Aviation Lease & Finance Co. (ALAFCO): Services

THE COMPANY: ALAFCO is a commercial aircraft lease provider founded in 1992 as a venture subsidiary of Kuwait Airways. It was registered in 2000 as a closed shareholding company after a takeover of a majority stake by Kuwait Finance House in 1999. ALAFCO offers a wide range of consultative services in relation to aircraft acquisition and disposal, lease management and technical monitoring. ALAFCO was listed on the Kuwaiti bourse in 2006 and is considered a pioneer in offering sharia-based commercial aircraft leasing products.

In the first half of 2011, ALAFCO expanded its asset base to KD552.7m ($1.99bn) from KD479.8m ($1.73bn) the previous year through the acquisition of additional aircrafts and equipment. The maturity profile of debt reveals the medium- to-long-term nature of its financial obligations. As of June 2011, some 48% of outstanding debt had a maturity of more than five years, while 41% had maturity between one and five years.

Net results for a nine-month period in 2011 showed a significant improvement in operating lease income (OLI), which surged 36% to KD38.8m ($139.87m). Net profit skyrocketed by 272% to KD28.8m ($103.8m) due to a one-time gain on the cancellation of an aircraft agreement. Core profitability ratios in the same period highlight the improvement in ALAFCO’s operating environment, as it generated a 28% return on average equity and a 6% return on average assets.

Additionally, ALAFCO successfully delivered two Airbus A320-200 aircraft to Saudi Arabian Airlines, three Boeing B737 aircrafts to Ethiopian Airlines and two Boeing B737-800 to Okay Airways in China. Moreover, the company agreed to lease six Airbus A350-900 XWB aircraft to Thai Airways for 12 years and signed an agreement with Airbus to purchase six additional A350-900 XWB aeroplanes for a cost of $1.6bn.

Over the past five years, ALAFCO’s main source of revenue stemmed from its OLI, which grew at a compound annual growth rate of 17%. During 2010, in line with the growth in its leased aircraft fleet, OLI grew by 50% to KD39m ($140.59m) up from KD26m ($93.73m) in 2009. Finance charges surged 44% to KD9m ($32.45m) on the back of a significant rise in debt. Due to the nature of the company’s business and its increasing fleet size, depreciation continues to be the major contributor, accounting for 89% of total operating expenses for 2010. Depreciation amounted to KD17.7m ($63.8m), compared with KD11.2m ($40.38m) for 2009.

During 2010, ALAFCO’s net profit grew 5.8% to KD10.8m ($38.93m) mainly on the back of a rise in its operating revenue, which rose 32% to KD40m ($144.2m).

ALAFCO has delivered healthy operating profits over the period 2003-10 to reach KD10.6m ($38.21m) in 2010, with an operating profit margin of 27%.

ALAFCO saw its fixed assets grow 57% to KD471m ($1.69bn) in 2010. This was mainly due to the addition of 15 aircraft to its fleet. During 2010, ALAFCO increased its fleet of aeroplanes from 26 to 40 and managed to obtain long-term financing of $620m to pursue its strategy of fleet expansion.

Reflecting rapid growth in its assets, debt has also registered a parallel growth due to increased borrowing in order to fund its expansion in its fleet size. Since 2003, ALAFCO’s level of financial leverage has been consistent with global banking industry standards.

DEVELOPMENT STRATEGY: According to Boeing’s latest report, passenger air traffic rose 8% in 2010, after declining 2% in 2009. The persistent resilience of air travel is expected to sustain a 6% rise in 2011 and keep the growth rate at or above the historical trend through the middle of the decade. Although volatile fuel costs, political upheaval in the MENA region, and unresolved government debt in many industrialised economies create risk of a renewed downturn, commercial aviation has weathered such shocks in the past, recovering its long-term growth rate of 5% per year.

ALAFCO’s business strategy is to rapidly expand its pool of “lease-encumbered” aircraft to achieve capital growth, while maintaining a manageable level of investment risk. Moreover, ALAFCO’s operations are in top gear to avail of opportunities in the Asia-Pacific region.