Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the at least fourth quarter 2019 earnings Conference call.
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Because presentation, there will be question and answer session.
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I'd now like turn the conference your Speaker today May list upon my head of Investor Relations. Please go ahead.
Hello, everyone and welcome to Air lease Corporation fourth quarter and year end 2019 earnings call.
With the PAMA and I'm joined this afternoon by Steve Harvey Our executive Chairman, John Plueger, Our Chief Executive Officer, President and Greg Executive Vice President and Chief Financial Officer.
Earlier today, we published our fourth quarter and year end 2019 with.
A copy of our earnings releases are available on the Investor section our website at Www Dot early Corp. Dot Com. This conference call is being webcast and recorded today Friday February 14th 2020, and the webcast will be available for replay on our website at this time.
This call on West.
At the conclusion of todays conference call instructions will be given for the question and answers.
Before we begin sees that certain things in this conference call, including their houses to your question are forward looking statement.
Other private Securities Litigation reform.
It's include without limitation statements regarding our future operations underperforming.
Operating expenses stock based compensation expense and other income and expense.
These statements and projections the company's future performance represents.
For future results I speak only as of today February 14th 2020 be that's macabre uncertainties that could cause actual results could differ materially from expectations.
Please refer to our filings with the Securities Exchange Commission for a more detailed description of risk factors that may affect our resolve.
Air Lease Corporation assumes no obligation to update any forward looking statements or information in light of this new information or feature that in addition, certain financial measures will be easy during the call such as adjusted net income before income taxes adjusted diluted diluted earnings per share, but frankly taxes and adjusted pretax return on equity or non-GAAP measure at ASCO.
None of our results for utilizing these non-GAAP measures as well as our definition of then on the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-K, we issued today. Its release can be found in both investors and cross section of our website at Www Dot Air lease Corporation.
Unauthorized recording of this conference call not permitted I would now like turn the call over to our CEO and President John Berger.
Well, Thanks, Mary Liz good afternoon, everyone and thank you for joining us.
Like actually begin by wish you my wife's Alaska Happy Valentine's day.
So we're pleased to report that air lease enjoyed another successful quarter end here in 2019 recording diluted earnings per share for the fourth quarter $1.42 up 14.5% year over year and $5 a nine cents for the full year up 10.7% year over year, all through our continued organic growth.
Our portfolio metrics remain strong and consistent as or end of our business achieved a pre tax profit margin of 36.5% and a 14.2% pretax return on common equity.
Ill see the revenue surpassed $2 billion at year end for the first time up 20% over 2018 at our aircraft investments in 2019 were the largest in <unk> history totaling almost $5 billion. Despite the Max grounding and a continued delivery delays.
825 million of these aircraft investments were made in the fourth quarter as we purchase 12 aircraft.
Accordingly at year end, our balance sheet grew to $21.7 billion up 17% from 2018.
Consistent with expectations, we sold a billion dollars of aircraft in 2019 with most of these sales achieved during the second after the year as planned given an delays our new aircraft deliveries.
In the fourth quarter, we generated sales proceeds of $585 million selling 11 aircraft into the Thunderbolt three transaction and the remaining aircraft to other eight aircraft to other buyers.
Ill see now stands with 788 aircraft own manage and on order in December we sign the final purchase agreements for the order, we announced the Paris Air show for 102 aircraft, including a two twentys for with Airbus is now purchased the remainder of embodies interest.
Also watching the Athree 21, XLR and ordering incremental Athree 21 neos.
We view all of these orders as important for growth and for the overall contribution towards environmental sustainability of the airline industry.
With these orders we have 89% of our order book placed including the Max on long term leases two years forward a in a significant amount of poor visibility with over $29 billion in total committed rentals.
Finally, and importantly in 2019, we continue to achieve chief success in the debt capital markets raising over $4 billion in capital. This includes the issuance of over $3 billion and senior unsecured notes, including our first Canadian dollar bond deal and the expansion of our bank facilities.
Ill see ended 2019 with over $6 billion in liquidity.
This month marks our 10th year in business.
All I can say is that looking back we have exceeded our initial expectations. When we started early.
I want to pause and take a heartfelt moment to especially think are unparalleled and world class ill see team and board of directors, our customers investors finance hears the airframe and engine manufacturers our suppliers in our management business partners for your unwavering support and belief and what we're doing.
Looking back over the last 10 years I will only say this.
It was a very good beginning.
Our engines are set at full thrust and we look forward to an even more successful next decade.
So when I look forward a bit by starting with a few topics that I know or on your mind.
First the Corona virus and its impact.
Look I will Miss words, besides the obvious human impact it has been extremely tough in particular for China, and Asia airline customers with flight cancellations and dramatic drop off in traffic.
I won't quote facts and figures to use their ample sources for that information.
Yes, we have received requests for assistance from some lessees and as always we're working with our customers as needed.
For example, we're making outright cash aircraft purchase offers as well as offering sale leaseback transactions, which will provide or customers cash and positively contribute to lcs growth this year.
Furthermore, the purchase of selected aircraft can also help our Max customers, who are struggling to find summer live lift in the face of still uncertain Max delivery taught timing.
We will also be doing some temporary lease paper payment deferrals as happens in these types of situations.
However, as we see things today, we do not foresee a significant overall impact from this on our financial performance in 2020 or beyond.
We have a very strong in healthy balance sheet and through that balance sheet, we can and will help our airline customers.
We do expect the global passenger traffic growth.
Growth numbers will be impacted for 2020, possibly even resulting in flat to negative growth.
That's also remember that the traffic growth also continues to be negatively impacted by the Boeing Max situation, which will have drawn out to at least a year or more of no deliveries into the global marketplace.
