Q2 2022 Air Lease Corp Earnings Call
[music].
Good afternoon, and welcome to the air lease.
Q2, 2022 earnings conference call, all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Jason Arnold Head of Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to Air lease Corporation's second quarter 2022 earnings call. This is Jason Arnold and I'm joined this afternoon by Steve Hardy, Our executive Chairman, John <unk>, Our Chief Executive Officer, and President and Greg Willis, Our executive Vice President and Chief Financial Officer earlier today, we published our second quarter.
2022 results a copy of our earnings release is available on the investors section of our website at Www Dot at Air lease Corp. Dot Com. This conference call is being webcast and recorded today Thursday August four 2022, and the webcast will be available for replay on our website at this time all participants to this call are.
In a listen only mode before we begin please note that certain statements in this conference call, including certain answers to your questions are forward looking statements within the private Securities Litigation Reform Act.
This includes without limitation statements regarding the state of the airline industry, including the impact of sanctions imposed on Russia.
Kraft delivery delays, our future operations and performance revenues operating expenses stock based compensation expense.
Other income and expense items.
Statements and any projections as to our future performance represent management's estimates for future results and speak only as of today August four 2022. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the securities and Exchange Commission for a more detailed.
Description of risk factors that may affect our results.
Air Lease Corporation assumes no obligation to update any forward looking statements or information in light of new information or future events. In addition, we may discuss certain financial measures such as adjusted net income before taxes adjusted diluted earnings per share before income taxes, and adjusted pre tax return on equity which are non-GAAP measures.
Description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q, we issued today.
This release can be found in both the investors and press section of our website at Www Dot Air lease Corp Dot com.
As a reminder, unauthorized recording of this conference call is not permitted I would now like to turn the call over to our Chief Executive Officer.
President John Flicker.
Thanks, Jason Good afternoon, everyone and thank you for joining us today.
I'm pleased to report that ALC generated $558 million in total revenue during the quarter up 13% relative to the same period last year, while our diluted EPS of 95 per share rose, 27% year over year.
Second quarter performance benefited primarily from the growth of our fleet recognition of caspase basis revenue in the rent and the reduced impact of restructuring stemming from the pandemic.
We purchased 22, new aircraft, adding approximately $1 4 billion.
Thanks.
Our operating cash flow was up roughly 18% relative to the second quarter of last year benefiting from improved cash collections relative to the prior year.
We ended the second quarter with a lease utilization rate of 99, 6%.
Commercial aircraft demand. Meanwhile, continues to strengthen and with the uptick in international traffic volume, we're seeing that extend into the wide body demand.
In addition to the narrow body market, which has been strong for some time now in fact, we are now more than 80% placed on our wide body order book, which includes the <unk> hundred 30 Neo the acreage.
Passenger and freighter and the 787.
Our overall order book placements reflect the strong demand environment with lease placement of 99% of our deliveries through 2023 with 60% of our deliveries in 'twenty four place.
And with 25% placements in 2025 placements well ahead of our expectations.
Some of our narrow bodies, such as the <unk> hundred 21, neo including the LR and XLR versions now have forward placements out five years through 2027 farther out than we had pre COVID-19.
As such at the recent Farnborough Air show, we placed a large order with Pratt and Whitney for additional engines to allocate to our <unk> hundred $23 21 in the order book at.
At Farnborough, we also announced in end of lease placement with a newer line customer for six new <unk>.
We're also seeing a higher pace of lease extension well in advance of lease explorations on both single and twin aisle aircrafts, which is lending added support to used market lease rates and aircraft values reasons for this include a desire to secure current lift in the face of escalating new aircraft prices and higher interest rates.
<unk> supply chain constraints, leading to future delivery related work of aircraft on order.
And as a hedge against aircraft shortages.
We were pleased that our aircraft deliveries for this quarter and exceeded our guidance our Boeing Max deliveries this quarter happened to exceed our Airbus <unk> hundred 20, <unk> hundred 21, Neo deliveries 11 to seven.
