Q3 2022 Air Lease Corp Earnings Call
$61 million in total revenue during the quarter up 7% relative to the same period last year, while our diluted EPS was <unk> 90 per share.
Performance during the third quarter benefited primarily from the growth of our fleet and lower restructuring impact partially offset by the loss of revenues and earnings from the 21 Russian aircrafts, we wrote off in Q1.
We purchased 14, new aircraft in the quarter, adding approximately $843 million of flight equipment and sold one aircrafts and I'll update you further on our aircraft sales shortly.
We ended the third quarter with a lease utilization rate of 99, 7%.
The operating environment for ALC remains strong with commercial aircraft demand robust benefiting from the continued momentum of air travel demand recovery, which has more than offset the impact of macro economic and geopolitical headwinds to date.
225, consisting of 77 Dash 10, and a 350 dash 900 aircraft.
We expect both Airbus and Boeing to increase production rates meaningfully on 787, and a three fifty's, although we do not see this improving the delivery delays situation through 2023.
Narrow body demand. Meanwhile, remains very high with limited remaining deliberate physicians from our order book through 2025 and beyond.
At the Lam's Narrowbody <unk> hundred 20 family and Boeing 737 aircraft are more or less sold out through 2027.
So airlines are only finding opportunities from our order book and those of other other order book lists sores and those available aircraft are increasingly dwindling in number as placements accelerated which was further benefiting the lease rate environment and.
If you've been following our press releases, you've seen accelerating placements of our remaining eight to 20 positions.
So as of today, 99% of our deliveries through 2000 twenty-three replaced with about 70% of our deliveries in 2000, 2024 place and 60% of our deliveries place in 2025, we.
We see a rapid placement pace ahead for our remaining single and went out positions for delivery through 202005.
While competition remains robust, we see diminishing aircraft supply from the aircraft leasing sector combined with interest rate an escalation rate increases continuing to drive lease factors lease rate factors up.
I would just remind all of you that it takes time for increase lease right margins to make their way on financial performance.
Deliveries this quarter were lower than expected as a product of ongoing delivery delays from both Boeing and Airbus, which we've highlighted to you many times this year.
Delays of several months in our Airbus narrow bodies and on the 737 matches our typical.
We have been experiencing.
We continue to expect supply chain challenges to extend for the next couple of years.
Airbus Widebody aircraft had been delivering more timely and is highlighted last quarter Boeing has resumed deliveries of 787.
We're very happy to report that we indeed took delivery of a 787 in early October or first since April of 2021.
I do also want to remind you that we still have a number of already built 77 awaiting delivery and that those will still take some time to make it to us as Boeing works through the airworthiness certification and maintenance checks for each and every one of the more than 100 aircraft 787 that they have an inventory yet to be delivered.
We now expect to receive approximately $4 billion total of aircraft deliveries for this year roughly the mid point the midpoint of our previously guided range.
This outlook reflects roughly $1.2 billion of aircraft investments for the fourth quarter subject of course to further OEM delays.
Update your next quarter on our 2023 aircraft investment expectations.
On the sales front, although we only close one aircraft sailing Q3, we're pleased by the pipeline of aircraft sales we've built to date this year.
As a reminder, ALC normally concentrates aircraft sales in the fourth quarter. So we may enjoy the lease revenue and earnings on those aircraft for the majority of the year also our aircraft sales programs and meaningfully lower than it would have been for the past several years as a product of the 737 next grounding delaying or invest.
Activity.
Dimmick impact and 77 delivery delays impacting our fleet growth plans.
So we're looking forward to more regular aircraft sales activity and we are now expected to close approximately $150 million a total aircraft sales in 2022 with another $700 million of sales in the pipeline that we expect to close on during the first half of 2023.
The timing of sales activity from agreement also incompletion has been taking a bit longer than expected, which is why we pushed out expectations. We had previous would that we had previously for 2022 into next year.
I would also add that we are encouraged by the strong demand and healthy bids were receiving for our aircraft.
Lastly, we do have one update on our detained aircraft in Russia we.
