Q3 2019 Earnings Call
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I would now like to hand, the conference over to your Speaker today, Mary Lindsey PAMA head of Investor Relations. Please go ahead.
Hello, everyone and welcome to Air Lease Corporation earnings call for the third quarter of 2019. This is married with the PAMA and I'm joined this afternoon by Steve Harvey Our executive Chairman, John Gilbert, Our Chief Executive Officer, and President and Greg Willis, Our executive Vice President and Chief Financial Officer.
Earlier today, we published our results for the third quarter 2019, a copy of earnings release is available on the Investor section of our website at Www <unk> early <unk> Dot Com. This conference call being webcast recorded today Thursday November seven 2019, and the webcast will be available for replay on our website at this time all participants.
This call are in listen only mode at the conclusion of today's conference call instructions will be given for the Q and a session.
Are we began please note that certain statements in this conference call, including certain answers to your questions are forward looking statements within the meaning of the private Securities Litigation Reform Act. This include without limitation statements regarding our future operations are performing revenues operating expenses stock based compensation expense and other income and expense items.
These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today November seven 2019. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the securities and Exchange Commission for more detailed.
Description of risks factors that may affect our resolved.
Barely corporation assumes no obligation to update any forward looking statements or information in light of new information or feature that in addition, certain financial measures will be using during the call such as adjusted net income before income taxes adjusted diluted earnings per share before income taxes, and adjusted pretax return on equity or non-GAAP measures a description of or read.
For utilizing these non-GAAP measures as well as our definition of them and reconciliation to corresponding measures can be found in earnings release and 10-Q, we issued today. Its release can be found in both investors and cross section of our website at Www Dot air lease Corp. Dot com.
Authorized recording of this conference calls not permitted I would now like to turn the call over to our CEO and President John poor.
Well, Thanks, Mary listen good afternoon, everyone and thank you for joining us.
I'm happy to report the continued strengths of our business with revenues up 18% year over year for the quarter and up 19% year over year for the first nine months of the year.
Our diluted EPS is up 9.2% to $3.67 for the first nine months of the year and we continue to generate strong pre tax margins and returns on equity.
It will seize fleet a quarter in included 307 owned aircraft with a net book value of $18.9 billion up 20% from 15.7 billion at year end in 2018.
In the third quarter alone, we delivered 15 aircraft from our order book, representing approximately 1.5 billion in aircraft investments, despite the Max grounding and ongoing industrial delays at Airbus.
In the first nine months of 2019, we made approximately $4.1 billion an aircraft investments, 20% more than we did in the full year of 2018.
And as we told you we would do in the third quarter, we proceeded with aircraft sales with more to follow in Q4.
On that note I'm very pleased to announce the successful pricing of our third midwife securitization Thunderbolt three.
As most of you know our Thunderbolt platform serves as a valuable tool to keep LCC fleet age young.
Yet allow AOCI the keep its head into valuable midlife space as these aircraft age and to retain the important customer relationships.
Thunderbolt three as a portfolio of 19 aircraft, including too wide bodies with an average days of approximately 10 years on leased to 18 lessees in 15 countries.
Its structure is substantially similar to that opener boat to including DLC holding 5% of the equity.
This transaction along with Thunderbolt, one into demonstrates how ill see should be valued with a focus on long term cash flows.
The transaction will close tomorrow, meaning that the cash proceeds will be deposited into escrow with payout LLC as each of the individual aircraft is sold into took into Thunderbolt three meeting title transfer and least innovations are completed.
As with our prior Securitizations, we expect that this will happen over the course of Q4 in Q1.
With a close Afinitor, both three tomorrow plus the other contracted sales we have for conclusion.
Ill see has reached its 2019 goal of securing about 1 billion dollars' worth of aircraft sales.
Greg will provide some additional color unfavorable three and our Q4 sales outlook in his commentary.
As of today, our order book stands at 83% placed through 2021.
Our for delivery schedule assumed that we will not be taking delivery of any Max aircraft until the second quarter of 2020.
Now we made this assumption because all of our mass deliveries are to foreign carriers and as you know foreign carriers are likely to certify after the U.S. ebay.
Again, this is our own assumption not boeings.
Of significance our placement percentage includes very recent placement of additional Max aircraft, which we will disclose at a future date.
Once the Max does return to the air we expected it will take at least 24 months before all Max aircraft or re absorbed into the global fleet.
Ultimately any delays or the Max back into service just shifts the timing of our aircraft investments into the future.
We do believe that with Boeing ongoing financial assistance, we will retain most or all of our forward Max lease placements.
We also believe that once the Max returns to the skies. It will be the most tested and critically reviewed aircraft flying and we have full faith and confidence in that aircraft going forward.
Let me also point out the grounding of the Max has resulted in a net global reduction in seat capacity after even adding back aircraft that came into the marketplace from airline bankruptcies.
In fact, we believe the decline in passenger growth rate in 2019 has been influenced by the Max rounding.
Furthermore, as I just indicated we expected it will take at least two years to return all produced but under Libert Air Max aircraft to their customers.
For these reasons, we're not concerned about too many aircraft coming in the marketplace when the Max drowning is lifted.
Our focus and the focus of the Boeing company is getting these needed aircraft and let me reemphasize needed aircraft safely flying with customers.
Stepping back and looking at the broader macro picture, we're monitoring trade matters global economic activity and competition in the marketplace and any corresponding impact it's having on our business.
We see trade tensions impacting freight volumes, but passenger traffic holding up passenger traffic holding up relatively well.
Boeing notes the global trade matters have impacted direct orders from Chinese carriers, but as we previously previously stated Lcs Chinese customers are actively seeking Boeing and Airbus aircraft through the medium of leasing.
Our deliveries of aircraft to China remain on track. Most recently at the end of September we delivered a 77 dash nine on schedule, the China Southern the largest airline in China.
