Q4 2024 Air Lease Corp Earnings Call
Krista: Good afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the AirLease
4th Quarter 2024 Earnings Conference Call
Krista: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: And if you would like to withdraw your question, press the star 1 again. I would now like to turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.
Speaker Change: Thanks Krista and good afternoon everyone and welcome to Air Lease Corporation's fourth quarter and full year 2024 earnings call. This is Jason Arnold. I'm joined today by Steve Haase, our Executive Chairman, John Plueger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer.
Speaker Change: Earlier today we published our fourth quarter and full year 2024 results. A copy of our earnings release is available on the investor section of our website at AirLeaseCorp.com.
Speaker Change: This conference call is being webcast and recorded today, Thursday, February 13th, 2025, and the webcast will be available for replay on our website. At this time, all participants to the call are in listen-only mode.
Speaker Change: Before we begin, please note that certain statements in this conference call, including certain answers to your questions, may not be transcribed.
Speaker Change: are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes, without limitation, statements regarding the state of the airline industry, the impact of aircraft and engine delivery delays and manufacturing flaws, our aircraft sales pipeline, and our future operations and performance.
Speaker Change: These statements and any projections as to our future performance represent management's current estimates and speak only as of today's date. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations.
Speaker Change: Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results.
Speaker Change: Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events.
Speaker Change: In addition, we may discuss certain financial measures such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity, which are non-GAAP measures.
Speaker Change: A 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 in 10-K we issued today. This release can be found in both the investors and the press section of our website.
Speaker Change: Similar to last quarter, given ongoing litigation, we won't be able to take any questions about our Russia fleet insurance claims. Lastly, as a reminder, unauthorized recording of this conference call is not permitted. I'll now turn the call over to our Chief Executive Officer and President, John Plueger.
John Plueger: Well, thanks, Jason. Hello and good afternoon, everyone. Thank you for joining our call today.
John Plueger: During the fourth quarter, Air Lease generated revenues of $713 million and $0.83 in diluted earnings per share.
John Plueger: Our results benefited from the continued expansion of our fleet, offset by lower end of lease revenue as compared to the prior year. I'm also happy to report that full year 2024 revenue and ending fleet net book value reached record levels in the history of our company.
John Plueger: We purchased 18 new aircraft from our order book during the quarter, adding $1.3 billion in flight equipment to our balance sheet. And we sold 14 aircraft for approximately $540 million in sales proceeds.
John Plueger: The weighted average age of our fleet was stable quarter over quarter at 4.6 years.
John Plueger: while Weighted Average Lease Term Remaining extended slightly to 7.2 years.
Fleet utilization remains very robust at 100%.
John Plueger: Our fourth quarter deliveries came in better than expected as the OEMs pushed to achieve their own delivery goals and objectives ahead of year end.
John Plueger: On a full year basis, the $5 billion in deliveries we received hit the midpoint of the $4.5 to $5.5 billion range we outlined to you at the beginning of last year.
John Plueger: For 2025, we expect to receive $3 to $3.5 billion of new aircraft delivered from our order book, with around $800 million anticipated to deliver in the first quarter of 2025.
John Plueger: I would also note that approximately 80% of our deliveries expected for 2025 are Boeing aircraft. So any additional challenges emerging in Boeing's production efforts could be impactful.
John Plueger: With the lower forecast expenditures on new aircraft deliveries for 2025 compared to 2024, ALC will have the ability to largely self-fund those deliveries from operating cash flow plus aircraft sales.
This means reduced funding needs from the debt capital markets.
John Plueger: In effect, for 2025, we anticipate debt funding of approximately $2 billion including refinancing of remaining 2025 debt maturities.
So, we will have less overall financing in 2025,
Greg will discuss this further.
John Plueger: And we believe, by the way, that the same situation will exist for 2026.
John Plueger: Expected deliveries from our forward order book are fully placed through 2026, and the team is working diligently to achieve the highest possible lease rates on our remaining deliveries in 2027 and beyond.
John Plueger: Our young fleet and sizable new order book, with delivered positions well inside of any available crew manufacturers, continues to position us exceptionally well in the current commercial aircraft supply-constrained environment.
John Plueger: This strong environment is also continuing to drive up lease rates.
John Plueger: So to that point, I'd like to share some specific information that I hope you find useful as we report here on our full year 2024.
John Plueger: Now, I won't be updating the specific comments or examples every quarter, but simply wanted to give you a flavor of what we are seeing in the overall context.
John Plueger: First, during Q4, ALC executed lease extensions covering 23 single-aisle aircraft, including Boeing 737-800, Boeing 737-8 MAX, A321CEOs, and one E190.
John Plueger: In aggregate, that pool of aircraft extensions resulted in higher lease rates and lease rate factors than those just prior to extension.
