Q2 2019 Earnings Call
I'd now like to introduce your host for today's conference Mary List Apama head of Investor Relations. Please begin.
Hello, everyone and welcome the early Corporation earnings call for the second quarter 2019. This is Mary was the PAMA and I'm joined this afternoon by Steve Harvey Our executive Chairman, John Plueger, Our Chief Executive Officer, and President and Greg Willis, Our executive Vice President and Chief Financial Officer.
Earlier today, we published our results for the second quarter of 2019, a copy of our earnings release is available on the Investor section of our website at Www Dot Air lease Corp. Dotcom. This conference call is being webcast recorded today Thursday August eight 2019, and the webcast will be available for replay on our website.
At this time all participants to this call are in listen only mode. At the conclusion of todays conference call instructions will be given for the question answer session.
Before we begin please note that certain statements in this conference call, including certain answers to your questions are forward looking statements when the meaning of the private Securities Litigation Reform Act. These include without limitation statements regarding our future operations and performance revenues operating expenses stock based compensation expense and other income and expense items.
These statements and any projections as to the Companys future performance represent managements estimates for future results and speak only as of today August eight 2019, you definitely involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the securities and Exchange Commission for a more detailed description of risk factors that may affect our results.
Air Lease Corporation assumes no obligation to update any forward looking statements or information in light of new information or future events.
In addition, certain financial measures will be using during the call such as adjusted net income before income taxes adjusted diluted diluted earnings per share for income taxes and adjusted pre tax return on equity are non-GAAP measures.
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 and 10-Q issued today. This release can be found on the investors and cross section of our website at Www Dot Air lease Corp. Dotcom unauthorized recording of this conference call is not committed I would now like to turn the call over to our CEO and President John Plueger.
Thanks, Mary Lynne.
Well good afternoon, everyone and thank you for joining us.
I'm happy to report the continued strength of our business with revenues up 18.5% for the quarter and up 20.3% for the first half of the year.
Our P.P.S. grew 5.8% to $1.10 for the quarter and 14.2% to $2.33 for the half year with strong pretax margins and return on equity.
During the second quarter, we delivered 16 aircraft from our order book and acquired one aircraft from the secondary market, representing approximately 1.6 billion in aircraft investment, which despite the Max grounding and ongoing delivery delays with Airbus is the highest level of aircraft investment in any quarter during our company's history.
Last quarter, we advised that we were lowering our assumptions for aircraft investments for the full year 2019 from six and a half billion to 5.8 billion.
Now due to ongoing grounding of the Max and ongoing delivery delays by Airbus. We are lowering our assumptions for aircraft investments again for 2019 down to approximately 5.1 billion, which assumes that we will not be taking delivery of any Max aircraft for the end of 2019.
This assumption is our own not boeings and I would remind you that our match customers in fourth place deliveries are outside of the United States and therefore are ultimately dependent on foreign regulators not the essay.
Frankly, I hope our assumption is wrong as we do look forward to the Liberty Recommencement of them acts as soon as possible.
Well the Max crowning has been tough for our customers and the entire industry. The most important aspect is that the aircraft is safe when it returns to service, we know that Boeing the F.C. and the world's aviation authorities are working hard to restore the Mac safely to the year and we remain fully confident in that outcome as do our airline customers.
So big picture for L.C., Let me just summarize by saying that our revised estimate of 5.1 billion and aircraft investments for 2019 is still 55 zero percent higher than 2018. So we remain on track for our strongest growth year since inception of the company.
As anticipated and as we previewed to you last quarter, we did not sell any aircraft in the second quarter as we focused on fleet growth.
Our fleet remains young and full of highly in demand aircraft, which are generating healthy returns for our shareholders.
We see continued strong demand from aircraft buyers for the foreseeable future, which allows us to tailor our sales to be consistent with our growth objectives and maximize value of each and every aircraft to our shareholders.
Consistent with our expectation and as we shared with you last quarter, we do anticipate sales from our fleet occurring in the second half of the year for which several have already closed into Q3.
Greg will provide further quantification of this in his remarks.
Looking at the macro picture as you would expect we are closely monitoring trade matters global economic activity environmental issues currency and interest rates.
As we have expressed to you over the past year based on our interactions with our customers to date.
We have yet to see impact to overall demand for aircraft.
And as we have also shared with you previously we are experiencing no issues on our aircraft deliveries into China, or a pretty new deals with China. As you saw from our June 16th press release for 10, New Athree 21, new aircraft with Sichuan Airlines.
Looking at todays overall demand picture the shortage created by the Max grounding and the Airbus delivery delays have if anything strengthen near term single aisle demand and we have seen an uptick in certain lease rates, particularly on the Athree 21 Neo.
It is premature to speculate on Max lease rates going forward.
As much of our new lease lease lease placement activity has been somewhat muted pending return to service of the Max.
On the wide body side I would call your attention to the strong lease placements, we have announced during the past 90 days and particularly during the Paris Air show to show. The continued good placement momentum we have been experiencing.
Those placements include 10, Boeing 787 Dash tens with Korean won 787 Dash 10, with KLM 177 dash nine with yellow T. Polish Airlines, three Athree 59, hundreds and Athree 50 Dash 1000, with air carried and French be respectively, and six Athree hundred 3900, Neil's at Virgin Atlantic.