As to aircraft tariffs.
As a result of the World trade organization ruling.
The United States has recently imposed a 10% tariff on Airbus aircraft being imported into the USA.
As a reminder, ill see has well under 5% of our overall business in the USA.
It has yet to be seen what the world trends, what WT, all ruling will be on air and the Airbus claim against the U.S. and Boeing.
Our view is that tariffs ultimately benefit no one.
Boeing has aircraft going into Europe , Airbus aircraft going in United States and the airlines do not want to pay the tariffs.
We see this as a manufacturer problem as aircraft buyers and operators will not carry this burden.
In regard to competition, we see less activity from new Chinese leasing companies. In fact, I think it's fair to say, we see some of the more recent entrance exiting the space.
As evident from some of the more recently announced transactions, we are seeing renewed interest from Japan, and the leasing space, but the team is running those businesses are seasoned veterans having been in the industry for some time.
So the bottom line is that the fundamental need for aircraft remains strong and the market for both new and used aircraft remains robust.
Accordingly, I can report the air Lease's profitably placed all 11 aircraft consisting of seven owned and for managed aircraft that were on lease with the Thomas Cook group, including two the remainder Condor.
In this situation we were once again protected by our security package and we experienced multiple bids for all of our Thomas Cook aircraft, including our Athree hundred 3200.
One further comment looking forward.
With environmental considerations living larger and larger in airline fleet decisions Lcs order book represents the most fuel efficient environmentally friendly aircraft that can be obtained in the world today.
With Airbus and Boeing order books full years ahead, our delivery positions are highly valuable and needed.
Environmental sustainability is now one of the largest global concerns and the best way that airlines can address this concern is with adding the most environmentally friendly aircraft available.
So despite any other macro supply or demand or economic set of circumstances. This fundamental need to protect our environment will not change in fact, it will grow stronger.
And with that let me turn the call over to Steve for further remarks, Steve. Thank you very much John .
As you just heard LC continues to deliver outstanding financial and operating performance.
We have delivered excellent results while building the best in class aircraft fleet on long term leases to globally diversified customers.
In recognition of this and reflective of the confidence we have in our ability to execute on our strategy.
Yesterday Elsie's board of directors declared a 15% increase in our quarterly cash dividend.
The shareholders.
13 cents per share to 15 cents per share representing 60 cents per share per year.
Versus 52 cents per share per year.
This dividend will mark our 28 consecutive dividend since we declared our first in February of 2013.
And our seven.
Dividend increase over that time.
Earlier today.
The International Air Transport Association data reported that year to date through September .
Revenue passed new kilometers were up 4.5%.
What would the same period of 2018.
With high load factors of 82.9%.
Overall traffic growth is scope compelling.
And we believe that to a limited extent the passenger traffic growth has been influenced by both the Max Groundings and the late deliveries of Airbus aircraft.
One indicator of continued passenger demand.
Is the high load factors are occupancy that we'll see.
September was 81.9% a record for that month.
I add to also stated that the moderate upward trend in underlying demand remains firmly in place.
And that demand growth continues to outpace that up capacity.
Illustrating I added several favorable view of industry conditions.
As we see this continuing well into the future.
Air lease now has 108 different airline customers and 59 countries.
And that list is growing.
In addition, we're having dialogue with new and existing customers around the world for both new and used aircraft.
In the third quarter, we had several significant placements and deliveries to many diverse airline customers.
To begin with.
We placed six new Athree 21, Neo aircraft with China Airlines, the national carrier of Taiwan.
These are the airlines first 80 21 neos.
Which will support their single lives fleet transformation.
At me up Mongolian.
We signed a contract for 77 nine aircraft.
Which will be the first 77 nine dreamliner to operate a Mongolia and the first Dreamliner EMEA Mongolians fleet.
This new wide body aircraft will connect Mongolia with other destinations in Asia, Europe , and North America.
In Asia. We also delivered the first three of eight new Boeing 787 Dash 10 aircraft to Vietnam Airlines.
This is the largest version of a 77 dreamliner.
Air lease has been a long term.
Fleet advisor to Vietnam, and we're pleased to meet a first less or to introduce a 77 tend to the airline.
Another 70 710 was delivered to EPA also in Taiwan.
And in Europe , we delivered one Boeing 787 dash nine to Nielsen, Italy.
Which will be deployed on services to it'll from Italy to Europe , The Americas Asia and Africa.
We have now delivered three out of eight AC 21, 200, Neil LR aircraft to Aer Lingus in Ireland and.
And we have delivered the first three of six.
The 21, Neil L. ours to Air Arabia.
We delivered another new 77 on 12 year lease to China Southern Airlines, the largest still on the Asia and signed a long term lease with KLM Royal Dutch Airlines for a new Boeing 77 Dash 10.
Which will deliberate early 2021.
The market has been speculating about athree hundred thirtys, their desirability and corresponding lease rates.
We continue to have airline customers for many corners of the world very interested in this aircraft given its operating efficiency and the premium experience it gives to passengers.
You are seeing this in various news releases by LC Airbus and Airlines policing direct orders for this aircraft.
On the heels of our recent placement.
Athree hundred Thirtyneo aircraft to Virgin Atlantic Airways and this summer.
In early September we announced delivery of AC 3900, new aircraft the high flying Portugal in new customer of air lease.
And at the end of October Air lease announced the long term lease for two new AC 3900, new aircraft to another new LC customer Delta Airlines.
Delta was Lcs coal launch customer of the Athree hundred 3900 Neal series.
And the airline is leasing these two wide body aircraft.
We also recently delivered two long range Athree hundred 59, hundreds to Aircore, a French intercontinental airline.
We also wrapped up deals for three each athree 21, Neo aircraft and AC 21, Neal L.R. aircraft with Sky in Chile, and Scandinavian Airlines system in Stockholm.
