Q2 2020 Air Lease Corp Earnings Call

Earnings Conference call.

This time, all participants are in listen only mode, where we will conduct a question and answer session and instructions will follow at that time had been a bunch of departure assistance. During the conference. Please press Star Zero as a reminder, this conference call is being recorded.

Oh, no one could turn the conference over to your host Ms., Mary <unk> Dipalma, Vice President of Investor Relations.

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

Earlier today, we published our results for the second quarter 2020, a copy of our earnings release is available on the Investor section of our website at Www Dot Air lease Corp. Dotcom. This conference call is being webcast and recorded today Thursday August six 2020, and the webcast will be available for replay on our website at this time all participants.

This call or in listen only mode.

Please note that each member of the early seems speaking day isn't a separate location in their respective home. However, we expect the format of the call to remain the same.

Great. Thank you any session. So whats instructions will be given at the conclusion of the call.

Before we begin please note that certain statements in this conference call, including certain answers to your question are forward looking statements within the meaning of the private Securities Litigation Reform Act.

This includes without limitation statements regarding our future operations in performance revenues operating expenses stock based compensation expense and other income and expense item.

These statements that any projections as to the company's future performance represent managements estimates for future results and speak only as of today August six 2020. These estimates involve risks uncertainties that could cause actual results to differ materially from expectations.

Please refer to our filings with Securities and Exchange Commission for more detailed description of risk factors that may affect our results.

At least corporation assumes no obligation to update any forward looking statements or information in light of new information or future events.

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 our non-GAAP measures a description of a reason of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to correspond.

Got measures can be found in the earnings release and can you be issued today. This release can be found both the investor and cross section of our website at www dot or at least Corp. Dotcom on authorized recording of this conference call is not limited before we proceed I would like to make a quick announcement as it relates to our third quarter earnings call.

Third quarter earnings call would normally have been scheduled towards the end of the week of November 2nd However, given the presidential election at that we will move our third quarter earnings call to Monday November nine I as usual, we will press release called details. After the conclusion of the third quarter I would now like to turn the call over to our Chief Executive Officer, President John Plueger.

Well, Thanks, Mary lives and good afternoon, everyone and thank you for joining us.

I'm pleased to share that today or leases reporting another strong quarter of financial performance.

Our revenues for the second quarter grew by 10.6% year over year to $521 million with net income of 144 million up 15.9% year over year.

Our fully diluted earnings per share for the second quarter was $1.26 up 14.5% over the second quarter of last year, and we continue to generate strong pre tax margins and returns on equity.

Since our last earnings call in May the airline industry is continue to navigate through an unprecedented extremely difficult environment.

We are seeing signs of recovery.

More than 65% of the world's commercial passenger fleet was in service at the end of July that's compared to mid April one where nearly two thirds of the world's passenger aircraft for Stuart.

In the United States to your say checkpoint numbers. This week have been seven to eight times greater than that of early April and just today. The U.S. State Department lifted its advisory on avoiding international travel.

Eurocontrol reported this Tuesday that flights reached 46% of 2019 levels as compared to roughly 10% of 2019 levels in early April.

In China, which was ahead of Europe in the U.S. in terms of depend dynamic domestic daily flights have significantly improved.

Well, all those updates or a progress when compared to where each region was at the start of demand dynamic we still have a very long way to go and airlines or adjusting schedules on a weekly basis.

We know that many of you remain focused on leased referrals cash collections airline bankruptcies and the status of how we're dealing with each.

So let me provide a quick update on these matters.

When we last spoke to in May we had agreed to accommodations with approximately 46% of our lessees to defer $125 million and lease payments.

Since then we have agreed to an incremental $65 million and lease payment deferrals.

50% less than the amount of deferrals granted from the start of coal that early may.

To date in total we have agreed to accommodations with 59% of our lessees to defer approximately $190 million and lease payments.

The lower level of deferrals granted over the past three months speaks to the slower pace at which we received additional requests and reflects the amount of time, we spend to diligence each request and understand which customers really need our help.

As I shared last quarter, most of our deferrals or partial leased referrals for payments due in the first and second quarter 2020, typically with the short repayment period in fact, a majority of those we granted rigor paid over the next 12 months.

Our team is making a concerted effort to do our best for each airline customer and we believe that Phil is appreciated and in addition to the support they're seeking elsewhere is making a difference.

Our airline customers or largely abiding by the deferral arrangements in place.

As such our collection rate for the second quarter and month of July we're at 91% in 89%, respectively compared to the first quarter month of April for which our collection rate was 90% and 86% respectively.

We believe our asset strategy focusing on young modern fuel efficient aircraft has made a difference in our negotiations and discussions with our airline customers as they want to operate or aircraft.

For this reason in many cases, we successfully negotiated lease extensions along with a deferrals.

No. We understand this is all in the rear view mirror stuff and we for that reason many of you want to know how we expect this trend to look going forward.

Airlines have in many cases negotiated an agreed to the terms of the first round of deferrals and have also done their part to seek out other forms of support with their governments finance years et cetera.

There's still some of that in the works.

As we sit here today, we believe many of our customers or better position than they were at the start of this pandemic financially speaking given the support they received so far.

That said most airlines are still constrained by lower levels of passenger traffic and some now need additional liquidity measures.

For this reason, we're starting to see limited requests for another route or deferrals from certain customers.

So far I can tell you the volume of those Rick inbound requests is much lower than it was for the initial requests.

Of course, the impacts of cobot are evolving real time, and therefore, the status of deferrals can change day by day.

Our deferrals through today represent only 3% of our total liquidity position at the end of the second quarter, placing us on strong footing moving forward.

As it relates to airline bankruptcies, we had no aircraft I would remind you at Virgin Atlantic Norwegian all bianco, the town or tire ways.

We do have five aircraft at Aeromexico, which filed for voluntary restructuring at the end of June.

Aeromexico has been a longtime customer base LC and we're working with the airline.

At this point, our expectation is that each of our aircraft will remain with aeromexico.

Also you've likely read about Virgin Atlantic, which filed under chapter 15 for any effect, a pre packaged stay and reorganization.

