Avation (AVAP)

[Carcosa]

A320 Extension

Today, Avation announced a lease extension for the Airbus A320-200 aircraft G-EJCG (MSN 4033), which is operated by easyJet. The lease expiration has been extended from October 2026 to March 2029, providing an additional 2.5 years of service.

Manufactured in September 2009, this aircraft is currently 15 years old and will be approximately 18 years old at the end of the extended lease. It joined the Avation fleet as a used aircraft in January 2016 and was initially leased to Air Berlin before being taken over by easyJet Europe and then esyJet which has operated the aircraft since last year. Notably, it ranks among the oldest aircraft in easyJet's fleet.

On October 30, 2020, Avation transferred the eleven-year-old A320 from a subsidiary to its holding company. According to filings from Companies House for Capital Lease Aviation Ltd, the aircraft was valued at $20,549,595 at that time; its current value is estimated to be around $15 million.

The demand for A320s remains strong due to Airbus's relatively low production rates and Boeing's ongoing challenges across its product range.

Avation had the option to terminate the lease and sell the aircraft; however, doing so would have meant ending a significant business relationship with easyJet, a major operator of the A320 series. Maintaining this lease may allow Avation to secure a slightly higher lease rate while also retaining an aircraft that could be sold in the future with an existing lease attached. Furthermore, having a reputable operator like easyJet could enhance Avation's future finance ratings. Overall, this decision provides Avation with strategic options with minimal effort involved.


ATR in America

As previously explained, getting a >50 seat turbo prop in the USA is very difficult due to regulations protecting pilot interests. However in recent weeks it seems as though ATR have been making overtures relating to this market. Here are three recent links

Elevating ATR’s Presence in the US Skies
The Turboprop Renaissance
The Future is Regional – Why Aviation is an Essential Bridge Connecting Communities in the US

Whilst Avation may not enter this arena the fact that there is such a potential market infers demand for the ATR's will continue for decades to come allowing demand to drive up valuations.

[jwk88]

Good Evening Carcosa

Good to see the update on IR Manager.

The accounts didn't contain many surprises to me. Thank you for explaining the maintenance reserves to us.

What do you think the new lease rate for the easyJet A320 is? How do you think it compares to the past lease rate?

Do you think Avation needs to partner with a North American lessor to exploit any US ATR opportunity? Presumably Jeff does not have similar relationships with North American airlines as he does in Asia-Pac. Or perhaps a North American lessor is interested in acquiring the purchase rights or new aircraft emanating therefrom.

JWK88

[Carcosa]

jwk88,

The new lease rate will not come into force until October 2026. In essence I would expect the lease rate to be set now but subject to revisions at time of the lease extension reflecting interest rates and aircraft valuation. However I would expect the lease rate to increase because interest rates back in 2017 when it was originally leased to easyjet Europe were much lower than today and perhaps likely to remain that way in 2026. Also the aircraft valuation would be higher in 2026 than originally anticipated back in 2016.

However the aircraft value will be around half or less than that when Avation initially acquired the aircraft. So whereas they are currently earning around $2.7m/year , post 2026 that is likely to decrease to around $1.0m/year. Post 2029 the aircraft would be of such an age that potentially it would be sold or potentially scrapped providing a lump gain overbook plus, as previously posted about, potentially large maintenance reserves turning into cash profit.

I do not see the need for a NA partner. It's just that with America being the largest fleet operation in the world the likes of other US based lessors handling that business is very high. I believe there are some unusual tax implications for an overseas lessor to contend with. Avation would be an ideal candidate to order and pay for the ATR and sell it to an airline or another lessor at factory gate.

All IMO

[abtan]

Hi Carcosa
Thanks as always for all your insightful comments.

You mentioned that the A320 was leased for $2.7m pa. I hope you don't mind me asking but was this a statement or an estimate? I don't recall the company ever divulging lease rates, so it would be fascinating to know if this is more or less correct.

Based on the $25m loan that the company took out in 2016 when it purchased the aircraft, this $2.7m looks about right given that the Easyjet lease was initially expected to finish in 2026 i.e. it was a 10 year loan and the leases were arranged around this.

