 2023.
Executive Chairman, Jeff Chatfield, said:
“During the year ended 30 June 2023 Avation reduced the number of off-lease aircraft in the fleet from six to two by transitioning or selling off-lease aircraft. Avation has agreed to sell or lease both remaining off-lease aircraft and on completion of these transactions will have a fully utilised fleet.
Avation has continued to de-lever its balance sheet, achieving a reduction to 62.0% in the ratio of net debt to total assets as at 30 June 2023. A significant portion of the cashflow generated by the fleet is directed towards repayments of debt. Scheduled loan repayments for the 2024 financial year, amounting to around US$62 million, exceed expected depreciation of the fleet over the same period. The Company is hedged against further interest rate changes on 95.8% of its loans and borrowings.
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.
After the recovery from the COVID-19 pandemic, Avation plans to re-grow its business in a prudent and sensible manner. We will target organic growth, which includes leasing the two ATR aircraft we have on order for delivery in 2024. We have paid all pre-delivery payments for the two ordered aircraft and believe that the balance due on delivery can be funded with senior secured debt. Avation has a significant purchase rights position on a stream of new ATR 72 aircraft. The manufacturer expects that, with a new engine variant, these aircraft will be approved for use with sustainable aviation fuel in 2025. The Company believes that the ATR 72 aircraft is the most sustainable commercial aircraft type currently available.
The Company has significantly lowered overheads by reducing headcount and actively managing legal expenses and other expenditure.
Few aircraft were built during the COVID-19 pandemic so lessors that own them have seen positive developments in valuations. As a result, Avation has been able to reverse around US$3.3 million of previously recognised impairment charges and has seen a positive impact on the valuation of our 28 purchase rights for ATR aircraft.
We are reasonably confident that the Company will be able to arrange leases for the two new aircraft ordered for delivery in 2024.”
Financial Summary
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Revenue | 91,861 | 112,232 |
| Other income | 7,389 | 4,152 |
| 99,250 | 116,384 | |
| Operating profit | 70,633 | 90,184 |
| Profit before tax | 13,000 | 22,502 |
| Profit after tax | 12,192 | 17,127 |
| EPS (basic) | 17.43c | 24.65c |
| US$ ‘000s | 30 June, | |
| 2023 | 2022 | |
| Fleet assets (1) | 898,616 | 987,995 |
| Total assets | 1,179,596 | 1,217,020 |
| Cash and bank balances (2) | 116,905 | 119,171 |
| Unrestricted cash and cash equivalents | 24,816 | 35,267 |
| Net asset value per share (US$) (3) | US$3.41 | US$3.27 |
| Net asset value per share (GBP) (4) | £2.69 | £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 30 June 2023 comprise cash and cash equivalents of US$24.8 million (30 June 2022: US$35.3 million), investment in fixed deposits of US$1.2 million (2022: nil) and restricted cash balances of US$90.9 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 30 June 2023 of 1.27 (30 June 2022:1.22).
Aircraft Fleet
| Aircraft Type | 30 June 2023 | 30 June 2022 |
| ATR 72-600 | 16 | 18 |
| ATR 72-500 | 5 | 5 |
| Airbus A220-300 | 5 | 5 |
| Airbus A320-200 | 2 | 2 |
| Airbus A321-200 | 6 | 6 |
| Airbus A330-300 | 1 | 1 |
| Boeing 777-300ER | 1 | 1 |
| Boeing 737-800NG | – | 1 |
| Total | 36 | 39 |
At 30 June 2023, Avation’s fleet comprised 36 aircraft, including five aircraft on finance lease. Avation serves 17 customers in 14 countries. The weighted average age of the fleet is 6.4 years (30 June 2022: 5.6 years) and the weighted average remaining lease term is 5.0 years (30 June 2022: 5.7 years).