The airline industry and its leasing partners, including our management team with decades of experience have experienced shocks and pandemic episodes with varying degrees of severity before with passenger traffic always strongly recovering overtime and we believe this resilience we will continue.
This belief is strongly echoed in the hundreds of conversations we've had over the past month with our airline customers in Asia and globally.
Well the current Corona virus has had a huge and large immediate impact the airline industry takes a sound long term view in their overall fleet growth plans.
The Max production cessation, an Airbus production delays have resulted in a shortage of aircraft in the marketplace for the long term view.
Let me be clear that the vast majority or mass customers still need these aircraft greatly.
And is Airbus themselves stated clearly in their recent earnings call there was no capability.
To replace or backfill Max capacity with Airbus single aisle over the next several years.
Outside of the Max our new current or new aircraft deliveries continue to date with our customers globally, including our customers in Asia yesterday. For example, we delivered at Boeing's facilities in Charleston, South Carolina, a new Boeing 787 dash tend to either Airways based in Taipei, and a few weeks before that.
But from Airbus, We delivered a new Athree 21, new to Vietnam Airlines.
As to Max deliveries, we're confident in boeing's than the F. <unk> leadership, and we now see light at the end of the tunnel.
Nevertheless, we still believe that it may take around two years for the more than 400 Park Max's globally to ultimately return to service.
Using our best about estimates, we believe we will be taking four new Max aircraft deliveries and 2020.
I hope this is overly conservative as we actually up 27 aircraft that have been built but under levered to our customers. In addition to the 15 Max aircraft, we delivered to our customers prior to the grounding of them actually.
Please remember that there are many elements that need to come together for Max deliveries to recommence over and above the greenlight given by the F. Hey for example.
The airlines own training schedule.
Technical issues, including returned to service from a preservation maintenance state.
The uploading and testing of new software on each aircraft.
Hi, My wife commercial discussions as to calendar time or likelihood of components on aircraft they've been park for a long time.
Airways and its approval afford certification authorities.
Cancellation of delegation of authority by the Phase two Boeing engineers for issuance of certificate of airworthiness, which will now be done by Epay inspectors as each for aircraft liver and this may entail greater time as we do not know the experience level of these inspectors.
Late compensation delivery discussions.
Yes, no lift demands that are particularly impact smaller operators, particularly if they miss the upcoming summer season.
And in the immediate near term the Corona buyers impact, which as a practical matter manpack some countries abilities to obtain visas for travel to accept delivery.
In total L.C. as place more than half of our Max Orderbook aircraft with 20 Airlines in 18 countries.
And there remains a lot to be worked out for the delivery process.
I would add that to date, none of our Max placements have been two airlines in China.
Despite all the challenges we anticipate that 2020 will be another strong year for AOCI.
As you will see in our 10-K, we anticipate a total of 46 aircraft delivering from our order book in 2020 with only four Max aircraft included in that amount.
We hope, we and Boeing can improve the number of Max's that we take this year.
Also those 46 aircraft do not include any incremental aircraft purchases such as the sale leasebacks, we've been offering to help some of our China and Asian customers or other opportunistic aircraft acquisitions.
On the aircraft sales side, we're seeing strong demand from a diverse base of buyers for aircraft.
Given the strong demand reception market reception.
Through our T., both three transaction in the.
Fourth quarter 2019, we will look to continue building upon this platform in 2020.
Greg will comment further as to our forecast aircraft sales dollar volume and timing plus aircraft delivery timing for the next quarter and 2020.
Let me conclude by thanking all of you who are listening to this call for the thoughtful questions and comments you've raised in past earnings calls and which I anticipate today.
Many of you live in following us since inception of our company and we do value your perspectives.
With that let me turn the call over to Steve Harvey for further remarks, Steve.
Thanks, John for an excellent overview of Air lease Corporation as.
As John mentioned since day, one of our company's founding it has been our goal to have a strong independent investment grade company.
With a best in class fleet, a long term leases.
To achieve profitable organic growth.
It is with this team's hard work and dedication that we've been able to grow ill see in just 10 years.
Could be $50 billion in size and scale.
And just the last year, we delivered our 300 new aircraft.
Now with 362 of the most modern fuel efficient aircraft scheduled to deliver between 2020 and 2024.
Early has the opportunity to again more than doubled the size of our fleet.
Over the next five years.
Ill seats order book is a huge asset and that continues to hold true today.
Currently there are over 6000 exceed 20 family aircraft in the Airbus backlog.
And more than 4737 aircraft in the Boeing backlog.
That equates best case to more than five years of wait time in production for each aircraft right.
On the wide body side.
A healthy long term dynamic with about 1400 aircraft on order between the 77.
The new Athree 30, Neos and easy 50 aircraft.
And more recently the eight to 20 aircraft.
Which will replace eight threenineteen.
Larger regional Jets and many older 77 classics in some cases.
As more than 500 aircraft in the backlog.
All of these aircraft will be critical for replacing older less efficient aircraft.
Including the more than 3000 jets that will turn more than 20 years of age in the next five years.
With a well balanced the order book with high emphasis on the easy 21, Neil the easy Twentyneo, New Boeing 737.
And the most desirable Boeing 787 dash nines and dash stands.
As well as the Airbus Athree hundred Fiftys and Athree 30 Nils.
Air lease is very well position to meet both the growth.
And future, replacing requirements of our airline clients.
Over the last few years the airline industry has been increasingly criticized.
<unk> contribution to environmental pollution.
Let me remind everyone that aviation accounts for only about 2% of human induced feel to emissions today.
Each year since 1990 aviation has seen fuel efficiency improvement of 2.2%.
Which is three X that of cars and nine ex that of trucks.