John Plueger: This is very significant in that lease rates normally are lower during a lease extension compared to when the aircraft delivered new.
Second
John Plueger: Year-to-date in 2025, ALC has agreed to lease extensions on six Boeing 777-300ER aircraft across two airlines.
John Plueger: The aggregate total lease rates and lease rate factors were largely in line with what they were prior to the extension. And I would add also significantly higher than the lease rates indicated currently for those aircraft by well-known appraisal firms.
John Plueger: This points to the growing strength of wide-body aircraft which historically have always lagged narrow-body aircraft. In fact, we believe that wide-body demand has surged faster than narrow-body demand over the past six months.
Steve will comment on this further in his remarks.
Steve Haase: Third, our Q4 new aircraft deliveries represented the highest delivery yield in a quarter in over four years.
Fourth.
Steve Haase: As you recall, during COVID, we had a number of leases that were restructured or signed at relatively low lease rate factors as a product of the challenges facing our customers at that point in time.
Steve Haase: Approximately $5 billion net book value of these lower yielding leases will mature by the end of 2026.
Steve Haase: As these leases mature and expire through 2026, we continue to be optimistic about lease rate extensions at significantly higher lease rates, or releasing to the next lessee at significantly higher lease rates, as we are seeing today.
Thank you for watching!
Steve Haase: Now, at the same time, we must recognize we are in an environment where interest rates have not fallen as rapidly as most of us expected a year ago. In fact, looking forward, it appears that interest rates will remain elevated for a longer period of time than we anticipated.
Steve Haase: Looking back over the past 24 plus months, it can still be said that overall interest rates rose more than lease rates from their historic lows.
Steve Haase: Let me also remind you that we undertook a program several years ago to reduce our China content and we have done so very effectively.
Steve Haase: That continued in 2024, wherein almost half of our aircraft sales were aircraft on lease to China.
Steve Haase: We made healthy gains on those sales, yet I want to remind you that those China leases were very profitable. In fact, some of our highest yielding leases. So this also affects our margins looking forward.
Steve Haase: With these factors, it is taking and will take a bit longer for increased lease margins being seen in our financial results.
Steve Haase: Nevertheless, we expect to see a moderately-sized steady upward trajectory in fleet lease yields each year for the next three to four years based on our views of the market and assumptions around our sales activity and interest rate environment over the same period.
Steve Haase: At the same time, we are reaping the benefits of higher aircraft values and our aircraft sales.
Steve Haase: Strong commercial aircraft demand continues to support our sales efforts and gain on sale margins.
Steve Haase: Our gain on sale margins for fourth quarter 24 and full year 24 were very robust reflecting this environment.
Steve Haase: Our sales pipeline remains solid at 1.1 billion dollars a consistently healthy gain on sale margins.
Steve Haase: We envision an overall sales outlook of about $1.5 billion for 2025, around $400 million of which is expected to close in the first quarter.
Given this overall backdrop, let me discuss capital allocation.
Steve Haase: For 2025, it's going to be quite simple. We've told you that, besides funding our order book, our top priority is to get back to our target debt-to-equity ratio of 2.5 to 1.
Steve Haase: We expect to be there by the end of 2025, perhaps even earlier.
So in 2025, we are focused first on debt reduction.
Steve Haase: Once we hit our target debt-to-equity level, we will, as always, consider all capital allocation avenues, including incremental aircraft or fleet purchases, capital return to shareholders, M&A possibilities, whichever we deem the best deployment of capital for our shareholders.
Steve Haase: Let me conclude a bit off topic, but importantly, to comment on the tragic fires that devastated Los Angeles, our hometown, recently.
Steve Haase: You all read and saw firsthand the unprecedented devastation in our city.
Steve Haase: Despite a number of our employees being evacuated, I am incredibly thankful above all that none of our employees suffered the loss of their homes or any other tragedies.
Steve Haase: During this period of crisis, I am proud that the ALC team maintained normal business operation during this time without skipping a beat.
Steve Haase: At the same time, we are all profoundly saddened by the loss of life and property of others less fortunate.
Many of our employees spent time helping others in need.
Steve Haase: And, while we offered financial assistance to all employees for any fire-related housing or other costs, most declined, wishing instead that ALC make a meaningful contribution to those who saved our homes and our lives.
Steve Haase: As such, I am pleased to advise that ILC is donating a half a million dollars to L.A. City and County Fire Departments with our profound gratitude and heartfelt thanks.
Speaker Change: So let me now turn the call over to Steve Hazy to offer some additional commentary. Steve?
Speaker Change: and others. Thank you for joining us. We'll see you next time.
Thank you, John. I'd just like to underscore John's comments.
Speaker Change: and my thanks to our team for their dedication, to our company and our colleagues in the LA Forest.
Speaker Change: I'm very proud of the way our team responded in offering help and assistance to each other, as well as family, friends, and neighbors in their communities.
