Q4 2020 AerCap Holdings NV Earnings Call
Good day and welcome to the Aercap Holdings N V fourth quarter at 'twenty and 'twenty financial results. Today's conference is being recorded and a transcript will be available following the call on the Companys website.
At this time I would like to turn the conference over to Joseph Mcginley head of Investor Relations. Please go ahead Sir.
Thank you, operator, and Hello, everyone and welcome to our fourth quarter 2020 Conference call with me today is our Chief Executive Officer, Angus Kelly and our Chief Financial Officer, Pete You US before we begin today's 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 looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied and such statements Aercap 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 signed and aircrafts earnings release dated March <unk> 2021, a copy of our earnings release and conference call presentation are available on our website at Aercap Com. This call is open to the public and is being webcast simultaneously at Aercap dot com and will be archived for replay.
We will shortly run through our earnings presentation, and we'll allow time at the end for Q&A as a reminder, I would ask analyst day limit themselves to one question and one follow up I will now turn the call over to Angus Kelly.
Good morning, everyone and thank you for joining us for our fourth quarter, 'twenty and 'twenty earnings call.
I am pleased to report another strong quarter of cash collections for the company, where we continued the significant progress we made in Q3.
Operating cash flows in Q4 were almost double the Q2 level.
So why do we expect the airline sector has a couple of choppy quarters ahead of us.
The resilience and necessity of this industry to the global economy is clear from our operating cash flow numbers.
With 2020 now on the books, we are focused on returning the business to healthy levels of profitability and executing on the growth opportunities that are in front of us as the vaccine rollout gains traction.
And as the health of our airline customers continues to improve.
Given this we believe that the worst effects of the pandemic are firmly behind the aviation industry.
And at Aercap, we're looking to the future with increasing confidence.
Our conviction is based on the fact that airlines are implementing new strategies that will be required to succeed in the post pandemic world.
The first priority for all airlines is to deleverage their balance sheets and increased our fleet flexibility going forward.
Both of these objectives asset life balance sheets for the airlines.
On our last earnings call, we highlighted that Aercap will have significant growth opportunities and the post pandemic world.
We strongly believe that this is the case and these opportunities are materializing now.
So the four things I want to focus on for today's call are one the significant structural shift towards leasing aircraft as airlines look to rebuild our balance sheets, creating significant growth opportunities.
To the importance of the vaccine rollouts and impact of vaccine passports.
Free the resilience of consumer demand for <unk>.
And we remain completely focused on disciplined management as we navigate the pandemic.
Regarding the structural shift to leasing aircraft. It is clear that the pandemic has had a lasting impact on many airlines balance sheets.
And so their appetite for deploying large amounts of scarce capital to aircraft purchases will remain and use it for some time.
The priority will be to repay debt or government subsidies not to send money to the Oems.
This will result in and increased dependence on accessing the lessors order book for New aircraft and also for lessors to execute sale leasebacks on their existing aircraft.
The sale leaseback channel is used not only to finance their new deliveries. This channel is also a and effective way for airlines to raise capital from their existing fleets.
We see this trend as a tailwind for aercap in 'twenty and 'twenty, one and beyond.
We are pleased to report that we've begun to capture opportunities in this market recently agreeing LOI for 10 aircraft to be delivered over the next 18 months.
These transactions take time to bring to fruition. However, I believe the opportunity will be even greater when the Oems get back to delivering aircraft insignificant numbers.
Airlines will not repair their balance sheets overnight and so the flexibility that comes from leasing will remain attractive to airlines for years into the future.
Such that we see a number of very strong years ahead for the industry.
Secondly, with numerous successful pack vaccine rollouts, taking place around the world.
And then to the pandemic his insights.
Of course, it won't be a seamless our linear returned to normality given the sheer scale and complexity of administering a global vaccination program and.
And not every airline will make it through unscathed, but we believe they will get there.
And the last two months alone over 250 million vaccine doses have been administered around the world.
This is likely to grow exponentially in the coming months.
Creating an inflection point as further government approvals of new vaccines take place and significantly greater supply interest the markets, which can only be good news for the airline industry.
The vaccine rollout is also shaping our conversations with customers who are buoyed by the improving sentiment.
The improved outlook gives consumers the confidence to book further ahead and improving the cash flows of the airlines immediately.
It has also helped a number of airlines to raise capital on more attractive terms.
There have been a number of other positive initiatives like the clean corridors, which were trial by several U S majors and the rollout of health passports and certificates and.