In fact as of today, we are 76% placed on our wide body aircraft cumulatively and importantly, these placements or reach which with which we are very happy.
So at the Paris Air show, we announced a significant deal with Airbus for 100 aircraft.
And as part of this agreement we partner with Airbus to launch the Athree 21, XL, our India with 27 from orders and we added 23 incremental Athree 21, Neo firm orders and ordered 58 to 20, the X 300 aircraft.
We also just or order book for the additional 577 dash nines with Boeing.
Look we believe strongly in all these aircraft.
Just to provide some color on these doors, let me start with the Athree 21, EXL our neo in our view. This aircraft currently has no equal it has the ability to fly tend to live in our missions with a range of up to 4700 nautical miles and the XL arc and carry well over 200 passengers. It's also 30% more fuel efficient than the 757.
We're already seeing strong demand from our airline customers.
Frankly, this aircraft was a no brainer.
As it relates to the eight to 20, we believe that this aircraft under Airbus ownership is much more than our traditional regional jet.
It has the ability to carry up to 160 passengers comfortably in a substantially more fuel efficient than an athree 19, or a 737 700.
This aircraft is ideal for connecting secondary cities, where we are seeing continued growth in passenger traffic and the market is embracing this aircraft as near term delivery positions are sold out.
Steve will comment a little bit further on the 220 dash 300 in his remarks.
Finally, the 77 Dash nine has been one of the strongest if not the strongest wide body aircraft in our portfolio.
We continue to get good strong request for the 77 and these five additional units reflecting ongoing lease placements.
Our all covered they've not all all these lease placements are and have not yet been announced.
Looking ahead, we see demand for aircraft as being resilient in the face of global headlines.
In addition to the need for replay to replace aging aircraft, which has been ltcs focus since inception.
The industry continues to have a multitude of other factors driving incremental demand for new jets.
It's undeniable that air travel has become the world's form of mass transportation for anything over about 500 nautical miles.
As the total cost of travel becomes more and more affordable with increasing connectivity globally.
This is being driven by the technological disruption throughout the travel agency for example, with hotels rental cars with businesses, such as air Bnb and Uber along with the advent of.
The Lccs and you lccs in the airline industry, all which helps to make travel more affordable than ever.
AOCI is daily conversations with our customers provides our team with the best real time pulse on the marketplace and it's clear to us that the dynamics I just discussed are driving passenger traffic and our airlines needs for new aircraft.
As a result of this we continue to place our order book to both long time, and new airline customers at a good pace and at rates rates with which we are happy.
With that let me turn the call over now to our executive Chairman, Steve Harvey to provide further color on our placements and additional commentary and what we were seeing in the marketplace Steve.
Thank you very much John .
Air lease is delivering outstanding operational and financial performance.
As we build our best in class fleet on long term leases.
We now have over 100 airline customers.
And as of mid July we had already surpassed 300 aircraft in our own fleet.
And more than $20 billion in total assets.
Two fantastic milestones.
For our company after nine short years.
Aviation is a dynamic business given its global nature.
As always are currently many variables at play with trade currencies rates and OEM delays just to name a few.
But broadly speaking our airline customers are generally healthy as a result of ongoing passenger traffic trends.
Relatively low interest rates and manageable energy prices.
Labor of course does prove troubling for some airlines, particularly in Europe .
But this is nothing that we've not seen before.
And despite ongoing geopolitical dialogue, we continue to see ongoing demand from airlines from all regions of the world.
In fact earlier today.
The International Air Transport Association data reported.
That as of June .
2019, RP case revenue past few kilometers were up 5% globally.
With a record high passenger load factor of 84.4%.
Despite I added highlighting a moderation in growth over the past few months.
We find overall traffic growth.
Still compelling.
With continued strong load factors.
The grounding of the 77 Max.
Has given many airlines a healthy opportunity to pause.
We evaluate and reconfirmed their fleet replacement and growth requirements.
And we do not see any evidence.
Oh, an overall pullback aircraft demand.
The continued demand we're seeing for our new aircraft is evident in our forward lease placements.
Which now stand at 97% 2020.
And almost 80% through 2021.
These placements together with the aircraft we have on lease result in LC having.
28.7 billion.
28.7 billion in total committed future rentals.
In addition to the announcements we made at the Paris Air show.
Which John shared with you.
We have made several other significant placements and deliveries over the second quarter.
For example in Asia, we announced the placement of two Athree 2200 meals with Vietnam Airlines would follow our recent placement of 12 Athree 21.
Neos to Vietnam Airlines, one of the fastest growing airlines in Asia and a customer.
With which we have a longstanding strategic relationship.
Additionally, in Asia, we placed two new Airbus Athree hundred 20, Neos and two new Athree hundred 21 meal, Lars which PT aviation in Japan and delivered the first of what will be two additional 77 tends to Eva air in Taiwan.
In Europe .
We just delivered the first the eight new Airbus Athree hundred 21, 200, Neil as ours. The long range version of 80 21 Neo.
Aer Lingus.
The flag carrier line of Ireland.