Speaker Change: to overcome the tragic destruction witnessed in Los Angeles during January.
Speaker Change: We are very pleased to report record revenues and fleet size during 2024.
Speaker Change: and Vue AirLease has very well positioned for the current environment.
as we move forward in 2025 and beyond.
Speaker Change: and our own fleet and large order book consists of some of the most attractive commercial aircraft types on the market.
Speaker Change: There's rarely an airline customer meeting that goes by way of not having asked to find more aircraft for them.
Speaker Change: And nearly all of our leases maturing are being extended at very strong, profitable lease rates.
Speaker Change: The phenomenon of lease extension rates exceeding initial new aircraft lease rate is truly exceptional.
Speaker Change: Second leases are typically signed with a step down in the lease rate given the depreciation of the aircraft over time.
Speaker Change: So it's a pretty remarkable environment where lease rates are actually stepping up on a second lease to such high levels.
As John noted,
Speaker Change: I do also point out that the drag of the lower yields of the restructured leases that we did during the pandemic.
and early deliveries in the pandemic season.
Speaker Change: should begin to weigh less heavily on our overall fleet yield as the lower lease rate
Terms end and they're extended at market rates.
with the existing airline or with the new airline.
by exceptionally strong passenger traffic volumes.
Speaker Change: According to recent data released by IATA, total passenger traffic volumes rose by more than 10 percent.
during 2024 versus 2023, reaching all-time record levels.
Speaker Change: International volumes were the strongest segment on the market, rising an amazing 14% year over year.
Speaker Change: and practically all markets growing at double-digit or near very strong double-digit rates.
Speaker Change: Asia-Pacific remains the leading international market globally, rising 25% during the year.
Speaker Change: While this dramatic pace of growth is likely to slow somewhat in the years ahead, as growth rates normalize, we continue to see this region as being a significant source of expansion worldwide.
Speaker Change: Latin America, Middle East, Africa and Europe were growth leaders in the international segment last year.
Speaker Change: Domestic volumes, meanwhile, delivered a solid 6% rate of growth in the last year.
Speaker Change: which is more or less in line with the longer term industry averages of approximately two times the pace of GDP growth on a global level.
Passenger load factors also continue to rise.
Speaker Change: reaching approximately an average of 84% for the full year of 2024.
Speaker Change: These are exceptionally robust levels, breaking records in a number of regions and markets.
Speaker Change: Asia-Pacific region, low factors, for example, achieved their record all-time high in 2024.
Speaker Change: Fifteen to twenty years ago, developing markets and international load factors were exciting if they moved into the high seventies range.
Speaker Change: Well, now some are approaching and in some cases even exceeding 90% load factor levels.
Speaker Change: High demand and low supply of commercial aircraft is certainly a component driving debt load factors to achieve these record levels.
Speaker Change: As a reminder, Air Lease clearly benefits from strong passenger traffic volume expansion, though we are not dependent on it, as we focus on replacing aging airline fleets.
with New Technology Fuel Efficient Aircraft and Economically Profitable Leases.
Speaker Change: Much of the market focus on recent years has been on narrow-body supply-demand imbalances.
Speaker Change: But I want to expand on John's comments highlighting the wide-body side as well.
Speaker Change: White-body demand was more muted during the period during which the industry was recovering from the pandemic.
Speaker Change: But now, things have changed. We are seeing extremely strong international passenger traffic over the last year or two.
In particular, the shortfall of wide-body availability
is becoming increasingly apparent.
and continued aging of the in-place operational wide-body jets.
Speaker Change: is developing into what we expect to be a protracted shortfall of good wide-body aircraft over multiple years to come.
John Plueger: John mentioned on the call the extension of six of our 777-300ER aircrafts
John Plueger: to date in 2025. We're also seeing this strengthening demand supporting similar dynamics to our other widebodies, including our A330s coming up for lease exploration.
John Plueger: This backdrop of strong demand and limited production is appearing to repeat the same path and characteristics as witnessed in the narrow-body market already.
John Plueger: which should definitely support strength in the value of our wide-body fleet.
John Plueger: It is very difficult to foresee a significant ramping up of OEM production rates that could address this expected shortfall, especially with the ongoing delays in the 7.7x program.
John Plueger: Wrapping up my comments, I'm very excited about Air Lease's prospects for 2025 and beyond.
We look forward to enjoying the holiday treats.
John Plueger: and our new aircraft from our very sizable order book along with robust lease rates on new extensions as well as further normalization of the yield curve over time.
John Plueger: which combined should be highly beneficial to our operating performance ahead.
John Plueger: I will also remind you of the deep underlying value of our own fleet.
which is carried at historical depreciated cost.
as well as our audible positions.
John Plueger: which are for slots well inside of any available aircraft from the OEMs.
and at prices that could not be duplicated at present.