Which leads me to my next thought.

In recent years a lease of $2.7m probably did not generate much positive cash flow after:
1 - capital repayments ($2.5m pa for a $25m loan over 10 years)
2 - interest payments (I estimate these would be $0.1m - $0.2m pa for these last couple of years.)

Accordingly a lease of $1m pa, on a fully unencumbered aircraft where no capital repayment or interest is required, should actually provide a higher cash profit for the company than the current $2.7m lease.

One also has to hope that, given the age of the aircraft, its valuation between 2026 and 2029 won't actually change too much either, so the lease extension for such an old, soon to be unencumbered aircraft is presumably a very good thing.

As always I'm happy to be corrected if any of my above assumptions/thoughts are wrong.

Cheers
A

[Carcosa]

Abtan,

Am not sure but I think I got the leasing figure from the Capital Lease Aviation Ltd accounts.

Since Avation had the aircraft its leasing history is as follows (registration, Operator and Delivery date:
D-ABDZ Air Berlin, 22 Jun 2017
OE-IZC easyJet Europe, 21 Dec 2017
G-EJCG easyJet, 16 Mar 2023

As for the rest of your post, I agree with what you say.

In terms of the senior debt 25m that was raised it is possible that it was refinanced at some point as described here. Just a possibility.

[Clitheroekid]

... the lease extension for such an old, soon to be unencumbered aircraft is presumably a very good thing.

It would appear that the market agrees - up 14% today, the biggest ever one day rise I've seen.

[jwk88]

Any theories as to the recent share trading volume and price?

[Carcosa]

Assuming there is a single large buyer out there if you add up all of the large trades and assume some of the sells are actually buys (because they are reported late) and ignore the numerous deleted trades then I get 900,000 shares were bought over the last few days by a single large buyer.

That's a 1.3% holding of the total shares (70,878,124). If there is a notifiable RNS on Monday then maybe Milkwood Capital Limited could be adding.
as they have been adding to their holding in the recent past.

Alternatively it could be one of hundreds potential investors both US or UK based. Given the recent results plus the increased likelihood of US interest rate cuts plus the medium term outlook for the company then it would be a reasonable trade IMO, also noting the weakening of the USD against sterling in recent weeks which would be advantageous for anyone holding USD.

Having said that, the current share price brings Avation valuation P/NAV 0.6 which is pretty much in line with other listed lessors. However given the silly prices being ascribed to AA4 and DNA I would not be surprised if UK retail investors continue to drive the price of AVAP even further; although personally I would not adding at these prices. In fact am more likely to be a seller next week if the large trade buyer has finished. The danger being that any 'corporate' event could make me look silly.

[Carcosa]

JCAS Airlines - Delay

Further to my posts from 26 July 2024 and 5 October 2024 JCAS airlines issued a press release a few days ago which basically said:

Japanese start-up JCAS Airways (Osaka Kansai) has raised JPY300 million yen (USD2.1 million) in its first Pre-Series A funding round, according to a September 18 media release from the carrier. The airline says it has raised approximately JPY450 million (USD3.13 million) to date.

"We have raised funds from companies in Toyama Prefecture, where a route will be operated, in the first close of the pre-series A round," the release reads. "The funds raised this time will be used for equipment leasing, system development, personnel recruitment, etc. We also plan to raise funds from companies in the San'in region in the second close of the pre-series A round."

JCAS says it intends to connect Osaka Kansai to Toyama and Yonago with an ATR72-600 and commence services in the first half of 2025. The press release named 12 companies that participated in the recent funding round, including Ise Co., Ltd., Otaka Construction Co., Ltd., Kanamori Industry Co., Ltd., Isaac Co., Ltd., Shimada Shoten Co., Ltd., JEC Management Consultants Co., Ltd., Baron Co., Ltd., Sakurapax Co., Ltd., GRN Inc., Tachi Construction Co., Ltd., Hokuriku Coca-Cola Bottling Co., Ltd., and Horii Iron Works Co., Ltd.

