Q1 2020 Earnings Call

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Ladies and gentlemen standby.

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One of your watch it sounds into <unk> earnings conference call will begin momentarily.

HM claim by you're saying well begin momentarily.

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Ladies and gentlemen, you framed by your annual this quarter, one tiny tiny earnings conference call no because momentarily again the same by your constraints will detail. Shortly thank you for your patience.

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Good afternoon, ladies and gentlemen, I'm talking to the early order 1000, Thingy earnings Conference call.

This time all participants are in listen only mode. Later, we'll conduct a question answer session and instructions will follow at that time.

No one should be quite system during the conference piece, that's our Investor go on your Touchtone telephone.

I would now like to try and get concrete celebrate see Merrill Lynch Dipalma, Vice President Investor Relations. Please go ahead.

Hello, everyone and welcome to Air Lease Corporation earnings call for the first quarter of 2020. This is Mary like the PAMA and I'm joined this afternoon by Steve Harvey Our executive Chairman, John Plueger, Our Chief Executive Officer, and President, Greg Willis, Our executive Vice President and Chief Financial Officer.

Earlier today, we published our results for the first quarter 2020, a copy of are arguably is available on the investor section of our website Www Dot early Corp.

This conference housing that's not quite a day Thursday night, 720, 20, and the webcast will be available for replay on our website at this time all participants are in listen only let.

Please note that each member of the air leasing speaking today isn't a separate location in their respective held however, we expect the format of the false.

Including the cute and accessing the with instructions will be given the call.

Before we begin please note that certain statements in this conference call wouldn't there any answers to your question a forward looking statements within the meaning of the private Securities Litigation Reform Act. This include without limitation statements regarding our future operations are performing revenue operating expenses Safi topic.

<unk> expense and other income and expense.

These statements and any projections as to the company future forming represent managements estimates of future results and speak only as of today may seven 2020. These estimates involve risks and uncertainties that could cause actual results to differ materially some acquisition.

Please refer to our filings.

And it seems that gen. One more detailed description of risk factors that may affect our resolve.

At least corporation assumes no obligation to update any forward looking statements for information in light of new information that you do it.

In addition, certain financial measures, we will be during the call that that adjusted income before income taxes adjusted diluted earnings per share before income taxes, and adjusted pretax return on equity our non-GAAP mother description about either for you.

I do not want another as well as our definition.

Conciliations a corresponding GAAP measures can be found in earnings release I pass you. We issued today. This release can be found in both the investor and process and other website at www Dot and plus dotcom five than either on authorized a recording of this conference call is not somebody.

I'd now like it's on the call over to our Chief Executive officer inside them down for that.

Thanks Mary was.

Good afternoon, everyone and thank you for joining us.

Before we give them we begin the call today I just want to acknowledge the profound in park globally Cope with 19 has had on both businesses and individuals everyday lives.

Ports are with everyone impacted by the spend demick as the world navigates through this challenging time, including or airline customers add or supporters.

We are deeply grateful for all those in health care.

Oh individuals in the front lines, putting themselves at risk to get us through this crisis.

Turning to the quarter I'm happy to report the air lease grew its revenue by 9.7% year over year to 511.4 million.

We achieved net income of 103, three point Threemillion pretax profit margin of three 3.6% and fully diluted earnings per share of $1.17.

Our bottom line earnings and margins were slightly down compared to Q1 of last year, primarily due to end of lease revenue recorded in Q1 of last year, resulting from a prior your airline and solvency and we didn't have that in the first quarter. This year.

Greg will walk you through more details on our numbers and provide additional color.

Since we spoke to in February the airline industry has been navigating through uncharted territory with an uncertain timeline to recovery.

It is difficult to speculate about what traffic levels will be held load factors will adjust and the list of question. Good questions goes on.

Simply put kind at the highest level, we continue to bleed into fundamental importance of air transportation as a vital industry to the global economy as evidenced by approximately $100 billion of state support being offered to or received by the airlines to date.

We believe this figure could double prior to the end of this year, which offers substantial support for our customer base, given 75% of able she's customers have some form of governmental ownership for our flag carriers.

Coupled with the most fundamental desire for people around the world to travel and be interconnected. We do ultimately expect passenger traffic to grow again, just as we've seen the reimburse of air trouble after prior sharks and downturns.