As part of that airlines ongoing fleet transition.
For a more extensive trans Atlantic operational network.
We also delivered one new Airbus Athree 21, Neo to Atlantic Airways, the first of two which we delivered to the national airline to the Faroe Islands.
And two eight doors airlines.
In Portugal, we delivered airlines first of three AC 21 Lars.
Also operating on the North Atlantic.
To us and Canada.
Finally, we continued our dialogue with our customers in the Americas.
And over the past month delivered to Athree 21 200.
Two our long time customer Air Canada.
And placed.
Three Athree hundred 21, 200, neo aircraft with Sky airline in Chile.
So as you can see a great deal of activity across the globe just in the past quarter.
In addition, we have a number of unannounced lease and allied commitments for both new Airbus and Boeing aircraft, we have on order.
As well as leases for a number of used aircraft in our portfolio.
Since inception of LC, we have targeted I diverse, but highly efficient mix of aircraft types.
Constitute an optimized commercial aircraft portfolio.
That will be in high demand across a broad base of airlines.
And we will maximize long term profit generation for our shareholders.
We've had many inquiries about our decision to place an order.
For 50, Airbus Athree hundred 20 aircraft with the options for an additional 25 units.
It became clear to us in the course of the past year and more strongly so over the past six or seven months.
At this aircraft has gained considerable momentum in the marketplace.
We are now being asked routinely about it.
And our ability to provide this aircraft is really important for our customers.
Let me just remind you that the Airbus to 20 has now been ordered by airlines, including Delta.
Air Canada.
Jet Blue.
Korean Air.
Air Baltic.
Swiss.
Egyptair, David Neeleman, Moxy, and most recently air, France, which announced last week a commitment.
For 16.
Eight to 20 dash three hundreds.
This is quickly turning into a mainstream aircraft. So as always we take our strongest indications from our global airline customer base.
In considering the types of aircraft order.
On the Airbus is ownership and with our LC order, we have much long term confidence in the growth and role of the 220 for many of our good airline customers.
And with our new order for the Athree 21, XLR, Andy 18 20.
We enjoy a market leading position among less source for these aircraft.
And with that I will turn the call over to our CFO Greg Willis.
To provide an update on air lease's financing activities during the second quarter.
Thank you, Steve and good afternoon, as John mentioned earlier, we continue to execute on our growth plan by providing revenues.
By growing revenues by 20% during the first half of the year. This growth was driven by the $2.6 billion in aircraft investments that we made over this timeframe.
Keep in mind, we are harvesting the commitments that our team made three to four years ago and they are bearing fruit today, which you can see through our 15% pretax return on equity.
It is worth noting that these returns were generated with minimal aircraft sales trading and other activities, which represented less than 2% of total revenues.
Our quarterly earnings were impacted by the continued delays that the industry is experiencing from both Boeing and Airbus Our decision to shift sales to the second half of the year.
As well as the fact that we had seven aircraft in transition during the second quarter relating to the file bankruptcy.
As you'll remember at the end of the first quarter, we foreclosed on the while security package, which resulted in a gain during the first quarter. This gain more than offset the fact that these aircraft were in transition during the second quarter and were not fully generating revenue. During this period. The bottom line is that these the gains from Q1 more than covered the loss of revenue in Q2 during their transition.
Turning to expenses interest expense increased year over year in line with the growth of our fleet.
Given the high percentage of fixed rate debt, we typically do not see very much movement in our overall composite cost of funds quarter to quarter that said new financing rates have come down significantly since the start of the year and we will benefit from these lower rates as we layer on new debt to finance our growth.
Next depreciation continues to track the growth of our fleet similar to how funding costs work and lastly, SGN and remained in line with the last three quarters.
Outside of quarter to quarter variances, we expect revenue growth to outpace SGN and growth over the long term.
Looking ahead, we expect that 19 aircraft will deliver in the third quarter, representing 1.9 billion in aircraft investments. This number does not include any incremental purchases or Max deliveries regarding sales as John mentioned, we anticipate that sales activities will increase in the second half of the year.
As the market for used aircraft remains strong.
These sales will continue to demonstrate the value of the aircraft that are in our fleet today.
We are still targeting around $1 billion in sales during 2019 consistent with what we told you at the beginning of the year.
We expect approximately $350 million of these aircraft sales to occur.
In the third quarter.
However, we will update you again, when we publish our activity report in early October .
Turning to financing activities in 2019 to date, we raised $3.4 billion in debt financings to finance the growth of our fleet and to increase our liquidity position to 5.3 billion. We completed two debt issuances during the second quarter, including a fixed rate $715 million medium term note.
At a fixed interest rate of 3.75% that matures in 2026, and a $300 million floating rate issuance priced at LIBOR, plus 67 basis points maturing in 2021.
We continue to benefit from our investment grade credit ratings, which are the best in class as compared to Standalone aircraft, plus or peers, providing us increased access to capital and attractive funding costs.
Our debt to equity ratio increased modestly quarter to quarter to 2.4 times still below our long term target of 2.5 times that continued delivery delays have left that have left us modestly underlevered relative to our target, though we continue to expect to return to the 2.5 level later this year.