Overall, we continue to see airlines globally, performing well despite the few bankruptcies this year.
Airline bankruptcies are natural development of the aviation industry as business models evolve and change over time.
Many of the more recent bankruptcies have been more unique to the individual circumstances of the airline whether it's because of competition strategy financing.
None of the events, we have seen stem from a lack of passenger traffic demand.
And the market as we covered quickly from each event given the sheer demand there is for the aircraft.
In certain cases.
Airlines have been even willing to conduct a different aircraft type in order to increase capacity to cater to passenger market demand.
A good recent example of this is India.
Where jet Airways aircraft pilots and slots with quickly taken over by other airlines within India, allowing for minimal impact on the region from the jet Airways bankruptcy.
This speaks to the increased stability of our industry and the need for the airlines to support their volume of passenger traffic and growth.
Looking ahead, we expect air lease to end the year with more than 22 billion in total assets and having made.
4.8 billion the aircraft investments during the year.
Which will be the strongest growth year.
Since the inception of the company in 2010.
As we look around we're operating in the industry that has a real need for aircraft to satisfy replacement needs growth trends and environmental sustainability.
Air lease is well positioned to take advantage of that need.
Let me offer one last comment based on decades of experience in this industry.
Trying to time cycles, and ups and downs in the marketplace.
It's like trying to predict or time to stock market.
At Air lease, we built our company and business models.
On strong solid and consistent performance overtime with contingencies and risk Mitigator.
Baked in to our fundamental business model since our inception.
We do not react overnight or change course with month to month quarter to quarter, well year to year headlines.
We plan our business assuming in the broader sense.
That in fact, many factors and developments both positive and negative.
Well indeed happen at some point in time.
We believe in the fundamental importance of air transportation.
As vital to the world and we invest in that belief and in that future.
We are proud of our consistent solid performance since inception.
And on that note air lease will be turning 10 years of AIDS in 2020.
And I want to take the special opportunity to commend and thank our dedicated team of professionals the best in the industry for making this happen.
And with that I will turn the call over our CFO , Greg Willis to provide an update on ale I'm, sorry on the air Lease's financial metrics and financing alternatives and activities in the second quarter.
Thanks, Steve and good afternoon, everyone as mentioned earlier, we recorded another great quarter reporting deluded earnings per share of $1.34. Our results were largely driven by the growth in our fleet along with aircraft sales activities.
We have continued to generate a 15% adjusted pretax return on common equity and a 36.5% pre tax margin, which reflects the embedded strength in our business model and we achieved this despite the continued aircraft delays from both Boeing and Airbus important to note our key portfolio.
Metrics.
Portfolio yield and lease term remaining were stable and in line on an eight adjusted basis.
AOCI generated record total revenues of 531 million in the third quarter of almost 18% year over year.
Comprised of $493 million of rental revenues and 38 million in aircraft sales trading and other activities.
Our fleet activity included the purchase of 15, new aircraft, representing 1.5 billion in aircraft investment and the sale of five aircraft.
Turning to expenses interest expense increased year over year inline with the growth of our fleet.
Partially offset by the decline in our composite cost of funds.
The financing side of business, we have benefited from a decline in prevailing interest rates as we have opportunistically access the capital markets to lock in long term low cost financing, which I'll cover in more detail momentarily.
Yes, you today was elevated this quarter due to transactional and aircraft transition expenses, our transition related expenses were covered by our security packages and our transaction costs were incurred related to our very successful fundable three transaction the sales from which we expect to close over the course the next two quarters.
For example, three we expect to realize 575 million in total consideration similar in many respects defendable too we anticipate recognizing 116 million in economic value over the life of the deal.
Half of this will come in the form of an earn out a unique feature in our Tivo platform, which provides for excellent alignment with investors and allows us to put our money where mouth is in expressing a view on the value of these aircraft. The remainder of this economic value is distributed between gains and management fees.
With regard to our fleet the federal three transaction will slightly improve our portfolio metrics of average age and lease term remaining with a minimal impact on our portfolio yield and we ultimately anticipate the trend that the transfer these aircraft will be accretive to our ROI.
I'd like to extend my sincere thanks to the LTAC and its untroubled investors. We're very excited completed Thunderbolt three transaction and look forward to more managed portfolio issuances in the future.
Looking ahead to the fourth quarter, we expect nine aircraft to deliver into the fleet, representing approximately 660 million in aircraft investments with respect to aircraft sales, we anticipate closing 250 million in the quarter.
Turning to the financing activities of the company, we completed two debt issuances during the third quarter, including 600 million and senior unsecured notes at a fixed rate of two on a quarter that mature in 2023, and 500 million and senior unsecured notes issued at three in a quarter that mature in 2029.
Our detect our debt to equity ratio increased modestly quarter to quarter to 2.5 times inline with our long term target as a reminder, our debt equity ratio are regularly fluctuate above and below this level based on the timing aircraft investments and sales.
We also remain committed to our core financing strategies of roughly 80% fixed rate debt and more than 90% unsecured debt.
We continue to benefit from our investment grade credit ratings, providing us strong access to debt capital and attractive funding costs. We have enjoyed great success in the debt capital markets throughout our history. These investors have consistently rewarded our highly profitable business model combined with our low leveraged balance sheet, which is supplemented with a large on it.
Robert asset base, which has resulted in access to the attractively priced capital.
And as such looking forward, we feel highly confident in our position in financial markets, given the size and scale of our platform and the strength of our balance sheet and with that I'll turn it back over to Maryland is for the question answer session of the call.
Thank you Greg. This concludes managements remarks, now I would like to hand, the call back over to the operator to open the line for the Q and a session.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Charlie Your question press the pound Keith we ask that you limit yourself to one question and one follow up.
