Q4 2023 AerCap Holdings NV Earnings Call
Please standby were about to begin.
Good day and welcome to the Aercap Holdings N V fourth quarter 'twenty to 'twenty three with financial results.
<unk> conference is being recorded and a transcript will be available following the call on the company's website at this time I'd like to turn the conference over to Joseph Mcginley head of Investor Relations. Please go ahead Sir.
Thank you operator, and Hello, everyone welcome to our fourth quarter 2023 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 in such statements.
<unk> undertakes no obligation other than that imposed by law to publicly update or revise any forward looking statements to reflect future events information or circumstances that arise after this call.
Further information concerning issues that could materially affect performance can be found in aircrafts earnings release dated February 23rd 2020 for a copy of the earnings release and conference call presentation are available on our website at Aercap Dot com.
This call is open to the public and is being webcast simultaneously at Aercap com and will be archived for replay.
We will shortly run through our earnings presentation and with a lot of time at the end for Q&A I'm sure.
A reminder, I would ask that analysts limit themselves to one question and one follow up I will now turn the call over to Angus Kelly.
Thank you for joining us for our fourth quarter 2023 earnings call.
I am pleased to report another year of record earnings for Aercap.
We generated GAAP net income of $3 $1 billion.
And earnings per share.
$13 78.
Adjusted net income came in at $2 4 billion and adjusted EPS of $10.73.
And we generated a record operating cash flow a $5.3 billion.
We expect to see a continuation.
The trends in 2024 that we observed last year.
In terms of the supportive supply demand dynamic.
<unk> accretive capital deployment.
<unk> for our assets.
Leading to an EPS range of $7 50.
To $8 50, however.
This does not include the impact of any gain on sale, which historically has been significant.
Given the continued strength of the business and consistent cash generation.
I am also pleased to announce another 500 million dollar share repurchase program.
Taking total authorizations in the last 12 months to over $3 billion.
We continue to see tremendous value in the stock today.
And this latest authorization underscores our confidence in the outlook for 2024 and beyond.
As we have consistently said for some time.
<unk> continues to outstrip supply for aircrafts for engines and for helicopters.
We expect this dynamic to persist for many years.
The largest global leasing conference was just hosted in Dublin and attracted over 5000 people to the event.
It was clear from the many conversations we had with airlines aircraft traders and finance years.
That demand for aviation assets continues to grow.
Unsurprisingly the main concern for airlines at the moment is around sourcing lift and the reliability of their fleet.
So in tandem with our engine leasing business.
We're in a unique position to offer a multi faceted solutions.
Putting us in a very envious position.
On the trading side we.
We continue to see a healthy bid for aircraft from investors and other lessors.
And expect to see robust demand for aviation assets continuing throughout the year.
The topic that dominates most conversations today is the global supply demand imbalance.
And I'd like to spend some time talking about how we have reached this point.
As we see it.
There have been three substantial drivers of today's aircraft shortage.
The first dates back to the grounding of the 737 Max in March 2019.
Which resulted in significant cuts to boeing's narrow body production rates.
Followed by Covid in 2020.
Where production rates across the board, we're taught by Boeing and Airbus.
As a result, the 723 aircraft delivered in 2020.
Represented only 45% of 2000 Eighteen's outposts.
Moving forward to 2023.
It is clear from the chart on the left.
That production rates are still yet to fully recover.
And remain approximately 20% below 2018 levels.
So whilst there was plenty of discussion about.
When the Oems will return to their pre COVID-19 output rates.
Many seem to overlook the 2700, new technology aircraft that simply have not been built in the last five years.
This is one of the main reasons why I expect this favorable supply demand dynamic to persist for many years to come.
Even if Boeing and Airbus do manage to resolve the many issues facing their supply chains and deliver on their promises for 25 or 26 that is really only the beginning.
The second factor revolves around new engine reliability.
During their maturation phase.
As the first batch of new technology engines come off the production line.
They must undergo rigorous testing and checks following their initial entry into service.
If these checks do not result in any issues then longer and longer lead times are allowed between shop visits.
Increasing reliability and time on wing.
This is a natural part of any new engine development.
In an ordinary environment.
This would be expected to cause some minor delays to the earliest equipment.
However.
As a result of the already stressed MRO network.
The shortage of parts and labor.
And further compounded by the recent Pratt <unk> Whitney.
<unk> metal issue.
This is stretching engine turnaround times to over one year in some cases.
As you can see from the chart on the right hand side.