Just as a reminder, our debt to equity target is a target and we regularly fluctuate above and below this level based on the timing of aircraft investments and sales.
We also remain committed to our core financing strategies of roughly 80% fixed rate debt and 90% unsecured debt.
And with that I will turn the call back over to Mary lives for the question answer session.
Thank you at this time, we'll open the line for Q and I would ask that you limit your questions to one question and one follow up operator.
Thank you ladies and gentlemen at this time if you have a question. Please press Star then one on your Touchtone phone. If your question has been answered or you would like to remove yourself from the queue. You May press the pound key to prevent any background noise. We ask that you. Please place your line on mute. Once your question has been stated.
Our first question comes from Mr. Kim.
Of Stephens Your line is open.
Thanks, Good afternoon guys.
First question kind of on the the Max delay. So appreciate the updated guidance for purchases this year.
I guess once the delay is gone and global regulators approved the changes.
What would you expect the chiefs of Max deliveries to be.
From your experience with prior delays.
Well I will only say, we truthfully, we really haven't had experience of of this type of delay.
It's really hard to say what the what the pace of re deliveries will be there will be a certain amount of time, obviously to take current aircraft that were flying and fleets.
To to start flying again, as well as a process of taking aircraft out of their stores that have already been.
In effect completed and delivery of completed in production by Boeing.
It's really hard to to to estimate and also will depend upon how much for example, foreign or other regulators might require some additional training. We don't know if that will happen as well so.
There's really a lot of variables Vincent.
And I I, so I kind of pause shore from giving you a timeframe no one month to month six weeks, it's just really different in some it will depend upon each individual airline yeah and the other factor Vincent as.
We cannot predict as we sit here today, what boeing's production plan is.
Beyond September October November December of this year.
If they're going to make further adjustments in production.
And when will they get back to the 52 a month.
Which was the rate just prior to the grounding so.
All those factors will enter into the picture of when.
Oh, and new aircraft will deliver and to what extent they'll be delayed from the original contracted months of delivery.
Okay got it that's helpful in the interim with the delays.
Has there been any themes on the discussions you've been having with the airlines on getting some intermediate left and.
I thought it was interesting that you shifted some of the Max orders disseminating seven study.
Any views that as that drove that change. Thank you.
Well.
We are working with each airline on a case by case basis, we have lined up interim lift.
For some of these carriers.
Both on a dry lease and on short term wet leases from other airlines.
We've also worked with some of our customers to realign their scheduling.
And modified their operational parameters.
To fly more hours with the aircraft that they already have.
And with respect to your question about the 77.
We basically founder fell short.
In the second quarter of this year of 77 Dash nines in other words, we had more demand.
In 2020, 2021, and 2022 than aircraft we had on order.
Of this a subtype of 77.
So with the.
A mutual agreement with Boeing.
We felt that the wisest thing to do was to convert.
15 of our Max.
Eights and nines into five additional 77 dash nines.
Okay got it very helpful. Thanks, so much and we continually reshape our order book and make changes, it's an ongoing process with both Airbus and Boeing. So this is really nothing.
Very unusual we're perpetually fine tuning our fleet composition.
Great. Thank you.
Thank you and our next question comes from Moshe Orenbuch of Credit Suisse. Your line is open.
Great. Thanks.
I guess, maybe just track the downstairs expected pace of normalization.
You know that the Q is got a schedule.
Expected.
Yeah.
You paid for it.
No that's not the same as directed Capex.
Six and a half billion 20.
6.7 billion to change 21.
How does the delays.
But back to the other models kind of factor into that.
Moshe its Greg I'm right now we.
I have.
Taken as John said during his opening remarks that with regards to the Max we're not expecting any in 19, and we spread those across 2021.
With regards to the Airbus narrow body aircraft. We then regular dialogue with Airbus and we have adjusted our contracted schedule from last quarter to reflect continued delays with their ability to meet their.
Original commitments to us. So we continue experience several months delays on Airbus side, as well and those have been reflected in the commitment schedule that you see.
And right now it's our best estimate of when we think these airplanes are going to deliver bottom line. Moshe is if we have if we can take as many airplanes. This year, we will still be taking them on their way and so we just spread them over the next couple of years to our best capability in working with both Airbus and Boeing the Moshe the one thing I'd like to emphasize theme that we've not had any cancellations.
On the Airbus products that are Lee, which are primarily the AC 21, Neo and Athree 3900 Neos.
For the maxus so.
All of our leases are still intact.
And even though.
It's an ongoing dialogue with all the customers.
People have not walked away from their commitment.
Got it so it's just a it's essentially China once those leases.
Yes, similar contract [laughter] Wow aircraft had been on the books at the beginning of the quarter and placed at the beginning of the quarter could you tell us what the impact.
Or the benefit would have good Q2.
I don't think we're going to give the specific rentals a tie attached to a individual name, but I can say that the yield of the portfolio would have been in line with where it was last year.
So I without giving you a specific number if you look at our yields they would have been normalized year to year. So you wouldn't you wouldn't have seen change well she's having understand these aircraft, we're actually in very high demand, but when they come out of a situation with an airline closing there has to be reconfiguration and that sort of thing and the mros across the world are very very busy.
