US Lessor ACG reports $891 million benefit from tax status conversion

California-based aircraft lessor Aviation Capital Group’s (ACG) tax status conversion in late March provided a substantial tax benefit to its overall equity, propelling ACG to an $887.5 million net profit for the first half of 2017, compared to $37.6 million in net profit for the same period in 2016.

Prior to March 31, ACG Corp. was a wholly owned subsidiary of Pacific Life Insurance Co., itself a wholly owned subsidiary of Pacific Life Corp. On March 31, ACG was converted to a limited liability company, Aviation Capital Group LLC (ACG LLC), to be taxed as a partnership for US income tax purposes.

“Therefore, for periods after March 31, we are a flow-through entity for US tax purposes and not subject to federal or state income tax at the partnership level,” the company said in its financial statement released Aug. 14, clarifying that the company’s members are now responsible for income taxes on US federal and state taxable income.

“As a result of the change in tax status, we recorded a benefit of $890.9 million on March 31, 2017, primarily relating to the elimination of our net deferred tax liability,” the company said.

Aside from the tax benefit, ACG LLC posted $455.4 million in revenue for the first half of 2017, down 4.7% year over year (YOY) as operating lease revenue fell 2% and maintenance revenue dropped 64%, offset by an 89% increase in finance lease revenue and a net gain of $7.4 million in aircraft sales.

Expenses rose 9.7% to $459 million for the first-half of the year, as aircraft impairment expenses were up 83.4% and aircraft parts, maintenance and transitions expenses increased 34.5%. The company reported a $3.5 million operating loss for the half-year period, reversed from a $59.5 million operating profit for the first half of 2016.

During the second quarter, the company posted $57.6 million in net income, nearly tripled from $19.9 million in net profit for 2Q 2016. Revenue for the quarter was $222.7 million, down 7.6% YOY; operating expenses totaled $172.4 million, down 16.7% YOY, resulting in a $50.3 million operating profit, up 47% YOY.

As of June 30, ACG owned and managed leased aircraft to approximately 95 customers in about 40 countries, with a long weighted average remaining lease term of 5.8 years, with 7% of the company’s leases, by net book value, set to expire over the next two years. The company has an owned and managed fleet of 270 aircraft, including approximately 118 Airbus A320 family aircraft, three A330-200s, 138 Boeing 737 family aircraft, 14 757s, and two 767s. The company has 171 aircraft on order set for delivery through 2022 (24 in 2017, 23 in 2018, 36 in 2019), including five Boeing 787s, 20 737 MAX 10s, 50 737 MAX 8s, 10 737 MAX 9s, and 47 Airbus A320neos, 14 A321neos, three A321ceos, and one A320ceo, according to Aviation Week Fleet Discovery data as of Aug. 3.

As of June 30, ACG LLC’s assets totaled $9.4 billion, including $7.5 billion in net aircraft, $333 million in aircraft held for sale and $848.2 million in aircraft orders and deposits. The company reported it had $194.3 million in unrestricted cash.