And the last few weeks, Iceland and became the first country to issue vaccination certificates to citizens, who have had both vaccination doses with Poland. Following suit shortly after.
Other countries reliant on tourism, like Spain, Portugal, and Greece, Cyprus, Denmark, and Sweden are also putting the support behind the initiatives as well as the European Commission.
Separately IATA has rolled out a health passports app to help airlines with the administration around us.
With 20 Airlines, taking part and the initial trial and many more likely to adopt it in the coming months.
Third on the passenger side, which is what ultimately drives the airline industry.
We see no reduction and the desire to travel going forward.
And the consumer wants to travel.
If anything the recent travel restrictions of heightened desire to travel and we believe there'll be a strong snapback in demand as restrictions are eased over time.
We witnessed the impact of this most clearly in Europe, the U S and China during the summer of 'twenty and 'twenty.
For example, and Europe Air travel increased from 2000 daily flights to over 18000 flights and just four months.
Showing the pent up demand created from the first lockdowns.
This was shown once again and the U K last week, when Boris Johnson outlined their robot for reopening air travel.
Tour, operator, TUI said reservations for popular European holiday destinations increased six fold overnight.
Easy Jazz also noted a fourfold increase and ticket sales.
And lastly, we want to make it clear that we remain highly focused on managing the growth potential of the business and increasing shareholder value without reading vision, we make.
In terms of capital allocation, which we are often asked about and we continue to review all options.
Please know that any decision on this front will be made and keeping with managing the business for the long term and maintaining the strongest possible balance sheet.
As you've heard me say the best way for a company to navigate a crisis like the pandemic is from a position of strength.
Over the past year, we have done exactly that.
<unk> all the turbos. This pandemic has thrown at the industry.
I am pleased by how well Aercap has managed its way through the crisis.
And the fourth quarter, our operating cash flow increased a further 21% to $653 million, representing a doubling of operating cash flow from the Q2 lows.
Our cash collection rate for Q4 improved to 96% and the strengthening cash flow profile wouldn't have been possible without the extraordinary work of our employees around the world who've had a relentless focus on cash collection.
Additionally, on the deferral side I'm encouraged that the level of support being requested reduced sharply and the fourth quarter.
In fact over the period, our deferral balance increased by only $5 million.
As I've said many times the airlines will be in a position to pay their cash expenses long before they are profitable.
And this is being borne out in our results.
So while our profitability has clearly been impacted during the last couple of quarters.
It's notable that our cash generation has remained solid.
This places us in a very strong position to offer helpful solutions to our airline customers coming out of the crisis.
Importantly, we have and especially strong balance sheets.
We've gained this position by taking a series of deliberate steps over the course of 2020.
These included extending duration of our debt accessing very competitive financing from multiple sources and maintaining our investment grade ratings with all three major rating agencies, all of which will have positive benefits to shareholders into the future.
These factors are also supports our placement activity and the fourth quarter during which we signed lease agreements for 'twenty, two narrow bodies and nine wide bodies.
This included significant multi year extensions and long term lease agreements on narrow and wide body aircraft.
In addition, we have signed lease agreements for further 24 aircrafts since yearend and closed five further sales, including three wide bodies.
So in summary, it is clear that the worst is behind us and while there may be some choppiness from the industry and accordingly for us and the next couple of quarters. It is clear that a number of growth opportunities are before us we've already begun to deploy a small amount of capital into sale leasebacks. The first time, we've done so since 2013, and we won't hesitate to act.
On other attractive opportunities as they arise.
We've always managed the business with the long term and mind and with a backdrop of increased demand for leasing vaccination rollout is continuing at pace and confidence and the return of consumer demand, we see a bright future for the industry ahead.
Aercap has a robust balance sheet deep customer relationships and a strong track record to take advantage of these opportunities.
I'll now hand, the call over to Pete for a review of the financials.
Thanks, Gus good morning, everyone and the fourth quarter Aercap generated net income of $28 million or 22 a share.
Net income for the fourth quarter was affected by a number of items, including and cash accounting impacts of $117 million loss on debt extinguishment of $76 million and loss on investment of $29 million.
The cash accounting impacts related primarily to airlines that are and restructuring or bankruptcy the loss on debt extinguishment related primarily to the premiums we paid on the debt tenders that closed in October and December.