In July, JCAS entered into a memorandum of understanding to dry lease the ATR - Avions de Transport Régional turboprop from Avation. It expects to take delivery of the aircraft next year. The airline plans to expand its fleet to seven ATRs and its network to 16 routes over the following five years.


The first ATR is likely to be supplied by Avation although I note Avation have yet to issue an RNS confirming the LOI as a fully signed contract (Avation staff visited JCAS in early October). It does appear however that not unsurprisingly the hoped for delivery before year end is going to slip into spring of 2026.

The current plan for the airline is to expand the fleet to a total of seven aircraft and operate 16 different routes within five years of flight operations commencing.


Head of Aircraft Trading and Capital Markets.

Today Avation announced the appointment of Mr Gerry Butler as the new Head of Aircraft Trading and Capital Markets. The RNS partially lists his career. Bottom line is that he is extremely well experienced. The fact he has an Executive role should mean active involvement in the day-to-day operations and strategic management of the company. It also infers to expect some big things in the coming couple of years.


Largest ATR Fleet Operator Parks Aircraft

Indonesia’s Wings Air is I think the largest ATR operator with 73 aircraft. Unfortunately things appear not to be going well. They have reportedly parked thirty ATR turboprops due to high import duties, especially for sourcing aircraft spare parts.

Wings Air has a fleet of seventy-three ATR - Avions de Transport Régional turboprops, including nineteen ATR72-500s (of which seven are inactive), and fifty-four ATR72-600s (of which twenty-three are inactive).

Due to high operational costs, the Lion Air Group has chosen to move some of its planes to other less-restrictive, cheaper countries, such as Malaysia and Thailand.

If anyone reading this has worked in Indonesia then it will boil down to politics and bribery. Interestingly ATR have entered the fray supporting Wings Air (Indonesia) with this press release.

[Carcosa]

Misc

It seems that Avation failed to deliver the promised ATR aircraft for October.

I note Companies House has issued a First Gazette notice for compulsory strike-off. I assume this is just a admin oversite due to the late Confirmation statement being overdue since last June.

I also note the monthly Corporate Presentation has not been updated since July 2024


Sky News Report - Takeover

On Budget Day, Sky News published an article titled "Oaktree-backed predator eyes swoop for London-listed Avation", suggesting that Avation could be a takeover target. In response, Avation’s share price briefly climbed to 191p before retracing to close at 169p, which was 3p below the pre-report level—an unusual movement.

No notably large trades occurred throughout the day, though there was significant interest from retail investors. Additionally, several substantial share purchases took place in the days leading up to the Sky News article, though these were not substantial enough to trigger regulatory notifications (RNS).

Azorra Aviation Holdings has previously been discussed in this context. To provide some background, Oaktree Capital has established itself as a key player in aircraft leasing, pursuing strategic investments and mergers to strengthen its regional and commercial aviation portfolio. In 2021, Oaktree injected $350 million into Azorra Aviation Holdings to support its expansion and acquisition capabilities, demonstrating its interest in backing growth-focused aviation firms like Azorra—an approach that could potentially facilitate Azorra’s acquisition of Avation.

Oaktree has also previously backed other aviation enterprises, such as Elix Aviation. In 2022, Oaktree facilitated a merger between Elix and ADARE Aviation Capital, forming Abelo, a prominent regional turboprop leasing company. This merger consolidated resources and expertise to position the company for leadership in the turboprop sector—a strategic move aimed at capitalizing on rising demand in regional aviation. Oaktree’s support for Azorra and Elix underscores its broader investment strategy: focusing on growth and resilience within cyclical markets like aviation.

However, it is worth noting that Oaktree and Azorra would be credible suitors for Avation. Furthermore, Avation’s major shareholder, who holds a 25% stake, is a “non-activist activist” and might be open to selling, particularly as a takeover would present an opportunity for a substantial return just one year after acquiring their stake.

In a recent video presentation, CEO Jeff was asked about a possible management buyout (MBO) and responded “not yet,” adding that a catalyst would be required for a meaningful increase in share price.

