Q3 2020 AerCap Holdings NV Earnings Call
Good day and welcome to the aircraft turret Coffer Twentytwenty you find out children. So it's called.
This conference is being recorded I transcript will be available following the call on the Companys website at <unk>.
At this time I would like to turn the conference over Mr. Joseph Mckinley head of Investor Relations. Please go ahead Sir.
Thank you operator, Hello, everyone welcome to our third quarter 2020 conference call with me today is our Chief Executive Officer, Aengus, Kelly and our chief among.
She officer Pete you asked before we begin todays call I would like to remind you that some statements made during this conference call, which are not historical facts may be forward looking statements forward.
Forward looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements are.
A couple undertakes no obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
Further information concerning issues that could materially affect performance can be found in Aercaps earnings release dated November 10th Twentytwenty, a copy of the earnings release and conference call presentation are available on our website at <unk> Dot com.
This call is open to the public and is being webcast simultaneously an aircraft dot com and will be archived for replay we will shortly run through earnings presentation I'm a lot of time at the end for acuity.
As a reminder, I would ask that I must limit themselves to one question and one follow up I will now turn the call over to English Kelly.
Thank you Joe Good morning, everyone and thank you for joining us today for our third quarter earnings call.
There are four key points that we would like to address on today's call.
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While there were still many challenges facing the aviation industry.
We have seen a significant increase in air travel and in our cash flows from the lows of April.
The positive developments announced yesterday regarding the near term availability of a vaccine should provide a further boost to the industry.
Second throughout the pandemic air cap is taken numerous proactive steps to manage through this environment.
Executing over $12 billion of liquidity initiatives, which resulted in the company ending the quarter with our strongest ever liquidity position.
Third COVID-19 is accelerating the pre pandemic trend of airlines moving into new technology aircraft, which aircraft is the world's largest owner.
I'm sourced we are confident that as the recovery continues there will be ample opportunities for aercaps redeploy its capital.
In March and April there was widespread concern about whether air travel has permanently changed.
Similar concerns prevailed immediately after 911 during the depths of the financial crisis.
In those cases, we heard the same extremely bearish predictions regarding the imminent demise of air travel.
But after each of these events air travel recovered and it is recovering today.
Over the summer, we saw rapid and significant increases in air travel all over the world in a relatively short period of time.
In Europe, the number of flights increased from 2000, a day in April two almost 19000 today by the end of August.
In the U.S. traffic increased from a low of 87000 passengers a day in April two.
To almost 800000 today by early July.
Last month, there were over 1 million passengers in a single day.
And then China. They are now box to 100% of pre pandemic domestic demand.
All of these rebounds occurred in less than four months.
So it is evident from these numbers that once they were allowed to fly millions of people will quickly get back on board an airplane.
As we look around the world today, we see the airline industry at various stages of recovery depending on the region.
In the U.S. in Europe, we're currently between 35% and 45% of pre Pandemics like levels.
This is a significant recovery from the April lows, but there has been a pause in the recovery recently due to the resurgence of COVID-19 infections and the imposition of new quarantine periods.
Yes in China in October 600 million people travel by Air Road and rail during Golden week.
And then Latin America passenger numbers continue to increase steadily.
The one region of the World, where we have not seen a material increase in passenger numbers is southeast Asia due.
Due to the significant restrictions on international travel that are still in place and these countries.
We have also seen a stabilization in the financial condition of many airlines.
Boy by government supports.
Significant funding in the capital markets and the ability to reduce costs airlines have significantly extended their cash runway.
Since the Corona virus outbreak, we have seen an extraordinary response from governments around the world to support their lives.
This includes almost $200 billion of direct assistance in the form of loans payroll supports and other initiatives.
As well as billions more of indirect supports provided by many countries.
Governments around the world recognized that airlines are critical parts of the global infrastructure.
This country specific economies.
Airlines have also raised a record amount of funding from banks in the capital markets.
The U.S. Airlines alone have successfully raised over $40 billion since March.
These factors combined with the rise in passenger traffic and the reduction of their expenses will enable the vast majority of the world's airlines to navigate through this crisis.
We use air cap have experienced the improved conditions as well in the form of a significant increase in our cash collections.
In a marked slowdown in rent deferral requests.
So where do we go from here in terms of the airline industry's recovery.
In our view the key metric that we are using to gauge the industry's health.
Is the point at which airlines are able to cover their cash operating costs.
With today's low fuel prices and the cost reduction programs that airlines around the world have implemented.
We believe that airlines cash operating costs can be covered at around 60% of 2019 traffic levels.
In contrast.