This is leading to outsized storage rates for younger aircraft.
Amazingly there are currently more zero to five year old aircraft stored than any other age group under 20 years.
Outside the Max grounding.
This had not happened before in the last 25 years.
Finally, the third major factor impacting supply today.
Came as a result of the reduction in shop visit activity in 'twenty, 'twenty and 2021.
This is for both aircraft and engines.
During that period.
Airlines did all they could to reduce capital expenditure on their fleet to preserve cash.
Naturally.
This had a significant impact on the MRO network.
Which reacted by causing capacity and headcount to stay in business.
That meant when demand for engine and aircraft shop visits returned in late 2021 and into 2022.
There was a significant backlog of shop visits to be completed fast in a smaller MRO network.
This has led to consistently longer turnaround times and time off wing and the ground for many engines and aircraft.
These issues persist today, and we'll continue to do so into the future.
Together these three factors create sustained demand for our new slots.
Our used aircraft and a wide array of engines.
As the leading provider of all these assets in the markets.
Aercap is in a strong position to capitalize on this trend.
Increasing returns across the portfolio and driving growth in earnings.
The combination of these favorable conditions.
He is most evident today on our gain on sale line.
She is the most immediate way to take advantage of this heightened demand.
We are of course also increasing lease rates.
Which support the continued strength in our operating cash flows and margins.
I'll touch on those later.
Before that though.
Let me take you through the math of how we recycle capital to create value for you our shareholders.
In 2023.
Aercap sold 74 aircraft 65 engines and 28th helicopters.
Assets were held in our books for $2.27 billion.
However, we sold them for $2.76 billion generating a gain of $490 million.
This equates to a 22% gain on the carrying value of the assets.
But importantly.
And 80% gain.
The equity component.
Those assets.
So.
After repaying.
The 1.66 billion of gas attaching to those assets to keep our leverage neutral.
We have $1 1 billion to deploy into share repurchases.
As the stock was trading.
At an average discount.
0.8 times, our book value.
We were able to buyback 1.38 billion of stock.
So.
From a starting position.
Of 615 million of equity we had against those assets.
We were able to generate $419 million from the gain on the sale of the assets.
And a further $276 million.
Through the discounted share repurchases.
So in total we ended up at 1.38 billion, adding those three together the $6 15 to $4 90 and $2 76.
And this results.
In a 2.25 times book equity multiple.
Gains on sale are not limited to aircraft engines and helicopters are also in demand selling for gains in the period.
Our engine leasing businesses in particular are benefiting from the widespread shortages of engines increased turnaround times and time off wing.
Airlines scrambled for capacity to take advantage of the strong passenger yields available.
Another pleasing aspect.
On the trading side. This year was that the improved gain on sale performance was reflected across our entire fleet.
And not simply a few outliers are solely from the <unk> transaction.
It was notable that.
That the gain on sale margin from the sale of legacy Aercap assets was actually higher in the year than the former <unk> assets.
This should not be a surprise to you.
We have demonstrated for more than 10 years in a row.
The market value of our assets is much higher.
And our book values would imply.
As we generated over 1.9 billion of gains on sale in that period.
To do this consistently.
Across such a broad variety of assets and market dynamics.
Flex the inherent value created by the unique aercap platform and.
And our consistent portfolio management strategy.
So when we say that not all book values of leasing companies are created equal. This is what we mean and this is what we demonstrate.
While gains on sale represent the strength of our portfolio.
The trend we see continuing is our consistently strong cash flows which form the bedrock of our earnings and capital deployment.
In 2023.
We generated operating cash flows of $5 $3 billion, our highest ever.
Please bear in mind.
Our operating cash flow does not include the $1 3 billion of proceeds from Russian insurance claims.
Or then nearly half a billion dollars of gain on sale.
These strong cash flows.
Allowed us to buyback over two $6 billion of stock or 18% of the company between March and December 2023.
While at the same time, we de Levered, Eric <unk> balance sheet in doing so.
This is a key part of our strategy.
As you know we are incredibly focused on how to maximize the value of aercap for our shareholders and to do so in a prudent and sustainable way.
Since 2015, we have returned $7 billion to you our shareholders.
And with today's announcement, it will exceed $7 5 billion.
We have returned this amount of capital.
Despite the impact of Covid in 2020.
The conflict in Ukraine in 2022.
And the completion of a tertiary 1 billion dollar M&A deal in between.
Demonstrating.
The tremendous cash generating power and resilience of Aercap.