Two ATR 72-600 and one Boeing 737-800 aircraft were sold during the period. Turboprop and narrowbody aircraft make up 82% of fleet assets as at 30 June 2023. Fleet assets have decreased 9.0% to US$898.6 million (30 June 2022: US$988.0 million) as a result of aircraft sales and depreciation. As at the date of this report, Avation has two off-lease aircraft. One of these aircraft is expected to commence a new lease in November 2023 and the remaining aircraft is subject to an agreed sale which is expected to complete shortly.
Avation has orders for two new ATR 72-600 aircraft and purchase rights for a further 28 aircraft as at 30 June 2023. The order-book and purchase rights provide a pathway to organic fleet growth.
Debt summary
| US$ ‘000s | 30 June, | |
| 2023 | 2022 | |
| Current loans and borrowings | 61,401 | 63,900 |
| Non-current loans and borrowings | 694,575 | 764,230 |
| Total loans and borrowings | 755,976 | 828,130 |
| Unrestricted cash and bank balances | 24,816 | 35,267 |
| Net indebtedness (1) | 731,160 | 792,863 |
| Net debt to total assets (2) | 62.0% | 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 7.8% to US$731.2 million (30 June 2022: US$792.9 million). Two aircraft previously financed under the Group’s floating rate warehouse loan facility were re-financed with long-term fixed rate debt, reducing exposure to changes in interest rates.
The weighted average cost of total debt has increased to 6.1% as at 30 June 2023 (30 June 2022: 5.7%) due to repayments of lower cost secured loans in the period. The weighted average cost of secured debt also increased to 4.5% at 30 June 2023 (30 June 2022: 4.0%).
At the end of the financial period, Avation’s net debt to total assets ratio improved to 62.0% (30 June 2022: 65.1%). As at 30 June 2023, 95.8% of total debt was at fixed or hedged interest rates (30 June 2022: 90.0%). The ratio of unsecured debt to total debt was 40.1% (30 June 2022: 35.8%).
Financial Analysis
Revenue
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Lease rental revenue | 85,936 | 93,352 |
| Less: amortisation of lease incentive assets | (1,368) | (1,383) |
| 84,568 | 91,969 | |
| Interest income from finance leases | 2,230 | 2,918 |
| Maintenance reserves revenue | 5,063 | 13,207 |
| End of lease compensation revenue | – | 4,138 |
| 91,861 | 112,232 | |
Lease rental revenue decreased by 7.9% from US$93.4 million in the year ended 30 June 2022 to US$85.9 million in the year ended 30 June 2023. The decrease was principally due to the reduction in the number of aircraft in the fleet from 39 at 30 June 2022 to 36 at 30 June 2023.
Interest income from finance leases decreased by 23.6% from US$2.9 million in the year ended 30 June 2022 to US$2.2 million in the year ended 30 June 2023. The decrease was principally due to the reduction in the number of aircraft leased on finance leases from 6 at 30 June 2022 2021 to 5 at 30 June 2023.
Other income
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Foreign currency exchange gain | 3,154 | 1,018 |
| Claim recovery | 3,137 | – |
| Fees for late payment | 966 | 1,940 |
| Aircraft late delivery compensation | – | 540 |
| Deposit released | – | 200 |
| Others | 132 | 454 |
| 7,389 | 4,152 | |
Foreign currency exchange gains in the year ended 30 June 2023 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 is the balance of a distribution paid to creditors of Virgin Australia in excess of amounts allocated to trade receivables.
Administrative expenses
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Staff costs | 5,587 | 6,771 |
| Other administrative expenses | 3,173 | 2,694 |
| 8,760 | 9,465 | |
Staff costs reduced by 17.5% from US$6.8 million in the year ended 30 June 2022 to US$5.6 million in the year ended 30 June 2023 principally due to a reduced average headcount, lower bonus payments and lower charges for employee share warrants.
Other administrative expenses increased by 17.8% from US$2.7 million in the year ended 30 June 2022 to US$3.2 million in the year ended 30 June 2023 principally due to increased marketing related travel expenses.