Air cap does not need to see anything like the levels of airline profitability, we witnessed in 2019 or otherwise over the last five years for our company to be successful.
This is an important differentiator between leading lessors like air cap and the airlines.
In order to make progress towards the traffic levels at which the industry becomes profitable.
There will be two key drivers.
These are the standardization of pre departure testing as well as the successful vaccine.
On both of these fronts very significant progress is being made particularly with regards to the vaccine.
Very positive news yesterday from Pfizer or the 90% effectiveness of their vaccine it preventing hope its 19 infections will give travelers much greater confidence in booking flights, which will be a major positive for our airline customers.
And on the testing side, there were various initiatives underway at airports around the world to support this goal that avoid placing pressure on existing national testing systems.
Key among these is the European Union's recently introduced traffic light system.
Oh, you countries have signed up to.
Once implemented this will standardize measures across the continent, and will either remove or significantly reduce quarantine periods.
Thereby removing the uncertainty that is currently constraining passenger travel.
Hong Kong and Singapore I've also reached a preliminary agreement to establish an air travel bubble to reopen borders between the Asian financial hubs that will exempt travelers from current quarantine requirements.
These systems may take several months to be fully implemented just as it took time after 911 for governments to agree a new security protocols.
But it is an important step and it will get done.
The same is true in the U.S., where progress is being made on the implementation of rapid testing capabilities at airports, such as San Francisco and Dallas.
Another example of this from October well spend Hawaii dropped its 14 day quarantine requirements provided the passenger had a negative test within 72 hours of departure.
Progress is also being made on both sides of the Atlantic to reopen the north Atlantic markers, which is the most important long haul market in the world by far.
Governments have spent far too much in their airlines not to make sure that most valuable roots reopened.
We expect the measures taken to facilitate the reopening of these north Atlantic routes will likely serve as a template for other lucrative long haul routes.
As I said at the beginning.
We believe that once consumers know for certain that they can fly they will fly.
Turning to air Cop.
As I referenced earlier, our relentless focus on cash collection continues.
We have collected significantly more cash month after month over the five months since April.
This is evidenced by the improvements in our Q3 operating cash so.
Which was up by more than 70% versus Q2.
Of course, there are individual airlines that present challenges.
But the vast majority of our customers continue to pass every month.
We have also seen a significant reduction in the number of new deferral requests.
Our deferral balance itself increased by 56 million in the third quarter comps.
Compared to 288 million increase during the second quarter.
Our placement activity also picked up in the quarter and whilst we are not at the levels. We saw in prior years, we continue to place our aircraft.
Coming into this crisis, one of Aercaps advantage as well is that we have been significantly extending our average remaining lease term through the sales of older equipments and the purchase of new technology aircraft on long term leases.
As the results only 7% of our leases are scheduled to come off lease in the next two years.
In addition of the 933 aircraft in our fleet only 42 are on lease to airlines involved in a chapter 11 style process. This includes Norwegian Airlines.
We expect these airlines to emerge from chapter 11 and to keep the vast majority of our aircraft unacceptable terms as they are predominantly new technology aircraft.
This is evidenced by the fact that even now many of these aircraft continued to be operated by the Airlines every week.
It is worth noting that just because an aircraft is on lease to an airline in chapter 11 or subject your restructuring discussion.
It does not mean that it won't be leased again.
Any aircraft that we do take back would of course be leased to other airlines on long term leases.
These are long lived assets that will generate cash well into the future.
Please bear in mind that the aircraft platform has leased over 1000 aircraft in the last five years.
This is what we do.
On the balance sheet side, we continue to actively manage our capex and debt maturities, leaving us with a record level of liquidity.
As I noted previously Aercap has already executed over $12 billion of liquidity initiatives and Twentytwenty.
Our ratio of cash sources to cash uses for the next 12 months is currently 2.9 to one.
The highest level, we have ever had.
Turning to the asset side of the balance sheet.
As we mentioned on the Q2 call.
We felt it was important to take a detailed and conservative review of all of our aircraft in light of current events and changing outlooks.
As you can see from the slide.
Our fleet consists of 62% new technology aircraft being the Athree 20, Neo falling 787, Airbus Athree hundred 50, and the Boeing Max.
29% current technology narrow bodies being the Athree hundred 20, the Boeing 737.
And 9% current technology wide bodies being the Airbus Athree 30, and the Boeing Triple seven.
Our new technology aircraft are the most in demand models in the world and will form the backbone of the World fleet for the next 25 years.
Air cap has more of these aircraft than any other airline or leasing company in the world.