We have not taken unnecessary risk to do this.
In fact, the reality is that by selling or less desirable assets and recycling that capital into a stronger company as a discount.
We are actually improving aercap risk profile assets and returns at the same time.
In 2023 alone.
Aercap would've been in the 99 percentile.
Of the S&P 500 companies for share repurchases.
And yes, we de Levered, our balance sheet, while doing so.
This is leading to consistent returns for Aercap shareholders.
And an upward trajectory in our credit rating.
We're on positive outlook with both S&P and Moody's.
So to wrap up.
Eric <unk> book value per share ended the year above $83 growing by 25% last year.
And as Pete will reference shortly.
We remain confident in our ability to grow it even further in the year ahead.
Eric <unk> platform is clearly the best in the business, we offer more services and products to our customers around the world.
With an unrivaled level of execution.
We will continue to do what's right for you our shareholders and look forward to demonstrating the results of this strategy in the year ahead.
With that I'll now hand, the call over to piece to review the financials and the outlook for 2024. Thank you.
Thanks, Gus good morning, everyone.
Aercap had a record performance for the fourth quarter, our GAAP net income was $1 $1 billion or $5 37 per share.
Piece: This included recoveries of $614 million related to our Russian aircraft, which is included in net recoveries related to the Ukraine conflict.
The impact of purchase accounting adjustments was $83 million for the quarter. This included lease premium amortization at $40 million, which reduced our basic lease rents maintenance rates amortization of $25 million, which reduced maintenance revenue and maintenance rates amortization of $18 million, which increase leasing expenses.
The tax effect of the insurance settlement proceeds and these purchase accounting items was $66 million. So taking all of that into account our adjusted net income for the fourth quarter with $641 million or $3 11 per share.
Talk briefly about the main drivers that affected our results for the fourth quarter base.
Basic lease rents were $1.576 billion that reflects continued strong cash collections and we also continued to benefit from power by the hour rents from our lessees that are on PVH arrangements in their leases.
As I mentioned, our basic lease rents reflected $40 million of lease premium amortization, which reduces our basic lease rents lease premium assets are amortized over the remaining term of the lease as a reduction to basic lease rents.
Maintenance revenues for the fourth quarter were $142 million and that reflects $25 million the maintenance rights assets that were amortized to maintenance revenue during the quarter. So in other words maintenance revenue would've been $25 million higher or $167 million without this amortization.
Piece: Net gain on sale of assets was $94 million for the quarter. We sold 35 of our owned assets during the fourth quarter for total sales revenue of $625 million.
That resulted in a gain on sale margin of 18% for the fourth quarter.
And at the end of the year, we had $297 million worth of assets held for sale.
For the full year of 2023, we sold nearly $2 $8 billion worth of assets and recorded a total gain on sale of $490 million, which is an average unlevered gain on sale margin of 22%.
As I mentioned earlier net recoveries related to Ukraine conflict, where $614 million, which primarily consisted of recoveries of insurance claims on a Russian aircraft on lease to for Russian Airlines.
Interest expense was $496 million for the quarter, which included $19 million of mark to market losses on interest rate derivatives.
Our leasing expenses were $135 million for the quarter, including $18 million of maintenance rights amortization expenses.
Income tax expense for the fourth quarter was $39 million, we recognized tax benefits of $85 million that include valuation allowance releases and other items and has it.
Insurance settlements as these go through investing cash flow.
We continue to maintain a strong liquidity position as of December 31, our total sources of liquidity were around $19 billion, which resulted in the next 12 months sources to uses coverage ratio of 1.4 times, that's well above our target of one two times coverage and represents excess cash cover.
<unk> of around $6 billion.
Our leverage ratio at the end of the quarter was 2.47 times, that's lower than last quarter and also lower than at the beginning of 2023. So even after taking delivery of 80 aircrafts seventy-six engines, and 17 helicopters $6 $2 billion of cash capex for the year and after $2.6 billion.
Share repurchases during the year, we were still able to de lever and that really demonstrates the significant amount of cash flow and capital that aercap generated over the past year.
Our total operating cash flow was around $1 $4 billion for the fourth quarter driven by continued strong cash collections and as I mentioned earlier was $5 $3 billion for the full year.
Our secured debt to total assets ratio was around 14% at the end of December which is basically in line with prior quarters.
Our average cost of debt was three 7% for the fourth quarter. Our book value per share was $83.81 as of December 31, which represents an increase of 25% over our book value per share at the beginning of 2023.