We have no aircraft at that are line today.

However, we do have wide body aircraft scheduled for future delivery through 2024.

As such you will see fully participated in the restructuring and we do expect those aircraft to deliver as planned as the airline deems or new aircraft integral to their recovery and environmental sustainability goals.

Many times such as in the case of both Aeromexico and Virgin Atlantic, We see airlines restructure with a full intention of keeping DLC aircraft in their fleet. This goes back to the point I just mentioned about our younger aircraft being differentiated in times of stress.

As such we are seeing continued health in our utilization rates, which for the second quarter and month of July was 99.6%.

This is largely in line with the first quarter.

We're seeing minimal impact on our revenue line is the result of the deferrals, but our cash flow will continue to be impacted.

At the same time, we also expect lower levels of aircraft investments than originally expected pre co but of course as our deliveries continue to get pushed into future quarters.

On our last call. We told you that our growth would likely slow and that while we were hopeful to deliver $250 million of aircraft in the second quarter. The level of aircraft investment was ultimately dependent on how the environment involved.

As such we took delivery of only one aircraft from our order book and the second quarter.

We anticipate that although our scheduled aircraft investments for the Scott second half of the year could be about $2.6 billion that number it may be lower due to further delivery delays.

Obviously the continued delay in the returned to service of the Max has resulted in a number for a max placements being more than 12 months delayed.

In fact, we believe that ultimately the majority Remax Ford order positions will be delayed more than 12 months.

We continue to work with the Boeing company at our customers to address these delays and to look a deferral or cancellation on a case by case basis.

We hope that essay certification of the Max will occur this year and just a few days ago. The F. They released their notice of proposed rulemaking proposed rulemaking for the Max Airworthiness directive.

However, we want to remind all of you. The only one of L. sees forward backs delivery is to U.S. airline customer.

We have somewhat less confidence that certification by the end of year will be achieved by all four and regulators, including Iasta in China.

We do still expect that once the Max returns it will be one of the most tested aircraft flying and we as well as many others look forward to its safe returned to disguise.

But big picture as you can see from the second quarter announcements of both Boeing and Airbus. They like the airlines are under significant stress and this leads to further uncertainty.

Well production rate decreases have helped the demand supply equation, we would not be surprised to see further production cuts ahead.

To date, most of our airline customers continue to want the aircraft, which they have on order from L.C.

It's become clearer to us that airlines or downsizing their overall fleet sizes by retiring older aircraft at the same time, they're taking this opportunity to advance their environmental sustainability goals to replacement with a smaller number of modern environmentally friendly aircraft for the recovery phase.

Furthermore, we believe the financial strain on the airlines today and in the foreseeable future is charting a clear course towards more leasing by airlines to obtain the aircraft needed to achieve their sustainability targets and enhance their own liquidity.

Right now there are many unknowns largely all due to the cobot pandemic.

Virus resurgence in the United States and select other parts of the world poses challenges to recovery.

Yes, we do believe the globally there is a growing pent up demand for air travel and that overtime, we will see a recovery of trans Atlantic and business traffic as countries work together to find safeways to allow people to cross borders.

Such relaxation of water restrictions should also facilitate easier aircraft deliveries from Boeing and Airbus to our airline customers.

During this time as always or at least continues to maintain a strong balance sheet with significant liquidity and that remains our top priority.

In mid June you saw us access to investment grade unsecured bond market raising $850 million the five year notes.

At the end of the first quarter, we had ample liquidity more than $6 billion.

Yet we chose to take additional advantage of a favorable bond market for LC and this transaction further strengthens our liquidity position, which is now 6.9 billion at the end of the second quarter.

Since inception, we have built our business to withstand difficult market environments, and it's because of our conservative approach over the years, we're able to manage through today.

I'm very proud of the L.C. team and the way, we've been supporting our airline customers and working with the manufacturers suppliers and finance errors.

This has indeed been a unique and extremely difficult time in our world our country and for the aviation industry and our teams professionalism is once again allowed our platform to differentiate differentiate itself in the marketplace.

So with that let me turn the call over to Steve policy, our executive Chairman for additional commentary Steve.

Thank you very much John I would like to Echo John's comments about the unmatched effort and dedication of our team.

In working with our airline customers and our industry partners.

And also a sentiment regarding our second quarter results.

Which are extremely strong against a difficult and evolving backdrop in the industry.

As most of you know since going public and even before then we spent a lot of time and effort sharing with the investor community.

Oh, the success of a well managed well capitalized less or.

Not solely dependent on the profitability of the airline.

Despite them being our customers.

There are several reasons for that.

Many airlines well not profitable our flag carrier.

Or systematically important to the countries they serve.

Government eight in the form of grants and loans made available to airlines is not over $120 billion. This year.

And this is a very important reason that the local economies, we line airlines, bringing passengers in country to fuel there other business sectors.

Particularly in areas and places where tourism is a large portion of their GDP.

Today, the aviation industry supports more than 65 million jobs around the world.

And then April 2.7 trillion, Oh, the world gross domestic product.

Or said simply the world needs airline in times of stress they are worthy of assistance and investment either stakeholders.

Let me remind you.

That approximately 75% of the net book value of AOCI fleet.

Our lease to flag carriers or airline.

I would have some form of government ownership.

Additionally, as airlines that have to significantly increase their liquidity, they're doing so with financing.

Much high rate and the pre cobot crisis, and further leveraging their balance sheets and the process.

Taking on more debt and more obligation.

In the face of these reality.

The fleet solutions obtained by leasing from air lease.

Our growing stronger and stronger and more attractive everyday.

Air Lease Corporation now has considerable cost funding advantage.

Over most of our airline customers globally, and also compared to most of our less or.

Competitors.

Our customer base is extremely diversified.

With our average customer representing approximately 1.1%.

Of our fleet net book value.

And the long term nature of our leases provides us with significant long term visibility.

In fact, we have minimal lease expirations over the next five years.

And only a handful of leases expiring between now and the end of 2021.

We are hopeful that our continued success this second quarter and our ability to manage and navigate the various stages of this pandemic impact.