John Plueger: A significant part of the order book that we have today that is still yet to deliver were contracts that we negotiated in 2021.
John Plueger: Our order book has significant value, and none of that is carried or reflected on our balance sheet at this time.
Speaker Change: I would like to now turn over the call to our CFO, Greg Willis, for his comments on our financial situation.
Greg Willis: Thank you, Steve, and good afternoon, everyone. During the fourth quarter, AirLease generated total revenues of $713 million, which was comprised of approximately $639 million of rental revenue and $74 million of aircraft sales, trading, and other activities.
Greg Willis: Rental revenue was in line with the fourth quarter of 23 and lease yields remained essentially flat. Rental revenues have benefited from the growth of our fleet offset by significantly lower end of lease revenue.
Greg Willis: As a reminder, we recognize $60 million in end-of-lease revenue in the prior period, which as compared to the current period was $6 million.
Greg Willis: As we have messaged before, we continue to anticipate lower levels of end-to-lease revenue due to higher extension rates attributable to the supply shortage of commercial aircraft.
John Plueger: As John discussed earlier, this environment has led to higher lease rates on extensions and has served to increase the value of these aircraft in our fleet.
John Plueger: Sales proceeds for the quarter approximated 540 million from the sale of 14 aircraft. These sales generated 65 million in gains representing roughly a 14 percent gain on sale margin.
John Plueger: We continue to expect to see healthy margins towards the upper end of our historical range of 8-10% based on our current sales pipeline of $1.1 billion.
John Plueger: These gains continue to reflect the significant value embedded in our fleet, which we carry on the balance sheet at depreciated cost.
John Plueger: Moving on to expenses, interest expense rose by approximately 38 million year over year, driven by a 37 basis point increase in our composite cost of funds to 4.14% at year end.
John Plueger: Increased financing costs and higher debt balances were the primary contributors to the year-over-year increase in interest expense. However, as compared to the third quarter of 2024, our composite rate declined slightly as we benefited from the Fed rate cuts in 2024.
John Plueger: At year-end, roughly 79% of our borrowings were at fixed rate versus floating, just inside our 80% target.
John Plueger: We continue to benefit from our largely fixed rate borrowings, which have meaningfully moderated the impact of the current interest rate environment.
John Plueger: Depreciation expense continues to track the growth of our fleet. SG&A expense declined relative to the prior year while also declining as a percentage of revenue relative to the prior year's quarter.
John Plueger: It's also worth noting that we did benefit from a 67 million dollar Russia insurance recovery in the fourth quarter of 23
John Plueger: Moving on to our financing activities for the quarter. In mid-October, we redeemed our outstanding $250 million Series A Preferred Stock, utilizing the proceeds from the lower-cost $300 million Series D Preferred Stock that we issued in the third quarter.
John Plueger: During the fourth quarter, we raised approximately $1.3 billion in debt financings. This was comprised primarily of a $1 billion three-year syndicated unsecured bank term loan priced at one month SOFR plus, 1.125%.
John Plueger: This capital is primarily sourced from new Asian banks, helping us to grow our bank group to a global base of 83 financial institutions.
John Plueger: Additionally, I'd like to highlight that we have launched a $2 billion commercial paper program in late January of this year.
John Plueger: We believe our commercial paper program should serve to reduce our borrowing costs, as CP rates at present are approximately 80 basis points lower than the rate on our revolving credit facility.
John Plueger: The CP program also represents another funding channel to further diversify our access to capital.
John Plueger: And with our lower CapEx outlook for the next few years, we anticipate reaching our leverage target by the end of the year, which should increase our financial flexibility.
John Plueger: Our strong liquidity position of $8.1 billion as of quarter end, $30 billion of unencumbered asset base, and $30 billion of contracted rentals remain key pillars of the strength of our business.
John Plueger: As John and Steve outlined, we expect our portfolio lease yields to steadily increase at a moderate pace over the next several years.
John Plueger: This is driven by an increase in yields on our attractively placed order book aircraft delivering over the next several years, higher than anticipated lease extension rates given the strong market dynamics that we see persisting through the next several years, the continued seizing of our existing fleet, and the roll off of our COVID era leases.
John Plueger: However, turning to margins, we still expect to experience some headwinds given the current elevated interest rate environment, which look to keep our adjusted margins in 25 generally around the levels we recorded in 24.
Jason Arnold: With that, I'd like to turn the call back over to Jason for the question and answer session of the call.
Jason Arnold: Thanks very much, Greg. This concludes our prepared commentary and remarks. For the question and answer session, we ask each participant to limit their time to one question and one follow-up. Krista, please open the line for the Q&A session.
Speaker Change: Thank you. At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad. And your first question comes from the line of Catherine O'Brien with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thanks so much for the time.