And the loss on the Norwegian investment and the fourth quarter was offset by maintenance revenue related to the termination of Norwegian leases during the quarter, we sold the remainder of our Norwegian shares during the first quarter. So we're now fully out of that position.
Our total revenues for the fourth quarter or $1 $32 million compared to $1 $257 million for the fourth quarter of 2019.
Total revenues for the full year were $4 billion $494 million down 9% from $4 billion $137 million for the full year of 2019.
Basic lease rents were lower and the fourth quarter due to lease restructurings aircraft transitions and the impact of airline bankruptcies. This includes the impact of cash accounting, which as I mentioned was $117 million for the quarter.
Maintenance rents for $110 million and the fourth quarter, which was a decrease from $133 million and 2019, primarily due to lower end of lease compensation recognized during the quarter.
In terms of aircraft sales during the fourth quarter, we sold 12 of our owned aircraft per totaled $97 million. The average age of the aircraft. We sold was 21 years old and our net gain on sales for the quarter was $14 million.
For the full year, we sold 46 aircraft for a total of $613 million and generate gains on sale of $90 million, both were lower than 2019 due to the lower volume of sales and 2020.
And the other income was $22 million for the fourth quarter, mainly due to higher interest income.
Despite the increase and travel restrictions and the fourth quarter, we saw another significant increase and our cash collections as Gus mentioned, our operating cash flow for the quarter was $653 million or 21% increase from the third quarter and more than double that of Q2.
This took operating cash flow for the full year of 2020 to over $2 $1 billion.
The vast majority of our customers continue to pass every month and during the fourth quarter, we saw a meaningful reduction and new deferral requests are deferral balance was $490 million as of December 31, which was a $5 million increase over September 30th.
Trade receivables decreased by $19 million during the quarter, so on and overall basis, including both accounts receivable and deferrals, we had a net decrease of around $15 million.
Our cash collection rate continued to improve and was 96% for the fourth quarter with no adjustment for deferrals.
Turning to the next slide other expenses, we had asset impairments of $27 million and the fourth quarter, which related to lease terminations and asset sales and were partially offset by maintenance revenue.
As I mentioned last quarter, having completed our comprehensive full fleet impairment review and the third quarter. We don't expect any significant further impairments as we're comfortable with the cash flows and associated book values of our fleet.
It's worth noting that the impairment analysis, we carried out and the third quarter was done before and a vaccine announcements came out and we remain comfortable with the assumptions we made.
Our SG&A expenses were around $64 million for the fourth quarter, which was about 10% lower than the fourth quarter of 2019 for the full year of 2020, our SG&A expenses were around $242 million, which was a 9% decrease from 2019.
Our maintenance rights expense was $6 million from the fourth quarter down from $25 million and 2019, and this was primarily driven by lower maintenance rights asset balance and the level of maintenance activity during the quarter.
Other leasing costs were $85 million for the quarter and increased from 62.002 million 19, primarily due to higher expenses related to these terminations.
As a result of all the actions we've taken to date and the improvement and our cash flows. We ended the year with a very healthy liquidity position. Our total sources of liquidity were $9 1 billion, resulting in and next 12 months sources to uses ratio of two three times, which is well above our target of one five times our excess cash.
Cash coverage was also high at $5 $2 billion, we continue.
To maintain a very strong balance sheet. Our leverage ratio is currently two six to one which is below our target ratio of two seven to one and is in line with where we began 2020.
Our secured debt percentage continues to remain low at 26 percentage of total assets and we currently have around $26 billion worth of unencumbered assets.
And January we raised $1 billion of five year senior unsecured bonds with a coupon of 175% the lowest coupon and this company's history. This reflects the prudent actions, we've taken and will continue to take and managing our balance sheet.
So and closing 2020 was the most challenging year and the history of aviation and we've seen the impact of those charges come through our results. Despite this we ended the year with a strong balance sheet with a debt to equity ratio. That's the same as where we began the year with a liquidity position that is higher than where we began the year.
And with funding costs that are lower than where we began the year.
We also took a number of important proactive steps during 2020 to position the company for the future. So while we will still see some ongoing impact of COVID-19 over the next few quarters, we enter 2021, well positioned to capitalize on future opportunities as the recovery continues.
And with that operator, you can open up the call for Q&A.
Thank you and if he wishes for a question. Please take note by pressing star one on your telephone keypad again that his style and to enter the queue for questions.
And then low take our first question from Jamie Baker of Jpmorgan. Please go ahead.