Now by saying this I'm not making a forward predictions on the ratio of Max and Neo deliveries for the future rather just that the Max is enjoying good recovery with escalating deliveries and lease placements.
Having said that as you are aware Airbus and Boeing are experiencing continued supply chain and labor issues, resulting in delivery delays.
So despite our deliveries exceeding guidance this quarter, we continue to experience delays with several months on our Airbus narrow body deliveries and 737. Max has also continued to be delayed as well.
Supply chain challenges will likely extend for the next couple of years, and we will likely further which will likely further exacerbate what was already shaping up to be a shortage of commercial aircraft as post pandemic demand continues to accelerate.
On the wide body side. The Boeing 787 has been a primary hang up but it is our understanding of the FAA has approved boeing's delivery resumption plan.
Now much like the time, it's taking for Boeing and third accumulated Max inventory. It will take time to deliver the <unk> 77, and therefore, we retain our estimate have taken delivery of only 177 by the end of this year.
We're very pleased that there seems to be finally and insights of the 787 delivery freeze and our airline customers are very eager to add the 77 aircraft to their fleets, particularly given the acceleration in international traffic.
Given all these factors we continue to expect about three 5% four and $5 billion of deliveries in total for 2022 consistent with our prior guidance.
We expect $1 2 billion of aircraft investments in the third quarter subject of course to manufacturer delays.
On the sales front, we are targeting up to $750 billion of aircraft disposition in the second half of this year somewhat subject to any further significant delivery delays we might experience during the second half of this year as we consistently prioritize fleet growth in core lease earnings.
Lastly, I do want to provide a brief update on our efforts on insurance plans from our Russian fleet.
We submitted our claims to our insurers in June to recover losses on these aircraft and continue to vigorously pursue our claims.
Similar to last quarter by one point out that this is a complicated matter and we're not able to provide much additional color beyond that but we will update you on meaningful progress here over time.
To summarize the big picture, while there are many cross currents in the global macro environment continued sizable traffic recovery tailwind remains a source of strength offsetting these factors with further recovery momentum building in Asia as Steve will now share with you.
So let me turn the call over to Steve who will provide us additional commentary Steve.
Thank you very much John and thanks to all of you for being on this call for our second quarter results were.
We are very encouraged to see air traffic volumes globally continue to expand meaningfully.
I added June traffic numbers, just out today show continued sizeable improvement.
With total traffic up 76% year over year.
For most of this year, it's been the international markets that are seeing the largest percentage increases.
Rising a significant too.
230% year over year.
Asia Pacific International traffic has been one of the slowest to recover from the pandemic.
And though off a very low base it just posted a 492%.
492% traffic improvement.
Relative to the June of last year, the largest game by large margin out.
Out of any major international market segments.
Domestic traffic also continues to improve in most regions.
China being the primary laggard for most of 2022.
Although recently travel curves have been relaxed.
In China domestic continues to stabilize particularly on their major trunk routes between their major cities.
Travel restrictions continue to constrain traffic in many countries, but these are fortunately quickly, becoming the outliers not the norm.
I would also like to point out.
At certain domestic markets.
And even some international routes now exceed 2019 traffic volumes.
And domestic traffic in Australia, Brazil U S, Canada, India markets are very close or in some cases, even matching 2019 levels.
Forward bookings Meanwhile remained elevated.
As compared to earlier this year.
Traffic improvement has continued to face rising interest rates inflation signs.
Signs of slowing global macroeconomic conditions.
And the unfortunate war in Ukraine.
So while these global macro economic challenges have emerged and <unk>.
Rising fuel costs interest rates and the stronger U S dollar, but not as supportive of global airline traffic profit margins.
They were previously.
They were a tailwind some of this has turned into.
Headwinds the magnitude of underlying pre pandemic demand returning and still can return to the market.
So offering a very very strong counterbalance to those headwinds.
One side effect of the strong truck demand recovery I'd like to spend a few minutes discussing.
As the global Air traffic control ATC system and airport constraints.
Looking at recent news headlines.