With many different aircraft and so it's really just a matter of timing certainly demand was very strong and our placements were very fast.
And from a capex, our cash position, we retained all of that cash deposits and reserves that we have from wahler and all of the New Airlines of course, then paid new deposits.
On on these leases.
So on a cash basis.
We really didn't see any any real impact for the call.
Right, Yes, I mean, I think it's important if you look from a six month year to date from a year to date perspective. The whole thing is normalized right you have a little PML geography, but year to date.
The if it's merely timing, resulting in a 15% pretax Harley.
Thanks.
Thank you.
And our next question comes from Catherine O'brien of Goldman Sachs. Your line is open.
Good afternoon, gentlemen, and welcome back Mary Lynne.
So I guess just a question one more on the Max I apologize. So your four placements are still looking really strong 77% over any deliveries already placed curious out I guess, how are you thinking about the impact of forward placements at the Max grinding process much longer.
I think you kind of alluded to maybe having to take a pause on placement efforts on that aircraft and then I guess do you. When do you anticipate any disruption on on lease rates steadily thinking any win when they kind of redoubled their efforts to get those.
Does play farther out or do you think that there's just such a.
Short term need for for Narrowbody lift it could offset that.
Katy I thought that.
Yeah, I just I did say in my remarks, it's a little premature to speculate on forward Max rate suffice to say that you're closing comment is correct people need these aircraft.
But at the same time as you can imagine as I also said our forward placements as a bit muted.
Because generally speaking airlines just want to make sure that this airplane is.
Backup and flying safely they haven't stopped we have a few ongoing dialogues, but certainly they've been muted until until this guy is clear.
Let me add a couple of comments here.
We should we should separate the Max is into two categories. One the aircraft that we've already delivered.
And aircraft that have already been contracted on lease.
So on those aircraft the airlines are committed.
Two specific levels of lease rates and other commercial terms.
To the to the extent that any of those customers will demand concessions.
Please understand that we will look to Boeing to cover every dollar of any deficiency that might arise. So that's point number one.
Secondly.
Aircraft that we have not yet placed.
To the extent that there might be a bit of softening for a certain period of time again, we will sit down with Boeing and address that issue.
It's not the intent of air lease to suffer for having had confidence in the Boeing 737 family.
The clear thanks, so much for that color.
And then maybe one for Greg Uh Huh.
The move and then just doesn't move lower interest rates, it's of course fairly recent.
But do you think you'll be able to take advantage of low rates and the short term I guess like what kind of refinancing opportunities you have or the next six to 12 months. Thanks.
Yes, I think we have.
We have a floating rate target of 20% that's tied to its our basically our revolving credit facility, which is tied to LIBOR at LIBOR, plus 105, and as short term rates are lower that has a very direct and quick impact.
Also it's worth as I mentioned earlier longer term rates have come down significantly. So when we go out there and do our refinancings as well as our new issues to fund our Capex.
The all in rates or.
75 to 100 basis points lower than they were at the beginning of the year. So as we layer on I think we're definitely have an interest.
Expense savings.
Appreciate that thanks for the time.
Thanks Katy.
And our next question comes from Jamie Baker with Jpmorgan. Your line is open.
Hey, good afternoon everybody.
Mark and I have a couple of questions first.
Following up on Catherines on the placements, 97% next year 77 through 2021, we ordinarily don't ask about this metric but could you.
For some color around the aircraft families that are unplaced.
Any commonality.
Yes, this 4737 Max's.
Oh in 2024, which we had little wise.
And commitments from an airline ready to be fine.
These are aircraft that the back end of 2020.
Okay and in fact, the airline in question was ready to sign those commitments.
Before the end of March.
Then we have the grounding.
And the airline decided to hold off on that commitment.
These deliveries are primarily in the fourth quarter of 2020.
So to the extent it Boeing cannot catch up.
Because of the reduced production rates it is conceivable.
It's conceivable.
Of that those delivery slots will actually slide into 2021.
And that really depends on the rate recovery.
In Renton.
To get back to the 52 and to recapture the 10 aircraft a month less that Theyre building currently.
So that explains the 2020 situation.
In 2021.
It's essentially a a relatively small number of Max airplanes again that are placed.
And then we have a very small quantity of Athree hundred 50.
And Athree hundred 30 Neos.
That are all under negotiation right now with various airlines.
So Jamie I would just add big picture Theres, no category or class of aircraft, Max or neo or wide bodies or not.
That are are taking on a posture of being less placed we are still pretty consistent.
Across these lines, even with the Max and Steve you gave the color on that so I just want to reemphasize, we have very strong confidence in our whole order book.
That's perfect. Thanks for the disclosure second question for Mark and I were looking at some data.
Earlier today from D.A. and.
Kind of showing how global airline earnings are beginning to trend lower but profits also growing a bit more concentrated.
In a select number of carriers I know you've spoken theatrically about the global industry, but how are you thinking about the specific you know the overall health of your specific airline customers. You know how many are on the watch list now versus maybe six months ago and how is that changed is it just seemed somewhat contradictory to be bullishness that you spoke with spoke to in neuro prepared remarks.