Please standby well, we compiled the Q and a roster.
And our first question comes from Moshe Orenbuch from Credit Suisse. Your line is open. Please go ahead.
Okay, great. Thanks.
Looking.
Through the Q you did mention that you do expect fear best delays to continue through 2021.
Obviously, putting aside the situation.
737, Max just talking.
Through whether there's any kind of change in that process in terms of pace of deliveries and how you're looking at that.
Well, thanks Moshe it's John .
We are actively engaged with Airbus. The fact of the matter is they have an industrial problem primarily centered at their homework facility, which is where the Athree 21. New is is manufactured at started of course was a delay delivery on the engine problems with the Pratt Whitney geared turbofan, but is now advance well beyond that into industrial.
All issues, including complications from their very popular AC us Airbus Airbus Kevin Flex.
Offering that they that Theyre take that many airlines are taking advantage of so the bottom line is.
Get home and his team has been very clear that they are completely.
Revamping the production system.
At Humbard.
But that this will take time and he has publicly stated and told US that this is a several year process. So we feel the end result is good.
It will cause some pain and some further delays as we are continued to experience.
The other challenge of courses. This is being done at a time one Airbus is in trying to increase rate.
Having said that.
We continue to work with Airbus and our customers, but these delays are a factor that we're dealing with.
And it just means that we just push the capex out the leases start when they start everybody needs. These aircraft, but for us at the timing issue and it's it's a customer hassle issue, but we're dealing with it.
As close as we can in especially with the.
Max Groundings.
People need these aircraft.
All of our customers.
Really really need all of these aircraft so.
Look this is really a question you should direct more towards Airbus bought that is the industrial situations.
Got it.
And just as a perhaps as a follow up.
Could you kind of talked about the impact between the.
Full fat and the Max Groundings impact Thats had on lease rates I'm, assuming that you talked about relatively healthy.
Traffic and how does that had a set plan you had the delays really havent impacted lease rates because it's generally with a few exceptions a different universe of airlines that are taking the max's than the PC 20 ones that John mentioned.
So we're not seeing the delays as impacting the lease rates.
Okay. Thank you very much.
Thank you.
One comes from Vincent can take from Stephens. Your line is now open. Please go ahead.
Hey, Thanks, good afternoon guys.
I appreciate all the detail on.
Thinking about the Max delivery delays and that it would take 24 months.
Before we get everything back on.
When we were just thinking about earnings.
Just a timing issue but.
Is it simply a matter of when we think about 22000 2021 that you just have we'd just be removed or 16 day delay the Max aircraft and that's the end of it or is it or are there other near term.
For two entities that you can deploy your.
Capital into whether its.
Used aircrafts are wide body aircraft or something else.
No.
No I think thats the wrong assumption I think what John was saying is that to absorb all of the aircraft that have been manufactured.
Since the March grounding it could take up to 24 months to deliver those aircraft, but it will not be a to the two year delay on every plane that's been manufactured.
Do you understand the distinction.
We're talking visit here about globally, all those aircraft. The Boeing has produced for everybody, but not yet delivered all those customers. So certainly as soon as the grounding as listed those deliveries were convinced but all I will start to commence.
But it will take in our estimation about two years or so before all of those aircraft, which are part not yet delivered.
Go into the global marketplace, not our specific units.
Delayed for two years each not the case, yes. Currently we have a 15 737 Max's.
That were delivered prior to the grounding and went into service with multiple airline customers.
As a further 27.
Than had been built and assembled by Boeing.
That await certification and delivery.
So today, we have 42 aircraft that are affected.
The 15.
That have already been delivered will quickly go back into service.
And we expect that a large percentage of the backlog aircraft to our customers will deliver hopefully in the net in the first six months.
From the time the aircraft are certified.
Okay perfect that is very helpful clarification, so I misunderstood that very helpful. Thank you.
And then separately on so we saw the recent acquisition.
Your competitors I am wondering yes.
You are seeing.
That's a consistent trend that you're seeing more appetite and if there's anything you can do to maybe take advantage of that nice to see.
Both do so well sort of third iteration, just kind of wondering what years, what you're seeing there and any opportunities.
Yes.
Look we continue thanks for the under both were feel great about it.
We are always opportunistic Vincent as you know you know us we're looking for.
Well priced assets and opportunity to grow.
As I mentioned in my remarks, Japan as has been stepping up their investment in our space. That's a good thing the management teams associated with those acquisitions are highly experienced we respect them I think that's a stable.
Transition so when we find an opportunity we will see it.
I think we are taking advantage of those anything that we that we possibly can but I think it'll be entered the day.
The valuations that have been achieved the certainly the public valuations are the transaction and Aircastle.
Our inching up.
And that bodes well for us.
It's also this Greg it's also important to note that a lot of these private investors.
All across the board are really focusing on cash flows and I think when you look at the strength of the cash flows and take the time to understand it it supports a much higher valuation them and once you currently Seattle.
And in terms of.
In terms of the public markets right. If you look at where we cleared the the Thunderbolt three transaction, which was in line with two in one we're hitting premiums to two assigned in the 130, 940% range. So it's substantial premiums to the appraised values I think overall, if you look at our history of.
Selling airplanes significantly at levels significantly above our carrying values.
Year after year after year, I think that supports a much higher value than what's being reflected on our books. So inherently that applies a much higher valuation across the board.
Perfect and I agree thanks very much.
Thanks.
Thank you. Your next question comes from Catherine O'brien from Goldman Sachs. Your line is now open. Please go ahead.
Hi, everyone. Thanks, so much for the time.
Oh. So you noted that you already have all the aircraft that were previously Thomas cut back on profit leases and so just a couple of questions on that.
Can you talk about the lease rates on those aircraft versus what you might have seen a five year old 80, 20 before the Max grounding.