Labor shortages and labor disputes all of these have widely impacted airlines doing the travel heavy summer season in the northern hemisphere, particularly in Western Europe , resulting in many flight cancellations and delays.
Many of these issues were caused by airlines themselves not planning ahead for a sufficiently rising traffic volume but.
But delays and cancellations have also been caused by airports and air traffic control systems being unprepared to handle the significant return of traffic volumes and aircraft activity.
Airlines are waiting excessively for departure clearances and aircraft are forced into holds as.
As well as inefficient routing.
Airlines tens of millions of dollars in additional fuel and labor expenses.
At a time when the cost of both.
Been rising exponentially.
Politicians, Meanwhile, continue to point to targeting to reduce carbon emissions.
But think about how much emissions generated by an aircraft sitting on the ramp with the engine running.
Or in a low altitude, a holding pattern due to insufficient capacity at the airport of destination.
This is a low hanging fruit that can improve airline operations profitability passenger experience.
And reduce global emissions if resolved.
As a priority.
Some are delays we've witnessed this year are a good reminder of what happens if airports and air traffic control modernization improvement is ignored or put on the backburner.
Clearly, there's a need for meaningful and immediate focus here on a global basis.
At Air lease we remain very active in placing our new aircraft order book.
With both first time customers and existing airline clients. During this period of airline recovery and rapidly increasing demand for new aircraft and highly efficient used aircrafts.
In addition to the lease placement of our six new eight too twenty's that we announced.
With tag and Golar Airlines at the par Board here show.
We also announced late in June the lease placement of three new <unk> hundred 21 Neo aircrafts.
The aircraft will let Tom the largest airline in South America.
And just this week, we announced the placement of two new <unk> hundred 21, Neo aircraft to the largest private airlines and is back in stock.
Further significant quantity lease placement announcements are forthcoming.
As we benefit from the strong demand, we're seeing for aircraft and our forward order book with Airbus and Boeing.
As well as lease placements from our order book that are stretching out further into the future as John mentioned.
Accordingly lease rates are strengthening reflective of diminishing aircrafts supply increasing interest rates and higher aircraft values.
As John mentioned.
Our deliveries were higher than expected this quarter.
In total we delivered 22 aircraft to customers.
Including Aerolineas Argentinas, the fly Kt of Argentina.
ARISTOTLE that flight carrier Kazakhstan.
Another 737 group of 7779, hundreds to Alaska Airlines.
Caribbean Airlines, the flag carrier of Trinidad and Tobago, China Airlines based in Taiwan Korean Airlines headquartered in anti of Turkey.
Also operating out of Netherlands in Malta.
The Norwegian low cost carrier Flyer operating out of Oslo, Indigo, the largest still out in India, which took delivery of three aircraft in the second quarter, including two from our managed businesses.
And this startup which is a joint venture airline between Singapore Airlines and the Tata group in India.
Which took 318 20 family deliveries in the second quarter.
Last but not least.
Virgin Atlantic and Starbucks, each took delivery of a new Airbus wide body aircraft in the second quarter spin.
Specifically in <unk> hundred 51000 for Virgin Atlantic.
And then 830 Dash 900 for Starbucks Airlines in Asia.
To wrap up my comments the continued strengthening of global air traffic post pandemic.
There is a clear evidence of the fact that we need to travel is irreplaceable.
This need not only as regional it is global across both developed and developing markets.
With our industry, leading 28 billion dollar Boeing and Airbus Order book backlog and the current fleet of $23 5 billion worth of the most advanced technology.
Environmentally friendly airliners.
Air lease Corporation is very well positioned to benefit from a strong airline demand environment and a growing shortage of aircrafts.
Now I will turn the call over to our CFO Greg Willis.
To provide more detail and color on our financial results in the second quarter Greg.
Thank you, Steve and good afternoon, everyone in the second quarter ALC generated revenues of $558 million up 13% as compared to the prior period.
This was comprised of $545 million of rental revenues and $12 million of aircraft sales trading and other revenues.