By comparison, only 12% of the global in service passenger fleet was comprised of new technology aircraft at the beginning of the year.
We expect to see solid demand.
Our current technology narrow bodies well into the future.
One of the reasons for this is the latest entry into service of the new technology narrow body aircraft.
Indeed, it can be said that the Max has yet to enter service.
The ramp up of Athree hundred 20, Neo production was much slower than anticipated due to its production problems.
Based on the Oems own production forecast, new technology narrow bodies will not make up the majority of the global narrow body fleet until well into the next decade.
In contrast on the wide body side, the Boeing 787 entered into service almost a decade ago in 2011.
The Boeing 787 was followed in quick succession by the Airbus Athree hundred 50.
The Airbus Athree hundred 30, Neo the Boeing Triple Sevenx and the Boeing 747 Dash eights.
This represented an unprecedented replacement wave of so many wide body variance in such a short period of time.
In response to this beginning six years ago Aircat implemented a deliberate portfolio strategy of reducing the number of current technology wide body aircraft in our portfolio.
We did this because we could see that over the course of the next decade Airlines would increasingly replace these types of aircrafts with new technology versions that are more fuel efficient and environmentally friendly.
COVID-19 is accelerating this trend.
When you see a trend where airlines begin to move out of a particular aircraft type you need to get ahead of us Andrew.
And reduce your exposure to that asset type is.
Especially the younger versions.
We have been highlighting this to you for several years.
In 2014, we a Turkey, 3% of our fleet in current technology wide body aircraft.
Through our focused portfolio strategy. Since then we have reduced these aircraft types to only 9% of our portfolio today.
Looking back on the last six years, where we sold almost 600 aircraft generating consistent and significant gains on sale, we could see that our aircraft were prudently valued on our apologies.
Reflected our conservative approach to asset valuation and thoughtful approach to asset selection.
This gave us significant headroom coming into the crisis.
Given the impact of colder dieting and airlines accelerating the move out of current technology wide body aircraft, we felt it would be prudent to update all of our assumptions.
In Q3, we reviewed each aircraft line by line with a critical eye to ensuring that our assumptions were reflected not only of conditions today, but importantly, the conditions. We believe are likely to prevail for the remaining useful life of each aircraft.
As a result of this comprehensive review of our entire fleet, we have taken an impairment of $915 million that is focused primarily on current technology wide bodies.
Now switching to the future.
You may have heard the saying about the aircraft leasing industry once.
When times are good the airlines need our airplanes and when times are tough the airline seat or financing.
I can tell you that over my 20 plus years in the industry financing has been a much more profitable activity for leasing companies.
Based on our experience of prior downturns and the conversations I'm, having with our airline partners around the world.
I am confident there will be significant opportunities for air cap to deploy capital attractively as the industry recovers.
Importantly, we are in the fortunate position to have the financial wherewithal to do so.
As airlines emerge from cold igniting, we expect that our main priorities will be to restore their balance sheets and unwind themselves from government's involvement.
This means they will need to focus on repaying debt rather than directing capital towards new aircraft purchases.
Prior to this year, there were still airlines, who strategy was to own their entire fleets.
That strategy has proved itself to be redundant.
We have already heard from a number of airlines that going forward they plan to rely more on leasing.
When you look back over Aercaps history of capital deployment, you will see that our strategy has been consistent for decades.
It is simply the opportunity set that has changed each year.
At different points in the cycle, we have been involved in large scale M&A sale leasebacks share repurchases and debt reduction in order to generate value for our shareholders.
Take the sale leaseback market as an example during the financial crisis, we completed two of the largest sale leasebacks embratel.
However, as that market segment became more competitive we find more attractive ways to deploy our capital.
Over the next few years as the industry recovers and airlines focus on repairing their balance sheets weve.
We expect to see significant sale leaseback opportunities in.
In particular as the OEM production rates start to ramp up again.
Given the broad impact of COVID-19 on sectors outside of aviation Ivan.
I believe that the tourist capital that came into the leasing sector in recent years will exist and find other avenues elsewhere to be deployed.
This may create opportunities for leading aircraft lessors like air cap.
Moving forward with a strong balance sheet record levels of liquidity and airlines that are motivated to lease aircraft. We believe that air cap is well positioned to come out stronger from this crisis piece.
Piece will now take you through the financials.
Thanks, Gus good morning, everyone in.
In the third quarter, Aercap had a net loss of $850 million or $6.66 per share. This.
This included a number of special non cash items, including a write off of $915 million related to flight equipment write off at 58 million related to goodwill and a 128 million of mark to market movement on our Norwegian shares.