And then also how would you compare.
Piece of of getting those aircraft that on lease versus versus what you saw in while earlier. This year. Thanks, yes, well the Thomas Cook aircraft that we had seven of them were owned by air lease and for our in the various.
Asset structures that we have.
They are Athree 21.
Aircraft.
Young if you 20 ones.
There were manufactured in 2014, 15, and 16 and all of them have been placed with four sorry, three different airlines.
And then.
Two of them in Europe , and one in North America, and one Athree hundred 30.
200 is going to an airline in North America.
And the lease rates our market rates.
That we're seeing for comparable age Athree 20 ones and Athree hundred Thirtys. So I would just add these are not distressed placements to the contrary. They are in line with our expectations current market levels et cetera et cetera, you. The last part of your question, Ken I think was the pace.
The pace at the pace was less than 24 hours.
Click right yeah.
That's right you know at as was our well placements. So I mean again I think the totality of our remarks.
Airlines need these aircraft and they are in demand and I'll reiterate we had multiple bidders for every one of the aircraft in the Thomas Cook Fleet.
I think it's also worth pointing out that theres other lessors out there second and third tier platform, they're still working on their while placements I think what you hear today is the difference between a top tier aircraft LSR and its ability to move airplanes very quickly and have a sense of where the demand is in the marketplace versus some of these other guys that are still trying to figure out how to lease aircraft.
Yes.
We were the only less toward that immediately placed all of the Thomas Cook aircraft. There's some less stores are still looking for.
Clients.
Very impressive you guys got it a deep rolodex I now.
And so maybe just one more just on your managed fleet.
That's now about 20% size your own fleet.
Obviously growing with the Fundable three transaction here.
When should we start thinking about management fees, becoming material material revenue source for our lease and then could you help us think about the relative durability of those cash flows versus cash flows generated by all fleet, which of course, we realized very durable. Thanks.
Hey, good both incredibly stable has their source in the same part.
I think your question with regards to timing as to when they come in I think in time as we continue to layer on more and more of these transactions, we'll see it become a more significant portion of our sales trading and other activities line, especially as we start to recognized.
Incentive fees from our earn out as we sell airplanes from the managed portfolios I think I'm not willing to commit to a timeline is big enough to breakout, but it's definitely picking up size and we expected to grow overtime.
Okay, but.
So I was one point.
It is not just for the management fees that we pursue the managed business in fact, the managed business has greater strategic importance for us.
We kept 5% interest in these aircraft it does reduce our exposure, but it keeps us in the mid life space, which is still a very very valuable space from a financial investment point of view and perhaps most importantly in fact I would argue I would say within our organization.
From a strategic perfect perspective, perhaps the most important will retain all of these customers, we're not selling them off to other potential competitors or startup leasing companies et cetera.
And today more than ever.
The relationships that we have with all of our customers are extremely important they want us there at the return of the aircraft as they age they want to talk to the people. They did the deal with.
So even though the ownership might not change that's an extremely important element for us that our customers still talk to us and eight 910 Years' time when the lease comes back they don't talk to somebody who they don't know.
The that's really helpful. Thank you all.
Thanks.
Thank you. Your next question comes from Scott Ellington from Compass Point. Your line is now open. Please go ahead.
Good afternoon, everyone. Thanks for taking my question.
With regard to the SG, Greg I think you mentioned there are some transition costs in there and some transaction costs and there is any way to figure out kind of when a base level question is just for modeling purposes going forward kind of core level.
You know, we've been averaging between five and 6% actually in a two to rental revenues total revenues I think thats sort of in line I think clearly see a spike up a little bit this quarter, but we expect it to the evened out over time, especially as we continue to grow because we definitely we expect that as we continue to grow the growth in red.
Avenues will exceed our growth next year.
Okay, and then just follow up question.
I know you mentioned Thomas Cook, you guys came out very well economically with security package, but looking at the lease rate factor and trying to do simple math of average average aircraft fleet versus revenue I.
I guess that at least we factor was negatively impacted.
Correct.
Turning for a little bit there is anyway to quantify that you expect a recovery simple. The difference is the difference is really the fleet getting younger that that's what you're seeing come through okay.
All right thanks very much.
Thank you and your next question comes from Helane Becker from.
Cowen Your line is now open. Please go ahead.
Thanks, Operator, hi, everybody. Thank you.
Hi.
Hi, I'm I just have I think two questions. One is when you transfer.
John in your prepared remarks, you talked about the innovations and transferring the ownership as you move these aircraft.
But the airlines will work with you in a timely thesis or do they sometimes delay.
The innovations because they don't they don't want to work with somebody else. They want to work just with you.
Sure.
Look airline aircraft transfers of ownership have have been.
Been an issue within our industry all leasing company still aircraft, it's part of our capital.
Our capital reassessed rejuvenation buying new aircraft.
It's a hassle for the airlines it just is.
But for example, our Carol fore sight, our general counsel is working with the aviation working group to try and.
Come up with methods that mechanically and administrator.
Ministry of lead make it easier I will say that air lease is a differentiator in that we do enjoy very good relationships with our airlines. So that we do use that relationship just to say Hey look this is very helpful to us. We appreciate your attention and we get traction from that relationship having.
He said that yes, sometimes it's unrealistic for us to sit there and put innovation in front of a north American airline on December 22nd the peak of their season expect them to get to it. So we are also reasonable in return, which is why we say in our comments that as we've done in prior Securitizations. This will probably take a key.
Couple of quarters for all these aircraft.
To transfer we think we've got a great.
Basis to do so but.
This has been a non issue for quite some time in the leasing industry.
One of the things that helps us a little bit is that.
If we sell a 10 or 12 year old aircraft to an existing customer, but we have pending transactions would that airline.
We'll introduce new aircraft in the near future.