We'll further prove out what weve tried so long to share with those outside or industry.

As we look at the total airline landscape and the recovery beginning to take place I.

I would like to remind everyone.

At Air Lease's major markets are not in the domestic U.S. marketplace.

But they're in Asia and Europe.

Both of these regions have seen recovery since spring.

But even quarantine orders being we impose.

Example in China.

As of early this week there were more than 11600 domestic daily flights.

Taking off which is 200 more daily flights.

And were operated on January one of this year.

China International scheduled flights and other international flights in the <unk>.

In the Eastern Pacific region are still down 73% year over year.

And we expect those flights will remain significantly lower at least into the fall.

On the other side of the World in Europe.

Both routes and frequencies have increase since the E relax some travel restrictions in early July.

Typically among member countries.

As of August for Europe control reported more than 15600 flights.

With intra Europe flights and amounting to more than 87% will be flight.

Well ill cede customers remained the busy it carries in Europe, including operators, such as with their air, France, KLM and easy jet.

We hear daily updates from our airline customers throughout Europe, a plants to restore additional schedule.

Throughout the remainder of the summer and into the fall season.

In the Middle East region.

You go back to mid March.

Were roughly 3000 flights per day from this region.

Which then dropped to about 400 by very early April.

Since then.

More flights had been added.

The end of July there were more than 1000 flights per day emanating from the Middle East region.

In the United States domestic traffic recovery has been impacted by the viruses resurgence.

As you all know only about 2% 2% of our business is in the United States.

Latin America also continues to struggle with the covert pandemic, particularly in Brazil.

Well, we watched this area carefully and as always continue to feel that our lowest closure to this region is manageable and then it's always been by design.

As a result of a significant decline in passenger traffic from covert 19.

We continue to see the theme of accelerated retirements as John mentioned.

Across the global airline space.

There have been approximately a thousand aircraft retirements announced across the global fleet.

We anticipate hundreds of additional older aircraft will be retired in the coming months.

If you look at the global fleet over the next 20 years.

Sorry over the last 20 years.

Age has steadily decline given the number of new aircraft deliveries.

However, before global events like 911, the financial crisis, and now cobot the number of aircraft over the age of 15 has increased.

This occurred because airlines were responding to growing levels of passenger traffic demand.

And we're operating aircraft that in other instances would've been already we place.

After these types of global events the industry has seen what the airlines to doing right now, which it rightsizing their fleets and retiring those aircraft that are no longer economical or they left sufficient.

Effect cleaning the house so to speak.

One specific area of market, where we've seen several retirements announced is on wide bodies.

And there have been misguided comments in the media that wide bodies will no longer be needed given the temporary disruption of long haul travel.

And the larger single aisle aircraft entering the market.

I think that it's a very short sighted view.

At passenger travel begins to recover.

We believe the airline industry will find itself back to where it was pretty cool that.

<unk> infrastructure limitations.

Slot and other airport restrictions, which will require airlines to again up gauge the size of aircraft are flying.

And the smaller and mid size wide bodies will again take center stage.

In addition.

We are witnessing a drastic reduction or elimination of the volume of new freight and cargo aircraft being produced by the manufacturers.

Accordingly, with relatively strong freight and cargo levels continuing.

We see a natural evolution of older wide body aircraft being converted to freight and cargo usage.

Examples of this a wide body aircraft such as the Boeing 777 300 yards.

The Athree 30 family.

Which are already being used.

To supplement their passenger loads with cargo and freight operations.

We expect this to continue for the foreseeable future until international passenger wide body passenger traffic we covered gradually.

This brings up another point, which is that even though our leaves very young.

As our Arafat age, we see an enhanced his position path.

Many of these aircraft.

Ultimately converted or sold for conversion to freighter application.

And that also includes the Boeing 737 800.

And the Athree 21.

Further driving airlines decision to retire older aircraft now and going forward will be the sustainability goals and requirements.

And the greater regulatory constraints that are coming about gradually.

Aviation is responsible for only 2% of all human induced feel to emissions.

And 12% of those come from the transportation sector.

Still the airline industry highly visible.

Those calling for changes.

Out of care for our environment and our planet.

The degree of regulation and taxation of those perceived to be polluting here will intensify in the next decade.

And forced airlines to address their fleet plans accordingly.

At the end of July the Environmental Protection agency in the U.S. announced a proposal of airplane emission standards.

Which is consistent with that of the United Nations International Civil Aviation of organization I killed.

There will be further announcements in guideline of commitments the environmental sustainability.

As a result, we believed that there will be an ongoing emphasis placed on fleet modernization.

Given that new aircraft from Boeing and Airbus, which comprise the LLC. Please and our order book are significantly more fuel and energy efficient than predecessor aircraft.

In my view, especially now that the manufacturer seen significant disruption.

It would be likely at least another decade, if not longer before we see alternative technologies.

At art economical to modernize these aircraft beyond where they are today.

And with that I would like to again congratulate our team for the excellent work and results in Q2, and I now turn the call over to Greg Willis.

Actual officer.

Provide more detail on our financial results in Q2.

Thank you, Steve and good afternoon everybody.

As highlighted earlier, we recorded another solid quarter financial performance. Despite the continued challenging backdrop.

Our results were largely driven by the growth of our fleet over the last 12 months with our key portfolio metrics of lease yield lease term remaining and average age remaining relatively constant.

In the second quarter of 2020, you'll see generated total revenues of approximately 521 million.

Representing an increase of 11% year over year. This includes 23 and a half million of aircraft sales trading and other activities.

As John noted our fleet activity included the purchase of one new aircraft.

And we sold four aircraft with total sales proceeds of approximately 7 million.

Turning to expenses interest expense increase year over year, primarily due to the rise in our average debt balances, partially offset by decline a composite cost of funds.

Our composite rate decreased to 3.15% from 3.49% in the second quarter of 29 team.

Depreciation continues to track the growth of our fleet well actually in a represented approximately 5.1% of total revenues as compared to 5.9% in the same quarter last year.

Outside of quarter to quarter variations, we continue to expect it overtime, our revenue growth will outpace our S unit growth.