So in fact, we have improved but we must find further and better ways to progress.
Flying more fuel efficient aircraft is an integral step in improving the airline industries carbon footprint.
The I.E.G. group.
Which controlled British Airways recently announced a goal to achieve a 10% reduction.
And feel to per passenger kilometer by 2025.
In large part by investing in 142 near new aircraft over the next five years.
There's also been announcements from the likes of Jetblue easy jet S.P.S. and others and this is just a real time example of the airline industry goals to become more environmentally sustainable.
We believe that scrutiny of the airline industry will only get greater <unk>.
I would order book aircraft anywhere from 15% to 30% more fuel efficient than the predecessors.
Hey, I'll see we'll be right there to help our airline customers modernize their fleet.
As they respond actively to this important issue.
Despite the tremendous gain and environmental efficiencies, primarily attributable to new engine technology.
We do believe that further improvements still needs to be made across all engine manufacturers.
To work out the teething pains associated with this new technology.
Which has impacted dispatch reliability in a negative manner.
We cannot airline customers look to the airframe and engine Oems.
Accelerate improvement in this regard.
Talking about the latest aircraft type.
Just as a factual reminder of importance. The early theme just took delivery of the 100 Boeing 787, Dreamliner that we ordered and bought directly from Boeing by LC and our previous leasing enterprise.
This is cheap Smith of 100, Boeing 77, Dreamliner is unmatched.
I don't reflect our commitment to supply airlines worldwide with the newest and most modern jet aircraft.
Switching to the geopolitical front, we continue to monitor trade Pops, Boeing and Airbus both have significant percentages of the orders.
To the Liberty airline in the U.S. Europe and Asia.
We are in a global business.
And ultimately there'll be more lost by an economy, then gained by any tariffs imposed on aircraft or underlying issues created by political animosity.
We remain hopeful and optimistic that these trade issues will be intelligently resolve that politics do not impact the growth of our industry or the regional economies served by airline customers.
Air Transportation is a vital life blood the global Commerce.
And our responsibility to create tailwinds not headwinds in this area.
Over the last decade, we have grown ltcs customer base to 106 different airline customers and 59 different countries at the end of 2019.
Some of the new customers. We've added our names we've known for years and others are newer or startup airlines.
Where we spent time and resources with senior level for the company advising them.
Our team continues to traveled the world to maintain.
Our client base well at the same time, expanding our customer list include new names.
Which are shaping the airline landscape.
As John mentioned some of our customers are dealing with issues today that did not exist a few months ago.
They will turn to their less or partners for guidance and help.
For years, we have received questions about that so competition.
And it is in times like these.
That our commitment.
Who our customers.
And the commitment of various aircraft less stores will be put to the test.
Have become very evident to our airline clients.
We are confident.
At the health of our business.
Excellent long term airline relationships and the strength of our seasoned management team.
Will allow us to assist our airline customers to any setbacks or turbulence.
While finding new opportunities the once again differentiate early.
And succeed.
And with that I turn the call over to our CFO Greg Willis.
To provide an update on air Lease's financial metrics.
And financial activities for the second I'm, sorry for the fourth quarter of about 2019.
Thank you, Steve and good afternoon everybody.
As mentioned earlier, we recorded strong results for the fourth quarter and the full year 2019 reporting diluted earnings per share of $1.42 and $5 a nine cents respectively.
We realized a 15.4% adjusted pre tax return on common equity.
39% adjusted pre tax margin, reflecting the a bench strength and stability in our business model and our key metrics of portfolio yield and lease term remain.
Remaining stable and in line on an age adjusted basis.
For the fourth quarter 2019, LC generated record total revenues approximately 549 million up 22% as compared to Q4 2018 and were comprised of 504 million of rental revenues and 44 million of aircraft sales trading and other activities.
Our fleet activity included the purchase of 11, new aircraft and one aircraft in secondary market, representing 825 million of aircraft investments as well as the sale of 19 aircraft for total proceeds of 585 million included in aircraft sales trading and other activities is 33 million of gains on sale.
Sales and approximately 6 million in management fees.
Turning to expenses total interest expense increase year over year on continued fleet growth, so partially offset by the decline in our composite Costa fun.
Our composite interest rate declined to 3.34% in 2019 versus 3.46% in the prior year.
On the financing side of the business, we have benefited from a decline in prevailing interest rates as we opportunistically access the global capital markets to lock in long term low cost financing, which I will cover in more detail momentarily.
On our percentage of fixed rate funny remains substantial at approximately 88% consistent with our conservative approach towards interest rate risk management.
Depreciation continues to track the growth of our fleet well ask DNA represented approximately 5.7% of total revenues.
As compared to 5.8% of total revenues in the fourth quarter of last year. We continue to expect it overtime our revenue growth will outpace our question Andrew we run a highly efficient organization with just a 117 employees now servicing 21.7 billion in total assets as we see this efficiency driving substantial shareholder value.
Well into the future.
Looking forward to 2020, we expect to deliver 46 aircraft, representing approximately 4.1 billion in aircraft investment as John mentioned, we substantially reduced our aircraft investment expectations for the Mac deliveries for 2020, given that our view, even if immediate return to service that have achieved it could take an extended period of time for both.
Going to deliver to deliver our aircraft on order.
In terms of quarterly mix as of today, we're expecting 600 million in Q1 1.6 million aircraft investments in Q2 600 million in Q3, and 1.3 billion in Q4.
Additionally, we expect deliveries in the first quarter of 2020 to be weighted towards the back end of the quarter.
And it's worth noting that even with revised Max expectations 2020 is still expected to be our second largest dollar value of aircraft investment.
Our history.