During the fourth quarter, we repurchased 10 3 million shares at an average price of $62 86.
For a total of $649 million and for the full year, we repurchased 44 million shares at an average price of $59 nine for a total of $2 $6 billion. So.
So clearly 2023 was an outstanding year for Aercap with adjusted EPS of $10 73.
As we look out into 'twenty 'twenty four we remain confident about the future for.
For 'twenty 'twenty four we're projecting adjusted EPS of $7 50 to $8.50 before any gains on sale I think it's useful to walk from 2023 'twenty four to call out some of the major items.
In 2023, we had gains on sale of $490 million or $1 88 per share after tax.
We also had over $200 million of power by the hour rents that we received on leases that had at PVH period at the front end of the lease as.
As I've mentioned on previous earnings calls most of those leases have now converted to regular fixed rate rents at all.
Almost all cases, the fixed rate rents are higher than the PVH rents. We are receiving so we expect cash receipts from these leases to increase by over $40 million. This year.
However from an accounting standpoint during the PVH period, we recognize both the straight line fixed rent, which is the average of the fixed run across the entire term of the lease and the PVH Ren.
Piece: Once we move out of the PVH period, we only recognize the straight line fixed rent. So as a result, we will record lower revenues from these leases in 2024, even though we're receiving more cash and the effect of those revenues is around 70 cents a share after tax.
As I mentioned.
We also recognized a number of significant tax benefits in 2023, which led to a low effective tax rate of only eight 9%.
In 'twenty 'twenty four we expect to have a higher effective tax rate, which I'll talk about in a moment. So that's a headwind of around 57 cents a share in 2024 compared to 2023.
Those are the major items to call out the other column includes everything else, including higher lease revenues higher interest costs the impact of share repurchases and other items. We expect the net effect of all of these will be about 42 cents positive in 2020 for that.
That takes us to an EPS range of 750 to 850 for 2024 again, not including any gains on sale during the year.
On the next slide you can see a breakdown of our projected income statement for 'twenty 'twenty four showing the major line items for the full year 'twenty 'twenty four we expect to have lease revenue around $6 $3 billion maintenance revenues around $700 million and other income of around $300 million for total revenue.
Around seven $2 billion.
We've assumed that we will have cash capex of around $7.2 billion for the year and asset sales of $2 billion. As you know these figures can vary significantly capex is largely dependent on OEM deliveries and sales volume depends on the demand for assets and the time it takes to close those cells.
We're projecting depreciation and amortization around $2 $7 billion and interest expense of around $2 $1 billion.
We expect leasing expenses SG&A and other expenses to total around $1 2 billion for the year.
On tax we've assumed a tax rate of 16, 5%. So I'll talk about that for a moment.
Historically, we've generally assumed a tax rate of around 14% the corporate tax rate in Ireland, where we own the vast majority of our assets is 12, 5%, but we're subject taxes at higher rates on assets in other countries, which is why we typically projected an overall tax rate a little above the Irish corporate rate.
At the beginning of this year, we became subject to global minimum tax under pillar two of the Oecd's minimum tax directives, which resulted in a top up tax jurisdictions, such as Ireland, where the company's paying an effective tax rate of less than 15%.
We expect pillar two to increase our tax rate by around two 5%. So that's why we have assumed a 16, 5% effective tax rate for 2024.
In 2024, we expect to recognize earnings of around $200 million from our equity investments, which is primarily our engine joint leasing joint venture Ses, but also include some other smaller equity investments.
And all together that gives us projected GAAP net income of around $1 $2 billion after purchase accounting adjustments around $400 million. After tax we expect to have adjusted net income of around $1.6 billion for the year and that gives us an adjusted EPS range of $7 50 to 850 for the year again, not including any gains on sale.
L.
Piece: So overall, we're coming off a record year for Aercap in terms of revenues earnings EPS operating cash flow and return of capital to shareholders as.
As we look forward into 2024, we continue to see a strong supply demand imbalance that shows no signs of ending anytime soon.
We believe we can continue to produce strong results and outperform and we will continue to vigorously pursue insurance settlements with the Russian insurers as well as our own insurance claims.
You can see this confidence in the future of our business demonstrated by the new $500 million share repurchase authorization that we announced today and with that operator, we can open up the call for Q&A.
Speaker Change: Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure your mute function is turned off to <unk>.
Press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will go first to Ross Harvey with David.
Hi, Catherine costs paid Joseph Congrats on a very strong result.