Well look I'm happy to comment.
First of all the level of Arrearages as if you will are very modest in our in our total fleet and.
John and I can also tell you that our total commitments under security packages, well exceed well exceed our level of arrears.
People have raised questions for example about hiring on a we don't comment on any specific receivables balance, but I'll just for the record say for example, we have two 737 eight hundreds and two 780 sevens with pine on but those two 737 eight hundreds are having their normal scheduled lease returns in the fourth quarter. We are progressing with the airline on on those returns.
We have the first of those 800 place we're close to a place in the second so that will reduce our exposure there.
Two to 780 Sevens.
And back to abroad outlook look since the start of air lease Corporation than as we experienced and I live see naturally speaking whatever whatever levels of receivables or Arrearages you have it just grows with the size of the company.
Ours is overall very low and manageable, but as the case with Heineken and all the rest of the companies who May Airlines, who may have a little bit of money, our security to packages well cover what they owe us.
And if I could just thanks for that John if I could just squeeze in a third one for Greg because I missed some of your remarks right before you went to the culinary so im on funding Aircastle source, some pretty aggressively priced bank debt is there a role for some secured bank debt in your cap structure or is the focus basically I think you said that 90% unsecured level I just I just missed some of your commentary there.
Right now we have about 3% secured debt to total assets are our funding target is 90% unsecured were well above that.
Right now we can fund significantly cheaper on an unsecured basis, both in the bank market as well as the bond market. So right now I feel like we're not receiving any compensation or if there is no incentive for us to secure financing.
Got it thanks for letting me sneak that in.
Yeah.
Thanks for letting me sneak that in thanks gentlemen.
Okay. Thanks take care Jim.
Thanks.
And our next question comes from Helane Becker of Cowen Your line is open.
Hi, Thank you operator.
Hi, everybody. Thank you for the time.
And so here is my question for you I don't want to ask about the Max if that's okay.
When I look at your distribution your geographic distribution are there opportunities for you you seem to be underrepresented in the Americas and I'm kind of wondering if there are opportunities for you to grow that did you grow your portfolio in those markets versus.
No other markets like Asia, or Europe , where you seem to have a lot of exposure.
As usual your mind reader.
[laughter].
Hi, [laughter], yes, so the answer to that yet.
We have a number of of lease of campaign initiatives.
Both in the Us and Canada, and you will be seeing announcements very very soon so we are going to ramp up a little bit.
Our us domestic business in our North American business.
And of course, the the new tax loss from corporations also will benefit us.
In that we can take additional depreciation.
For us asset versus a foreign assets.
<unk> will it adjusts your tax rate as well.
Now the tax rate will be neutral it just has to do with.
The timing of tax profit today.
It's a tool that we can use it in place of the loss of 10 31 exchanges.
I would add Atlanta on the tax rate.
You've heard us comment before.
You know we have a we have a strong office in Ireland, even our headquarters are here.
But we're also opening up our Hong Kong office, and there's a lot of tax incentives by the government of China, and Hong Kong for less stores.
To do that and that any assets that we own in Hong Kong will be taxed at about an 8.5% in Ireland is the low teens, so as we grow our business and place assets ownership in Hong Kong, which we intend to do we do envision a gradual lowering of our overall corporate tax rate.
But to answer your first question.
Well Helane in 20, and 21, you will see the U.S. and North American business percentage increase a little bit.
In the overall matrix.
Okay. All right. That's on that's really helpful. Thank you very much I appreciate that that's all I had.
Thank you.
And our next question comes from Scott Valentine of Compass Point Research. Your line is open.
Hi, Good afternoon, everyone. Thanks for taking my question just with regard to the secondary market I know you had one purchase in the second quarter. Just wondering how you view that market is it do you see it being attractive and maybe what segments or types of aircraft and maybe what age you mentioned new wide body, you've seen some pretty good demand that's kinda counter to what you hear generally speaking I just wonder if that's true for for maybe.
The second hand market aircraft as well.
Well well look we.
Scott since elsie's inception, and even in strong order book times, we have always seized upon opportunistic used aircraft purchases, we don't really see any major change in that right now, we we pounce when the opportunity arises so.
There's really no no change the marketplace for for used aircraft is strong.
But that doesn't mean, we can't find a good deal here too and we seize upon it so I would just say that theres really no.
Any sea change or anything else like that these are just things that we always look out and we seized upon.
There's just no.
Really no change there, but in the next two years.
Vis-a-vis used aircraft our primary emphasis will be selling used aircraft not buying new and used aircraft.
Okay. Thanks for that and then just a question you mentioned.
Adjusting for the while aircraft the yield.
Would have been flat compared to I think because a year ago I'm just wondering as we look out with repricing of older leases coming due.
How do you expect.
Overall lease rate factors and trends should there be some slight downward trend there.
Now, we expect that our portfolio yields to remain flat as well as our age.
As well and lease term remaining those core portfolio metrics, we don't see changing over the course over the next over the near term if anything the average lease term remaining may grow a little bit fractionally.
Because we're booking and delivering a lot of leases are that are between 12 and 14 year.
Terms.
I would remind you what I'm what I commented on in my remarks, and that is that we are seeing a particularly good strength in the 321 neo.