Hey, good afternoon, everybody, so mark and I were wondering a year ago, our operating cash flow was projected at $3 1 billion and today. It's two four so call that a decline of about a third and.
Naturally some of that is going to be due to deliveries being pushed off and rent deferrals and the SAP. So besides the variance and Capex and the $2 4 billion guide today is up only about 13% from the 2.1 you realized in 2020. So I guess the question is.
How much of 2021 rent recapture is being offset by lost rent to bankruptcy and lower lease rates basically the improvement from two one to 2.4.
What are the building blocks of that positive is obviously include deferrals being payback negatives include the bankruptcy and lower leases. The other stuff that you mentioned any way to.
Address that.
Yes, sure Jamie So I think that the building blocks of that or one we've got a number of airlines that are still on restructuring and those will come back online during the course of the year. So we would expect them to start contributing operating cash flow during the year. So that will that will build up over time.
And then Youre right, we will see some repayment of deferrals during the year and then as we place aircraft that are currently AIG right that will build up as well I mean, I think that as we look at the $2 4 billion.
We I'd say, that's a conservative estimate on our part because we assumed that while the recovery will continue that it may not be as smooth and line right and we will see some some day.
Starts and that so that's really how we projected that I mean, as you look at and general winter tends to be weaker as you know right and so we assume that just given some of the lockdowns that you still see and Europe and elsewhere that maybe.
And maybe let's.
I'd say, we were we were just conservative and our projection.
Hey.
And as a follow up any thoughts as to $53 million write downs on seven year old <unk> hundred <unk> and why that's not a risk for aercap.
Yeah, well, Jamie first of all we've been very clear about the portfolio strategy for many many years at all costs avoid and have line airplanes theyre very tempting because they give you a big lease rental for a short period of time, but if you have been buying <unk> hundred <unk> or triple Sevens and the law.
Last five or six years, youre going to get let's come on to yet.
Those airplanes.
And are going to be replaced you won't get 25 years out of them and.
And you would've seen debt we have been.
<unk> dash very deliberately for a decade.
And.
And that's what we've been warning you about you can avoid near term impairments, while the airplanes are on lease but once they come off lease reality bites.
That's excellent. Thank you guys I appreciate it our book.
Yes go ahead sorry.
And if you look at our own book, you'll see that we have I believe it's in the appendix there we have 3% of our fleece and <unk>, which are all very old and 4% are triple Sevens, which are all very old and declining rapidly and we've been very clear about that strategy for many years.
That's perfect. Thanks for that color guys and really do appreciate it just wanted to clear that issue up because it.
It has percolated and last couple of days. Thank you.
We will take our next question from Ross Harvey of Davy. Please go ahead.
Alright, Thanks for taking my question.
On costs.
Despite the P&L difficulties and 2020 and demonstrated quite pleased and see the leverage fell below targets.
And I won't just wondering access top up against your eyes can use across the different capital deployment opportunities and how you buy.
Baxter day laughing with compared to the sale leaseback opportunities you mentioned.
Sure and of course, Ross and look.
Charity to focus in 2020 book to make sure we deleveraged the balance sheet Patriot was rock solid the benefits of that manifested themselves and the 175% unsecured coupon and we achieved.
Quite recently, but that has to be done at that time now you are correct. As we go forward our balance sheet continues to Delever and I do believe that the suite of opportunities that are available to the company will be there for quite some period of time, because structurally we just see the demand for aircraft leasing increasing airlines.
We'll have to be asset light lighter companies going forward.
Already levered up coming out of the pandemic can see them hiring more and.
And I think from our perspective, we are analyzing all the time all the opportunities that are available to us and.
In relation to distribution of capital.
Yes.
And as a follow up can I ask about the you mentioned the positive marketing campaigns and the presentation on science and so a lot of that momentum has carried into Q1.
Can you just share thoughts on where that demand is coming from maybe the economics are what aircraft are being sandwich and any sort of on site to be helpful. Thanks.
Certainly of course, youre not getting the same lease rentals as you would have cost a couple of years ago, but the most important thing and the recovery of any Marcus is liquidity. The worst thing that can happen is a frozen markets. So liquidity is coming back.
During the quarter, we delivered a couple of 787% that we've taken out of Norwegian we sold 787 since the quarter and attach as we sold at <unk> Turkey.
But we are leasing 320 730 sevens.
And you know.
The activity is coming out of Europe, and North America, I would say and elsewhere. So look it's been fairly across the board there's been a lot of extensions to with customers.
