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Sunday, July 03, 2011

AeroCentury Corp (ACY)

"that's a lot of Fokkers, but they're cheap Fokkers"

I've followed ACY for many years.  Looking at their latest numbers for Q ending March 31, 2011.  10-Q

Revenues are way, way down.  $4.9 million vs $8.8 million prior year Q.  Net loss of $2.3 million ($1.48 per share!).  Last year they earned $1.20 per diluted share.  More planes are off-lease, plus they had to lease stuff out in 2010 at a lower rate.  Also uncertainty about collecting some receivables.  All this is partly offset by an increase in revenue from planes that are now on-lease vs last year.

Expenses went up by $2.4 million due to planes returned.  Most of this is funded by reserves previously collected.

The question is whether this represents some large bad trend.  I doubt it, but it could be.

Need to go through the 10-Q.  The subsequent events: they forfeited $100K to avoid buying a Dash-8-Q400.  They extended a lease of a Dash-8-300 that was going to expire in May (good).  They should be gaining $1 million by selling two DHC-6 planes above carrying value (I recall that happens a lot with ACY).  A Fokker 50 went to someone in Asia on lease.  The credit facility was amended to change some provisions of a debt coverage ratio "to more accurately  reflect the purpose of the covenant."  Also changing the max leverage ratio (up? down?).  Signed 5 leases with company in Estonia for 5-year leases on 3 Fokker 100 planes returned in 2010.

Sounds like the sky is not falling.

Ok more details:  $1.2 million drop in revenue from off-lease planes.  $1 million drop due to re-leasing at a lower rate (ominous).  $294K increase due to a new lease of an off-leased plane.  $239K reduction due to possibly uncollectable RXables.

$2.8 million increase in maintainence expense.  Seems like a timing issue.  $597K drop in depreciation due to changing estimated residual values (hmmm).

In 2010, two customers, one that leased two Fokker 50 and one that leased three Fokker 100 aircraft, experienced severe financial difficulties, and the five aircraft were returned to the Company. The Fokker 100 lessee was a significant customer based on 2010 lease revenue.  The Company retained the entire $12,752,500 of non-refundable maintenance reserves from both lessees that were previously recorded as maintenance reserves revenue.  The Company has incurred and will continue to incur significant maintenance costs in order to prepare the five aircraft for lease to new customers.  Approximately $4,173,000 and $3,900,000 of such costs was incurred during the year ended December 31, 2010 and the first quarter of 2011, respectively. 

Tough times for small regional airlines?

These two customers caused about a million dollar writeoff of RXables.

In 2010, they replaced the old $80 million credit facility with a $90 million one.  None was borrowed or repaid in this quarter.  $63 million due.  Secured by all assets (planes and engines).  Interest rate went up.

Here are the planes currently off-lease:
3 Fokker 50s (lease expiration in 2010, one will be re-leased for 4 years)
3 Fokker 100s (returned in 2010, mentioned above, all these should get re-leased in Q2 to an Estonian airlines)
1 Dash-8-Q400 (purchased in Dec 2010, which is good, this is getting leased out to an African carrier for 4 years in Q2)
1 Saab 340-B (returned at lease expiration in March, nothing going on with it yet)

So 5 of these 8 have new leases signed.  That's a good sign.

Largest Customers:
21% in Antigua
16% in Germany
15% in Norway

Asset concentration:
7 Fokker 100 regional jets (30% of book)
8 Dash-8-300 (24% of book)
14 Fokker 50 (that's a lot of Fokkers, but they're cheap Fokkers at only 19% of total book value)

Warrants for 81K shares.  Seems like small potatoes.

The management structure is very weird, going through JMC.  I checked this out in more detail back around 2002.

Interest rate risk seems real and could be trouble in the future.  Also currency fluctuations could kill customers.

2011 looks bad due to the lingering downturn.  Lower on-lease percentages, longer lead times, lower rental prices.  Also possible lease defaults due to airline failures.

The high maintenance expense will continue in 2011, another $1.8 million in Q2,Q3.  Could end up exceeding the retained reserves.

Three leases set to expire in Q3.
Four leases set to expire in Q4.
Three customers leasing 5 of these 7 assets previously extended the lease.  It's likely these will get extended again.

So far, it doesn't look like there's a covenant risk, but they admit the cushion is getting eaten up.  Customer financial conditions seem to be weakening.
The Company has seen indications of a weakening in both the financial condition and operating results of the majority of its customers.


If the sh*t hits the propeller, things could get very ugly for ACY.  This is definitely worth watching in the event of some global financial meltdown.  The stock could get irrationally cheap.

I'm glad to see that they've been buying regional jets.  My concern around 2002 was that they could get in trouble if regional jets seriously replaced turboprops worldwide.

Unrelated Note: I went overboard a while back and bought a MacBook Air (13" screen) for doing this investment work.  I spent some time evaluating the alternatives and figured that the cost was "down in the noise" compared to glorious investment mistakes that can easily burn up ten times as much.  So I might as well have the computer I want.  Less than three pounds and still has a 1440x900 screen resolution.  So far it's working out very well.  Oops, it's starting to rain....

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