Marketplace for which we just ordered 50 more.
Okay. Thanks for taking my questions.
Thank you.
And our next question comes from Krish Patel with Deutsche Bank. Your line is open.
Oh, Hey, its Tom it's Mike Linenberg and quick to tell.
Actually two quick ones here John .
When you were going through your comments and you were talking about the strength of your wide body.
And then you made a comment about 76% of them being placed did you say I don't know if you said cumulatively or if they were placed through a certain year I missed what did you mean by on the wide bodies and the placement.
Cumulatively.
Cumulatively.
Okay. So thats.
What 76% of what you.
Have on order yeah, that's what we have on order.
Oh.
In other words, 70%, 76% of our wide body order book is placed so Mike Let's say, we had 100 wide bodies on order at a given point in time, including 70 777 nine and.
Athree hundred Thirtys Athree hundred Fiftys.
76 of those plans already leased contracted.
And less than a quarter still have to be place and Mike we have not announced all those lease placements, we not specifically announced all of them, but that's our overall percentage.
Perfect. That's that's actually very helpful. Then my second question I feel like I have to ask this because.
Like every single day, there's there's something new on on on the trade wars in tariffs in different industries getting hit and.
I think walk sort of watching closely whether or not you know aviation is going to be part of it I mean, the most part we're hoping that you know rational behavior prevails, but suppose that for whatever reason tariffs are imposed us on on Airbus Airbus on Europe on ongoing if you were to deliver an Airbus airplane.
I'd say, you're Ireland office.
With that.
Would that be subject to would that be a workaround.
With respect to Harris.
Okay, Okay, so that over that.
Well I already saw buys an airplane from to lose our Hamburg.
There is no importation of aircraft into the United States.
Right, it's not based on where the less or is domiciled. It's based upon the aircraft in where it's made and all of our leases require that the airline be responsible for.
Any tariffs are duties that are assessed in the importation process.
And right now there is already tariffs in place in various locations in a and b, including China, Russia.
His jurisdictions and the airlines figure out a way to make it too.
And Mike the greater first part of your question on duties and tariffs.
We have ongoing deliveries.
During the first half of this year and then continuing into later this year next year of aircraft into China.
Including 70 Sevens into China Southern.
We have 21, we recently delivered an athree 50 to a Chinese airline so.
We have not seen any any sort of declarations from the Chinese government.
That they want to.
Negate any importation of aircraft that the airlines have committed to.
Probably not that that's that's actually great great intelligence and Steve I guess when you take your first Comac COVID-19, it's going to the Hong Kong.
Brazil Im kidding, [laughter] will probably I will invite you on that flight, Mike well leased at Deutsche Bank.
To ferry cash between New York and Frankfurt.
[laughter], great Alright, gentlemen, thank you thanks very much.
Thank you.
Our next question comes from Kristine Liwag of Bank of America. Your line is open.
Hi, good afternoon.
Hi, Christine.
Steve and John for the 58 to 20 aircraft they ordered.
Can you discuss the fleet profile of the Airlines do you expect to lease this aircraft family what percent of them. Currently we are de aircraft and when you think about your sales campaign what percent of that 50% aircraft orders do you expect to sell two to lease of eight to 20 320, together and ultimately how to airlines thinks about.
Adding a new fleet tight to their fleets.
Okay, Christine you said a whole lot.
We're trying to write down what you're what you're the parts of your question can you just repeat again.
Piece by piece what percent of what again, you said a whole lot we're trying to answer by getting repeatedly slowly.
Well I was trying to get a lot. Other two questions. So I was trying to squeeze as much as I could but the pieces I'll give you a third one just to give you a third one will give you a path for a third one.
Okay. Good.
So the fleet profile. They airlines do you expect at least a family so how many of them already operate up on body aircraft.
What percent do you expect to lease an eight to 20 and easily 20, together kind of like a joint deal and then ultimately how to airlines think about adding this new fleet tied to their portfolio.
Okay. Good question. So on the 50 Athree hundred 20 ones that we ordered which are 27 XL ours. In 20 380 21, Neos, that's just an add on order.
We have the largest order and backlog for the 21 neo among all less source.
So the majority the majority of those aircraft will go to operators, who already have some member of the 20 family.
Either seals or Neos.
So in terms of integration those will be relatively easy due to the cockpit commonality a lot of the systems commonalities.
On the 220.
We're focusing on airlines that need to replace 80, 18, Nineteens and 77, seven hundreds and in some cases, even three hundreds and four hundreds and five hundreds.
And so we're looking at the 220 more as a replacement aircraft.
Whereas the XL ours are two airlines that want to open up their networks to longer range operations with the 21 XLR and the LR.
That makes sense. So let me let me just add on the percentage side Christine if I were to get and believe me we Haven.
I can't give you a definitive number here, but generally speaking one of the strengths we bring to any new aircraft program is to get new customers and new buyers and new lessees and that's what we're known for so as to the Athree eight to 20 I think your question was what percentage would be to currently existing eight to 20 operators and what would be to new and so generally speaking.
Our outlook would be that 80, 80, 80, 85% of our placements will probably be with new operators, maybe 15% to 20% with existing operators of eight to 20.