Given the extensive disciplined dynamic and the global economic tool it is difficult to predict when that will happen.

We do believe that we will see different rates of recovery and growth regionally across the world.

I know most of you have questions were speculating about lease deferrals cash collections airline bankruptcy risk and how we're dealing with those matters. So let me just walk you through our status and what we've done today.

As we indicated in our earnings release, most avail sees airline lessees have requested some form of accommodation.

To date, we've reached agreement with slightly less than half of our customers on such accommodation.

Generally this is taking the form of partial rent deferrals for two to three month period, followed by a relatively short term payback.

Payback period, either earlier, either by the end of the year or in some cases repayment over nine to 12 months.

And so for where we have those agreements in place or lessees or a borrowing by those agreements and payment schedules and our cash collections remain strong and we watch the strong collections everyday.

We also have many cases, where we successfully extended our leases in conjunction with the accommodation we provide.

As with all airline discussions there is not a one size fits all answer.

We do our best to diligence each situation on its own merits.

And accommodation made by AOCI on its own will not healthier line with all the issues. It is facing it's important to understand what other steps our customers are taking to get through this difficult time, and we required detailed information before any combination has granted.

We take into consideration the likelihood of the airline's ability to survive. This habit pandemic looking at shareholder and government support lender support I know likely strength of their current and future network.

We also consider future business prospects will each are aligned.

Finally, and perhaps most importantly, we look closely at our collateral package with each airline, including our cash security deposits maintenance reserves, plus any letters of credit and shareholder guarantees.

We do have a number of airlines paying us per their normal leases, but we also have a handful that are unable to pay a waiting for their funding.

Well, we are still in discussions with a number of or less she's working out details of their individual accommodations.

Our collection rate for the first quarter was 90%.

For the month of April net of all agreements reached a date our collection rate stands at 86%.

As a reminder, this reflects cash as opposed to revenue recognition and Greg will cover this further.

Also our aircraft utilization rate was 99.8% for the month of April and 99.7% for the quarter ended March 31.

In summary to date, we have agreed to approximately $125 million at least deferrals.

These deferrals account for approximately 6% of 2019 total revenues.

Let me emphasize that air lease has maintained a strong balance sheet at all times and has a significant amount of liquidity.

As a result, because the crisis unfolded and there was volatility in the debt market. We did not draw the full amount of worth 6 billion dollar bank revolver.

We continue to you to use that revolver in the normal course of business as we've always done.

With these deferrals to date, we foresee minimal impact on our rental revenue line.

But they will be reflected in our operating cash flow.

However, we will also have significantly less cash expenditures on the pursuit of new aircraft. This year and Greg will further walk you through that information.

As the potential airline and Solvencies now and in the future L.C. Currently has six aircraft on lease with three different airlines that are informed that are in some form of insolvency proceedings and those are all Italia air Moorish Us and South African Airways.

Now all Italians bankruptcy well proceed preceded the covert 19 disruption.

And ill. She has reached agreement with the administrator volatility or for the continue to operation of our three 330 aircraft and we believe that the <unk> nationalization of all the Talia bring security to our leases there.

Air malicious is any initial stages of determining reorganization with our two athree 30, Neos and if we were our removing one midlife Athree 19 from South African Airways.

Yes, he has no aircraft with Virgin Australia for Norwegian.

We won't speculate as to further potential airline insolvencies, but in these conditions. We do believe there will be further insolvencies and are like consolidation.

As always the young age of our fleet, our global reach in relationships and our creativity and structuring leases appropriate to each airlines facts and circumstances, and our strong balance sheet and liquidity help us navigate these situations.

As we shared last quarter, we're open to outright cash purchase a purchase of aircraft for such offers or sale leasebacks to assist the airlines and supplement our deliveries, but they must be attractive and making it makes sense for AOCI.

Interestingly very few airlines have shown interest an outright sale of aircraft and removal from their fleets and we have not yet concluded any sale leasebacks.

We have a very disciplined approach.

We're not looking to invest in aircraft that are significantly older than our average fleet age northern have returns inferior to our overall average fleet.