We will continue to evaluate aircraft sales opportunities and currently anticipate selling $1 billion of aircraft in 2020 with the majority of this volume occurring in a second third and fourth quarters of the year with relatively limited sales and gains on sale in Q1.
Sales activity remain focused on our managed vehicles that will continue so to third parties as buyers as well.
As John mentioned as a and as discussed on our call. Our Thunderbolt three portfolios answered are proceeding nicely and we anticipate transferring the remaining aircraft from held for sale into the new structure over the remainder of Q1 in Q2.
In 2020, including this 116 million of economic value, we expect to realize over the life of this deal we expect to transfer these aircraft to be <unk> to result in an accretion of ROI as well as to reduce our average fleet age.
As a reminder, these aircraft are no longer accruing rents, nor depreciation as a product or held for sale accounting treatment and the gains will be recognized upon the completion of the transfer the aircraft into two both three entity.
Moving to the financing side of the business as always we continue to evaluate and so you've got the most cost efficient financing for AOCI and fourth quarter. We completed our first international issuance via the Canadian by market raising $400 million in Canadian dollars at a two point.
Six to five coupon maturing in 2024, which we fully swapped back to U.S. dollar is at a rate of 2.535%.
Canadian Investor Appeal was strong for this issue and we're excited to have.
Successfully tapped and new market and Investor base.
Then in addition in January we took advantage of attractive U.S. capital market conditions, and issued 750 million senior notes at a coupon of 2.3% that mature in 2025, as well and 650 million in senior notes, a 3% coupon that mature in 2030. These issuances.
Represent the lowest coupon issuance for similar maturities analyses history and bodes favorably for outlook on our cost of funds in 2020.
We maintain a sizable liquidity position of 6.3 billion at year end.
Our only significant maturity remaining this year as a 400 million dollar bond, which has a coupon of 4.75% amateurs in March and we've already prefunded its maturity at a significantly lower rate.
We ended the year slightly below our 2.5 times debt to equity target a 2.4, but as a reminder, our debt to equity ratio regularly fluctuate above and below this level based on the timing of aircraft investments and sale.
We remain committed to our financing strategy that strategy is an 80% fixed rate that 9% unsecured debt and again and the year be benefiting from three investment grade ratings, all with stable outlooks.
Lastly, I want to highlight the fact that our business model is very straightforward and simple we purchase young aircraft in high demand with volume discounts and place them on long leases at attractive economic terms, and then sell them with substantial runway of economic life ahead of them.
And all while maintaining conservative financial leverage and risk metrics.
Over the history of our business, we have demonstrated track record of executing on this approach, including selling of aircraft at a premium carrying value.
This is part of this part is most important not just because it contributes incremental revenue to our business.
But the sales also served to prove out the success of our strategy by reflecting our ability to buy aircraft right.
Generating attractive returns all along the way and on average achieving 8% to 10% gains on sale clearly demonstrate the strength of our model as well as the substantial embedded value of our fleet order book and our leases and with that I'll turn the call back over to marry lives for the question and answer session. Thank you Greg That's concludes managements remarks.
Now I'd like to hand, the call back over to the operators in the line.
Yeah.
Thank you.
To ask a question you'll need to press star one on your telephone.
To withdraw your question press the pound key please standby, while the company given day roster.
Our first question comes from Vincent Camtek with Stephens. Your line is now open.
Thanks, and good afternoon, and earning speech at the best Valentine's day gifts. So thank you for that.
First question [laughter], if I remember correctly, there were some portfolio repositionings into fourth quarter that might have driven.
Rates or at least revenues lower than normal.
That's true just wondering what the <unk> run rate lease income would have been without the repositioning and if we're looking forward into 2020 is there anything we should also be aware of that.
Rental.
Rate volatility.
Yeah, I mean, we repositioned our Thomas Cook aircraft. The leases were done it market and you can see a very stable yield that weve been able to achieve all throughout the over the last several years. So there hasn't been an hourly outsize impact on on the numbers, we took a lot of the security baggage and.
In the end of Q3, but the results themselves were very stable.
Okay, Great and then secondly, so 2020 seems like it's going to be a volatile year in terms of aircraft capacity. So.
Some of the a issues you highlighted causing overcapacity and then you have others some extra lease costs.
Hi.
Are you seeing a lot of near term repositioning activity as result of all this and.
The impact the near term.
Yep.
Yeah, we don't see any aircraft repossessions in the foreseeable future.
Most of our Asian airline customers other large.
Well established global network carriers.
Many of them our state owned.
They have a lot of financial resources and resilience.
And.
The European market has stabilized.
The late deliveries of Airbus single aisle aircraft and the Max situation.
It's actually creating a shortage of aircraft.
We have more than a dozen European airlines looking for immediate list of Athree 20, 320 ones and 77 so.
In the European landscape, we actually see a shortage of aircraft, particularly single aisle aircraft.
And in North America, we continue to see good robust earnings.
Lower fuel prices, which will help the north making carriers on their margins.
And we're seeing yields stabilize or in some cases actually improved slightly in 2020. So.
So if we look at North America and in Europe.
I think when a very good position and Asia, we believe that our customers can withstand the short term impact of this fire situation.
Okay, great. Thank you very much.
Thank you. Our next question comes from Catherine O'brien with Goldman Sachs. Your line is open.
Good afternoon, everyone. Thanks, so much for the time.
Oh, so I really appreciate all the color you that you guys gave just on the evolving krona virus situation and I. Just just had a question on there are quite frankly since you're receiving I'm. Just wondering how does that usually play out as is typically you know one or two months of deferred rent payments and then I guess just out your former company any examples of how quickly.
An airline given some sort of lease payment relief typically gets back on schedule really appreciate any color. Thanks, Yeah sure <unk> as you can imagine again airlines have stopped flying they have less cash coming in and I think Steve highlighted the fact that.