Other operating income and expense items
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Depreciation | (38,566) | (39,304) |
| Gain on derecognition of a finance lease | 2,792 | – |
| Loss on disposal of aircraft and aircraft engine | (1,000) | (2,396) |
| Unrealised gain on aircraft purchase rights | 20,540 | 38,320 |
| Unrealised gain on equity investment | 7,520 | – |
| Reversal of/impairment (loss) on aircraft | 3,287 | (6,158) |
| Aircraft transition expenses | (11,389) | (5,479) |
| Expected credit losses | (659) | 1,980 |
| Legal and professional fees | (2,382) | (3,698) |
Depreciation reduced by 1.9% from US$39.3 million to US$38.6 million due to a reduction in the fleet.
A gain of US$2.8 million was recognised on derecognition of a finance lease for an aircraft repossessed from a defaulting airline in Myanmar. The gain represents the positive difference between the outstanding value of the finance lease receivable and the broker valuation of the aircraft’s market value at the date of termination of the lease.
A loss of US$1.0 million was recognised on the sale of two ATR 72-600 aircraft during the year. A loss of US$ 2.4 million was recognised in the year ended 30 June 2022 on the sales of an Airbus A220-300, an Airbus A321-200, three ATR 72-600 aircraft and an engine.
The Company’s 28 aircraft purchase rights were revalued at 30 June 2023 using a Black-Scholes option pricing model. The principal factors leading to the recognition of a gain of US$20.5 million (2022: US$ 38.2 million) were increases in the appraised value of the ATR 72-600 aircraft and increases in risk-free interest rates.
The Company recorded an unrealised gain of US$7.5 million on its holding of shares in Philippine Airlines, Inc. The Company received these shares as part of the settlement awarded to creditors in the bankruptcy restructuring of the airline in December 2021.
Aircraft transition expenses of US$11.4 million (2022: US$5.5 million) represent repairs and maintenance expenditure on aircraft repossessed following airline defaults resulting from the COVID-19 pandemic. The Company expects transition expenses to be substantially reduced in future periods as most aircraft which were repossessed as a result of the COVID-19 pandemic have now been transitioned to new lessees or sold.
Expected credit losses of US$0.7 million primarily relate to rent arrears and a payment plan agreement loan granted to an airline in South-East Asia. In a trading update issued on 6 July 2023 the Company advised that it was reviewing its provisions against trade receivables. Between 30 June 2023 and the date of this report the airline has reduced its total arrears and loan balance by US$5.1 million.
Legal and professional fees reduced by 35.6% from US$3.7 million in the year ended 30 June 2022 to US$ 2.4 million in the year ended 30 June 2023 due to a reduction in transaction activity.
Finance income
| US$ ‘000s | Year ended 30 June, | |
| 2023 | 2022 | |
| Interest income | 3,129 | 281 |
| Fair value gain on financial derivatives | 1 | 2,492 |
| Finance income from discounting non-current deposits to fair value | 611 | 571 |
| Gain on repurchase of unsecured notes | 508 | – |
| Gain on early full repayment of borrowings | 1,657 | – |
| 5,906 | 3,344 | |
Interest income increased in the year ended 30 June 2023 due to an improved interest rate environment for depositors. The group has proactively transferred funds into term deposit accounts to take advantage of increased deposit interest rates.
Interest income includes US$1.1 million interest on payment plan agreement loans granted to a customer.
Avation generated a gain of US$0.5 million on the repurchase of US$11.4 million of Avation Capital S.A. 8.25%/9.0% unsecured notes at a discount during the year.