Two questions from me firstly.
It appears that your that spread less pre CA and may have tightened in Q4 can you address that and secondly, I guess the 'twenty 'twenty four guide Michael quite conservative relative to how you finished from 2023. So can you just talk us through that again.
Sure. Thanks Ross.
On the net spread net spread decreased in the fourth quarter, because we brought forward some interest cost through the early refinancing of some bond maturities. It's also worth noting that we're earning higher interest income on our cash balances at the moment, but that comes through other income not through the net spread.
Similarly, our net spread less depreciation also went down because we accelerated depreciation on some older aircraft.
During the quarter, we eliminated the return condition the leases so all that leads to a higher depreciation expense. It also leads to higher maintenance revenue, which is also not part of net spread.
And just by the way as we look out to the year ahead, I think that after the effect of PVH, which is around 30 basis points. We would expect the net spreads to be stable in 2024.
And it's worth keeping in mind, you said net spread that we don't manage the business to maximize net spread we do it to maximize EPS. So for example, when we sell older assets that brings down the net spread but we're reinvesting those proceeds as Gus mentioned at higher returns to maximize EPS.
As we look at the guidance for next year. So look last year. Our initial guidance for 2023 was EPS of seven to 750, and we ended up producing EPS of 10 78. This year, we're guiding to $7 50 to 850. So you can make an estimate as to where we'll end up.
The same management team running the company and we did the projections on the same basis that we did last year and of course, we'd hope to beat those numbers the guidance excludes gains on sale. It includes estimates for default costs and higher interest rates and there is good reason to think that we could outperform on all of those items because fundamentally it's not like.
Everything has changed when we entered in new year, we're still seeing the same industry supply demand issues that we saw last year were still seeing the same strong demand for assets.
And we're still pursuing the same strategy to maximize the value of our assets and produce value for our shareholders.
That's great helpful. Thanks.
Sure.
We'll go next to Henry <unk> with Deutsche Bank.
Hi, Thanks for taking my question.
First is are you including <unk>.
Guidance are you, including any buyback with I'm, sorry, and then my second question.
Last quarter, you talked about having strong.
Thanks <unk>.
Speaker Change: Especially especially as the wide bodies as we liquidate the talk about what's the ROI for.
For this quarter and how that narrow, perhaps what the differences between the narrow body and wide body.
Thank you very much.
Sure. Thanks, Larry So look I'll take the share repurchase question. So so.
Speaker Change: So far this year, we've bought back around $170 million worth of stock and we have a little over $100 million left in our existing authorization and you saw we've announced a new authorization for 500 million. So we'd expect to deploy all of that this year.
Beyond that we have assumed some additional share repurchases in the projections and those are based on the earnings the capex and sales assumptions that we've laid out here, but if we do better or an earnings that will have more excess capital that we can deploy if capex gets delayed we will have more excess capital and likewise, if we can sell more assets.
<unk> or produced gains on those sales that will also lead to more excess capital and and I guess of course, that's all before any mention of additional insurance proceeds, which we would hope to recover but can't count on so it's really a function of all of those things how much we would ultimately do.
Do you Wanna anti sharp deadline extensions look as Pete said, the market's extremely strong.
There is hardly any aircraft that we have our customers that they don't want to extend they have to pay the going rate of course, but I think particularly on wide bodies nearly everything extends in the last quarter and on the narrows its very strong as well.
Got it thank you very much.
Oh good afternoon.
Peter <unk>.
Follow up to the net spread question.
That we already took during Q&A you guided to stable trends next year, you talked about the drivers for net spreads coming down sequentially in the fourth quarter.
But mark and I are still curious what impact lease expert lease extensions excuse me and asset sales might be having on this particular metric and maybe the answer is theyre not really contributing but are those factors that we should also factor in in addition to what you articulated.
In response to the first question.
Sure Yeah, so Jamie you're right both of those can affect it as well I mean fundamentally if we're selling of older assets that may have higher that may have higher yields. We are you know you lose that revenue right. So that can affect the net spread but obviously is as we laid out we're redeploying that capital. So we think that makes sense.
On the extension front, so that can have an impact on it because you know essentially if you are extending more aircraft and you're particularly if you're extending aircraft that are further in advance further advanced than you normally would as we have as we've been doing then that affects you because you have to straight line those rents.
Over the existing lease and the new lease and so that can have an impact on net spread all else equal I think those are contributing factors to but fundamentally we do expect to see it I think it will stay flat for the you know based on what we see for the for the next year, yes, but I would I would high rarely focused Jamie.