We had one Boeing 737 dash eight Max returned to us from Russia in early October the.
The aircraft was in storage since the Max grounding in 2019, and we expect to see it come back onto our books at fair value with a corresponding benefit to the income statement here and in the fourth quarter.
I wanted to be clear that this was a highly idiosyncratic event that resulted in the return of this aircraft and we do not anticipate the return of any of our other aircraft obtained in Russia, and that's all we will be able to comment comment on that subject. So at this point, let me turn this now call over to Steve Harvey from additional color in common.
Terry Steve Thanks, very much John <unk>.
First of all I'd like to point out that are owned fleet of jet aircraft Cross the 400 Mark in September .
Ending the third quarter at a total of 405 commercial aircraft.
I wanted to take this opportunity to congratulate the ALC team on this achievement.
And we look forward to receiving the remaining 412 new aircraft.
That we have an order with Airbus and Boeing.
Through the year 2028.
As John mentioned, we are very encouraged to see passenger traffic volumes continue to expand globally.
The latest Ayana traffic numbers released in October remains strong.
With total traffic up more than 60% year over year.
Significant strength remains focused on the international markets.
Which are up approximately 116% year over year as volumes continue to recover.
From the impact of the pandemic.
Though domestic traffic also rose meaningfully as well.
Regionally was Asia Pacific that witness the most dramatic recovery figures.
International revenue passenger volumes rose 449%.
Year over year.
Domestic traffic in Asia, Meanwhile, improved significantly in Japan.
Which was up 112% over the prior year.
India.
Was up 55%.
Even China was up 45% versus the prior year <unk>.
Following its many challenges with zero Covid policy.
Domestic worldwide volumes are within approximately 10% to 15%.
Of 2019 levels in most markets globally.
But no or the two point out that it's Brazil, which was the first large domestic market track by adder to actually exceed 2019 levels.
In fact, the South American markets, particularly robust in general and we expect further strength in this market ahead.
Global International traffic.
Still has room for improvement and it's still down around 30%.
Versus 2019 levels.
Although we expect continued improvement ahead.
International routes reopen and further expand in the coming months.
In view of these traffic trends is particularly encouraging given microeconomic and.
And geopolitical headwinds.
That we have weighed in in the course of 2022.
This strength in the face of adversity continues to speak volumes to the momentum behind Postman demick travel demand.
And the fact that air travel has become an irreplaceable not to mention highly durable an important component of the human interaction.
I would also like to highlight that.
That are pretax profit margin for the first nine months of this year increased to 29.2% in 2022 from 26.1% in the first nine months of 2021 again, showing an overall market recovery and alc's participation in this improve.
Being environment.
R. ALC fleet order book remain in high demand and.
And we have been very active in placing our backlog physicians with both new and existing customers.
We recently announced a sizable placement of 1980 320 family aircraft with condo of Germany.
Consisting of 17, <unk> hundred 21, Nyos and two <unk> back in late August .
Displacement will further modernized condor sweet.
Painting, and it's competitive stance and effectiveness operating in the European market.
We also announced the placement of four 821, XLR long range aircraft.
With air Transat of Canada, with three extra large serving delivering at 25 26.
And one additional aircraft an option.
These aircraft will enhance the airlines product offering boost efficiency.
In addition, offering significant opportunities and growing their transatlantic network.
In September we announced the placement of two new <unk> hundred 21, Neil LR aircraft with high Sky.
Which will utilize these aircraft in the eastern European markets beginning in early 2023.
He plays six Boeing 737 Dash eight aircraft with LLC Polish Airlines.
Doubling the number of aircraft, we have with the airlines.
And significantly Modernising, expanding lost sleep and network.
We also placed.
As a milestone transaction five new 821 XLR aircraft.
With luck Tom Airlines in Chile.
These xlr's will deliver it to the airlines beginning in 2025.
And we will see these aircraft is offering laptop, which is south America's largest airline group.
Significant efficiency and operational benefits, particularly in its longer haul international operations to North America.