Also recorded $43 million loss on debt extinguishment related to the repayment of near term debt maturities, which will be offset by lower interest expense in future quarters.
Excluding these special items, our net income for the third quarter was $158 million and our earnings per share was $1.24.
Our total revenues for the third quarter were $1.027 billion compared to $1.194 billion last year base.
Basically friends were lower due to lease restructurings aircraft transitions and the impact of airline bankruptcies during the quarter.
This includes the impact of cash accounting, which was around $100 million for the quarter we.
We have placed all of our lessees that are currently in bankruptcy proceedings, and other restructurings or where we otherwise believe that the rent isn't probable of collection on cash accounting, which is where we only recognize payments that we received during the quarter as revenue.
Our maintenance rents were $91 million in the third quarter, which was a little higher than last year due to lease terminations.
In terms of aircraft sales during the third quarter, we sold seven of our owned aircraft for a total of $63 million. The average age of the aircraft. We sold was 19 years old.
Our net gain on sales for the quarter was $7 million, which was lower than last year, primarily due to the lower volume sales in the quarter.
Our other income was $31 million for the third quarter, mainly due to higher interest income.
Along with the recovery in passenger traffic, we saw a significant increase in our cash collections during the third quarter.
Our operating cash flow for the quarter was $541 million, which was a 76% increase from the second quarter.
As Scott mentioned during the third quarter, we saw a slowing of new deferral activity. Our deferral balance was $485 million as of September Thirtyth, which is around 10% of annual lease revenues compared to a balance of 429 million as of June thirtyth.
So the increase in deferrals was only $56 million during the third quarter and the vast majority of our airline customers continue to pay us every month.
Our cash collection rate was around 80% for the third quarter that is renting we collected during the quarter compared to what we normally would have collected under our leases if.
If we exclude rent deferrals from that number the cash collection rate was around 90%.
Each quarter, we review our aircraft for potential impairments. This involves forecasting on a plane by plane basis. The expected cash flows for the remaining useful life of each aircraft and comparing those two are carrying value for that aircraft in.
In order to do this analysis, we update our expected lease friends as well as our other cash flow assumptions for each aircraft. This.
This involves not just an assessment of lease rents today, but looking at the entire future life of each aircraft and forecasting what the lease rents will be for future leases.
The assumptions that we used reflected our current estimates of the impact of COVID-19 on aircraft demand, both now and in the future.
As a result of this review, we took an impairment charge of $915 million in the third quarter, which related predominantly to our Airbus Athree hundred 30, and Boeing Triple seven current technology by bodies. These.
These aircraft types together now represent less than 10% of our total fleet.
Our impairment of these aircraft is based on our view that the lease runs for these aircraft types will be lower in future years as we're seeing an increased number of airlines transitioning out of current technology wide bodies and into new technology aircraft, such as Boeing seven eight sevens and Airbus Athree fifties, therefore, we decide.
It was appropriate to lower our assumptions for the future cash flows associated with our Airbus Athree hundred 30, Boeing Triple seven aircraft we've.
Weve always taken a proactive approach to looking at our fleet values and that's why we think it's prudent to take this action today.
We had minimal impairments on our current technology narrow body aircraft, which make up 29% of our fleet and we had no impairments on our new technology aircraft, which make up 62% of our fleet as we believe there will continue to be strong demand for these aircraft types in the future and they'll continue to form the backbone.
Don't have the global fleet.
And having completed this comprehensive review of all of our aircraft going forward, we don't expect to see further meaningful impairment of any aircraft types in our fleet.
We continue to see the benefits of having strong global access to funding since.
Since the beginning of April we raised six and a half billion dollars of new funding, both unsecured and secured we've.
We've seen strong demand from the capital markets and from banks and other funding sources. The average cost of the debt. We have raised this year is around 3.9%, which is in line with our overall average cost of debt of 4%.
And we've used a substantial portion of the proceeds of these offerings to retire or close to $4 billion of debt maturing over the next couple of years.
Working with Oems, we have reduced our capex for 2020, and 2021 by almost $6 billion, which is a 65% reduction from where we started the year we.
We currently expect to have around $300 million of Capex for the fourth quarter and around $1.8 billion in 2021.
Overall, we have rescheduled deliveries of over 90 aircraft from 2020 and 2021 into later years generally two to three years later than the original delivery date.
On our second quarter earnings call, we announced that we had canceled orders for 15 Boeing 737 Max aircraft. In addition to these we canceled orders for nine more Max aircraft. During the third quarter. We currently have 71 Max's remaining on order.
As a result of the liquidity actions, we've taken and the improvement in our cash flows we ended the third quarter with a record liquidity position.