It makes it a lot easier to get a novation done because they understand that we're trying to keep our exposure.
And at a certain level and when we have a new aircraft going in there in the future and we're simply transitioning an airplane to one of these structures.
The whole thing makes a lot more common sense to the airline than if the introduce a strange new less or a comes in that has no prior interaction with its carrier.
Right.
And then my other question is just on the environment. John you spent some time.
Talking about it I was in Hong Kong This weekend and.
Every panel everybody was talking about it.
I think nine finance ministers proposed the attacks I guess.
On the aviation because of it.
Fine.
Do you think that.
This is going to be leasing industry issue or.
Airline and OEM, Michelle I would think it would be airline.
So actually I actually I was one on one of those very first panels in Hong Kong.
Actually this is a global issue and it affects everyone. It affects the Oems the airlines certainly.
Leasing companies as to our order books, So you know.
This is not believe it or not at its fundamental roots it's not.
This is a broad global issue across all sectors, all aspects across all humanity and so on in our space. The airline space. Yes. This this impacts decisions on buying and leasing by airlines more and more going forward. So yes. This is this is a big deal into your point.
We've seen in Europe , and other places increasing escalation of taxes based upon.
You know carbon emissions or some other environmental metric and we believe this will this will continue so my point here is okay global economic factors traffic supply demand all that being whatever they will be in as they mature over time.
The environment and the need to protect our planet Earth will always be forever more extremely important and a priority going forward.
And that is what the airline C.
A month ago, you saw the international airline grew by AG production announcement that says that they promise they will be carbon neutral by 2050 and flow that sounds like a long time away and it is that's a huge achievement.
Guarantees you would never have seen the state in like two years ago three years four years ago, So more and more.
This is a focal point.
Of responsible airline management to the world to its passengers.
To the marketplace.
Yeah, I don't disagree. Thank you thanks for that answer.
Thank you. Your next question comes from Cushing Patel from Deutsche Bank. Your line is now open. Please go ahead.
Hey, good afternoon guys.
This year, the U.S. export import bank reauthorized, the financing of transactions in excess of $10 million for the first time since 2015, just wanted to see if you could give us an update as to what you're seeing in the market and how you think this additional lever for financing may impact aircraft demand.
Yes, so far we've not seen a lot of activity.
Part of that is you know some years ago. The the fee structures for both the season the ex Im bank were restructured.
So the entry fee the upfront fees have gone up considerably.
And with the current state of of of interest rates, both in the Us Europe and Asia.
When you combine those upfront fees.
What airlines can get in the marketplace either through.
Financing operating leases or sale leaseback.
The exim structure is not necessarily cheaper for an airline.
As compared to what it was maybe 10 15 20 years ago. So.
So far we haven't seen a lot of activity I think it will pick up.
But there's not a huge difference today between a U.S. government guaranteed X and loan.
With all of the built and costs associated with it plus it's a secured financing.
Versus other sources that are available to airlines.
Great. Thanks, and then just a follow up on the Max you spoke of it taking roughly 24 months from the time that regulatory approvals are received in order to get the plane in order to get all of them.
Currently crowded clean stuck in the air.
And then I just wanted to get my understanding is that driven by a physical constraints.
Tends to supply chain and labor or is that what would ultimately dictate the pace at which these aircraft global fleets.
They are actually many many factors that have to do with.
Getting the aircraft out employing one is the capacity in the rate, which intuit's each individual airline can reabsorb those aircraft.
One of the many examples of an issue there is how much more pilot training will be required and what time does that take take you have you have the actual technical aspects of taking aircraft, which aircraft, which is effectively but been put in storage and therefore placed under storage care programs for engines landing.
Here's everything else.
All of that being brought up to speed you have the software that needs to be.
The software that's been a question the MKS software flight controls that all has to be done aircraft test phone.
There are just so many different variables there are other things like time control components. When an aircraft is delivered the time starts ticking on certain things from a small his life best to other things landing gear.
The airlines will need these.
These effectively warranty travel times extended out so there will have to be agreements with the Boeing company on many things. So there are just so many different variables.
And for sure for sure the Boeing Company, we'll do everything they can working very closely with the airlines to make sure the airline is ready.
But so many different variables and that's why we believe for all the aircraft that have been produced but parked on delivered its probably going to take close to two years for everything certainly.
Blurs will start taking asap, but some of that is how quickly can can these airlines take them. The major U.S. carriers are probably in the best position to take the aircraft first but the variables are our large.
Great. Thanks, guys.
Thank you and your next question comes from Mike Linenberg from Deutsche Bank. Your line is now open. Please go ahead.
Oh, Yeah, Hey, good afternoon guys.
Hey, John when you were talking about Boeing and the Max and your order book, You mentioned something I think I heard you say something about ongoing financial assistance from Boeing where you where you referencing that you're just you're not making PDP is now well did I hear that right what was Oh no as we said last quarter the Boeing company.
Stepping up its financial support for our lessees.
We can't comment individually.
As a matter of agreement a contract whereby whereby were but that financial assistance is coming through okay. Steve highlighted two to certain airline to some airlines as a number of customers who need the support so so long as that continues and progresses, which we think.
So far we were I said ongoing because it is happening now.
We feel fairly confident that we will preserve all the forward placements, we have with certain match customers.
So you know Boeing is stepping up to the plate.
And we feel overall better about that today, okay, great and just one second sort of quick one here did you know with the Athree 80, now sort of emerging are becoming clear that this is this is a 10 or 12 year old airplane or an airplane, what the 10 or 12 your life.
We're going to see a lot of those planes get parked over the next few years. It feels like there could be a step up for wide body demand you look at the Triple Sevenx and I think absence. The recent order from D.A. I don't think you've had any orders in four or five years does that brief new life into that program do you see.