John thoroughly covered at least deferrals collection rates and utilization in his comments. However, I want to reiterate that we believe our accommodations remain manageable relative relative to our liquidity position, which stood at 6.9 billion at the end of the second quarter.

As a reminder, this number does not include projected operating cash flows were aircraft sales.

To give contacts to our strong liquidity position you also should know that our balance sheet was originally designed to support approximately $6 billion an aircraft investments annually over the next several years.

Right now we expect the aircraft investments for all of 2020 to be approximately 3.4 billion.

This 1.3 billion is expected in this third quarter.

However, we want to advise that these numbers may go lower.

We expect minimal aircraft sales over the remainder of the year.

That I just touch on.

Given the overall operating environment and the outlook to our investments.

Just starts turning to financing we continue to play offense and take advantage of opportunities in the marketplace.

As a reminder, L.C. prefunded its 2020 maturities with 1.4 billion investment grade issuances in early January at record low coupons. We saw another opportunistic funding window in mid June and as such we went on.

Went to the investment grade bond market again, intending to raise 500 million in five years notes.

As a deal with multiple times oversubscribed, we upsized the deal to 850 million and tightened pricing the deal price with a 3.375% coupon roughly inline with our composite cost of funds and well inside deals similar.

Our sector.

Separately, we also completed an opportunistic buyback of 185 million of senior notes due in 2021 at a substantial discount to par, thus proactively addressing near term maturities and still maintaining a record level liquidity.

Well, we took advantage of this opportunity during a period of dislocation that credit markets. We're pleased that the majority of our near term does not turning back above par, reflecting the improved market town and confidence on investment grade credit profile as you will see in our 10-Q. This buyback resulted in a gain of 13.6 million as included in aircraft sales trading and others.

Income on our income statement.

Over the last five years L.C. has nearly tripled our liquidity position well also substantially reducing our financing cost. Despite volatile markets. We had no further bond maturities in 2020 in our next bond maturity of $515 million is not due until the first quarter of 2021.

Adding to this is our low leverage and largely unencumbered balance sheet of $21 billion, which provides quick firmly investment grade balance sheet significant it significantly differentiated from peers.

Gross debt to equity at the end of the second quarter was 2.4.

2.49 times, and we expect no major change to any of our key financing target metrics.

We continue to benefit from three investment grade ratings and were recently reaffirmed by Fitch a triple B.

And with that I'll turn the call back over to marry last for the question answer session.

Thanks, Greg. This concludes managements remarks for the question answer session. We ask each participant to limit their time to one question and one follow up now I'd like to turn the hand, the call over to the operator to open the line. Thank you any fashion.

Ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your Capstone telephone. If your question has to be answered or you wish to remove yourself from that you press the pound <unk>.

First question, we have Moshe Orenbuch from credit Suisse. Your line is open.

Great can you hear me okay, yes.

Okay, great. Thanks.

I appreciate that and thanks for all of the you know the the incremental detailing disclosure that you guys, you're giving I was wondering if you could talk I don't know for Chegg, John or Greg about.

The the level that you talk to you had mentioned that Theres some.

New requests for four forbearance or defer deferrals could you just talk about the pace at which you know the first round or paying back and you know maybe just put a little little more color around what's going on with those new requests and if you have a thought as to when the you know the Cuba.

Would have announced that you've provided could you know could level off.

Thanks, Moshe you know I tried to be clear in my remarks, Oh, the pace of slowed in fact, a the amount of the increase or you know it was much much slower going from first quarter to second quarter.

And we indicated that the frequency in the flow really has been a much reduced we also and I've also said that most of these deferrals or relatively short term and the majority of the vast majority are all paid within a year or less so I'm not sure how much further color or that I can give on that youve.

And the total that we have there, but I think a you know the big messages to pay says has a significantly slowed a and you know we're still pretty we're in a good shape with the deferral repayments. We've said I also said in my remarks that.

The vast majority of all these deferral agreements are being honored so I'm not much in terms of their payments and how they're coming in so.

I really don't know how much more color a I can offer them that.

The only comment I have a moshe is that.

The amount of the payback of these short term deferrals is now far in excess.

Any new key quest for some small deferrals so in other words.

It's now flipped into a positive where the repayment of deferrals that we made in Q1 and early part of Q2.

Cash flow is coming back in.

And those amounts significantly exceed any new requests that are quite limited.

In the in the last several weeks kind of that's that's extremely helpful. Thanks, Steven John and follow up question just to see the three months ago. When we when we were talking on the first quarter call. You had we had discussed the possibility of doing sale leasebacks getting the place you know to replace.

Some of the.

Some of the Capex that you know that that has been pushed out is that still a consideration and you kind of alluded to it a little bit with respect to the cost of funds you know the relative cost of funds.

Points that you made maybe could you just talk about that a little bit.

Sure look we continue to evaluate but at the same time, you've all seen a and we all see the industry evolving.

Part of the reason frankly for a little bit of our not a pause, but I would say cautiousness.

As we like to see how airlines are unfolding, we want to see.

You know how does how their credit metrics come out how how are they doing on their own liquidity how successful have they been no matter, who the airline is at obtaining additional liquidity in this difficult time and these things take a lot of time. So I would just say that our conservatism and looking one by one at each airline and making sure not jump.

Turning to quickly into the Fray if you will.

Again, it's not our primary business model, but I would say, it's primarily been <unk> driven by our conservatism seeing who's gonna get funded who's not.

Making those observations and finally, just having said that we do have a number of sale leaseback possibilities that we are evaluating today and we we will act upon them. If we if we see fit but big picture is our conservative <unk> risen or conservatism as really let us to be.

Watchful on the airline for fun.

Okay. Thanks very much.

Next question, we have Catherine O'brien from Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. Thanks, so much for the time.

Hey, Ron Thanks, I guess.

OEM production cuts, we've seen so far in a relatively high number of aircraft being retired.

How far do you think we are from equilibrium.

And you know how much I'm guessing, there's still a bit of laid off given given where traffic is today, but how much of matching supply to demand do you think will come on the back further OEM production Cod is there certain please.