The fact that the.
The real focus is there if we manage to net spread I would not have sold any older aircraft.
Speaker Change: And so what we look at is what's the metric we want to focus on value creation earnings partially <unk>.
And the right risk profile of our fleet.
So therefore I'm selling older aircraft at massive games I'm redeploying them into the buybacks at a massive gain you saw from my example on the trades. We did last year, we turned book equity of one times into 2.25 times. So if I was worried about net spread I wouldn't have done something like that so we're here to make money for.
The shareholders and that's the way we drive it and in the meantime, as you sell those assets the residual business is actually better than it was before with a lower risk profile.
That's great guys no no pushback from us on this.
I'm just trying to articulate things for for some investors and then just a quick follow up on Russia can you remind us in aggregate what your average recovery has been as a percentage of the book that you wrote.
Initially wrote off it looks to be around I don't know 65 to 70 cents on the dollar at least for the aircraft that have been settled.
Speaker Change: Our math accurate on that.
Yeah, that's about right, 70% is is right, Jamie, but remember that we still retain the insurance claims for the full amount right from our on our own policy. So that's so it's not as though that money's necessarily lost.
Got it got it okay got it. Thank you very much appreciate it.
Sure.
We will go next to Terry MA with Barclays.
Go ahead Sir.
Right.
Hey, good morning, So I wanted to see if you can provide an update on your cargo cargo conversion program. I think you guys called out some one time costs last year. So I was hoping you can maybe quantify the revenue opportunity and how much of that is actually factored into the 'twenty four guide.
Well as it relates to the cargo program the development we have.
Several triple Sevens that are currently in conversion.
We expect any of our guidance, we expect that a triple San Francis start rolling out of the conversion program in the first half of this year and into the second half and from thereon.
So yes, our guidance does not include any revenue from those triples happens in the first part of this year.
Got it and then on your sales guide of 2 billion, what's the mix of assets, we should assume in terms of aircraft engines and helicopters and how should we think about the gain on sale contribution from each of those.
Well as it goes to the mix of assets I mean, generally speaking it'll be similar to what we've done in the past with a focus generally on older assets.
Pertained to the gain on sale, we don't give guidance to gain on sale and however, you can look at our historical performance and you can see that we have generated very significant gains there, but there are zero gains in our forecast.
Right got it thank you.
We'll go next to Catherine O'brien with Goldman Sachs.
Hi, good morning, gentlemen, thanks for the time.
Not to keep harping on lithium, but even if the Oems were to start to hit production targets faster than the market was expecting how about we not even really seeing the impact here lease yield from the strong lease rate environment that kicked off with how tight supply and demand wasn't maybe let's call. It second half 'twenty two all the way through next year accelerating.
Speaker Change: How many years out are we from your delivery slots.
Speaker Change: Or how many years out your delivery thoughts booked at this point and when they start taking delivery of aircraft. The majority being signed two half 'twenty two and later.
You could think about two to three years out Catherine Youre right in that in that.
Aircraft that were signed in 2021 would've delivered in 2023 aircrafts that are signed in <unk>.
Even into the first half of 2021 would it be in 2023 2024, you get to 2022 placements back half of 2020 to be back half of 'twenty for Q4, 'twenty four 'twenty five 'twenty six et cetera, So you're correct in saying that there is the lag I'm in that regard, but again I'd make the same comment about lease.
Yields that other portfolio basis that I do about this net spread at course as we sell the older assets, we of course reduce our lease yield because they're higher yielding at the last two years at least than they were at the front two years out of the lease bus why are you pick it all up is on the EPS and that's the key thing to look at.
Yeah.
I totally agree.
Speaker Change: Kind of wanted to make sure I wasn't thinking about that inflection in correctly just in terms of what we're going to actually start yes, I think you know what.
If you if you can keep the lease yield flat.
Improved the quality of your portfolio and drive up EPS, you're achieving a far better risk adjusted return and a higher quality business and Thats, what aercap has been doing for 10 years.
Right.
Totally makes sense.
And then can you speak.
Lease rates have trended since you last spoke you know realize it's only been a couple of months, but just given the incremental issues with the Max and the GTS is it fair to say supply has gotten even tighter.
Are you already seeing that translate to lease rates.
If yes is that mostly on narrow bodies or are you seeing it slows or do I buy as well. Thanks.