Speaker Change: So I think, you know, your comments on some of the puts and takes around lease margins and...
Speaker Change: and R.O.E., you know, China's a bit of a headwind this year. Some of the lease renewals are going to be a tailwind over the coming years. Obviously, it's a bit of a slow-moving ship as you turn through the portfolio. But can you just walk us through, you know,
Speaker Change: What do you think gets you back to mid-teen adjusted pre-tax ROEs that you saw before the pandemic, or do you think that's achievable? And just any rough sense of a timeline would be great.
Speaker Change: Sure. Thanks, Katie. I'll take that, and then I'll ask Greg to comment.
Speaker Change: I think, yes, I do think we are going to be able to achieve that mid-teens level that you spoke about.
Speaker Change: But it's going to take two to three more years. We've outlined the factors on the positive side and a headwinds. But given all that in consideration, I do believe that that's a reasonable time frame outlook in the two to three year time frame.
Thank you, John.
John Plueger: Yeah, and I think obviously the big question is around the timing of interest rates and lease rates as well. I mean, but at the end of the day, obviously when it comes to capital allocation too, those are other factors that we have. But I don't see any impediment of reaching.
John Plueger: are ROE targets over a longer period of time. It's just a question of how lease rates and interest rates evolve.
Speaker Change: That makes sense. And then, you know, I'm assuming your comment on reaching your leverage target is based on just core business trends, but correct me if I'm wrong.
Speaker Change: Based on what you see in the market right now between incremental aircraft, M&A, or the value of AL shares, if you were to get back to your target debt-to-equity faster than you currently expect, what would be the right choice for AL shareholders? Thanks.
We'll make that determination at that time, Katie.
Speaker Change: We've got time for about five more, 6, 7, 8, 9, 10, 12, 13, 14, 15, 14 Best tastes ever. We'll make it the most wonderful lunch in the world We發F
Speaker Change: But they're all on top of our list. Ideal capital allocation is very important.
with a view toward maximizing the value to our shareholders.
And once we get to the 2.5 area...
Speaker Change: which will hopefully happen sometime in the second half of this year.
Our board will consider multiple scenarios, including
initiating a buyback program.
Speaker Change: And one other appendage to that, Katie, I mean, it should be obvious, but also, you know, when you're looking at capital return to shareholders, our stock price has a major bearing on that. And so we never predict where that will be, but obviously, as you know, that's a key consideration.
Thanks for that additional call, ladies and gentlemen.
Speaker Change: Your next question comes from the line of Terry Ma with Barclays. Please go ahead.
Speaker Change: Hey, thank you. Good afternoon. So I appreciate the comments on the direction of the overall fleet lease yield over the next few years, but when you kind of factor in the forward curve and your planned funding needs, should we expect the net spread margin to go up by a similar amount, or is that going to be kind of depressed by just overall funding or interest rates?
Speaker Change: Greg? Yeah I think for 25 we thought that we'd be around the same levels for as we did in 24. A lot of that depends on what happens with interest rates. I mean it's nice to see a nice steady grind up of the lease yields over time which I think has a it's a pretty powerful lever but it does take time to make its way through the business.
Speaker Change: Got it. Okay. And then on the leases that you extended in the fourth quarter, like should we expect kind of the incremental pickup and yield or rental revenue to kind of flow through in first quarter? And then any more color on the cadence of the remaining renewals? Thank you.
Speaker Change: Yeah, I think those that were signed in Q4 will roll through in 25, and then as we work through the five billion dollars of airplanes that are rolling off for the next two years, I think that will also provide an uplift to Lee Shields. So I think
Speaker Change: You should expect a steady grind higher on the top line.
And then, I guess, finally,
Speaker Change: You need to factor in, we don't see the market changing given the supply-demand dynamics that are in play.
Speaker Change: So we still see airplane shortages for a long, extending three to four years based upon what's going on on the production side. So I think that's going to create a shortage of airplanes that is going to contribute to both aircraft values and lease rates.
being strong for the next several years.
Got it, thank you.
Yeah, and coupled Greg and John with the...
that were renegotiated during COVID as those progressively liberate us.
Speaker Change: and allow us to get back to market lease rates either by extension
Speaker Change: or repositioning those aircraft in the U.S.E. That will have a continual upward...
a trend on the overall corporate resale.
Speaker Change: Your next question comes from the line of Jamie Baker with J.P. Morgan. Please go ahead.
Jamie Baker: Good afternoon, gentlemen. So an argument that well a debate that Mark Streeter and I were having
Jamie Baker: as we don't really argue, have you thought about even greater aircraft sales into this strong market, you know, as a means of, I don't know, potentially proving the value proposition of the equity, or is the preference?
Jamie Baker: just to maintain the current level of sales and then, you know, wait for that, you know, pickup and delivery at some point down the road. Does that make sense?