And then as to a combination placement of Athree hundred 21 Neo.
We really havent look to connect those two dots, but as Steve indicated with a replacement of an Athree 19 in mind, we will probably have a number or a handful of customers will will replace both but the big message I'm, telling you is it's no different for us than anything else at LLC has done in terms of new aircraft that we take on our mission and our value to Airbus than to the industry is bring again, primarily new customers.
That's very helpful and when the eight to 20, what is known as the C series, you get an order it and with Airbus dial behind the plane. It became more attractive to you otherwise you wouldn't have ordered the aircraft.
So with that in mind.
How do you view the Embraer E. Two if the Boeing and Embraer deal doesn't close in the next few months and what would have to happen for the he choose to become attractive to you again for a new aircraft order.
Well, we had a wonderful experience early in the air leases.
History in 2011 12 13.
We acquired.
Almost 30, new Embraer Eone hundred Ninetys, and 170, fives and placed them all successfully and.
And those were profitable programs.
But then because of the.
The opportunities to expand into other arenas.
Like the Neos, though some of the wide bodies.
We felt that we should.
Exit those assets and we did so at a handsome profit.
We are certainly always open to evaluating the two.
We will look at the two even more carefully one the Boeing and Embraer.
Marriage is finalized and approved by the various regulators.
But right now that is a question Mark and so we are now focused more on the twentys.
Great and earlier in your prepared remarks, you guys mentioned that you are seeing a premium and the lease rates for the say 20 family due to the 77 maxs issues.
Can you quantify how much that is.
Well, we're not going to quantify Kristine hate to disappoint, you, but I think we specifically said was the Athree hundred 21 Neo specifically.
And Ah there had already been us.
A strengthening trend and the Athree 21, neo prior to the to the Max round is somewhat I would only just say that with the Max grounding I would say that trend in that premium.
<unk> continues to look like it's it's not only maintaining but in fact, increasing.
Great. Thank you very much.
Thank you.
Thank you and our next question comes from Josh Sullivan with Seaport Global Your line is open.
Hi, good afternoon.
Hi.
Just on the wide body market commentary I mean are you seeing any impact to any elongating expectations for the triple seven ex launch timeline does that in any way contributing to the wide body market strength.
We don't have any trouble seven axis on order.
I need to make that very very clear.
Boeing has already announced a delay of up to a year primarily related to the engine development.
So thats just a program that we watch, but we are not invested in at this time.
But it's not impacting any decisions on wide body capacity well I think what we'll see is yes, I mean generally speaking in the 20 to 23 and 24 timeframe.
As I said before you're going to see a lot of the larger wide bodies retire.
The youngest triple seven 200 yards the oldest triple seven 300 yards any remaining athree hundred fortys and so by nature of that replacement need.
We're going to see a little bit acceleration of wide body and I do suspect.
People, who may have been on the fence for the Triple Sevenx may look to alternatives.
The other thing is that as we get out in that timeframe 20 120 223.
If there are any triple seven 300 yards with leases expiring.
We would expect those airlines to then look to extending those leases.
Due to the delays in the Triple seven dynamics.
Okay.
And then just a question on the leap versus the GTF and the market can you comment on any valuation or performance differences, you're seeing you mentioned some strength on the Athree 21.
Is that having the engine choice, having any impact there.
Not really the the lease rates, we don't see.
Significant difference either way.
And a lot of those engine choices are made by the airlines.
Depending on what other components they have in their fleet, what the engine maintenance capabilities are.
So we're not really seeing a premium or a discount for either the.
CFM leap or the Pratt Whitney GTF engines, they're pretty much in the same ballpark neither engine is yet perfect.
Got it.
At this time.
Thank you.
And our next question comes from Rajeev Lalwani of Morgan Stanley . Your line is open.
Hi, gentlemen, it's actually John on for Steve.
Two quick ones.
John I think you mentioned on the Max all of those aircraft are getting placed outside of the U.S. and even a touch with regulators outside of us with regards to any additional requirements incumbent.
Oh, Hi, the short answer is yes, but this under confidentiality discussions and we were just were not going to comment.
We're hoping the good progress was made and we do think that progress is being made but we've made our own assessments as to our deliveries for the rest of the year.
Got it.
And then just another question on the 80 20.
So given the obviously the healthy demand.
Is it fair to say that the twentys sort of garnering similar lease rates to other next gen narrow bodies.
You start out the Athree too we can't hear you Tony you said eight to 20, okay. Yeah yeah.
So your point is it fair to say that I'm, sorry say it again no no. That's okay is it fair to say that the 80 20 lease rates are comparable to other next gen narrow bodies.
We believe that we're going to.
Equal or better our current or better our current portfolio.
Lease rate factor with the 20.
Got it thank you guys.
Thank you Keith.
And I'm currently showing no other questions in the queue I'd like to turn the call back to Mary list of Palmer for closing comments.
Okay. Thank you everyone that concludes today's call. We look forward to speaking to everyone again after the end of the third quarter. Operator, you may now disconnect line.
Thank you ladies and gentlemen, thank you for your participation you may now disconnect everyone have a great day.
Oh.