And we'll just say you know nothing out there and expect customers to meet their obligation any thought there'd be appreciated well, we're meeting or obligations. There are airlines unless source.

That has requested deferral and in some cases cancellations.

Or restructurings, but I can tell you that air lease as honored all of our commitments.

And.

One of the challenges that we face.

Is that once an aircraft is delayed more than 12 months.

Both the less or and let's see a certain right.

Oh, that's something that we're watching very carefully.

I think we've made public statements and interviews alluding to the fact that we could see.

Some further adjustments downward a production rates.

You've already seen these occur on the on the a triple seven.

X being delayed you've seen production rate cuts on the triple seven to 787.

Oh, the Athree 50 feet 30, and the Athree 2021 family.

If the rate of traffic recovery is less than what is projected by the Oems.

You could see another round of small reductions.

In the production as you go on and 21 22.

Hopefully by the time, we'll get into 2023 and 24.

We'll begin to see the equilibrium that you refer to between supply and demand.

And our expectation is things will begin to normalize.

As we get down 18 to 24 months from now.

Okay, Great and then if I could just a ask one follow up so I guess you mentioned signing some new lease deals in your press release and then you've also seen Kevin had some success, then and extending because it's part of your deferral negotiation I was wondering if you could share you know any.

Color on what what the turn of those either newly deals in the extension look like and four new lease deals that you're looking at.

What are the security package it looked like just compared to pre coded yeah. We are.

Intently religiously committed to security packages and as much as some of our airline customers don't like to pay.

Large cash security deposits and maintenance reserves.

We believe that in times of the stress.

That philosophy is really very beneficial to air lease and our shareholders.

So we continue to stress.

Cash deposits.

Upfront.

Even from the most credit worthy airlines is one of the hallmarks of our of or sort of corporate philosophy.

As far as extensions.

Oh, we have done some extensions that we're really not part of a deferral and some extensions that were part of short term deferral.

And they can be anywhere from two to six years additional rental periods.

And we've also negotiated some incremental transactions with existing customers to top up on added aircraft.

And they even include a Max a we just had a European airlines.

Commit to an additional.

Having three seven Max in 2022 so.

We're seeing activity there both on the wide body and single aisle front.

Obviously, the 80 21 Neo is right now the strongest.

And demand among the single aisle.

Craft and.

We were cautiously optimistic.

Please I need to make let me out to other you know additional comments Katy so number one even in the sale leaseback market with which we admittedly haven't done a lot of we do watch a quite a bit and where there has been competition or if you will from less source to larger named carrier, but it'd be you large et cetera et cetera.

We are seeing an increase in the lease rate factor and to Steve's point also a much more of a little bit of a stronger had on the part of the less orders on getting the security to packages and I will comment here are we we have the same position going forward, although we're in a very distressed period.

For us place can new aircraft now Opportunistically with a carrier also has a lot of credit metrics concern. So.

You know those are there, but the second the second comment really is that and I kind of think this might have been part of what you're talking about where we've had to give concessions and we have had to et cetera et cetera.

If we if we've done so we couple lease extension or that such that the total amount of monies that we're getting on the aircraft, which is really what we're looking out over the life or the the least wise with an aircraft.

The total amount of money through the extension period is not only preserved but increased the total amount of cash on any given error there when you buy an airplane.

Accelerate you depreciate over time, but the whole goal is how much total money are you collecting on against that asset and that has a accounting implications as well. So generally speaking the advantage of the deferrals is even where we have to give certain concessions, whether it's I don't know a you know restructuring et cetera by these extension we prefer.

Serve or actually increase the total amount of committed funds that were getting against these aircraft.

That's great color. Thank you both so much I think that applies to both single island wide body aircraft.

The comment that John just made about extensions.

Okay understood interesting.

Next question.

Yeah, Vincent Qinetiq from Stephens Your line is open.

Thanks, and good afternoon, everyone.

Another question on Deferments, if you could talk about so no 190 million of current deferments, if you could remind us what the security and maintenance. The buses you haven't those deferrals I think last.

This quarter, we were talking about roughly 500 million, but if you could remind us what or update us on the.

So security deposits and then for how long the the remaining terminal deferment sorry.

Greg.

Yeah, I don't have the detail allocation of the individual security packages on the hundred 90 million and deferrals granted gate I will note that it represents you know we have roughly $1 billion and security deposits and maintenance reserves on our balance sheet and the department is granted today cover roughly 60% of our customer.

So there you can see we're pretty well covered I mean, just looking at a at the numbers from the highest level.

And most of the deferments that you're asking about occurred in March April may.

Somewhere like mid April two.

Oh sort of the first part of July.

And then the paybacks usually start the month after that the three month deferral.

And so typical deferral will be 90 days.

A portion of the rent want to make that very clear, we're not deferring the entire red.

So for an airline pays $100 among.

$50 is deferred for three months.

And then 150 is paid back.

Usually over the subsequent months or subsequent quarters.

And most cases with interest of course.

That's a typical thats great well file.

Okay. That's very helpful. Thank you.

And second question does it might be for Greg as well and then.

It's on impairments question I get a lot from investors, but [noise].

So we've seen a couple of the other leasing companies that elements in some aircraft, including a young aircraft.

For leases and also with airlines on through some of restructurings.

So if you could remind us about how.

The accounting methodology, and how you look at impairments and asset values carried on your books. Thank you.

We've had no there we've had no impairments since this company started.

And Greg can comment on the accounting methodology.

Yeah, Steve I'm convinced it no problem if you look at.

Our situation, we have a young fleet a three year old fleet.

And the way the accounting works is you have 20, you aggregate cash flows are you.

We expect to earn on those assets over the remaining useful life, which in that case would be 22 years.

And once you aggregate demo, including a salvage at the end its pretty.

Pretty easy get to a point, where do you have more cash flows and once you're carrying yes. Its four on your balance sheet.

I can't really speculate as to why the other lessors have had so many impairments I mean, they might be tied to some of the bankrupt carriers that are John listed that others have had large exposures to.