Nor to purchase aircraft for the subsequent lease payments are immediately differ thereafter for several months.

To the extent, we do any sale leasebacks. We are focused on those are we can link the transaction to a new aircraft delivering from our order book at the end of the leaseback term.

We believe that our patience and discipline will bear fruit as the marketplace for sale leasebacks continues to evolve.

We're not looking to add forward a future deliveries of new undelivered aircraft via sale lease backs as we believe there remains uncertainty as to when those aircraft may actually the liver with lower production rates that we see from both Airbus and Boeing and we think there's still production rate uncertainty in the near to medium term, which also impacts our own order book.

AOCI its business model continues to focus on the purchase of new aircraft, rather than sale leasebacks, and we're not changing that model.

The late delivery compensation that we're receiving in the form of pricing credits and concessions coupled with further pricing incentives from the manufacturers coupled with the natural delivery delays and deferrals adjusting to market condition.

And our strong balance sheet investment grade ratings serve us well is the airline industry recovers, even if that's at a slow pace.

Although we're in a difficult environment I think it's important to share some of the themes, we are experiencing and expecting.

First it is important to note that discussions and negotiations on new aircraft leases have not stopped.

We do have a number of leasing campaigns on new aircraft, particularly for delivery in the 2022 to 2024 timeframe.

Our challenge there frankly is assurance of delivery dates from the Oems, but the airlines are continuing those discussions with us.

Second many airlines are now revisiting fleet planning decisions made prior to covert Nineteens pandemic.

Despite low fuel prices. It is clear that airlines are prioritizing younger aircraft with better dispatch reliability on lower maintenance costs.

Furthermore, environmental sustainability is growing ever more and importance in fact, some of the airline bailouts bailouts by governments in Europe require improving environmental sustainability and specifically include acceleration of fleet replacement with more environmentally friendly aircraft.

Air France is a good example of this.

In the press you've seen mention of accelerated aircraft retirements from Lufthansa American Virgin Atlantic KLM and Delta just to name a few as they respond to a decline in passenger traffic and look to retire there at least efficient aircraft.

These accelerated retirements, coupled with the Max aircraft production halt and Airbus delays, both of which result in significant less aircraft entering the marketplace in 2019, and so far in 2020 all of that will then some support to the supply and demand equation as our industry recovers opening doors for our new aircraft delivery.

These over the coming years.

Third.

We have always said that in good times airlines need or aircraft and in bad times Airlines need our balance sheet.

Going forward in an environment, where the airlines cost to financing increases or they are simply unable to finance aircraft, particularly now with airlines receiving state aid that they'll be prioritizing pay off we believe leasing demand will increase.

At the same time, we believe a shakeout of leasing industry is inevitable.

Those who entered our space in the past few years for quick returns without a large global fleet presence strong relationships remarketing creativity and strong balance sheets are not likely to remain.

As we sit here today ill see has a strong balance sheet with over $22 billion in assets, 93% of which are an unencumbered.

We have ample liquidity at over $6 billion.

We have a diverse customer base of 108 airlines across 61 countries, which well they do not need short term assistance.

They want to work with us keeping the aircraft young and <unk> that they have from AOCI and we are providing such short term assistance.

We have aircraft order, which continues to garner interest from airlines focused on modernizing their fleets or preparing their future fleet needs.

And we have relationships throughout the industry, which span decades, and will again allow us to maneuver and help each other through another global global crisis.

In the near term the growth of our business will likely be slower, although we remain vigilant about potentially significant opportunistic moves.

But the core philosophies that put us in the solid position we ran in today remain intact.

More important than ever.

Over the coming months, we will stand on those key principles to protect our strong balance sheet continue being the partner to the airline industry. We have always taken pride in being and we will further find opportunities to differentiate our business along the way.

And with that let me take that turn it over to our executive Chairman Steve policy for additional commentary Steve.

Thank you very much John a I would like to Echo John's initial sentiments regarding the cobot 19.

And they expressed on behalf of our entire air lease team.

Our genuine gratitude for all the frontline workers doctors nurses emergency personnel.

Really to everyone working to protect and help others right now throughout the world.

We as a team say thank you all of them.

While implementing proper precautions with our own workforce, enabling remote work from home.