Whether a takeover or major asset sale will actually occur—assuming Azorra’s interest is genuine—remains to be seen. A takeover bid at around 0.8x NAV (approximately 220p) would not be unreasonable, but a sale of 7-10 ATR aircraft could potentially fetch book value or more.

While a narrative for a potential bid is compelling it has been that way for the last 12-18 months, and equally can remain that way for a further 12-18+ months. Personally I do no think we will see anything coming from this in the immediate future. In fact I suspect some 'talk' about a takeover from other lessors or investment companies is often occurring but not getting to a level of issuing an RNS.

[Carcosa]

JCAS Airline ATR Contract

Today Avation announced the signing of a twelve-year lease agreement for an ATR72 with Japanese airline JCAS AIRWAYS. Previously Avation mentioned they had a LOI with JCAS back in June of this year.

A few days ago I said: The first ATR is likely to be supplied by Avation although I note Avation have yet to issue an RNS confirming the LOI as a fully signed contract (Avation staff visited JCAS in early October). It does appear however that not unsurprisingly the hoped for delivery before year end is going to slip into spring of 2026.

And, indeed, the delivery date of this aircraft is a year away as mentioned in the RNS. There is no certainty that the airline will still be in existence by then; after all the airline has taken over 5 years just to get to this point. However Avation would likely keep the deposits from the airline. Clearly further delays may well be incurred.


ATR in Canada
ATR recently announced the first -600 variant to enter operation in Canada with launch customer Rise Air.

[Carcosa]

ATR 42-600S Cancelled
ATR has decided to halt development of its Short Take-Off and Landing (STOL) variant, the ATR 42-600S, to focus on strengthening its existing product portfolio. This decision follows a comprehensive market review, which found a smaller-than-expected market for the STOL variant due to infrastructure improvements, such as extended runways and new airports in key regions like Southeast Asia. ATR’s current products are now positioned to fully meet market demand without the need for the STOL model.


Corporate Borrowing
Financial Times today reports on the fact that Corporate borrowers are seizing favorable conditions in the U.S. bond market, leveraging low borrowing costs and optimistic investor sentiment following Donald Trump’s election victory. This past week, major companies like Caterpillar, Gilead Sciences, and Goldman Sachs have raised over $50 billion in bonds, a figure exceeding bankers’ expectations and marking the busiest week since September. Investor anticipation of tax cuts has driven down corporate borrowing costs, with spreads for investment-grade bonds near their lowest levels in decades.

For an aircraft lessor like Avation, these favorable bond market conditions present an attractive opportunity to secure funding at reduced costs, although Avation may not be able to secure Investment Grade status so banking finance may still be favoured. In summary it seems an improved financial environment is on the horizon for Avation.

[Carcosa]

A few corporate events have recently occurred.

AGM
The AGM Letter from Jeff is available from their website (not been directly RNS'ed). Nothing of particular note but a useful read for new investors perhaps.

One key point worth re-iterating is '....continued to reduce debt and de-lever its balance sheet, achieving a reduction to 57.0 per
cent. in the ratio of net debt to total assets as at 30 June 2024. ...Scheduled loan repayments for the 2025 financial year, amount to around US$49.7 million, which exceeds the expected depreciation of the fleet over the same period. The Company is hedged against further interest rate changes on 96.4 per cent. of its loans and borrowings.' Hence all else being equal an increase in NAV id forecast.

AGM / Video is scheduled for 19 December.


Dividend
Avation have returned to being a dividend share albeit it's a nominal amount (0.5p/Share). It was the dividend many many many years ago that got me to buy Avation shares in the first place. I would be surprised if any 'meaningful' dividend occurs before 2026.

Interestingly they announced the dividend in sterling (p) rather than their usual US dollars (c). Payment scheduled 23 December 2024


Sale and Delivery
The pre-announced sale and delivery of an ATR was announced. This is one month late and is for one aircraft only. Hopefully the second aircraft gets sold before year end of 31 December to get an extra $5m into the books. From my understanding the delays are primarily due to ATR.


Equity
Nearly a 5% increase in the share count occurred as a result of warrant exercises. This resulted in a 10% decline in the share price. Seemed something of an over-reaction to me given it generated some £4.8m cash for the company.