2020
Financial Review
The financial period ended 31 March 2020 was another strong year for SMBC Aviation Capital.
We achieved record profitability with a profit before tax of $364.5m, a 5.8% increase on the previous financial year. EBITDA for the year was $1.1bn, with EBITDA to interest coverage remaining strong at 3.6 times.
Total aircraft operating lease assets grew by 3.7% to $10.6bn – a lower than anticipated level of asset growth due to the grounding of the Boeing 737 MAX aircraft and delays to Airbus’ A320 NEO deliveries.
Core lease rentals excluding redelivery adjustments increased by $55.8m to $1.1bn, a 5.5% increase driven by growth in average operating lease assets of 5.4%.
This increase in core rental income was somewhat offset by an increase in depreciation and financing costs, but the business still achieved an operating margin of 40.5%, ahead of our long-term target of 40%.
The year under review was also strong from an aircraft trading perspective. We sold 30 aircraft, realising gains of $33.6m. The average age of the aircraft was 8.6 years. Given the changed macro- economic conditions since year end, we expect that there will be a reduction in our disposal activity over the next couple of years. Against this, we anticipate the potential for some attractive buy side opportunities in that period which our trading team will focus on.
We finished the year with a very strong balance sheet and liquidity base. At year end, our net leverage was 2.66x and 100% of our assets were unencumbered. We had available liquidity of $6.3bn.
All of these achievements must be placed in the context of the subsequent impact of the Covid-19 pandemic. While the financial year under review was not materially impacted by Covid-19, airlines were beginning to experience cash flow difficulties in the final quarter as a result of their operations being severely curtailed.
Since year end, the situation has had a significant negative impact on our airline lessees’ operating cash flows, available liquidity and ultimately their ability to discharge their payment obligations under the respective aircraft operating leases that they have entered into with us. Post year end, we have agreed with many of our lessees to defer upcoming rent obligations. In general, the deferred rentals are due to be discharged in the current financial year.
While the impact of the crisis will be felt in the current financial year and beyond, we are confident in the ultimate resilience of the sector.
While the impact of the crisis will be felt in the current financial year and beyond, we are confident in the ultimate resilience of the sector. The global economy depends on aviation to function and as a sector, it represents 3.2% of worldwide GDP. The tourism industry employs one in 10 people at work globally – some 320 million people - and the aviation sector is a significant driver of this tourism. The $120bn of government support provided to the airline industry to date is a recognition of this contribution to global economic growth and we expect further support to be forthcoming.
Recent events have demonstrated the strength of our business model going into this crisis. Our access to shareholder funding means we are not hostage to market conditions when bond and bank debt markets are prohibitively expensive. Being owned by two of Japan’s premier corporates also facilitates access to funding from the Japan Bank for International Cooperation, a government owned policy bank that supports the international expansion of Japanese corporates.
31 March 2020, we had $10.6bn of support from our shareholders that was comprised of $2.9bn of equity and $7.7bn debt financing of which $3.2bn was undrawn.
With $6.3bn of available liquidity our sources to uses ratio for the next twelve months stood at 3.1x at 31 March 2020. This is a key metric for ratings agencies and has allowed SMBC Aviation Capital to maintain one of the industry’s strongest credit ratings.
The substantial experience of our senior management underpins our belief that leasing companies are vulnerable on the liability side in an economic downturn. Having access to shareholder support, diversified funding sources, minimal debt maturities and an unencumbered asset base will be critically important in the coming period.
The structure of our balance sheet and the unique advantages our shareholder funding puts us in a strong position to withstand the pressures of a dislocated funding market and to capitalise on the opportunities that reduced levels of competing capital will ultimately bring.
EDI
I am pleased to say that we are making strides in other areas of our business as well. I am proud to take over the role as sponsor of Mosaic, our Equality, Diversity and Inclusion Committee. I firmly believe that we need to do more to ensure equal opportunities for all of our employees across all of our geographies. This impact must be felt within our own company but also across the wider industry.
I would like to thank our staff for their commitment especially over the past number of months. If we have learned anything from the recent past, it is that we can achieve great things when we all work together with unity of purpose.
Barry Flannery
Chief financial Officer