Just two days ago, we announced the placement of three Boeing 707 dash shapes with arrows Italia, the startup Italian low cost airline based in northern Italy.
This is just a sampling of our placement activity as.
As we do not announce every individual aircraft lease placement.
But this sample reflects the fact that we've been keeping very busy placing our new aircraft and.
And demand.
Is clearly quite high in the current environment.
These in turn will help increase lease rates in the coming quarters.
We delivered 14, new aircraft airline customers during the third quarter.
Which was somewhat lighter than we originally expected given production delays at both Boeing and Airbus.
A number of the third quarter aircraft deliveries were pushed into the fourth quarter of this year.
Deliveries in the fourth quarter could be affected in some may slip into early 2023.
Deliveries in Q3 included the first two 820 dash 300 deliveries from.
From our forward order book to IPA, the flag carrier airline of Italy.
We also delivered III <unk> hundred 20 family aircraft, including <unk> in Mexico, the second largest airline there.
And want to pronounce sharp and Uzbekistan and.
In addition to two Boeing 737 dash eight to flair in Norway.
And 173, seven dash eight each to Scott in Kazakhstan and.
<unk> in Turkey.
We also delivered another new 737 dash eight aerolineas argentinas, the flag carrier and largest still in Argentina.
In addition to one brand new 787 dash nine.
On long term lease to Alaska Airlines.
On the wide body side Starlets in Taiwan received two of our 830 Dash 900, this past quarter.
While some class headquartered in Copenhagen, Denmark received their first <unk> hundred 30 Dash 900.
Lastly, I'm pleased to announce that our board of directors is authorized an increase in our quarterly common stock dividend.
2000 per quarter per share rep.
Representing the 10th increase.
And the 40th consecutive dividend payments since the founding of AFC.
And an 8% increase relish.
Relative to our dividend payout and the prior periods.
This new higher dividend will be payable to our shareholders beginning on January 10th 2023.
And now I'd like to turn the call over to our CFO Greg Willis.
To provide more detail and color and remarks on our financial performance.
Thank you very much Steve and good afternoon, everyone.
In the third quarter of 2022 ALC generated.
Revenues of $561 million up 7% as compared to the prior year. This.
This was comprised of approximately $541 million rental revenues and $20 million of aircraft sales trading and other activities.
The increase in rental revenues was primarily driven by the growth of our fleet lower COVID-19 related at least restructuring losses and higher aircraft sales. However, this was partially offset by the loss of rental revenue from a Russian fleet, resulting from the termination of our leasing activities in Russia earlier this year.
Moving on to operating expenses and the interest expense line rose, 7% year over year, driven by an increase in our averaged it balances.
It is noteworthy to point out that while prevailing market interest rates have rose significantly over the past year or composite funding rate increased only fractionally up just three basis points at 2.85% as compared to $2, 2% last year due to the fixed rate night nature of our funding strategy.
Depreciation continues to track the growth of our fleet, while SG&A rose as business activities have increased following the end of the pandemic along with an uptick in some of our operating expenses.
Including the increasing our insurance premiums by approximately $4 million as we discussed during our last earnings call. In addition to aircraft transaction transition related expenses.
We ended the third quarter with 87% of our debt at a fixed rate.
Which along with our strong investment grade credit ratings position as well for movement and interest rates over the intermediate term and also provides us broad and deep access to capital.
As discussed in the past our interest rate escalators on our four aircraft deliveries help protect us from rising interest rates as well.
Altogether. This approach helps insulate our profit margins from interest rate risk.
We remain dedicated to maintaining an investment grade balance sheet and utilizing unsecured debt as our primary form of financing maintaining a high ratio of fixed rate funding and targeting a debt to equity ratio of two and a half times we.
We ended the third quarter with a debt to equity ratio of 2.7 times on a gap basis, which net cash on our balance sheet is approximately 2.7 times.
Our leverage remained somewhat above our target following.
R. Russia fleet right off earlier this year.
We expect that trend back towards our long term target as our aircraft sales volumes increase and we continue to experience manufacturer delays.