Yep.
Look, I think it's our telescope.
https://www.kenhub.com
Jamie Baker: Sorry, let me just quickly start and then Steve will turn it over to you.
Jamie Baker: In the prior quarter, I also talked about the fact that we're being approached from fairly significant buyers who want to do larger scale managed portfolios.
Jamie Baker: So with all these factors, we have to look at opportunities and what's in front of us. But generally speaking, I think we're biased towards keeping about the same level of sales proceeds. It seems to be a good balance every year.
Jamie Baker: If there is a strongly compelling reason why we should sell X amount or more, we'll take a look at it. But I think currently our plans remain about our current levels.
Okay.
Jamie Baker: Steve, anything to add to that, or should I call it? Yeah, Jamie, that was it.
Speaker Change: Go ahead. I think we're also very interested in developing structures.
and bring in passive institutional investors.
into a managed structure vehicle.
Speaker Change: Well, we have a small equity stake, but we have a large portion of the profitability in the end of lease.
during the tenure of these arrangements.
That could be an avenue where we may add...
Speaker Change: and some additional assets to transfer them to these new entities.
Speaker Change: Okay, that's helpful, all the good points. Thanks, guys. And then second, and I guess this gets back to the comment that Greg made in the prior question about, you know, the steady grind.
Speaker Change: You know, AIRCAP had this slide that showed the percentage of, let's call it,
Speaker Change: sort of cold, medium, and hot leases as a percentage of total for each year, you know, the cold leases being the least profitable, you know, and reflecting, you know, aircraft that were placed at the bottom of the market.
Speaker Change: And again, Steve, you've commented on this just a moment ago, but if we were to focus just on those less profitable leases, their lease,
Would you have an estimate?
Speaker Change: for 2024, 2025, and 2026 as to what percentage of the book they represent. You know, just trying to put a visual behind the burning off of these leases as they are being overtaken by the stronger deals that you've been talking about ever since John's prepared remarks. Hope that's clear. Thanks in advance.
Speaker Change: Greg, you want to talk about that? Yeah, we don't have the page in front of us, but we're familiar with the numbers. And that's why we tried to give the color and the prepared remarks about a $5 billion worth of aircraft that were COVID-era leases that are rolling off over the next two years.
Speaker Change: I think you can take that as a ratio of the overall fleet. That was our attempt to give some color about how quickly the lease yield can move forward.
Okay, very helpful. Thanks everybody. Thanks, Jamie.
Speaker Change: Your next question comes from the line of Amushi Aurembach with TD Cowan. Please go ahead. Great, thanks. Apologize for some of the background noise here.
Speaker Change: As you look, John, at these lease renewals that are going on, are those getting better in this environment? Like, in other words, if you think about where they'll be in 2025 and 2026 versus what you mentioned in terms of up slightly for narrow bodies and flat for wide bodies, is that improving in this environment?
You know, how they peaked.
Yeah, the answer is unequivocally yes.
Speaker Change: The examples I gave on the extensions we executed in the fourth quarter on the single aisles where the lease rates were higher than the initial term.
Speaker Change: and about flat on the wide bodies, both of those are against the backdrop.
Speaker Change: of typically lease rates step down after the initial lease term on new aircraft. And so this is a very significant...
Speaker Change: element that we see. And we see it continuing to strengthen in 2025 as we look at our leases that are subject to extension and that we're discussing right now. So we look at it on a very robust level.
medical but if you were at your leverage target today
Speaker Change: and everything is as it was today, in other words, you know, a lower level of deliveries into 2025. You know, what would be at the top of your list for, you know, for deploying capital? You know, would it be, would you be looking at sale-leaseback? Would you be looking at a stock buyback with where the stock is? Like, you know, could you maybe talk about that from a hypothetical standpoint?
Speaker Change: Well, from a hypothetical standpoint, I would just say, based on where our stock is today, you know, we look at that very, very strongly, and it's a compelling value today.
Speaker Change: As I said earlier, we'll make that determination at such time when we get to our debt equity ratio. But just know very certainly that this is a very strong possible avenue for the company. But again, we withhold our decisions on that until such time as where we want to be.
Speaker Change: especially when you're selling your aircraft at a 14% premium to their carrying values and your stock is trading below bulk. Right.
Thank you.
Thanks.
Speaker Change: Your next question comes from the line of Hilary Cacanando with Deutsche Bank. Please go ahead.
Hilary Cacanando: Hi, thanks for taking my questions. So this question is more high level and not specific to your insurance situation. So I'm hoping you could answer it. But I was wondering, if there's a ceasefire agreement between Russia and Ukraine, you know, could there be any impact to the lessors? I guess, you know, more specifically, do you think there's any chance that, you know, Russia can try to, you know, return the aircraft to the lessors, which
Hilary Cacanando: I don't think the lessors would want. I mean I don't know if that's even a possibility but I wanted to see if there's any like high-level thoughts you could provide on a possible ceasefire.