And they may have been on older midlife assets, where you have <unk>, a smaller period of time in which to aggregate cash flows up because they're midlife in nature.

All those factors may have contributed to those situations.

But with regard to us I think we're sitting on very strong position given the.

Hi demand nature of our fleet and also the commentary both John and Steve as I've already touched on about the.

The the placements the extensions and in fact, the airlines are gravitating towards the aircraft that we haven't actually.

Right that make sense I think it was useful color. When you gave at some of the even some of the restructurings your preserving the cash flow of your asset with the extensions that you're generating so very helpful and appreciate the detail. Thanks, so much.

Thanks.

Next question, we have Helane Becker from Cowen Your line is open.

Hi, Thanks, very much operator, hi, everybody and thank you very much for the time. This afternoon I just had two questions. One is on your fleet actually Greg you were just talking about it being so young in fuel efficient, but is there any aircraft in the fleet that maybe one or two.

You would or wouldn't mind getting units.

[laughter] well.

You know <unk> or our fleet is pretty much where we want it could be.

We have very few older aircraft and I would remind you that or Thunderbolt platforms. One two and three have been very very successful and and placing aircraft into the hands of investors, who likes the midlife space and and and and we we retain managed.

And therefore, those customer contract so we have a disposal path.

For those assets in but we've we've told you in our release and are on our Q, having said that you know with a significantly reduced capex profile, we were not pushing aircraft sales this year for the rest of the year. So.

You know.

Theres really no a there's no like one dog geared airplane in our fleet that I can really think of a you know going forward I think we've done an overall pretty good job managing those dispositions.

We don't need to sell aircraft.

And I would just say that the lack of the Max deliveries in particular, a you know has had somewhat of an impact on our fleet edge and our overall fleet average age just by a matter of Decimals, you know 3.5 years to 3.9 or 3.6.

You turn off a you turn off a an inflow of narrow body aircraft, the Max which we had counted on ahead of plan.

And that's how you keep your fleet youngest take delivery of new aircraft and sell the aircraft when they get to certain age so.

That is impacted or fleet age a little bit but for a known reason. So I think were overall happy I I really can't think of any.

[laughter] real dogs in our fleet I mean, we don't have any 737 classic we don't have any 757, we don't have any more seven six evidence.

We have no 747.

We have no 80 80, we have no athree 40.

We have 118 19.

That was built at the end of 2004, that's a approximately 15 that half years old right now.

And up that aircraft the lease had ended with an airline in Africa.

And we just leased it to an airline in eastern Europe.

And once that aircraft matures for a few months or a couple of quarters.

We intend to sell that aircraft with the least attached.

And then we'll have no 18, 19 will only have a feed 2020 ones and.

The high concentration of the Neo series so.

I really can't think of any airplanes that are really unfit for our portfolio.

Yeah, I know I mean, I was just looking at it looks you know what you just said I mean, that's an ideal portfolio I just wondered on the other follow up question I had is that on the.

The airlines that are coming back for deferrals.

It's a little surprising given.

Our comments earlier in looking at your distribution right you don't have very many.

Much distribution in Europe for exposure there were.

Uneven there, they're coming back or the U.S., where they're really not coming back but is it just sit the airlines haven't had much government support is.

No I think I think the main reason that a few airlines are coming back for an additional like say 30 days of a partial deferment.

As to do with government restrictions on travel it's not so much related to the lack of government support.

It's a situation when airline had planned on operating international schedule.

Certain countries in certain destinations.

And all the sudden the the minister of House comes out with a rule thing.

We don't want people traveling to and from that country.

Or if they do there's an automatic mandatory 14 day quarantine. So what happens then.

Is the bookings they have the reservations drop off because people want to wait another 30 days or 45 days.

And reprogram their trip because they don't want to being a 14 day quarantine so.

It's not related to the airline's ability to perform or their willingness to make a lease payments. It has more to do with these.

Random government orders that come out every few weeks changing the rules.

Oh, who can travel internationally to and from that particular country.

And that is something that.

He has been very dynamic over the last three months.

And hopefully as we look forward to a vaccine or a series of vaccines.

A lot of this activity and and sort of overreaction will begin to taper off from from the regulators.

Oh, and let me just had big picture. This is yet another area of differentiation where.

Besides the factor as Steve mentioned, certainly in United States. Starting this past weekend early this week, we see the major U.S. carriers going back to the government again sort of for a second round.

You know that again, only 2% of our business the United States, we have almost nothing.

With the with the U.S. carriers, but that is differentiated from Europe, and Asia, where you don't see a this a yet a this large sort of push for second round requests by air, France, or lufthansa or et cetera, et cetera, because frankly.

As we've indicated the growth has been a bit stronger domestically and really in Europe and Asia. Our main markets. So again I think it's important to differentiate the U.S. from a Europe and Asia here.

We also have dozens of airline customers large airline customers.

That have asked for no government support.

Ever since the pandemic started have made all their lease payments completely on time without any interruption and never asked for any deferrals or any kind of financial assistance. So.

It's really hard to characterize and put every airline in the same bucket.

Because we've had many customers.

They have continued to operate in a fairly normal fashion.

And not come back to us for any kind of financial assistance.

And that's very helpful. Thank you very much for all that color.

Q.

Next question, we have Ron will come from Bank of America. Your line is open.

Hey, guys are on it.

Good evening dresses.

When you when you see the demand for aircraft from your customers are using a preference today.

He did threetwenty over the seven through seven Max.

Well I would say certainly the Max grounding has impacted for sure.

The marketplace than they market involvement of those two broad Singh of all types.

You know the Max for obvious reasons or has suffered a against the against the Neonodes. That's all the rest to it.

And the question is how will that be not necessarily your from now and when the thing is flying but really the question is how will it be five years from now.

So.

Yes, just by circumstance the neo has taken a stronger rule, but I would I would remind you run it for air lease.

We have always been one of the largest proponents.

And in fact, our the largest customer of the 321 Neo and we were the launch customer of the 321, L.R. and the 321, XLR because well before the Max crashing well before all of the current pandemic situation, we could see and foresaw the that the Athree 21, Neil in particular was going to be.