Our total sources of liquidity were $11.2 billion, which gives us. The next 12 months sources to uses ratio of 2.9 times the highest its ever been.
Our excess cash coverage is also a record $7.4 billion.
We continue to maintain a very strong balance sheet. Our leverage ratio is currently 2.67 to one which remains below our target ratio of 2.7 to one.
Our secured debt percentage continues to remain low at 24% of total assets.
And we have $26 billion worth of unencumbered flight equipment, which can be used for additional financing in the future.
Going forward, we will continue to maintain a very strong liquidity position. We believe that's the prudent thing to do in the current environment will.
We will continue to run at a higher liquidity level of at least one and a half times sources to uses coverage until things normalize.
Our strong liquidity position and prudent liquidity management have been recognized by the rating agencies during the third quarter, both Moody's and Fitch reaffirmed our investment grade ratings and in their commentary they highlighted our strong liquidity and the actions we have taken to enhance it as well as the strength of our operating platform.
So since the start of the pandemic all three rating agencies have affirmed our investment grade ratings.
This of course continues to be a very challenging time for the aviation industry, but with our strong balance sheet, our record liquidity and our unmatched operating platform as well as the actions. We've taken this quarter, we remain well positioned to continue to weather the storm and snake advantage of the opportunities that will arise as the recovery content.
Hughes.
And with that operator, you can open up the call for Q and a.
Thank you.
Ladies and gentlemen, if you would like to ask a question. Please take out by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signups or HR equipment.
Again press Star one to ask a question will pause for a brief moment hello, everyone the opportunity to south requests.
We will move onto our first question from Helane Becker of Cowen. Please go ahead. Your line is open.
Thanks, very much operator, hi, everybody and thank you very much for your time this morning.
Just a couple of questions I know that you.
You look at the values to the aircraft.
Can you just talk me through that how you came to those numbers for that the majority of aircraft that you wrote down is it just a discounted cash flows.
That came along.
Sure Helane, so when we do our impairment tests, we're looking at the long term cash flows associated with each aircraft.
So we're projecting.
Look at the lease rents that they are on today you look at the future lease rents that we expect for those aircraft maintenance rents all cash flows related to it.
And and so.
So youre evaluating those and comparing those to the book value and.
And basically if you have the shortfall there and your expectations than you write it down to the discounted value.
And really what we saw with the Athree Thirtys and Triple Sevens was airlines increasingly exiting those types of aircraft and.
And we expect that that will have an impact on their lease rents in the future.
Okay and then.
No about.
The Norwegian investment I think you have somebody from the company on the board and it looks like they're going to have some trouble you.
You know getting through the winter and there is just kind of wondering how you're thinking about that and if you're thinking about taking your aircraft back there.
Let me talk revenue aircraft for us and we have already leased two of the ERP.
One to 77.
The contract for the new carrier and the remaining 77 marketing at the moment as well.
The technology wide body located.
Okay.
Right.
Okay, all right thanks very much team.
Sure.
We will have move onto our next question from Jamie Baker of JP Morgan. Please go ahead. Your line is open.
Hey, good afternoon, everybody I guess could you hazard a guess when you think the leasing industry crosses that 50% threshold of the global fleet and and also.
No I agree with you that we are going to see greater use of leases as airlines try to.
Variabilize their cost structures, recognizing that's not an actual inglis word, but you get the point I suspect that CFO. Those are also going to gravitate towards shorter duration.
Do you agree with that and how does that change your business if duration declines by.
Several years.
Thank you the first question, Jamie the pace at which.
Operating leasing will hit 50%.
Velocity has increased.
There is no doubt in my mind as airline.
Have all right.
That's our number one focus.
The de leveraging our balance sheet.
Secularly go who have taken on government involved as governments involved or handicap their strategic capability.
That self interest level for their own ability to do that.
So that was definitely occur we saw about the financial crisis.
I do not see airlines setting billions of dollars to falling in there I just don't see it.
What they will do it because what we are seeing.
As an acceleration of the move new technology.
Finally on the wide body.
We will see an increase.
Leasing there.
Do they get to 50%.
Could be I would say generally will see it.
Three years within that 36 months, we'll see that.
Because airlines also realized.
The value.
In terms of option.
Fleet management strategy.
So and around the world airline that used to predominantly on almost all their fleet.
Question. They said, we will use more leasing.
Well definitely.
Sure.
And on lease duration.
Although lease duration that will be negotiated.
That will be a negotiated one Jamie of course, it will depend on that the bargaining position of both Counterparties LSR as well push no doubt for the longest term and let's see what the shortest term I think that will just be a question of fed the varying leverage of the two of us.