Step up and demand for other programs as a lot of seats are going to be leaving the market over the next few years certainly over the next five plus years thoughts on that.
Yes, we're working with virtually every one of the Athree 80 operators.
Yes, most of them will phase out the aircraft at 12 years.
Some may hang onto them for little while longer but definitely the please going to shrink.
And a very rapid rate and what we're seeing.
Is that most of the airlines that we're dealing with our not interested in replacing them with the largest twin engine wide bodies.
Actual trend is the other way.
There are more interested in increasing frequencies in existing CD payers.
So the 77 nine to 70 710, the Athree hundred 5900, the 1000 or the the four models.
That appear to be the most interesting to the airlines and what we're finding is that until this clear visibility on the triple seven nine X.
We're not seeing a lot of momentum there.
Until the airlines understand what that airplane is going to do and and is an expensive airplane.
So.
Until it flying an in service, we just don't see a lot of new campaigns coming to fruition.
Okay. So you guys aren't a great position, though given your order book and the airplanes you just mentioned so great.
Thanks, Steve Thanks, John .
Thanks, Mike.
Thank you. Your next question comes from Jamie Baker from Jpmorgan. Your line is now open go ahead.
Good afternoon everybody.
Follow up on that because I'm a little confused on this phenomenon.
Max centric airlines that are not.
Turn it on leases so first off how wide spread is this is it just the Max heavy airlines are bigger customers and.
I guess I'm confused Bowen compensating air lease or other lessors or the airlines and then they remit payment back to you how's the cash flowing.
We never said, Jamie that airlines are not paying us on their masses.
Where do you see that.
Well that that was my interpretation based on on what you would said before.
You're not of what because we have heard that some smaller Max airlines are not current.
My I guess you answered the first part of my question was.
Doug there always have any exposure to that.
I guess I guess, the follow up to that would be.
Are there triggers in either any of your contracts or just broadly at the industry level that we would expect to see.
Sort of horse trading behind the scenes in terms of delivery positions or should we consider your.
Max delivery stream as well as that'd be industry to be sort of.
So.
I am excited Jamie it's yes, I think.
I must not overly complicated as I here's the bottom line I think you can safely assume both based on our comments in your various do you talked to many airlines over the world.
Boeing is working very carefully with all of its customers to try and remedy.
The Max crowning alleviate financial burdens when they may happen and as as we've indicated and I indicated in our remarks.
That includes booking Boeing working with us and our customers and part of that is helping get early getting or at least payments paid bottom line. So we can't comment on.
So individually here or there are some industrial wise standard Boeing is going through a very thought very.
Arduous because it takes a lot of work every customer is different.
But the bottom line is with Boeing's continue financial support we're confident our four replacements, we are getting paid.
And you know we can't comment on who is unable to pay us or who is paying us, but we have offered as consistent with what you read what Boeing itself is saying they are helping our customers and we are getting paid.
Okay.
Blow up also related back to it to Helanes question I see so how do we think about vs.
You know it seems that with the pressure that Boeing is under there'd be no better tons of them to clean sheet an aircraft they actually had bandwidth to do it.
I would think that U.S.G. would also argue in favor of bad I mean.
How are you thinking how is air lease thinking about the timing of likelihood of began in may as it relates to both the SG phenomenon and thank you for touching on that in your.
Prepared remarks, as well as what's happening with Max.
Well are you talking about the enemy, Jamie that was sort of being touted to the airlines into a few less source.
The 12 to 18 months ago.
Where are you talking about a whole new.
Design of a smaller aircraft.
That would compete with the 323 21, well I'd welcome to input on boats, but the question was referring to.
So the 12 to 18 months ago.
Wrapping around is taking place.
Yeah, I would have to say that when I talk to Boeing and the engine suppliers and the airlines that is currently as we sit here today not a high priority.
Okay.
And you don't think DSG potentially impacts that.
The engine technology that would go into that airplane is not significantly different okay.
In terms of admissions per pound the frost.
So that we very marginal improvement in that area on the other hand, I think Airbus is working on other.
Avenues that involve more electric power.
And alternative combinations.
That are perhaps a little more advanced.
In terms of what the impact is on environment.
But again Thats outbreaks later I frame.
We're probably looking for more than 10 years down the road.
Okay gentlemen, thank you so much for the clarity my questions. Appreciate it thank you Jamie.
Thank you. Your next question comes from Ross Harvey from Davis. Your line is now open. Please go ahead.
Good afternoon, and thanks for taking my question.
More focused on Greg.
I'm wondering in light of the Capex pick up into 2020, and 2021 I'm just looking to check your latest thoughts on various forms of financing.
Firstly, what you would you look to issue more preferred stock given the pricing trends since you.
Your launch in Fabry this year.
Are you compare that to.
Execute on more Super bowls type vehicles.
Maybe we'll start taking a step back I think the way we look at financing will depend on ultimately the timing of aircraft that we take delivery of.
I mean, we've been doing about $3 billion to $4 billion in bonds a year.
This year, we did a billion dollars in sales that probably ramps up between 1 billion to doing five over time and then with regard to your question on preferred I think thats something we remain opportunistic on depending on what we're seeing out in the marketplace because that really allows us to buy more and make bigger investments.
If we see the appropriate opportunities. So that's kind of how we're looking at things I think it's.
Pretty easily manageable.
Given our ratings profile in our in our financial metrics as well as our large unencumbered asset base.
Okay that makes sense, if I may follow up I'm, just wondering in light of your commentary on.
Competition from New Chinese last ours sons.
You have been for a number of years a distant observer of the sale leaseback Mark how close are you too.
Three answer that area or is the case. So if you have an off.
Capex commitment so if you're rolling out maybe that's something we should look at much further down the line.
Yeah. Thanks, the short answer is no we're not looking to get into the sale leaseback market our.