An extremely strong aircraft and we're seeing that bear fruit, regardless of the Mac situation or the pandemic.

Now before.

This crisis, Ron I think.

And and assuming the Max was going to go back into service as Boeing had originally predicted either late last year. Early this year I think boeing's goal was to capture.

Hey, 45% to 50% of the single a market.

What we're seeing is that because of the strength of the 80 21, neo the LR and the XLR.

You know that number is shifting in airbus's favor.

Additionally, you know Airbus is building.

The thing a lot family in four separate production facilities in France, Germany, Alabama and in China.

So I think we're seeing that market share drift closer to 60%, maybe even 65%.

In favor of the Airbus, mainly because if the larger ended a spectrum.

In the 200 C plus size.

The Athree 21, Neil appears to be the most.

Desired airplane from the airline.

It's purely a function of what the airlines are looking for.

But we don't really see a lot of 737 operators.

Bending the Boeing 737 family.

And most of the demand that we're seeing as a less or.

The Athree 20, Neil and easy 20, when you are from existing.

Airbus a single operators or Airbus twin aisle operators.

Are you seeing any.

Are you seeing an airline has come to you and I'm looking for their aircraft at the other under the spectrum.

On the year on it if you're 20.

Are you guys support or even the 195.

Our you're seeing airlines want and Matt Yeah, particularly in this new environment post pandemic, absolutely. We we ordered a 50.

Eight to 20 dashed 300, we think the dash 300 is the more desirable aircraft for us.

And we order those last year at the the Paris Air show.

And we'll get our first deliveries in 2022.

By then that airplane should be humming.

With all systems the engines, so everything already.

The latest generation.

Oh improvements.

And we are seeing really good demand for that aircraft in Europe.

North America, and Asia is beginning to pick up as well so.

We're very optimistic.

That that aircraft and 140 to 160 seats side.

We'll be a winter.

Got it makes sense, just just look at a big picture.

In this period of reduce passenger load as well if you have reduced passenger load that dictates in many cases, a smaller aircraft now as those lows increase and normalize you know you get more into the typical Max Neo a size regime.

Bought particularly now we've had a lot of inbound more inquiries on the 220.

And you know our deliveries are also more geared towards when the power plants on the two Twentys you know Pratt Whitney is going through several iterations and and improvements.

I'm on the geared turbofan and so our deliveries or time to take advantage of those deliveries, but I think we're pretty we're feeling pretty good about where we sit today on our 220 order.

Lot of 18 19 replacements.

Some or even 737 700 replacement.

And then some airlines that are simply down gauging.

With the idea of adding more frequencies.

In certain city pairs.

Oh and using that to 20.

As a tool to connect to Hobbs and also.

City to city pairs, where they want increase frequency and and gain market share. So.

As John said, we're seeing good demand building for the airplane.

And I believe now would be only one of.

Of the less source with a.

Significant a backlog and capability to do fleet solutions on the 20.

Gotcha Gotcha, and then maybe just one last question if I may on an airplane front.

As you know Boeing ticked down their stated production rates on some of it Sevens just just recently.

And then if you're not comfortable answering this I understand but do you think it was enough.

Right I mean, it's still at six per month on that line seems like at least from my vantage point, given what's going on in the world still a lot of wide body shells hitting the market.

She was asking questions Ron as China, China, No. There's a number of 77 that had been built for Chinese Airlines.

This year.

There are still in storage awaiting delivery so.

The question is.

It may represent probably 20, 25% of the 77 market globally.

So the question that we and Boeing or pondering when we'll China begin to take delivery of airplanes that already built.

And when will the top up their orders.

And for growth and also <unk>.

Replace some of their older a wide body aircraft so.

That's a billion dollar question that we don't have the answers too right.

And perhaps we won't have the answers to until after the election right. So China on these and these factors as Steve talking about Ron.

Look that's a that's crystal ball and we were really until that time will tell I would say, however, I would say.

That's a 787 broadly even though we're in a reduced aircraft demand environment certainly by wide bodies.

The 77 remains a very for a very strong focal point of a lot of airlines and in fact or.

Or looking at their widebody fleet is going forward and using this was an opportunity to again as we've said down you know.

Park older wide bodies, a much more or less efficient and get into this ever. So we have a number of discussions ongoing for new 77 placements sitting here today, they will probably take some time to evolve, but 70 sevens bad been a very strong airplane I think it will continue to be.

And the payload range envelope. The versatility you know we have airlines that are looking to replace seven four sevens or larger HP 46 hundreds.

Or even triple seven two hundreds that are getting on to over 20 years of age.

So we're seeing good healthy demand.

I think in the short term as you say putting 2021.

We're not seeing a lot of customers asking for 21 positions, but we are seeing airlines asking for 22 and 20 feet positions.

And some of these have never operated 77.

So and and to some extent the same is true for Athree hundred Fiftys.

We just did a deal with a European airlines that is going to take an athree 50.

They've never had before so.

As I said earlier in the smaller and mid size wide body, we see the 77 and eight P 50, playing a very very.

Healthy role in the years ahead.

Thanks for your questions Ron.

Yeah. Thanks.

Next question.

Jamie Baker from JP Morgan Your line is open.

Hey, good afternoon, guys seven so Greg question on the 91% collection rate in the second quarter 'cause it Mark and I want to be able to reconcile that with whatever cabin Avalon disclose last week. So your rate is calculated after giving effect to lease deferral arrangements in place as of.

I guess this morning can you express collections as a percentage of your pre pandemic expectations.

Let me think Jamie I don't know if I have that number in front of me I mean I think it.

You can just look at our operating cash flow statement I think weve.

Form very well relative to the peer group.

Don't know if we've publicly disclose that number I think we stick with it 90% plus the $190 million and that gives you the complete picture.

We have not falling to.

Deals of the Avalon disclosures.

Sure I think they're under a different basins County, I think under I Veracyte <unk> I'm not quite sure I follow what they've been doing.

That.

Oh, sorry go ahead, I wish I could give you more clarity I can give you what we disclosed today.