[music] parties.
That's great and second question and it's a bit of a follow up to.
To Helanes question, you decided to leave aircraft at Norwegian.
But when we.
Going forward, let me see how to ask this I mean, there are you.
How are you handling stress at this point are you are you inclined to pull out aircraft earlier has the playbook changed you know with the pickup in flights as as you look at some of the airlines, particularly in the eastern part of the World I mean basically.
Basically.
Yeah.
Are you more courageous [laughter] now given what you're seeing in the market.
JBT approach hasn't changed as you were going through April May June so, it's very difficult to find a hall for airplanes at that point. So if you could store them keep them on an operating certificates have the storage costs, taking care of the maintena.
Its cost taking care of associated with the airplane. It made more sense provided the airline but still operating.
To leave the aircraft there and then as you found homes to take them out we have taken we have already signed up to 70 sevens out of Norwegian add to a new customer and Dan we are marketing at the palace at them as well.
Okay. That's helpful. Thank you guys take care.
Pleasure.
We will now move onto our next question from Ross Harvey of Davy. Please go ahead. Your line is open.
Hi, good afternoon states across and Joseph.
Questions on the impairment charge. So just wondering can you give us a sense as much as a time of that scale of future needs reductions are.
Remaining useful life change that store impairments in this quarter and whether they were applied to all the travel Sevens and 330.
Maybe pages, while you alluded to more broadly I wanted to clarify that the reviews suggest to you that there maybe impairments over the next say six to south lots on the current tax our bodies are our new tech wide bodies or was there kind of a very sufficient margin of safety there. Thanks.
Sure. Thanks, Ross, so well first off we looked at all of the aircraft in our fleet on a plane by plane basis. So it was a comprehensive review it wasn't just the Athree thirtys and Triple Sevens. It was every plane that we looked at and as I said, we look at the cash flows for each of those aircraft.
We stress those cash flows given the current environment.
You've given lease rents today as well as what we expect the impact of the COVID-19 pandemic to be on lease rents in the future and so as you would expect you know that results in lower risk right lease rents today and you know for most aircraft types almost all you see a recovery in the future.
For those Athree Thirtys and Triple Sevens, we believe that there is a permanent reduction there and that's what we reflected.
But there are a lot of other assumptions that go into it as well as you mentioned, including useful lives downtime on aircraft maintenance reconfiguration costs all of those things and so really it's the combination of all of those that go into it when you come up with this analysis now.
Now I guess turning to the second part of your question in terms of the rest of our fleet. So you know those athree thirtys and triple Sevens or 9% of the fleet when.
When we look at other areas of our fleet take current tight narrow bodies. Those are 29% of our fleet, we expect to see solid demand for these aircraft well into the future and as Gus mentioned, yet current technology bodies won't be overtaken by Newtek aircraft until well into the next decade.
As for Newtek aircraft, which make up 62% of the fleet. These are aircraft that airlines are transitioning into the most in demand aircraft types that form the backbone of the global fleet for the next 25 years, So really as I said in my prepared remarks looking out today, we don't see any more meaningful impairments or any parts of our fleet.
Right.
Quick follow up for me expected 12 of corporate costs on those 2.2 billion at an average of five corridor, which is kind of broadly in line with what Q3 was.
Just wondering does that includes or not any material easing and receivables balance and if so have you baked in any additional deferrals.
For me thanks.
Well, we've taken into account and what we expect in terms of deferrals I mentioned last quarter that we expect you know that I expected the deferral balance to grow overtime to around $7 million to $800 million.
As I look out today, I think it probably will peak at a lower level than that so we have reflected those in there Ross.
In that $2.2 billion of next 12 months operating cash flow and really you know what that represents is just that's our estimate over the next 12 months of what happened you know obviously you saw that we had a significant improvement in cash flow the past quarter up 76%, we expect to continue to see a gradual increase.
In cash flows continuing over the course of the next year.
Thanks.
Sure.
We will have move onto our next question from Krish Patel of Deutsche Bank. Please go ahead. Your line is open.
Hey, Good morning, guys you come in to that over the last several years, we've seen a lot of capital investments.
Some of your searches tourist capital and you see some of that pull back end.
Creating opportunities in the market.
Actually for.
Sure.
How do you see that playing out east and debt in the form of large scale M&A or more.
In this by way of asset portfolios or individual opportunities, which Nick.
I think it's fair to say.
That those people who have come into the sector looking for yield over the last five years or six years and pull it this was a spread business.
And they didn't need a full.