I wouldn't say a 90 days, there's been a dramatic move to be fair cows, but there has been a move upwards, there's no doubt about us.
For sure there has and what's very important of course is we've seen a bit of a fall in interest rates in that 90 day period, but we have not seen a fall in lease rates and thats, what youre really interested again is to say, okay. What happened with the headline lease rate is interesting, but what happened with underneath with the interest rate. So what we really like to see is falling rates and steady lease rates or even slight increasingly.
Right and I say over the last 90 days at lease rates, probably similar but interest rates fast. So we didn't have to pass on the fall in interest rates.
That's great.
Squeezing one really quick third one for Pete on the guidance.
Third quarter, 6K, but I think $6 4 billion.
In purchase obligations Youre guiding to 7.2 and come back for this year were you able to lock in incremental aircraft or is that just a function of you know I understand there's so many moving pieces in the skyline.
Speaker Change: To figure out what drove that delta. Thanks, so much for your time.
Speaker Change: Yes, some of that some of that is engines Kathryn.
Speaker Change: Engine purchases in 2024.
I mean, there are a bunch of things that move around here and I think you know.
As we look out at the seven point too we do have some significant questions about that so that's our estimate today, but it could clearly move around a lot given given the OEM issues, yes, if I was.
ZIP, adding if there's a betting man Kathryn I'd imagine that some of our capex. It is inevitably going to move to the right.
Great. Thanks for all the time.
Sure.
We will go next to Chris <unk> with Susquehanna International Group.
Good morning, Thanks for taking my question.
Hey, guys. Thank you for the.
The walk through on how Youre thinking about the supply demand dynamic the points three points you outlined but on points two and three so you spoke to the stressed MRO network backlog of shop visits.
As we think about those two points and we think about resolution here and which of those might persist longer.
We'd like to hear your view on how you see that moving into perhaps mid or end of decade is it.
Sort of MRO, perhaps resolving faster or is this are these both pressure points that for any number of reasons.
Have those love to hear them.
That we should expect to extend.
Closer to end of decade. Thank you.
Sure.
And.
I would expect that issue to get resolved sooner.
It's easier to conduct airframe MRO than it is to do engine MRO to do engine MRO you need.
Type of test cell are very big.
Good work force of highly trained engineers, it's a little bit different so I think the airframe MRO will get solved first the engine MRO, though here's the here's the big issue.
There's a finite supply of parts to build and repair engines.
Those parts when a part has made our manufactured it can go number one to a production aircraft engines I E. An engine that's going to go under weighing of an Airbus or Boeing aircraft.
Number two instead of us.
The part could go to spare engines.
Now if the fleece.
Walls are staying on wing longer than it currently is you would need as many parts to go to spare engines, but you do and then third.
Engines have to go into the shop to get repaired so shops. The MRO shops also need that part. So there are three sources of demand for every engine part being produced today.
And the manufacturers of those parts way back up the supply chain, who do the castings are not going to increase that significantly any time. This decade as far as I understand so I think we will see the engine issues persist through the decade and bear in mind that Aercap is the law.
Harvest marginal supplier of spare engines to the world, which gives us of course in enviable position when it comes to engine leasing, but as it pertains to aircraft leasing it gives us a unique advantage over all of our competitors because they cannot offer the vital products that we can in conjunction with our aircraft.
Okay. Thank you and as a follow up so.
We think about the secondary market here too.
Speaker Change: 2024, I think you said to in response to an earlier question.
<unk> been a slight fall in interest rates. It sounds like lease rates are steady to up but we have had news here around the Max and kind of growing concerns around quality control issues with certain aircraft types as well as some carriers recently signaling.
A potential change in the composition of the order book, So given all of that.
Could you put perhaps a finer point or details of what you are saying.
In the secondary market any sort of color you have around Eric.
Aircraft types or residual values that have perhaps meaningfully shift or not since you last updated a few months back. Thanks.
Sure.
It's worth again, just splitting the family up.
So.
We all know that Airbus is out selling bowling and has been for some time.
But it's not it's not enough just to say the 320 family Outsells the Boeing family.
Airbus wins in one particular aircraft, it's the <unk> hundred 21 product.
It does not win as much on the <unk> hundred 20 product.
The 320 product is the 180 seater $3 21 product is a 220 to 30 to 40 seat or even in some instances.
So the Max Ace is the 180 competitor from Boeing that airplane is an excellent aircraft and many operators will say, it's as good if not better.
Then the competing Airbus <unk> hundred 90 <unk>.