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 | Year ended 30 June, | |
| 2023 | 2022 | |
| Interest expense on secured borrowings | 21,170 | 24,062 |
| Interest expense on unsecured notes | 30,976 | 29,913 |
| Interest expense on borrowings from related parties | 271 | – |
| Amortisation of loan transaction costs | 1,057 | 2,226 |
| Amortisation of IFRS 9 gain on debt modification | 8,711 | 8,805 |
| Fair value loss on financial derivatives | 577 | – |
| Amortisation of interest expense on non-current borrowings | 571 | 539 |
| Finance charges on early full repayment of borrowings | – | 731 |
| Others | 206 | 1,205 |
| 63,539 | 67,481 | |
Interest expense on secured borrowings reduced by 12.0% to US$21.2 million in the year ended 30 June 2023 from US$24.1 million in the year ended 30 June 2022 as a result of net repayments of secured loans. Secured borrowings have been paid down by US$79.4 million from US$531.9 million at 30 June 2022 to US$452.5 million at 30 June 2023.
Interest expense on unsecured notes includes US$8.6 million (2022: 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$8.7 million (2022: US$ 8.8 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 30 June 2023 is US$345.2 million.
Interim Management Statement
The global aviation industry has continued to recover strongly from the pandemic in 2023. In its latest update IATA reported that industry-wide revenue passenger-kilometres (RPKs) increased 26.2% year-on-year in July, reaching 95.6% of the traffic numbers seen in 2019. IATA also reports that domestic air travel, a driving force in the recovery of global passenger demand since the onset of the pandemic, reached a new all-time RPK high in July 2023 surpassing the previous record set in July 2019.
Avation has primarily focussed on transitioning or disposing of unutilised aircraft, maintaining liquidity, and reducing leverage in the year ended 30 June 2023. The Company recently agreed to sell one of its last two remaining unutilised aircraft and to lease the other to a new customer airline. On completion of these two transactions the Company’s fleet will be fully utilised for the first time since early in 2020.
The company’s focus will now shift towards leasing two ATR 72-600 aircraft from its orderbook, which are currently scheduled for delivery in April and May 2024, and identifying opportunities to lease, finance and deliver additional ATR aircraft by exercising purchase rights.
Avation aims to gradually transition to a more sustainable, lower CO2 emissions aircraft fleet. Aircraft delivered from Avation’s orderbook and exercised purchase rights will be fitted with the new Pratt and Whitney Canada PW127XT engine. The PW127XT engine promises 20% lower maintenance costs, extended time on wing, 3% lower fuel consumption and 5% more power compared with the current engine variant. The manufacturer expects that the PW127XT engine will be certified to operate with 100% sustainable aviation fuel from 2025. Net emissions of CO2 will be reduced by 80% when using sustainable aviation fuel.
We also anticipate gradually trading out of older aircraft types and focussing on aircraft types such as the Airbus NEO and A220 series in addition to ATR turboprop aircraft. The Company’s portfolio already includes a significant proportion of Airbus A220 and ATR 72 aircraft.
Market Positioning
Avation’s long-term 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 supports the transition of the aircraft industry towards aircraft capable of using sustainable aviation fuel to produce lower CO2 emissions on a net basis. Reducing CO2 emissions is key to providing a sustainable future for the global aviation industry and in addressing climate-change risks.
The Company’s business model involves rigorous investment criteria that seeks to mitigate the risks associated with the aircraft leasing sector. Avation will typically sell mid-life and older aircraft and redeploy capital to newer assets. This approach is intended to mitigate technology change risk, operational and financial risk, support sustained growth and deliver long-term shareholder value.
Avation 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.
Funding for aircraft acquisitions is traditionally sourced from capital markets, asset-backed lending, operational cash flows and disposals of aircraft. The ability to access acceptably priced funding is key profit driver in aircraft leasing.
Principal risks factors facing the aircraft leasing industry include, but are not limited to, exposure to the airline industry and the risk of deterioration in the financial condition of airline customers, asset value risk driven by changing patterns of supply and demand and technological change, operational risks including risks resulting from war, acts of terrorism and natural disasters, regulatory risks from changes to government regulations and tax laws and climate-change risks.