Full scale operating platform to run the business.
I've found.
That that is not just about at assumption and.
That you most definitely do need a global platform to run this business.
So we have already seen many have to take the decision we are not going to be able to full scale operating platform and in fact, it's too late for that.
So what I believe we will continue to see from those type of participants that they wont deploy.
Deploy further capital into the sector. So I think there'll be further fretted there'll be less new capital coming into the sector than was the case over the last five years and on the other side I believe that we will have a greater demand for the aircraft leasing product. So that's how I would see it takes shape.
Great.
And then you mentioned that there's 42 aircraft on lease to airlines involved in chapter 11 like processing fees.
Portfolio I just wanted to see could you.
Can you clarify how many of those aircraft are new technology wide bodies and.
I guess, what what can you tell us about what you're seeing in the marketing environment.
And most of those aircraft are new technology wide body airplanes and as I said they include our Norwegian what.
What we are seeing is that even though the airlines are in chapter 11, or an equivalent they're all they continue to operate the airplanes, which means they have an obligation to pay offs as well for the operation of those assets. We would expect as I said in my prepared comments that those airlines will accept the market will continue to lease them up.
40 of those aircraft on acceptable terms.
Okay, great. Thanks, a lot guys.
Treasure.
We will have move onto our next question from catching O'brien of Goldman Sachs. Please go ahead. Your line is open.
Hi, Good morning, everyone. Thank you very much for the time.
Oh, Hey, just a quick one on the sale leaseback opportunity you know do you do you feel that Weve reached a point where it is so it's.
It's okay for you to start moving where it was in the transaction you you have a good so what airlines are capitalized well enough to get you can make whole payments, you know or or is rising cases, making when you take a little bit about further apart. So just wondering like what would what would a well.
What would what would lead to us being sanccob transaction and out I mean I think.
Therapy, a very limited number of sale leasebacks executed over the course of the last few months as some of them being in the public arena and of course, we look at those now what I do expect however, as fast as production and delivery ramps up from the Oems the demand.
For sale lease backs will become much more urgent and I believe the leverage dynamic will be more in our favor right. Now we have all time low of deliveries from Boeing and Airbus Boeing isn't delivering anything really except the handful of wide bodies, a month and Airbus is old production is significantly down so Catherine I think that as we.
Go into the new year, and the Oems start to deliver more aircraft there will be a more pressing demand for the sale leaseback product.
That makes a lot of sense. Thanks for that color and then maybe just two quick follow up potentially both repeat it.
Is the reason you expect apparel to peak. So first one being is the reason you expect apparel to peak lower than your prior expectation is that because the payments come in better and then apologies just one more in that region, but should we be expecting any further headwinds to financials as you're moving their meeting aircraft or is everything already on cash accounting.
So that impacting or weakens, our usually accounted for thanks, so much for the time.
Yeah sure. So on the first one Catherine the it's really because we've seen left deferral activity weve seen a slowdown in that as as you saw in the second quarter. The increase there was only 59 million. So it was much less than what we saw during the second quarter. So that's really given that trend.
Factory, that's why I think that the peak is likely to be below that seven to 800 million that I mentioned in the second quarter in terms of Norwegian So we do have a shares and Norwegian and perpetual securities that are on the balance sheet. We've also got an offsetting provision for those against those and.
So we don't expect to see a net impact from you know from Norwegian going forward negative net impact.
Okay very clear thank you.
Sure.
We will have move onto our next question from Ron Epstein of Bank of America. Please go ahead. Your line is now open.
Hey.
Good morning, guys, just a couple of small things.
During the quarter last quarter, you guys mentioned that 15% of.
Your your revenue or do you have it there are a number of lessors on cash accounting, how did that compare to this quarter.
It was about the same run again, 15%.
Okay, great. So.
No no not really not no not really many additions to what we had from last quarter.
Okay, Great Great and then maybe another question on the on the product front.
Does the narrow body shifts towards the 320 family away from the 737 family given airbus's marketshare pick up.
Does that played quite well for you given given their fleet.
What you're planning for the future.
Well it does round because we saw it a long time before anyone else and that's why we are the biggest lessor in the wireless Athree hundred 20 Neos.
And we could see that coming like we also saw in the current technology wide bodies, because Romney are the biggest in the world we get more information than anyone we see trends before anyone else sees them.
And we could see that that what's happening on the Athree hundred 20, Neo the Athree 21, Neo and you could see it on the Triple seven family on the three tardy family.
No no. It in your view do you think Boeing has to do something to counter the through 21 no XR.