Our airline perfectly in China are the strongest cell lines, there that having a that being said there are some secondary and tertiary <unk> carriers that need cash and so we've offered by aircraft.
Outright we've offered to do sale leaseback transactions, but in the line with that several of asked for a one to two month deferral of some lease payments and we will probably accommodate that this is what we've done also you know you referenced our prior company and although that was a time of stars as well don't forget we also lived through 911.
Which was a really big shock and you had the global traveling public that actually were hesitant to fly for three to four months, but there was ultimately a recovery. So in many ways I'm not minimizing but in many ways. It's a very similar situation here and I think I tried to emphasize in my prepared remarks, the long term outlook, which the.
Airlines still have so in summary in some cases, we're gonna help provide cash through our balance sheet and buying aircraft in some cases, we will allow a partial or some of deferment of a few months of lease payment. We normally collect that are within the remainder of the leasing terms.
Oh, the leasing a duration of these aircraft or there's a few other things that we can juggle around but I think the point here as we've gone through this before we have tools and techniques that are well proven to deal with our customers and I think the important thing for us to do as recognize this as a time to differentiate ourselves.
For our customers by helping them.
It was the biggest tailwind for the start of air lease everybody that came to us in that first year said, Hey, remember when you guys helped us here or there and I constantly emphasize that to our team so certainly difficult times.
But in the Big picture.
We've seen this before we have plenty of tools and big balance sheet capacity to help with it.
Thanks, I appreciate that maybe one quick follow up.
To that John and then a separate question. So the the quick follow up would be you know given the lack of narrow body supply right now in the market do you do you already have line of sight on some carriers to be more than happy to take any aircraft that you you buyback from those Chinese carriers offer has absolutely as Steve indicated we got about a dozen carry.
He was in Europe that probably feel that they will not have their summer season made because of the Max even if we have a may or June greenlight or by the FAA. Let me also still has to get the greenlight foreign authorities doing so yeah. We have a dozen airline operator, just in Europe alone that are asking us for aircraft. So that's why I said in my prepared.
Third marks not only with the help our own growth in 2020, but it will help our airline customers, particularly in Europe get through the summer season that they've already booked and now for the second Smyrna role will likely not have their Max lift.
Okay understood and then maybe just on on the manage vehicles and the pass you've talked about one of the benefits of these men manage vehicles being that even continue your relationship with the airline customer, which you know you noted the importance of that and so but like while still managing your fleet concentration so as you're mentally continues to grow.
It doesn't take these relationships help hmos is all about having more consistent dialogue with airlines and just being their fleet needs are or something else or not. Thank you. Thank you. Appreciate the time sure. It all comes down to our global depth and reach across the customer market base.
The more touch points the more depth, we have and that the better. It is in a more tools, we have to help our airline customers. So its been a huge positive win for us and that's why I want to continue.
On this management business track.
We can do so much more by controlling more aircraft. We don't always have to have those aircraft primarily on our balance sheet and that's the beauty the medical business.
One more comment the airlines that our customers when we sell in aircraft.
Generally the airlines prefer that we continue to management of those assets rather than having a new party in many cases, they don't have any relationship would that other let source though.
Overwhelmingly we're seeing airlines expressed a preference.
With a continuation of air lease being into the in the relationship on those aircraft.
That makes a lot of sense, thanks, and a happy Valentine's Chevron.
Thank you and view.
Thank you.
Next question comes from Helane Becker of Cowen. Your line is now open.
Oh, Thank you very much greater I appreciate the time.
Hi, everybody. Thank you.
And accounting question, Greg These receivables this year's help your customers well the I mean.
If you give your customers will show up in aircraft receivable says that Frac is that how we can monitor this going forward.
Not necessarily a lot of the if the there's rent deferrals will get really a the straight line amounts will get a it depends actually depends on which solution and how that the method in which we provide to help but very rarely does it wind up increasing the receivable balance.
Okay, that's I'm actually very good to know the other thing.
Yes, you know I know, we've all gone through this before and they've done some work in this area in China.
You know 10000, Pete a 10 million people rather traveled.
In New York, Yourselves, and 962 million people troubled outbound and 2018.
And they were 16% of or 16% of global economy now versus 4% during the first time so are you.
And that you know these numbers are so much bigger now that's a recovery time will be more than just sort of that's awesome.
Look I think it's a it's it's a possibility. It's one of the reasons like that I commented in my prepared remarks that we envision that this could very well be a year with a zero to negative passenger growth rate for some of these same.
Reason you talk about so let's say that does take a little bit longer that's certainly true, but I think the bigger 0.2 to impress upon you here is that over the longer term or whether it's near or medium term. The airline traffic does recover Steve commented in his prepared remarks about the vital essence of air transportation.
In glaucoma global Commerce in human connectivity so.
And maybe a bit longer this time kind of hard to speculate the severity does seem worse, but again, we've always taken the long term view and our business and we think that's where the that that's the case now.
Okay. That's really helpful. Thanks, John.
Well I'm wondering conference calls this year, we <unk>.
We talked about the fastest and you pointed out Steve that you know.
And then is your we're going to be a declining or certainly try not to the claims portion of your investment and U.S. in North America would increase when I see that happened actually year over year nice universities.
Sure you thinking about you know getting.
Where are you thinking about China, and sort of Canada or U.S. in Canada, North American going to enough as a percentage of roughly.
Look as John said, China will continue to grow once we get out of the short term a sort of aberration.
But I think long before the the medical crisis that arose in the last 60 days.
We had already program our fleet portfolio composition.
To have China mainland China.
The right around 15, 60% so.