But I think again it's.
Airlines are looking to the future and saying they see the vaccine.
Those that are well run and they see that it's coming yes, okay, it's going to be a choppy couple of quarters.
But there is there is demand out there and they can see vas and so their view is look if I can if I can lock in some attractive deals sign and I'm going to go on dose and.
I presume a property lease and more airplanes and anyone in the world.
Our business and with the biggest status.
Alright helpful. Thanks, Scott.
Pleasure.
We will take our next question from Helane Becker of Cowen. Please go ahead.
Thanks, very much hi, everybody and thank you very much for your time this morning.
And I just had a question about this shift to leasing.
And you make the argument and and airlines should never on an aircraft and should just.
Alright, so leased aircraft.
I don't know like there was there were very successful business models Helane on.
On owning nothing which I would point to say with air.
And in Europe on pretty much nothing.
I would point to indigo in India, which owns and pretty much nothing.
And at the other side you have southwest, which has moved from complete on our ship to starting to lease more.
I would say.
Bass from and Airlines perspective.
Owning the majority of their fleet.
And that's the wrong way to go and shareholder should push back on it and say is this the best you can do.
And with our funds stayed on money and metal for 20 years, you don't know the airplane market channel trade airplanes, youre, putting our equity at risk invest and the business or give us back the cash.
We don't want to see you, making big bets on airplanes and you see the difference for and airliners.
And they have to order a large number of aircraft to get attractive pricing that will deliver four or five years six years into the future and the huge risk is that the airlines. Most airlines are in their domestic markets and it could be take Ryanair Ryanair and look at Europe, that's their market Grace They bought airplanes next six years.
And probably for Ryanair is thats their market thats, the only markets theyre not going to be able to go into North America. They are not going to Australia. They are not going to Thailand.
And so if they get over their skis on the order book, yes, Okay, they're financially strong enough to do it but my point is it really ties their hands and what happens to these airlines sell off on and then when they have a problem, which you don't hear about it as they go back to Boeing and Airbus and banded knee and say please help us by Boeing and Airbus say well, Okay, you could defer your deliveries which are going on.
Pass and extra $2 million, a year and escalation from the pleasure.
And there is no free lunch with them and so I think with airlines too often they get fixated with Boeing and Airbus on a large order.
And they don't realize the risks that that entails.
No Ryan Eric one of the best ROE and airlines and the world So they'd be better at it and the vast majority, but the vast majority I believe take outsized risk for the potential benefit that's coming at them and yes, okay. They could argue out if I lease the airplane and I have to pay a little bit more sure, but no airline ever went out of business for having too few airplanes plenty of them.
I had a basis for having too many.
Zach this time, thank you for that and then just as a follow up you mentioned and.
And then inflection point is coming and I'm wondering if you've thought about.
And when that might be especially in Europe, where.
You mentioned the comments that force Johnson, and Easyjet and Purion and so on and I saw that too.
And which I suppose is may mid may.
And then do you think that the.
Zimmer will be rescued or do you think vaccine rollout in Europe is still.
Paul.
And late fall early winter away.
I think in Europe, and I and they'll get the vaccine role that will be happening I think they'll get that done.
And what the most important thing is the vaccine.
Travel agreements do you need a passport that is being discussed by the European Commission at the moment and the idea is that that would apply ideally to all the European Union and to the U K, they're talking about it as well I would say the sooner that gets up will dictate whether or not there is a good summer for the European Airlines.
And that can start in June.
Alright, and average summer that's are less and average summer that is August September October before they go to antique and of course on your back to school September October So like we said at the start and why we said at the start Helane look.
And <unk>.
The recovery is coming driven by the vaccines, but there could be a couple of quarters of choppiness, depending on how and the major markets.
Implement the.
And the travel on the back of having vaccines.
Vaccines.
Distributed and on.
And the long haul market the biggest one of all by far the North Atlantic markets. That's the most important long haul market and the world and hopefully we will continue to see and modest being fairly place on progress so far between the Europeans and the Americans, but hopefully that will start to pick up now as well as there's greater visibility on the rollout and the vaccines.
Gotcha, Okay, well, thanks very helpful. I appreciate your answers. Thank you.
Sorry, Bob.
We will take our next question from Moshe Orenbuch Credit Suisse. Please go ahead.
Great. Thanks.
You talked a little bit about kind of the combination of growth opportunities and helpful solutions for airlines.