Yes, Steve Steve made in his prepared remarks at a very important comment that I hope you all paid attention to we don't change our business model just from year to year quarter quarter. All you know air Lease's those model from day, one has always been.
That we are a new aircraft player our business model is we order large numbers of aircraft from Airbus and Boeing going forward that will say our business model and we're not looking to do any shifting to the sale leaseback side, yes, we look at sale leasebacks as simply a financing of aircraft that an airline is already ordered.
And our primary expertise and what differentiates us from a lot of these other less stores that have money.
Is that we work with the airline hand in hand years before they do their fleet planning and develop their network strategy.
And we work with them to actually determine what aircraft they will need and that's where early.
As a partner with the airlines were not just the finance here. We're a partner that works very closely with airlines a long lead times.
To optimize the fleet strategy.
And then we.
Use our airplanes as a portion.
Of that fleet strategy through the operating lease medium.
Thats a totally different business.
Then a guy that had the checkbook and simply by the plane that the airline already ordered at a premium.
And then leasing it to the airline.
In that case, the less or as no value added.
To the planning process orphaned a strategy that the airline was involved in to get to that point to begin with.
It's Russ I think what you're hearing is that the real difference between acquiring aircraft on wholesale basis versus paying retail for them I think that's the first strategy is wholesale.
Okay. Thanks, very much various off.
Thank you. Your next question comes from Josh Sullivan from Seaport Global Your line is now open. Please go ahead.
Hi, good afternoon.
Hi.
Just a clarification on the timing of the Max's turn here over the next two years are you assuming that timeline that theres any extra requirement for for pilots to increase training on the Max due to the new configuration or you're just talking generally the pilots would need to be trained up on the older requirements and the timing that would take.
Just trying to understand sorry.
Yes the.
Let me be clear the the certification or re validation of the airplanes.
Is handled by EFI Asa various airworthiness authorities.
That's a different regulatory process.
Then the certification of the pilots.
That is done on a country by country airline by airline basis. So you could theoretically have a situation in a country, where the Max is approved to fly.
But one airline May say, we will not do simulator training, we're satisfied that we can do what they call level be training and another airline in the same country you might say no we're going to doing a little bit of extra simulator training. So the training aspect of this and the human factors is a totally different element.
In the in the sort of reintroduction of the Max's into operations versus certifying the airplane hardware itself.
So two different regimes it could also be that in any.
Given any certification could be for example in the U.S. take take the U.S. carrier there may not be a regulatory requirement on the operating side of an airline for anything beyond whats called what we again, Steve referred to a level be but in fact, the airline itself may decide that no.
It wants to go and extra step and put more training and so the bottom line is we don't know there are so this was one of the large variables. We do think it's highly probable that training will be required by different.
Airlines different jurisdictions, foreign regulators et cetera, but we don't know and so therefore.
That is a good part of the basis why we think this up to two years number or.
Two years number is as a that's one element in a reasonable timeframe estimate that again. This is our estimate it's not I'm not we're not speaking for the Boeing company, but this is our estimate we think we have we think we have a pretty good overall judgment on us.
Got it.
And then just on the eight to 20 offering our customers responding to that and then maybe what would you want to see out of the two offering.
I'd have to bring to the table to maybe more attractive in your eyes.
Well the two is attractive.
To an airline that already has an embedded fleet of Embraer. One nine. These 190 fives. Good examples are a dual in Brazil.
ARISTOTLE in Kazakhstan, and these airlines that already have.
Embraer.
Regional Jets, and it's a relatively easy step up to the to.
The 220 is a larger airplane.
And we look at the 220 as more replacement for 18, Nineteens Athree eighteens.
737 Classic 77 700 Ngs.
So is it hit it serves a slightly different segment of the market.
And we look at the 220.
As replacing older.
Aircraft in the 100 250 seat category.
And that's where most of the interest that we're seeing.
Okay. Thank you.
Thank you My last question comes from Rajiv Lalwani from Morgan Stanley . Your line is now open. Please go ahead.
Hi, gentlemen, it's actually Jonathan on for achieve.
So revisiting the widebody comments and in light of a slower 77 production in the coming years could you give us an update on the appetite for 77, specifically.
Well I have to do is look at our press announcements of the appetite still remains pretty pretty strong and I think Steve commented earlier again that the sweet spot of the wide body market is we've moved away from point, we moved away from hub to hub huge big area.
Planes and the growth in the wide body market has actually been more in secondary and tertiary destinations and that means smaller passenger loads. So.
The largest.
Wide body twin aisle wide bodies out there don't know are probably little bit too big so therefore.
You specifically asked for the 77 dash nine in the Dash 10, the places have been going well.
You know as well as our Athree hundred 3900 placements and we've commented the frequency is positive now Boeing made his decision on the 787 rate.
Partially.
I want to say there was more than 50%, but a big part of that has been China.
China has not you know in case you [laughter].
Everybody knows China has not been doing direct doors. The Boeing company now for quite some time, well China is a big absorber up 780 sevens and wide bodies in general in general So I would say that and sorry, one other comment by the way just for my repaired, but we just delivered a 77 to China.
China Southern so.
Through the leasing medium those aircraft are going into China, but if you're the Boeing company and you're looking at global production and trying to is off your radar for an uncertain period of time, that's a major factor, but let me remind you that building 12 77 month is the highest rate for any wide body aircraft.
Thats over 140 aircraft a year that.
That is still at a record pace.
So churn from four seems to 12 month.
It's not necessarily a red flag in our opinion.
Okay. Thanks, gentlemen.
Okay. Thank you.
Thank you and that concludes today's question and answer session I would now like to hand, the call back to marry those de Palma for closing remarks.
Okay. Thank you everyone. That's it for today's call. We look forward to litigate you again after the conclusion to the fourth quarter. Operator. Thank you may now disconnect line.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.