The increase in our rental revenues was primarily driven by the growth of our fleet. The recognition of $8 7 million in cash basis revenue along with significantly reduced impact from lease restructurings. These benefits were partially offset by a reduction in rental revenue from the termination of our leasing activities in Russia in the first quarter.
It is also worth noting that in the second quarter of last year, we were unable to recognize $42 million of rental revenue due to cash basis accounting, so clearly a significant improvement year as the impact of the pandemic abates. Additionally in the prior year, you will recall that we reported a $34 million windfall from the sale of our aeromexico bankruptcy.
Claim.
Overall, our airline customers are continuing to benefit from improving passenger traffic trends, which ultimately has benefited from our off which ultimately have benefited our operating cash flows.
I've said before we are very we have a very limited appetite for providing additional accommodations to our customers as the environment continues to improve especially as our customers continue to look to lease new aircraft from our order book.
Moving on to expenses the interest expense line rose, 5% year over year, driven by an increase in average debt balances offset by a decline in our composite cost of funds our composite rate decreased to two 1% as of the end of the second quarter down from 2.91% in the prior year as.
John mentioned, our composite rate is only slightly higher than it was in the first quarter in spite of a meaningful increase in the market in market interest rates.
Depreciation continues to track the growth of the fleet, while SG&A rose at our business activities have increased following the pandemic along with an uptick in some of our operating expenses in particular at the end of the quarter. We completed the renewal of our insurance program, which as a result of current market conditions, we will incur a $16 million increase.
On an annualized basis.
We do expect these higher operating costs higher expenses expenses to persist given inflation the market for insurance and recent geopolitical events.
Beyond those factors, though SG&A was also impacted by expenses related to aircraft transitions primarily related to the aircraft we've recovered from Russia in the first quarter.
On the financing side of the equation you will call in January we raised $1 5 billion in senior unsecured notes at a blended rate of approximately two 5% taking care of our refinancing needs for 2022.
Earlier this year, we also increased our revolving credit facility to $7 1 billion.
With a final maturity in May of 2026, which provides us with a substantial amount of liquidity to fund our commitments.
We ended the quarter with 92% of our debt at a fixed rate, leaving is relatively well insulated from movements in interest rates over the intermediate term.
That combined with interest rate escalators built into most of our forward lease placements.
Which provides us with a onetime upward adjustment in the lease rate at the time of delivery.
This all works together to help insulate us from the negative effects of a rising rate environment.
Moreover, our strong credit profile provides us with a significant funding advantage over our customer base, which ultimately supports our margins over the long term as such we remain firmly dedicated to maintaining an investment grade balance sheet utilizing unsecured debt as a primary form of financing maintaining a high ratio of fixed rate funding and targeting.
Our debt to equity ratio of two five times.
We ended the second quarter with a debt equity ratio of two five times on a GAAP basis, which net of cash on the balance sheet is approximately $2 six nine times, while leverage now is somewhat above our target due to the Russia fleet write off last quarter, we expect it to trend back towards target as we resume our aircraft sales activities.
As of quarter end, our unsecured funding exceeded 99% of our total debt financing, resulting in an unencumbered asset base of over $26 billion.
Contributing to the strength of our balance sheet.
Liquidity position remains very strong at seven 6 billion as of the end of the quarter.
Our financial position on balance and balance sheet remains strong and we're very excited about.
The future of our business as illustrated by our results. This quarter. We are seeing performance continued to expand as we move beyond the pandemic.
We expect new deliveries from our $28 billion of forward order book to further bolster our performance along with a copy of the economies of scale inherent inherent in our operating expense base over time and a positive contribution from aircraft sales as our sales efforts resume with that ill turn the call back over to Jason for the question and answer session of the call.
Thank you Greg. This concludes management's commentary remarks for the question and answer session. We ask each participant to limit their time to one question and one follow up now I'd like to hand, the call over to the operator to open the lines for the Q&A session Danielle.
Danielle.
The Q&A running.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
The first question comes from Helane Becker of Cowen. Please go ahead.
Thanks, Alright, thanks, very much operator, hi, everybody and thank you for the time.
Just two questions. The first question I have is with respect to China.