We're just not going to comment on that. Sorry.
Hilary Cacanando: Okay, okay, I figured as much. And then I guess when you talked about, you know, taking two to three years to get to the mid-teen level return,
Speaker Change: Are you assuming that interest rates remain at the same, you know, at the current level? You know, if there's an interest rate hike or if there's, you know, if there are more cuts this year, you know, will that two to three year assumption change?
Speaker Change: Greg, I think a lot of it depends on where interest rates are. I mean, I think the the mid-team target is more of a longer-term target because there's nothing fundamentally different in our business today. It's just going to take a little bit of time for that stuff to make its way through our 30 billion dollar balance sheet.
Speaker Change: So, if anything, I would emphasize that it's going to take time to make it work its way through and some of it, of course, will depend on how quickly and in which direction interest rates move.
Speaker Change: Also, the cuts in interest rates only affect our incremental borrowings.
Speaker Change: All of our existing bonds that were issued two, three, four years ago
Speaker Change: and do not roll off during this period, the interest rate on those bonds is what it is. We can't change that.
What if interest rates improved for us?
It will affect all of our short-term bank borrowings.
and any new bond offerings.
But, as Greg said,
Speaker Change: That number would have to be pretty substantial to have a major impact on the portfolio debt coming down proportionally.
Got it. Okay, great. Thank you very much.
Thank you.
Speaker Change: Your next question comes from the line of Stephen Trent with Citi. Please go ahead.
Stephen Trent: Good afternoon, gentlemen, and thanks for taking my question. A quick one here, two quick ones here. First, when you think about what we know about tariffs today, and I know there's not a lot of information, but is it conceivable that
Stephen Trent: leasing could actually gain a little favor over aircraft purchases in the case of Airbus or Embraer customers here, that the impact of a tariff could be rolled over the long life of a lease as opposed to a one-time hit from
Stephen Trent: you know, purchasing on spot or, and I know there's not a lot of information, I'm just sort of high level trying to get my brain around.
Well, the first answer is that any tariffs or taxes
Stephen Trent: on these type of transactions involving leasing or financial lease, operating lease, the airline, the lessee, airline operator, is responsible for any such tariffs or duties or taxes.
Stephen Trent: The second point I want to make is that a very large percentage of Airbus aircraft
are either manufactured in the U.S., components, engines,
avionics
Stephen Trent: and same goes to Boeing. A lot of the components that go into Boeing.
aircraft are manufactured outside the United States so
It's going to be a pretty complex
Stephen Trent: calculation to figure out what percentage of an Airbus AC-21 is U.S. made
Stephen Trent: Even if it's built in Europe versus being built here in Mobile, Alabama.
Stephen Trent: And the same thing with Boeing, I mean big components of the 787s.
and 737s are manufactured outside the U.S.
Very helpful. Definitely appreciate the color.
Stephen Trent: and just one other high-level one for you here. I think on some of the previous calls you know you guys have not expected aircraft supply to normalize for a couple of years.
Speaker Change: And what you're seeing in the tea leaves from your suppliers, you know, have your views on that changed at all? Do you still think we're a couple of years away from normalization of aircraft production? Thank you.
No, views have not changed whatsoever.
Speaker Change: You know, over multi-years, we don't see any change at all. We think aircraft are still going to need a short supply. The manufacturers are not going to achieve.
Speaker Change: nearly the rate of production that they would want to achieve or that would need to make up for the last several years. So, we're quite convinced we're in this for a fairly long period of time.
Okay, I appreciate the color. Thank you.
Speaker Change: Your next question comes from the line of Ron Epstein with Bank of America. Please go ahead.
Good evening.
Speaker Change: So, maybe just following up on Steve's last question, do you have any sense when the industry will actually be back in equilibrium? I mean, how long is it going to take the industry to dig itself out of the hole in terms of the shortage of supply?
Speaker Change: If anything, Ron, we have been stretching out that time frame, not shortening it.
Speaker Change: I'll give you an example. The appetite of the airlines for spare engines
to cover
for engines that are in the shop.
Speaker Change: for much longer periods and with longer lead times to an overhaul facility to even just get in.
Speaker Change: creates a shortage of new engines because today, a larger percentage of the production of CFM leak.
GTF engines
are being allocated to cover airline operations today, AOGs today.
Speaker Change: And so that is a constraining factor on both Boeing and Airbus, getting enough engines
to be able to increase production rates.
So that's one factor.
Speaker Change: The second factor is that during the pandemic, a lot of the smaller subcontractors for both airframe engines and avionics and BFE, seats and galleys,
Reduce their staffing and cut back on their
Speaker Change: on their infrastructure, and now they're being asked again to ramp it up, which means they have to invest more in machinery and digital tools.