One of in a rough way one fixed or we.
Would be dedicated to China and.
And then a significant part of that one six well operate in long haul international operations.
You know with Athree 50, 77th and so forth so.
All of the 15% a portion of that will operate domestic and regional services in China, and southeast and northeast Asia.
And a large part of the investment we have in China with the airlines.
Our wide body aircraft that will operate North America Europe, Australia.
And some of the larger regional airports in Japan, Singapore, and so forth so does that make sense.
<unk>, even though yeah.
15% into various components of what those airplanes are really doing.
Gotcha, Yeah. That's that's hugely helpful thing Steve Okay. Thanks, everybody.
Thank you.
Thank you. Our next question comes from Cushing Patel with Deutsche Bank. Your line is now open.
Hey, good afternoon, guys just as I look at the order book for 2020, you have a healthy mix of Newtek aircraft from both the major Oems delivering this year. So just as we think about some of the various production issues that each of the Oems that's been experiencing over the past couple of years could you help us get a better sense of what percentage of 4.1 billion in capex that you're expecting to.
Liver might be at risk of getting pushed into next year and if you don't have a specific take or maybe you could just talk to us about what some of the biggest areas you perceive to be.
Most concern.
Sure.
Look lets just separate now for this purpose Airbus and Boeing.
We let's start on the Airbus side, and you're really talking about most of the single aisles here the Athree 21 Neo specifically.
We already have been experiencing three to five months delivery delays all throughout 18 and 19. So if you will some of the aircraft were taking delivery in the first quarter. This year already should've been delivered last year in the same way some of the aircraft that were in the third or.
They are scheduled for 2020 originally for our contract agreements will slide out so any effect, we've already had a slide so the bottom line is we don't anticipate on the Airbus side on a net net basis.
And a significant variance now that that could change you know recently there has been some developments further issues on the on the Pratt Whitney geared turbofan, which which may cause Pratt Whitney to divert a bit more of their production into support the a fleet of the aircraft that are in service.
As opposed to go into production that remains to be seen but that is a possibility.
And of course, we've already commented on the Max We believe we'll take for this year, we hope it will be more we'd welcome to have more but it's a big process to work out with our customers. So I think the bottom line is I think that 4.1 million appears today to be pretty solid.
And we've already been living with disease. These delays for awhile. So certainly if there is a major impact to that in the next quarter. So we'll let you know Airbus is currently running about five to six months late on their Athree 21, Neos I think that's been well documented by other airlines and less stores as well, so but I guess if there if there is good.
News here, it's that this has been quite a lot for several years now so the spillover effect has been happening.
I think in the next earnings call in May.
I think we'll have a better sense.
On where Boeing is headed on the certification of the airplane.
And also we'll see how Airbus is performing particularly in Hamburg.
On the Athree 21, Neil but as John said, you know it's conceivable that.
That we may have one or two athree 20 ones. They may slide into a 21.
It could also be that.
Since those aircraft or follow on configurations, they're not the first of that type to an airline Airbus could very well meet these objectives.
Oh, the biggest question Mark any all known as really the 737.
Because.
Currently were conservatively planning for aircraft.
But it could be as many as 20 aircraft and everything in between so.
We really have very little visibility until we have the regulatory.
Revalidation both from the EFI.
Oh, yes, so the European authorities and also the Chinese Canadian.
In Russian a authorities.
Got it thanks guys.
Thank you next question comes from Jamie Baker with JP Morgan. Your line is now open.
Hi, This is a dual on for Jamie and Mark on My first question is pick up lots to talk about how new their technology isn't how old the occurrence for older technology is so is that the right way to think about it and that the right way to think about eight leases portfolio strategy as well.
I think we have a very simple and demonstrated a strategy from at managing residual value risk right. We have young airplanes that we bought at attractive prices, we put them on long term lease and we hold on for the first part of it useful life and we have demonstrated track record of executing a sales dispositions to people.
And enjoy the that's two thirds of the life. That's remaining so to me. It's a very simple strategy, it's easy to understand and its proven and that's how we manage our residual value risk.
But to say that a five year old 737 800.
Somehow should be classified in a different category.
You know when you look at today's fuel prices.
Look at the maintenance cost the aircraft and compared to the Max.
The cash operating cost differentials are very very small.
Got it Okay and my next question is how seasonable is it to a ticket have dropped out of China and move into Europe. As you know what kind of I'm mentioning before how quickly can be done given the need to reconfigure. The claims and you know for example, if you take the playing out in March did you have it ready.
In June.
Yeah, we already are a in probably very close to taking delivery of two 737 eight hundreds for example out of China, a that we already have placed in Europe, and so a if you're talking about like I don't know like travel or somebody I mean, no me that that that that is happening and and there's no impediments that.
That the airlines are gearing up for it. So those types of operations are still are still going on aircraft movements are still taking place. So we really don't see any I.
I think his question is geared at.
As the ease that we can do the sale lease back to help our customers with the corner virus and then that's a question that customers are very willing of Oh, yeah, yeah facilitate that process and keep in mind that we have leases already with these airlines we have leases on aircraft that we lease them.
So the documentation already exist.
Oh for the majority of the people working ball.
While we have to do is insert the the aircraft involved and the new commercial terms.
But all of the legal.
And regulatory insurance issues are already agreed between the airline innolux, if you're a small or medium size airline who are trying to Asia and you need cash and we're about to right. You are wire transfer Big X, but you can bet your bottom dollar that transactional happen expeditiously.
Got it thank you very much.
And by the way that could take two forms.
We have discussed with airlines in China.
That we're ready and willing to purchase a for example, 80 20 category actually 20 177 800.
We would consider purchasing an aircraft and taking it out of China.