And.
I don't know are there can you have you heard or are there any concerns that at some point, China may closer to aerospace.
And how would that affect you guys if at all.
And the second question is with SaaS restructuring do you have any exposure to them.
Yeah Theres no plans for China, we have had to close communications with T. A C. The civil Aeronautics administration of China. There are no plans that we're aware of to close airspace.
There could be some minor restrictions from time to time.
When they conduct military exercises in the Strait of Taiwan.
But generally those are below 25000 feet.
Above sea level.
And so we're not really seeing that as an issue I mean, there's literally hundreds and hundreds of planes that overfly, China, a day that do not go to and from China.
So we're not aware of any any restrictions in that area whatsoever.
It's also a great source of revenue for China.
They charge exorbitant overfly navigation charges. So it's it's a profitable business for the Chinese.
If an aircraft is flying from say Europe to.
To Korea or.
Anywhere in Southeast Asia, that's the overflight China.
Okay, Alright, that's very helpful. Thanks, Steve on your second part of the question, Yes, we have.
Five the very young <unk> hundred 20, Neo and <unk>.
On lease with SaaS as the most desirable young as part of their fleet.
We have strong indications that they very much target those aircrafts as our highest priority to keep.
So we don't really have too many concerns about that bankruptcy.
The main problem Helane.
Is that.
About half of their wide body operations from.
From Denmark, Norway, Sweden was across Asia.
To Japan, Korea, Hong Kong, China Bangkok.
Singapore, so because of the of the of fact.
In fact that they are forbidden from flying over Russia.
Eastbound from Scandinavia, and coming westbound from Asia.
Basically half of their wide body fleet is not operational or they're not able to utilize them.
So unlike a lot of other European airlines that have a much stronger trans Atlantic.
Operation as a percentage of their total widebody fleet SaaS.
Finnair.
The two airlines that have a very high proportion of their wide bodies dedicated to transit traffic.
To go through Russia. So.
That is one of the major focuses of S. C. S is to reduce their their 830 and <unk> hundred 50 fleet.
And the second comment I have on that the only 80 21, LR as they have which operate across the Atlantic.
On some of their thinner routes.
Are all leads from ALC.
They have no other <unk> hundred 21 long range aircraft, except the three that they have from air lease.
Okay. That's hugely helpful. Thanks, Steve and John .
Welcome.
The next question comes from Moshe Orenbuch Credit Suisse. Please go ahead.
Great. Thanks, John .
Given your comments about the delivery delays still kind of probably you have the supply chain issues kind of.
Creating a.
Reduced deliveries over multiple years is there any way to think about.
How many years it would be before.
There is at least start catching up.
In other words.
Is it going to be.
At some point there'll be catching up.
The deliveries at that period could be higher than you would have previously contracted.
And any sense as to how long that could take.
Thanks Moshe.
Look it's a very complex equation.
But the biggest factor that leads to.
Single out of the way he's really is engine deliveries and I think that's that's really well now.
How far forward, we have to look in terms of delays or limitations.
On engine deliveries.
It's hard to say, but I think.
The broad answer is that recovery is more dependent on engine deliveries than anything else I think in Boeing last earnings call. David Calhoun said that he would go to 38 a month today, if you had the engines and so.
The good thing is we look at is and there are engine shortfalls in the operating fleet, which takes a priority.
Back a year and a half a couple of years ago. There were engines that were actually taken.
There were a delivery on new airplanes, and they were taken to put out to support the fleet. So we.
We don't know the extent if any of that that is happening yet, but thats whats happened in the past, but I think that is the single biggest driver that is where were watching.
At Farnborough, we met with.
Does it yield of all of the engine manufacturers and.
They are working our hardest to meet these delivery requests.
At the same time, they have their own limitations. So I don't have an answer except to say look primarily at the engine supply side.
Alright, Thank you very much.
Greg maybe just as my follow up question.
You've got some tremendous execution on the fixed income side.
The markets are turbulent are there going to be opportunities do you think.
The next six months to 12 months, where you can do things that others couldn't.