Get their hands on labor that's trained.
Speaker Change: And so those are all factors that are limiting the ability
Speaker Change: of the supply chain to get back to what you said was pre-pandemic levels.
And it's not an overnight process, as you can imagine.
But I would say the engine situation is the most...
are visible to us.
and all the discussions we have with airlines.
Thank you.
And would you say the airlines are...
Getting accustomed to flying older equipment.
meaning that maybe your releases will just...
Speaker Change: last longer for the foreseeable period of time? Yeah, we're seeing that particularly in North America.
where, with a refurbished
Old Northwest Airlines HB-20TO
that's more than 25, in some cases 30 years old.
Speaker Change: With a refreshed interior, the customer who gets on Jetway doesn't have any clue how old that aircraft is.
because most of them have been freshened up.
So a lot of the 767s.
earlier generation 737s, A220s, A221s
are staying in service longer.
Speaker Change: than what was originally anticipated. And this is to cover growth in traffic.
Speaker Change: as well as the delays and the new deliveries that they've contracted for us.
Speaker Change: All of that leads to us being asked to provide more aircraft than we have.
Speaker Change: where supply is limited and demand far outpaces our ability to get enough new airplanes.
Speaker Change: and many more. Thank you for watching. I hope you enjoyed the video. If you did, please give it a thumbs up, leave a comment and be sure to subscribe to my YouTube channel. I'll see you in the next one.
Speaker Change: And then maybe just one last related question, and again, this would be constrained by the supply chain, of course, but kind of all else being equal, do you think that the industry needs a third supplier now? Because it seems like two isn't enough.
Speaker Change: Well, if you look at the size of the overall commercial jet population,
Speaker Change: and the forecast that it's going to go to about 40,000 airplanes.
in the next six or seven years.
There's definitely room for a third party.
But I think that third party...
Speaker Change: and the ones that talked about Moses Embraer would need a partner in that program.
that has financial key pockets.
Thank you. Bye.
Speaker Change: But that is one possible alternative, and I know the guys down in Brazil are working on that very hard.
Speaker Change: The big question in our mind, Ron, is what engines would go on that airplane?
Because if it's the same old
Catalog, Leap.
Speaker Change: 1A, 1B, or the current GTF which hopefully will get upgraded in 2027. What engine would somebody put on that? Because that...
Speaker Change: is a big factor. There needs to be a step change improvement in the propulsion system.
Speaker Change: Not so much on Huber, but more on reliability and dependability.
and life on the wing.
Yeah, that makes sense.
Cool. All right. Thank you. Thanks, Ron.
Speaker Change: Your next question comes from the line of Katherine O'Brien with Goldman Sachs, please go ahead.
Oh, thanks so much for the follow-up.
Katherine O'Brien: I just wanted to come back to the 5 billion number you gave, you know, it was really helpful just helping us think through like what percentage of book values
Katherine O'Brien: you know tied to these COVID ever leases over the next couple years you know just in very rough numbers understanding you know the backdrop might be different today it doesn't sound like that's what you guys think sounds like you think it might even be better but if you could snap your fingers and write those leases at today's lease rates
Speaker Change: What would the upside be on that pool of aircraft? Thanks so much for the extra time.
Speaker Change: It's hard to say because it depends on the airline, the length of the lease extension.
important to know because it all described the business performance
than the lease rates we currently enjoy.
Speaker Change: So, as these leases come off that sort of charity period, I call it, to our customers to keep them alive and kicking.
as those progressively come off.
Speaker Change: Between now and the fourth quarter of 2026, we are going to see marked improvement in the lease yields on those aircraft.
especially since they're being depreciated.
Speaker Change: So the factor of the depreciated cost versus lease rate is going to be improving every quarter.
once these charity careers are over.
Yes, so doubly beneficial to lease yield.
You know how much of this comes off
every quarter or every six months.
Speaker Change: Yeah, I mean we we gave some color that we thought that we'd modestly increase over the next four years. I think what that means is somewhere between 150 to 200 basis points in yield improvement over that period of time, over the four year period.
per year, Greg, or the total period? Sorry. Total. Okay.
Keep in mind, Katie, we've got a...
Basically, just about a $30 billion
Speaker Change: that book of aircraft and so these Significant lease rate increases are very very helpful But you know it's trying to steer a pretty big aircraft carrier So it just takes a little bit more time to push the carrier around versus a little speedboat
Understood. Thanks again for the extra time.
Sure.
Jason Arnold: And that concludes our question and answer session. Mr. Arnold, I'll turn the call back over to you.
Jason Arnold: Thanks everyone for participating in our fourth quarter call. We look forward to speaking to you again next quarter. Krista, thanks for your assistance and please disconnect the line.
Jason Arnold: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.