And leasing it to one of our customers in Europe.
We can also consider it say leaseback structure.
Well, we body aircraft create liquidity for the airline.
At least that airplane back to the Chinese carrier or an Asian carrier.
Three or four years.
So those are no different scenarios that were happy to discuss with our customers.
Understood. Thank you.
Next question comes from Moshe Orenbuch with credit Suisse.
Great. Thanks.
Thanks, and in addition to happy Valentine's Day, I guess happy 10th anniversary to Ah to everyone.
Thank you I was hoping.
I was hoping that smoke most of my questions actually been asked and answered, but while you were during your prepared remarks, Aircat announced that they actually had a did some rescheduling to defer deliveries of Abaxis with Boeing.
There are opportunities to you know to create additional value for air lease and its.
And its customers through this process that stuff that you're working on the share with us yeah look.
As you can imagine these discussions have been ongoing for months.
And we're we're always orienting out towards an outcome to have a win win win where we can help Boeing and somebody circumstances and taken aircraft earlier, we are more than you know open.
If we can help in other situation, where there is critical delivery needs and maybe we haven't unplaced position. We don't have that many left but if we haven't unplaced physician or we have a customer who says you know what if I can't get this matched by September October I don't want it until April well give that position up to Boeing to satisfy a bigger need. So this is really part of a bit.
Very large.
Framework in fabric and puzzle, we're all parties worked together in good faith.
I do believe that we'll be able to.
You know to to get some advantageous either positions or opportunistic aircraft buys where they'd be from Boeing or other but that's just what we do I mean, a this is a this is this is how we can move quickly. This is what we offer so I'm pretty confident that would be able to be a net it'll be a net positive for us yeah. We.
Have we have daily consultations with going leadership, a we are up their frequently in Seattle Chicago to make sure that.
Both sides understand where we're headed.
And we're working this on a customer by customer basis.
So.
We're very.
Sensitive to our individual airline requirement on the 77 dash eight and the 77 Dash nines.
That have already been built or will be bill shortly after production reserves.
Got it my follow up question for Greg I mean, you talked about the fact that you're basically able to finance at the lowest level you've seen so how much debt kinda gets repriced or how much will be issued during during 2020 to kind of take advantage of that you're what percentage of the total and how much lower do you think cost will be than your average.
Hi, I guess the way I look at it we did a billion for in January we typically do between three and $4 billion in financing a year a lot of that ways with how much we wind up selling issue that's another source of financing.
And a lot of that's also dependent upon where interest rates are.
Right now when the rates out of the way they are typically load up on liquidity and lock in long term financing. So it's kind of hard to guide, where we expect our composite consequence ago, but.
Given the rate environment right now we feel pretty.
Pretty good happy that we were able to locked up our lowest five year coupon as well as our lowest tenure coupon genuine.
I'll just add one other comment that that we are.
They are mindful is an election year.
It's an election year.
And so the majority of our financing will be.
Concluded and done well before we get into the ended the year in any election jitters in the marketplace et cetera, et cetera, we've already well thought that out and it one other thing to add to it as I mentioned the prepared remarks, we're about to pay off a 400 million dollar issuance that we did seven years ago carries a coupon of 4.75% and that's well.
North and 200 basis points, where we're currently borrowing today, so I think that that that bodes well for our future composite cost of funds.
Got it thanks, a lot from.
Thank you.
Next question comes from Kristine Liwag with Bank of America. Your line is open.
Hi, Good afternoon, guys, Steve in your prepared remarks.
In light of the aviation is only two for a sign of man made at mission globally.
Do you think that focus on carbon emissions in aviation is aside for a long term trend.
No. This is a a very important trend both in Europe, and North America, particularly.
And we are talking to I add up.
To make sure that the airline community.
As a singular voice.
Because I think most people.
On the streets are not really aware of the percentage contribution that aviation.
Makes to the heel to mission.
So I think that's to be more education.
I think people have to understand it in the last 30 40 years a commercial aircraft.
Have become quieter.
Oh, and and have been able to improve tremendously in the area emissions and fuel consumption.
Oh, I don't think the general public affairs well informed.
And both the airline community the manufacturers.
And I add up and other groups need to communicate this to the general public and also to the politicians.
And policymakers.
Oh that are so.
This issue.
The only thing when you see.
The other thing Christine's air traffic control.
Really frustrates me and John because were pilots.
It's every time, we fly to Europe.
We're pointing to holding pattern.
Oh, we fly a 300 mile leg between two city, but we actually wanted to flying 500 miles.
And so you have all these politicians, making a lot of noise.
<unk> Airlines are pulling your.
But they can't get at United Skies Air traffic control system together in Europe.
Which would save hundreds and hundreds of millions of gallons of fuel.
And cut down on pollution.
And healthy environment, and and just in that area alone that could be significant gains made with very little investment.
So instead of ridiculing airlines these politicians and leaders.
Sure look in their own backyard and see how incompetent they've been modernized E systems in Europe.
That seems to be the logical path, but I guess, what we've seen in the industry, sometimes it they they focus on other things what seems to be something of focus would be what you've highlighted which is new aircraft that are more fuel efficient.
We also have lower emissions. So if they wanted to take the easy way out it could be something focusing on those assets do you think that yeah. You're right. You mentioned you have a very yes, you friendly portfolio because you haven't more fleet, if you're an airline and you can't really changed politicians mine, but you want to make sure that you hobby.
AH, Yes, you find the fleet one way to do it would be to focus on newer technology.
It continues to be the long term trend and this is you know.
Not the hard topic ctcs.
What do you think happen to the average service life of an airplane does that get shorter.