I guess I was hoping you could put a little more.
And more specifics around that and yes as you look at it now do you see like this coming in the form of transactions for <unk>.
And half a dozen clients at a time or are there going to be.
There still potential for kind of larger deals.
Like you've done in the past and how you think about that evolving over the next few quarters.
I would think and Marcia it's more than over the next few quarters, because what we can see is that the airlines now are coming out of 2020, and the first quarter of course, which has been the most difficult and their history.
And they're trying to say, okay, I need to simplify all aspects might business I need to become a more nimble business that I've been before flag carriers and many other airlines are just huge employers very stuck on their ways and this is Chuck them all to the core and flexibility starts with the fear to fleet flexibility and I think what youll see.
C and simplification of fleets of major airlines.
And downsizing and perhaps the number of shelves, but very importantly, downsizing the different types of families of airplanes. They have with a trust towards the newer type airplanes.
And when I say the growth opportunity it may not be growing and overall number of shelves, but they'll be growing within certain families of shelves I think that will happen in terms of how that manifests itself and the size of the opportunity that faces us.
And it'll be over day, I think it's something that will be structurally there for another year or two just think about somebody walking into a board of and airline anytime in 2021, and saying I want to buy 100 airplanes from Boeing and Airbus delivering and the next five years.
I just can't see any airline board, saying that sounds like a great idea.
It would be very rare for them to do that because of the leverage they put on their balance sheets to our exceptions. There are airlines that are exceptions that had an extraordinarily strong position coming into the pandemic and we're able to absorb the additional leverage.
And without threatening themselves, but I do think that what you will see is a greater reliance on lessor order books and.
And the sale leaseback channel going forward.
Thanks.
And as a follow up Pete.
Given what you see now and recognizing it and where.
And two thirds of the way through the first quarter.
The progress that you saw and kind of a net deferral balance I mean do you think that continues into 2021.
And how that plays out maybe depending on on.
You could kind of frame that relative to this summer.
And the summer rebounds.
Okay.
And the potential for sure sure Moshe Thanks.
And so I think that the deferral balance as I said it was $490 million at the end of December and I expect that we should continue to see that come down right. So that will come down over the course of the year I don't expect it to come down all at once but I think.
Julie over the course of the year, we'll see that come down and there will still be some balance at the end of this year, but I think we should see steady progress and that because remember these deferral agreements.
These are agreements that we've reached with the airlines and so and so.
The airlines are honoring those and repaying and according to the schedule so based on those schedules.
Even if things even if traffic recovery picks up faster I would still expect them to be paying on those schedules I wouldn't expect them to accelerate it. So we should see a gradual reduction and it during the course of the year.
Great. Thanks very much.
Sure.
And we'll take our next question from Andrew <unk> from Bank of HSBC. Please go ahead.
Oh, hi, there.
Can I ask about what it does for saying in previous quarters about how youre expecting tourists capital to disappear from the sector.
On.
And going to happen.
All of that manifest attractions of the debt.
Laid out in your presentation.
Good luck and attempt and more and more new entrants, so we kind of get excellent.
Excellent M&A.
And the structure the sector kind of play out from here. Please.
Well.
As a glib comments I'm dying to see tourists globally the Charlotte.
Yeah.
Two to be more serious.
And I referenced the tourist capital that had entered aircraft leasing over the last few years is done so without the benefits of our platform is it done so and the belief that this was a spread business and it had done so and the belief because of the spread business that the credit risk and the startup and India carried the same credit risk as U S treasuries.
And that has proven not to be the case and it has hurt those more who came into the sector looking for that quick pickup and yields but without willing to build a global platform or an infrastructure that was suitable to the level of risk they were taking on.
This is a difficult business.
To build a platform.
And that's it for our subscale fleet it doesn't justify us. So for example, if you have 30 40 50 airplanes, you're at a level of risk where you do need to have some level of global coverage I mean on.
Order to manage that portfolio, but whether a portfolio of that size can make a dynamic and economic investment.
I don't believe is the case, so but I do think we will see as those subscale players realize that look this isn't the business from me I did like the business, maybe a better way to get in is on the managed fleet basis, if I want to be and us.
But being outright bidders against experts in the industry, but global infrastructure I think many would have said that hasnt worked.
And in that regard is what I mean of the tourist capital leaving.
And of course, given the world that we're in today.
And of coal, but there may be other opportunities and other sectors be it real estate or whatever for them to invest into.