To put that capital to work or there are there things you're thinking about that you could share with us.
Well I think I'll start with the fact that we that's one of the reasons why we maintain such a high level of liquidity and we want to be able to take advantage of.
Windows to access the market at opportune times.
Right now.
We're watching the market carefully we will also look at other alternatives to figure out ways to raise.
Inexpensive debt to fund to fund our growth and I can't give you any specific examples of what we're going to do but that's one of the reasons why we maintain a lot of liquidity.
Let us take advantage of those market windows when they present themselves.
Thanks very much.
The next question comes from Hilli, Katherine <unk> of Deutsche Bank. Please go ahead.
Hi, Thanks for taking my question, so you've got it.
A address the whole.
Mike yet.
Trying to be optimistic so I noticed that you drew down on your revolving credit facility, a little bit during the quarter instead of coming to the market the unsecured bonds.
But I'm, assuming that you would have to come to the market, sometimes if you're keeping the capex requirement.
And I know you've kind of talked a little bit you touched up on the capital market strategy, but could you go over it in more detail if you think youll.
Coming to the market this year and what you're expecting in terms of cost of funds just given the rising interest rate environment, Yes, we're looking at a collage of opportunities in the bond market.
I recently made a trip to South East Asia, I met with a whole number of Asian banks.
That had a surplus of dollars we're looking at the possibility of a direct bank facility.
On a term loan basis separate from our revolver.
And we're looking at optimizing our payment programs with the Oems, particularly with regard to these delays.
Because as you know we pay progress payments based on the contracted delivery of aircraft.
And now that we're experiencing these sustained delays from both Boeing and Airbus.
We're going to look at that very carefully.
And see if we can reject some of the progress payments to those manufacturers, which will give us additional cash liquidity.
And then lastly don't forget that between now and the end of the year.
We'll bring in well over $1 billion more of cash from the airlines to lease payments deposits reserves et cetera. So.
Cash flow is strong.
And we're gonna access.
That makes sense for us.
And keeps us having the lowest average cost of financing them all the lessors.
Steve just asked about it.
On the on the revolver side it shouldnt surprise anybody that will drop on our revolver, we typically target between 130% to 50% utilization during the pandemic, we maintain very little drawn on that revolver, increasing our liquidity, even higher but that is that is designed to be used facility.
And also as I ramp up our aircraft sales in the second half and we traditionally.
To focus the business and taken a lot of aircraft in the first half and then selling aircraft at the tail end of the year.
As we can enjoy the rental revenue on those aircrafts until Theyre sold.
As we ramp up sales in the second half that's also going to give us additional liquidity that will minimize the amount of external financing that we require.
Got it got it that's helpful. And then and then I have a question on the escalator and you mentioned OEM. So I know theres, an escalator to reflect the higher interest rate environment, but I know that the Oems have their own escalator to reflect the higher supply costs. So the escalator.
Escalator reflect Oems escalator to reflect higher aircraft question does your escalator only.
You know, it's only related to higher interest like the Oems.
Our escalator, we have both we have both the manufacturers escalation formula is a well known provision and lease rate adjustment as well as interest rate adjusters as well. So we have two separate economic consequences on the final reads story at delivery.
Okay got it got it great. Thank you very much that's helpful.
Thank you.
The next question comes from Jamie Baker of Jpmorgan. Please go ahead.
Hey, this is James on for Jamie. Thanks for the time, just one for me.
Mentioned in the prepared remarks.
First time customers.
Any color you can share on the demographics of those whether it be region.
Our credit profile.
Scale of them.
So I think they are geographically spread through Latin America.
Western Europe .
Central Asia, and Southeast Asia, There's no there's no particular concentration in any particular geographic so it's quite diversified.
Alright, great I appreciate that thanks.
This concludes our question and answer session I would like to turn the conference back over to Jason Arnold for closing remarks.
Thank you everyone for your time participating in our second quarter call. Today, we look forward to speaking with you again, when we report third quarter results operator. Thank you and please disconnect. Your lines now you complete top gun.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.