RE:RE:FlyBE goes under leaving CHR holding the bag on 7+ aircraftcibc analyst mar 5
Flybe Declares Bankruptcy But Minimal Impact On CHR Our Conclusion: Despite Chorus having eight aircraft on lease to Flybe, which has entered administration, the airline accounts for less than 5% of Chorus’ 2019 EBITDA. We believe Chorus has a well-diversified portfolio and continue to see a good risk/reward set-up. We value Chorus’ CPA (Capacity Purchase Agreement) with Air Canada at ~$6/share which is where the stock is currently trading. We would argue Chorus is not getting any credit for its regional aircraft leasing operations. We have an Outperformer rating and $9.50 price target. Flybe announced it has ceased operations and was placed in administration. This should not come as a complete surprise given the government stepped in during January and provided a “tax holiday” for the airline as it had been under distress in recent years. That said, there was hope that the airline would find its footing given the government intervention earlier this year and the financial backing it received from a consortium, which included Virgin Atlantic, a year ago. Unfortunately, the impact of COVID-19 pushed Flybe into bankruptcy. A few points to consider: 1. Chorus currently has three ATR 72-600 and five Dash 8-400 aircraft on lease to Flybe. These aircraft account for less than 5% of the net book value of Chorus’ regional aircraft leasing segment fleet and less than 5% of its 2019 EBITDA. Chorus holds security in respect of these aircraft and has a plan to manage their repossession and remarketing. Our understanding is Chorus is already in discussions with interested parties to re-lease these aircraft. Additionally, Chorus’ loan agreements provide time and flexibility to remarket the aircraft. We estimate the impact from Flybe's bankruptcy on our 2020E EBITDA at ~$10MM (we are currently modeling 2020E EBITDA of $425MM) before re-leasing. 2. While the news on Flybe is disappointing, we would note that leasing companies will inevitably have a customer go under; this is why Chorus has been focused on building out CAC (Chorus Aviation Capital) with a diverse customer/geographic base versus building out its portfolio with a few large deals with a few large airlines. The question then is does Chorus have any other high-risk customers? We provide a risk assessment on Chorus' current customer base and would point to Virgin Australia as potentially another higher-risk airline within its portfolio (it leases three ATRs). We do not see significant additional counterparty risk amongst the remaining 12 lessees. The diversification within CAC ensures that even with Flybe being placed in administration, Chorus' underlying earnings stream remains intact.