You know the way it works and the aircraft market is that the Boeing 737, Max 10 can do a lot of the missions that the Athree 21, XL or does not everybody wants to fly a narrow body from Dublin to Miami, It's a long way to go in a narrow body Chu.
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So.
Following could say to themselves you know what we're just gonna can see that mission to the Marcus.
And yes, we have an airplane that's less capable.
By reducing the cost of the aircraft, we can make us a.
Very competitive airplane, which is exactly what Airbus did with the Athree 20 for many years against the 737 Angie.
When deanne she had a superior operating performance, but the Airbus airplane was good enough that with a slight price reduction below the competitor airplane it was competitive aircraft.
Gotcha Thats and then if I may just one last question.
Not on a typical triple seven 300, they are middle aged how much do you think the residual value it's been impacted because of what's going on in the market.
Top of the.
The pandemic.
Well look wrong, it's hard to say specific numbers, but we saw it six years ago.
Again, because we see more data than anybody else in the world.
We see more of what airlines are doing and.
And that's why we acted so so much on it over the course of the last six years.
Reducing the fleet from a third of the fees to 9% and that wasn't done by balance sheet growth in fact, the value of our assets stay constant or shrank slightly.
So what I would say to you is that it's very much case by case, but we have our own view of us and we have acted accordingly, but our own airplanes.
Okay, great. Thank you.
We will now take our next question from problem Wash our book of Credit Suisse. Please go ahead. Your line is open.
Great. Thanks.
Got you and Pete talked about this kinda you'd be comfortable with the level of C.
You know the charges that you took in terms of value in the portfolio. So [noise].
Number one is can you talk a little bit about that the discussions you had with the rating agencies around that and then second part of that question is as you know does at what point does it make sense for you to be able to go more on offense and defense.
Sure. Thanks, Moshe so yes, we discuss those with the rating agencies and Ah previewed them with them I mean from the rating agencies perspective. Their main focus in this regard has been on where our leverage ratio is a if we take an impairment.
So as you see we've done the comprehensive review on the fleet I don't see anything else out there and having done that we're at 2.67 to one so that's that's below our target ratio of 2.7 to one it's in line with or below where all the rating agencies want us to be in terms of our leverage.
I show. So I think you know from that standpoint, I think that that should be fine I don't expect any negative reaction as a result of that.
Do you want to comment on.
Offensive and as we said look.
The company is in the strongest liquidity position as it has ever been in.
We do believe that there will be ample opportunity as we get to the other side of it and they said this crisis.
And the focus of airlines as I mentioned in my prior comments will be to de lever the balance sheet and in particular online themselves. Some government Das also I believe there will be fewer competitors for us I think the tortoise capital that came into the sector. As I said, that's believed it was a spread business.
They are leaving the sector. So I do think that there will be ample opportunity and if you look at our track record over the course of the last 10 years, we've engaged in the largest sale leasebacks ever done that.
Largest M&A ever John the largest ordering a larger buybacks ever done and so we're always looking at the alternatives that are there and to maximize the value of the business for our shareholders.
[noise] <unk>. Thanks.
Just a quick follow up on the cash flow question.
Given that you now expect you know that the deferral balanced kind of peak at a lower level.
Are there other things I mean in other words your your forecast out 12 months is really kind of the current current.
Q3 cash flow kind of annualized what are the other puts and takes or could it be better than that to come to book.
It couldn't be better I mean, as we look out at it Moshe you know, it's we are projecting as I said to a gradual recovery in a gradual recovery of air travel generally you know as you know the winter tends to be weaker for airlines you know so we'll have to see what happens over the next couple of quarter.
Is there, but we're also seeing some positive developments in terms of free departure testing protocols coordination among governments around quarantine periods and then obviously you know we'll have to see what happens in terms of the vaccine development. So really those are all different variables that factor into that you know we have.
And I would say, we havent been aggressive about in our view on assuming a rapid recovery there in terms of cash flows.
[noise]. Thanks.
Sure.
It appears there are no further questions at this time I'd like to have a conference back to Mr. Angus cut a C O <unk> Cup.
Thank you all for joining us today to sum up the four key points I Hope you will take away. Our one we are witnessing a significant increase in air travel and in our cash flows from the lows of April to Eric.
Aercap has a strong balance sheet and the strongest liquidity position we have ever had.
Three COVID-19 is accelerating the pre pandemic trend of airlines moving into new technology aircraft.
Eric Happy as the largest owner of new technology aircraft in the world.
Four we are confident that as the recovery continues there will be ample attractive opportunities for air cap to deploy our capital. Thanks.
Thank you all for your time, we look forward to talking to you in three months time.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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HM.
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