No. This is John I look we've had other environment is is a big buzzword today, but 10 years ago or 15, we called that fuel fuel efficiency. There's other factors that drive the technology development of aircraft and I think the factor. The matter is this is not.
A short year, one or two or three or five tenure phenomenon technology progresses aircraft improve in this case, we're talking we're focusing on emphasizing on the environmental friendly aspects of the newest technology aircraft, but there's absolutely no forces. Despite this focus.
The airline transportation network and number fleet globally, now 28000 aircraft simply too large to be replaced in any short term period and therefore the need for those aircraft continue so we absolutely see no.
No drive at all for shorter aircraft wife, 15, 20, 530 years ago noise was a huge thing.
And the international regulated went from what they call stage two aircraft to stage three.
And everybody said the stage two aircraft are gonna be obsolete they'll never go 25 years, what really happened.
A Boeing and Douglas, which were the two main manufacturers are those aircraft came up with husky.
And all the sudden stage two aircraft became stage three aircraft.
So this notion we hear every few years that aircraft lives, maybe you're gonna get shorter we don't believe in that.
And secondly.
A lot of airplane types, our cargo conversion candidates.
We see that today with the oldest 77 eight hundreds.
The Athree 21, CEO is now becoming an intensive or a program for cargo conversion Dreamplay 757 freighters.
We see it on 767.
I think Boeing and several other organizations are working on triple seven.
Passenger aircraft to be converted freighters, so those conversions well actually extend that useful life of these aircraft.
At the 30 to 35 years.
[noise]. So I don't believe the environmental concerns will diminish the useful lives of aircraft plus this parts at a world where this issue is not really front and center with the local politicians.
Okay, well, thank you for the colors.
Thanks Christine.
Thank you. Our next question comes from Harvey with Daisy. Your line is now open.
Thanks, and thanks for taking my questions I have two.
Firstly compares to your 10-Q in November you expect a 34 less leverage and 2020 in terms of the quantum for much of stuck out do you think could be filled with the sale lease back on aircraft purchase offers youve managed and I'm sure customers such mentioned earlier in the call last accurately all the 1 billion of sales Greg.
Mentioned for 2020, how do you think that much space between sales and to manage platforms.
And two independent third parties.
I think it's too soon to comment in terms of the split I like I think it's important that we have access to multiple channels to sell airplanes. I think it's also too soon to comment in terms of the scale and the amount, but the volume of sale leaseback transactions will do to help out our customers, but we have a substantial amount of cushion in our balance sheet.
Right now we are at two we are below our debt to equity target but.
It'll be a very facts and circumstances approach to figure out how we help our customers on a case by case basis, Yes. Please bear in mind that it's only in the last five or six working days.
That the dialogue with our Asian customers has become more intense to discuss their particular circumstances and and so we're very early in that process.
Of discussing with airlines, what exactly are the optimal solutions.
To give them the short term support.
Whether it's through acquisition of aircraft that we take away sale lease backs or deferrals of some a short term rents.
Or applying other security deposits that we have Ford some assistance. We this is in the very early stages a formulation.
I can add maybe to help you where you're going in terms of the split on aircraft sales. We managed vehicles not if you look back historically 2019 2018 generally speaking it's been about half of the aircraft or sales have gone to manage vehicles give or take it on a few percent or over the last.
Several years and that's that's historically, what we've done.
And one more thing at the back end of the year as we get into the third and fourth quarter. When we have more clear visibility on the Boeing and Airbus delivery situation, we can make adjustments to our aircraft sales.
At the back ended a year and and maintain our debt to equity ratio and and make the necessary fine tuning.
For the for the full scale 2020.
It's too early as we sit here today.
Due to comment on what you'll have to do at the back into the year.
To make those adjustments.
That's very helpful.
As a follow up but I just ask you've exceeded obviously your own original expectations not sure attends anniversary and I might guess that the competitive landscape is quite different to what you might have anticipated.
You entrance some interesting M&A.
Do you have expectations you can set out in terms of the overall leasing space in the competitive landscape in the coming years.
Well actually believe or not when we started earlier, we knew very very well that we would be.
Going into more competitive we started at a time, where the airline was where the industry was starting from stress.
The financial crisis in 2008, 2009, some you know parent companies went out of business or close to going out of business. So we knew going in that we would face an increasing competition. We had already seen back then and envision a cheaper capital coming in from Asia, China, and Japan, So the truth.
Is that's pretty much been born out and we you know we set our business objectives and did our plans accordingly, I do think a as Steve alluded to as the as we have some stress now in Asia looks stressed does one thing it tends to separate the men's from the boys the.
Long term players from those that were just in for shorter time, I do think that there'll be some shake out there and maybe we can take advantage of that it's it's hard to define right now but in times of stress.
The people that enter the business with ease during times of capital of plenty and et cetera, et cetera tend to get their metal tested and we've seen this before as well and keep in mind that the total airline industry has grown more than 50% in that 10 year period.
Both in terms of traffic and number of aircraft being utilized so the pie is gotten bigger yes, there's more players in this space.
But the overall size of the of the industry has grown and secondly, what's really important and we get very little attention recently.
If we look at the period up to 2010.
The export credit agencies like the export import bank in the European <unk> were significant finance fears or guarantors of financing.
Oh, the new aircraft for the airlines, whereas in the last five years, it's probably been less than 1% or the financing has come from export credit agencies and the less stores.
I've played a big role in displacing.
Oh, the financing that was traditionally done by the export credit agencies.
That's very very helpful day, Thank you very much.
Thank you I'm not showing any further questions at this time.
I like to turn the call back over to meet list Apama for any closing remarks.
Okay. Thank you everyone. That's all from our call today, we will look forward to speaking with you again after the conclusion of that first quarter two al. Thank you and you can now the snap the line.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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