Okay. Thanks, and then as a follow.
Follow up I guess.
As we see sort of progress towards maybe resonating the tariffs on.
On aircraft between the EU and the U S.
And then does that make any difference to you guys looked at you and managed to navigate your way through it so the tariffs tolerate relevant.
We can't comment on specifics and between ourselves and Boeing and Airbus and the different markets. They are confidential, but what I can say is that it is a necessity for both governments the biggest exposure and the United States is the Boeing company.
Europe is an enormous markets.
There are tens and tens of thousands of U S pipe tech manufacturing jobs dependent on us.
It has to get resolved there are no winners out of this and the same is true the other way around and that Airbus is one of the biggest exporters in Europe and the U S is a huge market force and there were tens of thousands of jobs and I know the people who run both of these businesses I know that that's what they want to see.
And.
The World is a better place for us when we have competition the American consumer does not benefit from their airline and not having a choice other than Boeing and the European consumer does not benefit from the European and from the only choice for their airlines being Airbus equivalents.
So I would be hopeful that this will get resolved and there are no winners on the manufacturing side or the consumer or the average Joe Payne is taxes, it's just degrees of loss.
Yes.
And Youre optimistic together.
I am I am I think day will.
Particularly COVID-19 twin.
If you're realistic about Boeing.
I don't see the Chinese market last night, they didn't approve the Max that's another big market shock.
And to try and shoot the European market to would be yeah.
Naive and the extreme.
Fair enough. Thank you.
And we'll take our next question from Catherine O'brien of Goldman Sachs. Please go ahead.
And thanks for the time.
And a slightly different.
Take on the competitive environment question.
With the senior and the significant opportunity and to deploy capital and to the sale leaseback market I was just hoping to hear an update on the competitive landscape. There I know we are already seeing some participant pullback before COVID-19 and.
And for a period last year, some of the debt markets certain less salaries and to finance their growth rate not open.
And so how do you see the competitive set that actually has available dry powder to execute on the sale leaseback deals are available on the market today.
Versus what that competitive Kelly Scott market looked like pre COVID-19.
Thanks.
Well Kathryn as I said I don't believe that you will have as many people chasing and as you did pre COVID-19 because there were the aforementioned tourists who are present.
Now what.
What I do believe going forward is that until we see the Oems ramped up the deliveries.
The opportunity and the sale leaseback market is still reasonably limiters and you have to remember Boeing arent really delivering any airplanes at the moment and Airbus will struggle to deliver to their targets for this year as well I just don't see that and so it will be something that will be with us for I think.
Several years into the future.
Okay understood and then maybe more on a modeling one from my my second question.
Any view on what 2021 and Capex will be this year are you still thinking $1 $8 billion is the right number and if so at this point and there is upside or downside risk that either OEM delivery Red bar are incremental Kelly stack opportunities respectively. Thanks for that.
Hi.
So for 2021, I think cash Capex Kt will be around one 5 billion.
And total Capex. So if you include.
The delivery and at delivery what will it be $2 1 billion and that includes the use of PDP.
Already got on the balance sheet.
I think that of.
Of that one and a half could some of that slide I think there is a possibility more likely than not that that slides, but for now that's our best estimate as to what it will be and then Katy we may pick up some other stuff along the way as well.
And in terms of sale leasebacks et cetera.
That won't be material debt.
And you said it will be material or welcome materials sorry.
No it won't be it won't be bumpy.
Understood. Thank you very much.
Sure.
And we'll take our next question from Ron Epstein of Bank of America. Please go ahead.
Yes, good morning, good afternoon.
I guess, how are you feeling about the six 780 sevens are supposed to get this year.
When do you think we'll start to see some of those things flow out of South Carolina and.
And are you expecting the debt all six.
Not to be dependent narrower on obviously on how Boeing get on with their repairs and with the FAA all of our airplanes are leased.
And.
Look at the 787 Dash nine has proven itself to be and excellent airplane and they're the only ones. We have on order, we don't have dash tens or dash eights, but look I do think Boeing will fix those issues and they will get them resolved thats, an extraordinarily difficult time for the company.
I do believe in them and that they'll resolve these issues.
We have tremendous capability, but it's an extremely difficult time.
And so of the six it's hard to say what you just referenced a few minutes ago could one or two of them slide I'm sure they codes and.
Because the more they all slide some period of time and firm.
Other than the current delivery dates and I expect that will be the case.