A quarter and we had strong about had a strong balance sheet support by our significant liquidity position of $6.7 billion.
And our large unencumbered acid base of 2000 $7 billion.
We believe that ALC remains very well positioned for the future with significant growth embedded in our business VR 2000 $6 billion for an order book.
Look forward to returning to a more regular sales activity head, which we believe will further boost our financial performance and illustrate the embedded value in both our current fleet and our order book with that I'll turn the call back over to Jason further question and answer section of the call.
Thank you Greg. This concludes management's commentary remarks for the Q&A session. We asked each participant to limit their time to one question and one follow up that.
We are time constraint. This afternoon, so we'll be living inning, our call promptly at 530 PM and we'll do our best to answer the questions now and follow up with anyone we can't get too.
Operator can you. Please open the line for the Q&A session.
<unk> I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad.
First question comes from Henry <unk>.
Hi, Thank you for taking my question Uhm.
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I guess, what it was.
92%.
I just wanted to get him what color around that why.
And at some point.
<unk> <unk> <unk> <unk>.
Natural.
Hi, Thank me complaining and you've never had to put her head John but at some point, we didn't make sense to put on my <unk>.
To you know.
Mmk.
Elevated drag we typically target about 30% utilization on a revolving credit facility that $7 billion in size and as an which is floating rate. So as we continue to draw down on that revolver.
Fixed rate ratio will come down a little bit are long term target for our fixed rate funding is actually 80%.
Right now were significantly above that target.
We don't anticipate doing any any short term hedging of those of those draws on that line I think as long as we're meaningfully above our fixed rate target.
Okay got it. Thank you and then and then I guess just on.
Is that something like that.
<unk> schedule, so we can get get.
And you can you can <unk>.
Alright.
Get that how it was <unk> applied to your account activity.
It's typically a balance right I mean in the past it definitely has been driven by the significant delays that we've experienced from the lcm's, but as we as we continue to move forward.
And given that are elevated debt to equity position leave restarted our sales activity program in tents for it to be more regular going forward.
Mmk alright, thank you.
Your next <unk> next question comes from Jamie Baker J P. Morgan.
Hey, good afternoon, everybody so I.
I guess, John Mark and I were wondering you know pointed Erekat made this morning was that the engine manufacturers are being asked to prioritize spare availability, which is apparently diverting resources away from new aircraft deliveries.
Is is that something you are also witnessing and I assume it's so that's also going to have an impact on the delivery cadence going forward is it a real thing for you guys in other words.
Amy is Shaun yes, yes. It is the short answer is yes, yes, yes.
[laughter] okay.
I'll take it.
Another data point in this kind of builds on some jones prepared remarks, but still.
Stored 787.
Availability is actually below that of stored 320 neo is in the context here being a potential wide body shortage you know I think the I think both the equity in the credit markets are.
Finally, cognizant of the Narrowbody shortage, but how strong.
Should we be.
How <unk>, how strong would you describe the pending wide body shortage.
I think it's a very gradual process.
It it's not like an earthquake, but what we're seeing is two things one of.
The recovery and international traffic is now beginning to gain momentum.
Uh-huh as more and more countries liberalized or <unk>.
Travel restrictions.
And we see Asia other than China International growing very very nicely.
We've seen results from Korea.
Taiwan, Japan, Southeast Asia, Singapore things or.
Crawling back to normalcy, and we expect by the middle of next year.
Those regions will be pretty well caught up on their international long haul business.
But remember those airlines still have direct orders a successful carriers.
But we are seeing more demand for replacing some of the oldest wide body aircraft.
That are hitting 2025 years of age Jenny I would also add as I.
Enter that in my prepared remarks, there are many current campaigns, which are unfolding.
I'll just I'll just give you several which has been publicly written about United Airlines upcoming campaign for 100 wide body aircraft Air India reportedly 40 to 60 aircraft Wi bodies a component.
Saudi Arabia up to 50.