Our team has been working tirelessly seven days a week to understand our customers individual situation.

As the outbreak, Rob and escalated, while maintaining close dialogue with the manufacturers as well.

Well also experiencing significant issue.

Ill see has also been interacting with our investors.

Financiers.

Regulators and rating agencies answering the questions and providing the highest level of transparency allowed any case.

Not knowing what the next global event impacting the airline industry could be.

We have worked diligently over the past 10 years.

To best position, our business to succeed in any market environment.

Simply put.

Employed conservative financial policies and practices since inception.

We achieved our first investment grade rating.

Three years after inception.

And then matched our business in line with our financial targets.

Over the years, you've seen other less or adjust our capital structure and strategies.

Who chief investment grade like AOCI.

However, today ill still AOCI still remains the highest rated standalone aircraft less or.

Furthermore, since inception.

We did not deviate from our core competencies even at times it would have an easy to do so.

As a result, AOCI strong in a resilient today and while being conservative to ensure that we can manage through this pandemic.

We also see opportunities could play offense.

In fact.

Over the past few weeks.

We've been in discussions with airlines regarding replacements.

We have also executed a number of lease extensions with airlines in various regions.

Two to three years.

At which time, they will likely leaf and new aircraft delivered from L. scenes order book.

In fact, our new aircraft lease placements.

Art approximately 84% between now and the end of 2022.

I want to also remind you that the weighted average lease term remaining in our fleet is 7.2 years.

So we have minimal lease expirations over the foreseeable future.

Despite challenging industry conditions and significant new aircraft delivery delays from both Oems.

We have not experienced any alarming desire by airline lease customers.

Cancel their commitments with AOCI to take future deliveries of our new aircraft.

At the same time air lease does have flexibility in our agreements with Boeing and Airbus <unk>.

It would just to current market conditions.

For example on the back 77, we're now beyond the 12 month point of delay a nine of our contractual delivery slots.

And with the cessation of production today.

Coupled with the lower announced production rates ahead it is likely.

The majority of our forward position.

We'll be more than 12 months delayed on the 737 program.

With both Boeing and Airbus, There's a mutual right to cancel if any delivery stretches more than 12 month.

Beyond the original contracted delivery date.

We are working closely with the Boeing company and our customers to address these delays.

And to look at deferral of cancellations on a case by case basis.

I simply want to emphasize this example on the 77 Mac.

As one way in which we look to adapt the current demand and market environment.

We do believe however, the wants to 77, Max as we enter service.

It will be one of the most highly tested aircraft flown and.

And we do believe in the aircraft.

Times of distress also provide opportunities in the airline landscape to redirect and Rightsides itself. So it is likely that over the coming months, we will see further consolidation activity, particularly in Europe.

It is also important to remember that several airlines facing difficulty may reorganized.

And we emerge slimmer and under new ownership.

It was at South Korea by a similar process.

The last two weeks many countries will go to derive systems and agreements to get the citizens on aircraft and travel domestically.

Well as internationally.

Signifies the importance of air travel.

And should allow us to gain comfort that the volume a passenger traffic.

Will continue to grow and pick up again in the coming months and the rest of the year 2020.

In other regions or the world.

That have been recent announcements and the last several days flights resuming for example in Europe.

Okay a lamb.

Dutch Airlines has started to restore it's European network resuming daily services to eight additional destinations.

Which were subsets suspended due to the cold with restrictions.

In made the airline hopes to resume 15% of it flies.

They were flying before the covert outbreak.

Airline also mentioned that a number of intercontinental flights are being operated on a cargo only basis.

This is an important unappreciated point.

As many of L.C. passenger aircraft.

Are being productively unprofitably use as cargo and trade aircraft.

This is an adaptation that the airlines are making and this environment.

Where demand for cargo stronger.

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In Latin America.

I hope our airlines, the Panama announced at the end of April that flights between Venice, all in Panama as well as Caracas, Valencia will restart in the middle East.

Qatar Airways has continued to offer additional flights throughout me.

In the U.S. Delta recently announced that will resume service between New York in Tel Aviv Israel.

Each of these announcement is significant.

We're so slowly seeing recovery.

Taking place across the world.

Air France recently mention that the airlines activity could recover to 70% of its.