Aircraft.
Yeah, Boeing fall down, though is that the Max 10 is not yet been certified and it's not as capable and airplane even when it is it's unlikely to be as capable as the <unk> hundred 21 currently yes.
So from our perspective.
We are very bullish on the Max as in fact, we bought a few of them around Christmas that just popped up.
And we think that is an excellent aircraft, but because of the 321 superiority over the larger Boeing product and the fact that it's so early to the market versus the Boeing product and.
We are going to see them you know a significant majority of the market heading towards the Airbus product line for the long term.
Okay. Thank you.
Okay.
We'll go next to Ron Epstein with Bank of America.
Hey, good morning, guys.
Following up on that last comment.
When you when you look at Airbus as narrow body backlog.
Of the approximately 11000 airplanes, so 70% of them are <unk> hundred 20 ones I mean, it's an overwhelming majority of their backlog.
I mean, you know for lack of better words really kind of corrections.
Speaker Change: Boeing's offering I mean.
A sense of what kind of has to do something are they really going to just lose out on that larger segment and it does seem like.
Carriers are and tell me if im reading this wrong are trying to migrate the narrow body product to larger.
Shells.
Yes by and large they're seeing up gauging Ron for sure in the markets and that's where you know when the 787 803 hundred 20, where the heart of the market. The 161 80 seater at Boeing had a majority of the markets that has clearly changed now as you rightly point out the $3 21 at the dominant airplane, but you know the Max eight still high.
As a very significant user base and is in good demand actually but just the target market for the Max HST is not as big as you rightly point out that Ron is at $2 21, and because many customers are up gauging, but we still see a very strong demand for Max eights, and there's very limited supply of them.
Got it got it.
And then what's your sense on the $2 20.
Is there much demand there, particularly the 300 and if they were to do a 500, which suggest there's speculation that may or may not.
Would there be demand for that.
Listen I think the amount of factors should focus on making what they have I honestly tank.
Any of the Oems to contemplate a new platform with new engines given the trouble is they have had with the three Acs their rolls Royce engines. The 787 grounding 19 months after entry into service the Max issues to delay several year after year for Airbus a 390 program.
I think they should focus on their customers now and delivering the promises they have made and delivering them on spec on time.
And then and then maybe one last follow up to that how are you planning your I mean, your own kind of delivery horizon with your customers on the Max is given.
Just in general given all the uncertainty.
That's right.
Actions and everything that's going on.
We just work with them Ron you know when we work closely with Boeing and the customers want the aircraft as soon as they can deliver them and we try and get them the with Boeing the most accurate delivery dates we can at the moment that's not possible.
But hopefully we'll have clarity as to what the delivery profile will be for 'twenty, four and 'twenty five.
And by the time, we talk again.
Got it alright, thank you.
We will go next to Stephen Trent with Citi.
Stephen Trent: Good morning, everybody can you hear me okay.
Yep Yep.
Oh, great. Thank you.
I'm, having some terrible phone problems. So I apologize if I drop and I missed part of the call because of these issues, but just if I could.
Understand.
Sort of your long term view.
The credit rating you know do you sort of have.
And idea in my in terms of you know where you guys would like to be rated.
By Moodys and S&P all over the long chairman.
Sure. Thanks, Stephen I don't know if you got cut off there, but in any case.
Yes look we're on we're typically flat across the board now we're on positive outlook with S&P and Moody's and we hope to get those upgrades from them and really that's a function of how the business has performed its both the resilience that we showed through COVID-19 through Russia through all of those things.
The.
Improved the improved credit profile of the business coming out of the G. Acas acquisition, but also the fact that if you look at any operating metrics, whether it's operating cash flow.
Net spread whether it's.
F. A photo that any of those things that are that are meaningful for the rating agencies. We're outperforming the competition by a by a big stretch right and so when you look at other companies that may be ready at the same and they look at us and say, okay. Theres a big difference there, we think that that warrants an upgrade and really that's what.
We're pushing for it so I think if we can get to triple B plus that across the board that would be great and you know look can we get into the single as I mean, that's a different category I think but but certainly I think there's a good reason to think that we could get to <unk> plus.
And as a reminder to ask a question on today's call that is star one on your telephone keypad.
And at this time there are no further questions.
Thank you operator, and thank you all for joining us for the call.
Like to let you all know that we will host a capital markets day in New York on May the eighth and we look forward to seeing you. All there. Thank you very much for your time.
This does concludes today's conference we thank you for your participation.
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