To another aircraft. These are very very significant numbers and if that's true and usually there's something when these kind of things are published there is they're they're not published at a center.
Then that really adds further momentum, which is also why I stated that we expect both Boeing and Airbus to seek production rate increases, particularly in the 77 and 80 350, yeah, Jamie the pending campaigns that Airbus and Boeing have.
If you accumulate them in terms of quantity of new aircraft, it's almost three years of production.
787.
Triple <unk>, <unk>, <unk>, <unk> and <unk> 50, so.
So even if you take.
Only a 50, 60% success ratio.
We are looking at almost two years of production.
Entirely going to these.
Bulk orders that John prescribed.
That's a good perspective on that thank you very much gentlemen, mark and I appreciate it take care.
Thanks.
Your next question comes from the line of <unk>.
Great. Thanks, Greg I guess.
I'm, hoping you could kind of talk a little bit about the the quarterly not year over year quarterly progression and rental revenues was down slightly second to the third quarter.
I did notice in the queue that you said that there was like 6 million does.
Cash basis interest that wasn't received in Q3.
I guess there had been some.
Interest received in the second quarter could you just talk about.
Talk about that and you know and how we should think about the staging of the deliveries in Q3, and Q4 and what that means for the fourth quarter rental revenues.
Yeah sure Russia.
There was a little bit of noise in cash basis accounting I mean last quarter. There was a pick up this quarter, we had a little bit of a loss.
Typically the has to do with the timing of cash payments, especially with some of our more troubled essays, but I'd like to reiterate that.
Quantum of of this is really quite small on roughly a $500 million revenue quarter, but as you noted it did cause a little little blip in a yield if you strip those items out yield was relatively five Q3 Q too. So I think we're <unk> and I think we're starting to head in the right direction, which is good.
We are looking forward to get into position, where we're not talking about COVID-19 related matters, but.
You're right. There was some there was a blip in the road on some collection, but our team is working hard on it and I think we're going to catch up.
In terms of deliveries you know I think most of it has to be seen the timing of how the 1 billion Capex will roll roll through the.
Through the quarter, there's a lot of questions about the <unk> ability to deliver and as we already chatted about what the engines.
Manufacturers, having significant issues as well but.
The Big question is what's what's gonna happen in December , but I would expect most of the stuff to be back and waited.
I just wanted to add that in October we had quite a surge in cash collections of some of the airlines.
That failed to make their payments in the last week of September so.
Since we have the cut off at September 30th almost like an artificial thing because a few days later some of these guys stayed in $345 million catch ups. So.
It's a snapshot, but it is not indicative of a variance in the.
Overall cash collection activity.
<unk>.
Your next question comes from the line of marijuana.
Think of America.
Good afternoon.
Cause my graduating the Y body Mmm market. So would you mind me.
And now given that makes sense nine from <unk> production.
Are you able to take that into account.
I T.
That sounds like it'd be.
Challenging.
Keeping our body.
Yeah. So I mean, that's kind of the definition of supply constrained so as.
As I mentioned, we have less and less overall supply available we placed a good number of our wide bodies.
And that supply constraint is having an upward impact on our placement so absolutely.
And do you want to compare.
Today too.
Mmm strength given me.
<unk> today.
Mmm, how do they compare.
Well, it's kind of a variation on.
On the map by aircraft types, obviously, the single oils are much stronger, but the twin aisles are coming up a much better and I would say are getting very close to parity if not in a couple of cases in excess of parity to where they were in 2019, but keep in mind that a lot of our Wi Fi and even single out deliveries and.
2022.
Contracts that we actually entered into prior to the pandemic.
Okay.
Thank you.
Thank you. Thank you.
Again, ladies and gentlemen, Anther reminder, in order to ask a question. Please press star one.
There will be no further questions at this time Mister Arnold that turn the call back number to you.
Thanks, Paul and thank you everyone for your time participating in our third quarter call today to look forward to speaking with you in January 4th quarter Reasonableness operator, Thank you and please disconnect alive.
Thank you that does conclude today's conference call you may not you may know.
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