<unk>.
And then we will negotiate with Boeing.
What to do next but.
It's a difficult time ahead of them I'm sure they will get through us and in.
In summary, I would say that those 780 sevens could slide a bit to the right.
Yeah and then.
And I can.
Maybe a follow on.
On our previous call you'd mentioned debt with with fuel prices, where they are and the cost reduction programs at the airlines that you had you expected that the airlines could.
Cover their cash operating cost.
And at around 60% of 29 to <unk> air traffic levels now fuel prices have gone up. So if you were to rejigger that equation with fuel prices, where they are now.
How much of 2019 traffic do you think we need to cover the cash operating costs at the airlines.
I still think we'd be in the mid sixties day around as well.
That comment I made was in reference to last year.
I think we can see yields getting a little bit better out there as well.
But I would still say we'd be in the mid sixties yourself.
And then fuel devices like almost from <unk>.
Kind of reflective of a more optimistic outlook on the global economy.
Got it got it and then if I can just squeaking.
One more follow on.
China and eastern placed an order for a firm order for 900 guidance.
What do you think about the 91 and as a platform remember do you guys have or want to finance us.
Look I think Ron and the C. 919 is the first important step for Chinese aviation to compete some day with Boeing and Airbus and it has to be done you have to start somewhere it was the same for bolt on fab to Boeing and Airbus If they had to start somewhere.
And it obviously needs.
Mastic market to seed itself to trial itself and.
I think it is likely that over the next 40 years or so we might see a family of airplanes that may compete with Boeing and Airbus, but that's what it takes.
In the late 19, ACC <unk> hundred <unk> was launched.
And that was.
After many many years of effort from the Europeans to create Airbus. So I think there's a long road ahead before we see a family of airplanes coming out of China, but I have no doubt they will get there and this is a very important milestone on that debt that trip.
Great. Thank you so much.
Okay.
We will take our next question from Chris <unk> of Deutsche Bank. Please go ahead.
Hey, Good morning, guys I wanted to talk about your order book and how wide bodies and seeded into the portfolio growth longer term.
Some time I guess talking about the shift from owning to leasing and when I look at your current order book, it's primarily weighted towards the narrow bodies, but just wanted to get a sense of where and the next cycle and you kind of CD to wide bodies coming back into favor.
And it seems like there is large and with wide body.
Parked and 2020 and most of the lessor capital seems to be focused on investing and the narrow body statements.
So just wanted to see if there comes a point, where the economics and you can look attractive and maybe what are some of the factors that would cause them to let you place on order.
Certainly I mean, we obviously are Ram.
Very big lessor with a lot of wide bodies now when you look at our order book There is only 23 wide bodies left out of 286 aircraft.
Thats because the state the 787 program, which has been the backbone of our wide body order book started delivering much sooner and you had delivery delays with the <unk> hundred 20 Neo delays at the 737 Max.
Otherwise a lot more of these airplanes would've delivered into our portfolio, but look we're a big believer and the wide body market.
Sure.
It's been hit of course by the particularly that the lack of international long haul travel, but that will come back and for sure the wide body market will come back.
And we would be very confident and the 787 dash nine and in particular and.
And Jim.
That would be the most popular and then on the Airbus side. The Best Center. They have is the <unk> hundred 5900.
And they would be the two airplanes and I think that the very large aircraft are the triple Sevens and eights triple seven axis, the Hvac's may take a little bit longer.
Those assets to find a sweet spot, but I think we will be surprised.
People will want to.
To go on on long haul holidays trips of a lifetime and.
We're going to see that so yeah definitely we're big believers and the wide body market. When you are and the right ones.
Okay.
And then can you just give us an update on where you're at on remarketing, the aircrafts coming out of Norwegian or whether you've completed all of those.
Sure.
No.
We've leased two 707th already and delivered those two and then we've signed LOI for several more.
They all have to be converted into lease contracts, but that's that's.
And that's where we stand on those aircraft again look the 780 sevens are assets.
That have a long term future ahead of them and.
And we will lease those assets.
Okay. Thanks, a lot for the call it for the time guys.
And if youre very welcome.
And there are no further questions at this time I would like to hand, the call back to our host for any additional or closing remarks.
Thank you all very much for your time today, and we look forward to talking to you and three months time, and maybe God willing we might actually see some of you in person before that happens thanks very much.
Thank you that now concludes the call. Thank you for your participation you may now disconnect.
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