90% collection Reight hundred $90 million, what the deferrals, which is still relatively small both in terms of revenues as well as.

And then you can see how we're all kind of doing on our operating cash flow statement, but it is really nice to see is the customers adhering to their deferral schedules and those cash will start to come in.

I will try to.

Sorry go ahead, John your four months from now lot of that 190 will have already been feedback.

Yeah, I hope, so Ben and sorry, Steve any color John I wasn't sure who is a pipe and then we'll we'll try to back into it just going through the financials, but second question. This one will go back to John.

In your prepared remarks back to Virgin Atlantic You mentioned participating in the restructuring does that mean, you've already re cut you know wide body deal with them in can you provide some color. If you have yeah, I'm actually how steve's been the most involved in that so I'm actually going to have them answer that but okay. Yeah, we've already cut our deals a enough not to conceive off but.

Bottom line is a we've cut our deals or their long term deals that we have a cut it in a in the context of all the restructuring.

With all the other creditors and that sort of thing and so it's all been worked out.

Anything that Steve.

Well it was it was a joint effort involved the existing less or.

Vault Airbus because they have direct orders for 80 51000.

And Aintree 30.

Nine hundreds.

Involved in our bank lenders in the UK.

Involve delta.

49% shareholder.

All their credit card processors, so with.

John mentioned, it was really like to pre package.

Effort.

And what we did.

Some of our deliveries.

I've been reschedule.

But most importantly, their direct buys.

Where we schedule.

Two later time frames.

Which means the airline has to pay less in the delivery deposits to Airbus.

And therefore they can.

Sector cash liquidity position.

And the leased aircraft from early.

Well actually arrive before the purchased aircraft.

On me 30 Neal family.

And the easy 51000.

Replacing last 7474, hundreds and the easy 46 funded.

Oh.

It's all said and done.

They'll have a much more streamlined clean up.

77 Dash nines.

<unk> 30, Neos and easy 51000.

And the AC 51000.

I that's city markets like the flight in New York.

Daily they'll probably up that the twice a day.

L.A.

The one thousands do the highest density city pair.

And then you'll have the 77 doing the longer.

Oh, let's say little thinner route.

Many of those are in co chair or joint venture with Delta.

And then the Athree hundred Thirtys, we'll do a lot of the other stuff like down to Florida the Caribbean.

The middle East and secondary markets in Canada across the Atlantic So.

It took a lot of effort.

The other key less Aurs air cap and Avalon participated.

We don't have any aircraft at Virgin at the moment, but we obviously had to be cognizant of a total solution rather than a.

One of a parcel solution.

The Jamie this brings up a really important point and just allow me to expand on it because I think it's really fundamental to the message that we're trying to share with you. All this is not or.

What we were seeing more and more and more yes fleets are contracting yes. Some airlines are canceling their orders et cetera et cetera.

But they are using the leasing vehicle.

To populate their fleets going forward.

And by by using this lead by using US is less source, a they're not having to worry about tapping financing resources financing is not easy for lines. These days and so we're seeing this is a very pronounced trend I can give you a or even if an airline has not council. This orders it shifts or.

Purcell pushes back its direct orders to much later points in time, yet knowing that it actually does need a the new aircraft.

<unk> as they as they as they move forward they take our positions earlier I'll give you another very specific a concrete examples that I would personally really hard on a Korean airlines.

Yeah, No. We we leased a we signed a deal or two years ago, your and a half ago.

Two years ago to lease them 10.

10 model 77 dash towns for which of course I'll remind you we at least for a launch customer.

They also procured a number of equal or more number for directly from the Boeing company.

Originally they do that as the delivery slowed Boeing deliveries were supposed to precede air Lease's deliveries.

However, that's now flipped the airline and Boeing of work together to push out their direct buys and we're going to take our aircraft first I think it's a really important point here. Because this is this is a trend. We're seeing this is this is the migration towards leasing as part of the solution that we're talking about and we have these very specific.

Concrete examples where this is happening globally.

That's very helpful. I really appreciate all the color Tricare gentlemen, thanks, Thanks, Jamie.

You too.

Next question, we have Ross Harvey from David Your line is open.

Hi, Thanks for taking my question I know you covered a lot of T cell, but just a quick one for me.

On the existing fleet I'm wondering can you update us on how many aircraft are expected to come off lease between not on the end of 2021 I think the figure was 29 at the time, the 20 asked but I might not change some loss.

Quite cheap money I believe its 20.

2020, though I think it's 20.

By the end of 21 right correct I think it's 20.

Yeah, that's sounds about right.

Our at the 10-K, maybe one.

Go ahead perfect. Thanks on maybe just one quick follow probably for Greg.

You haven't seen at very low asked you neighbors and Q2 was 5.1% revenue paci cracking I'm sure some of that age travel expense related but much of it is potentially sustainable into future. Thanks, I could you repeat that last part I didn't hear the last year that thing about right I heard the travel part I didn't hear.

The second part of the <unk> thought it might be yes.

I was wondering how much of the year on year decline it looks like 80 bucks or so Oh, I will say potentially sustainable future you know I. The way we look at it is clearly we're benefiting from lower travel at and.

T any I mean travel and entertainment.

The other thing is.

Last year, we had elevated transition transaction and transition costs related to tease him a aircraft movement. This quarter. There's few of those but all in all I think it's more important to look at that she may over a multi quarter period and as you can see that Ah. The ratio has continued to decline. So I think that's that's all.

The positive and we expected that operating efficiency as we continue to ramp because ER visits itself has a very low expense burden given how efficient we always are roughly 120 people on stuff.

Excellent. Thank you very much.

<unk>.

I'm showing no further questions at this time I would now like to turn the conference back to Miss married Lilly's Dipalma.

Okay. Thank you everyone for your time today, that's it for our call. We look forward speaking with you again after the conclusion of the third quarter Cree named go ahead and disconnect. The lines. Thank you so much.

Thank you very nice ladies and gentlemen. This concludes today's conference call. Thank you for your participation have a wonderful day you may all disconnect.

You too [noise].

Thank you Sam.

[music].