AerCap Holdings N.V.

Good day and welcome to AirCap Holdings NV first quarter 2020 financial results conference call. At this time, all participants are in a listen only mode. After speaker presentations, there will be a question and answer session. Today's call is being recorded and a transcript will be available following the call on the company's website. I would now like to hand the call over to Joseph McGinley, head of investor relations. Please go ahead, sir.

Thank you, Operator, and hello, everyone. Welcome to our first quarter 2020 conference call. With me today is our Chief Executive Officer, Angus Kelly, and our Chief Financial Officer, Pete Uhass. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AIRCAP undertakes no obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AIRCAP's earnings release dated May 5, 2020. A copy of the earnings release and conference call presentation are available on our website at aircap.com. This call is open to the public and is being webcast simultaneously at aircap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Angus Kelly.

Thank you, Joe. Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings call in what is clearly a remarkable time. Our thoughts go out to those of you who have been directly impacted by this virus and to our staff, suppliers and customers who are working tirelessly in such trying circumstances. Despite the impact of the coronavirus in the first quarter, AirCap produced a strong quarter with net income of $277 million and earnings per share of $2.14. Now, how any company emerges from a crisis depends firstly on what condition it was in when it entered both from a financial and operational perspective, and then critically, what the company does during this period. AirCap has been through several crises before and has emerged stronger from each one. The key, in our experience, is to have a strong, independent liquidity position going in. AirCap has that with $8.2 billion of liquidity on hand, $28 billion of unencumbered assets, a seven-year low debt equity ratio of 2.5 times, and very manageable CapEx, particularly relative to our size. Our expected CapEx for the rest of 2020 is 2.7% of our total assets. It is vital in times of stress that one has a platform that can handle multiple challenges. AirCap's platform is unrivaled in this regard. To remind you, AirCap has bought, sold, and leased over 2,000 aircraft in the last five years alone, including over 500 wide-body transactions. These numbers and the associated infrastructure are unmatched in the industry. Turning to airline credit, it is very important to look at the credit quality of AirCap's customer base when assessing our financial strength. Approximately 70% of our fleet is with flag carriers or Chinese and U.S. majors. Relatively speaking, this gives AirCap a stronger base from a credit profile perspective. And given our scale and capabilities, we will generally have a more influential position with an airline than other lessors when deferrals or similar agreements are being negotiated. As you will be aware, aviation has been deemed to be part of the critical infrastructure of the global economy. This is evidenced by the massive state support airlines are receiving. I believe there will be over $200 billion of state support for airlines globally. Well over $100 billion has already been announced and or received. Crucially, most of AirCap's revenue comes from carriers that are important enough to receive state support. Now I want to explain how and why we help our customers. Many of our airlines have been long-term customers of AirCap and will be for many years to come. Because of this, we are providing them with assistance in this unprecedented time. in the form of rent deferrals. You can see from the slide in our presentation that we've entered into approximately $300 million of rental deferrals and expect to enter into another approximately $300 million of deferrals. The amount deferred is generally equivalent of two to three months of rent and repayment generally begins four to six months after. It is important that these numbers are seen in context. Against this $600 million of deferrals, we have $1.1 billion of security deposits we have a further 1.6 billion of maintenance reserves given the aforementioned credit quality of our customer base we expect a very high level recoverability of these amounts when discussing a deferral with a customer and deciding the size and duration of the deferral we take the following into account what is the collateral package we have what level of shareholder support has been received and what is the potential for state support of course AirCap continues to receive cash every single day. Since the 1st of April, AirCap has already collected over $200 million in cash from our customers and over $100 million in cash from aircraft sales. So even when there is a deferral, it is generally for part of the rent and the timing of the deferral agreement is staggered between different regions of the world. There is no doubt that some airlines will fail because of this crisis. To date, in our portfolio, we have seen Virgin Australia and Air Mauritius enter administration, which is a similar process to Chapter 11. When an airline enters Chapter 11 or administration, they will normally have between 30 and 60 days of protection from their creditors. After that, they either pay for the lease or return the aircraft. If we believe the right thing to do is remove the aircraft, then we won't hesitate to do so. In a number of cases, the airline can emerge from Chapter 11, and in these situations, they generally maintain the majority of their fleet. I think this is a likely outcome in the case of Virgin Australia. As I mentioned, aviation is viewed globally as critical infrastructure. Therefore, one way or another, The vast bulk of the world's airlines and aircraft will be in operation after this crisis ends. We are already seeing this in China. On liquidity, we have and continue to take actions to further improve our position. As I mentioned, we have $8.2 billion of liquidity on hand and $28 billion of unencumbered assets. We continue to source financing from our globally diverse lending base. And we have $1 billion of funding initiatives that have either closed already in the last few weeks or will close in the near term. The terms of these financings are relatively comparable to the terms we achieved with these lenders in prior transactions. These actions demonstrate the benefits of having a globally diversified funding structure with long-standing relationships and not being solely reliant on one source of funds. Further helping our liquidity, we have deferred over 60 aircraft deliveries. As a result of these actions, we expect CapEx for the rest of 2020 to be 1.3 billion, which is 2.7% of our total assets as of March 31, and this is fully financed. In March, we took the decision to draw down our RCF, Revolving Credit Facility, out of an abundance of caution due to the volatility of the capital markets at that time. Given the actions of the Fed since then, and further stability in the broader funding markets, we have repaid $3 billion of this RCF. Turning to the OEMs, as mentioned above, since our last earnings call, we have agreed to defer the delivery of over 60 MAX aircraft by several years on terms that we believe are attractive for aircraft. We do believe that assuming a successful re-entry of the MAX, this aircraft will be in demand in future years. and we wanted to ensure that AirCap has access to this aircraft on competitive terms. Part of this agreement, we retained our contractual rights and remedies. However, I do think it is likely that there will be additional delivery delays due to the challenges that the OEMs will have in their supply chains as they restart production. These potential delays are not factored into the numbers I just mentioned. Separately, In light of the recently announced OEM production cuts, we expect to see further reductions in our CapEx and deliveries in 2021 and beyond. Looking forward, it is very important to remember that aviation is by far the safest form of transport in the world. A fundamental part of this safety has always been the air quality on board an aircraft. The air in an aircraft is cleaner than any office train station or bus station this is due to the regular recycling of the air in the cabin every few minutes and the use of HEPA filters which are on a par with those used in hospitals to purify their air as people return to work they will and are using public transport hundreds of millions of people use public transport every day as such I am extremely confident people will say to themselves, I am on a train, a tram, or bus every day, so why don't I get on an airplane, be that in Seoul, New York, London, Beijing, Istanbul, etc. On the portfolio side, I believe that any crisis accelerates trends that were already evident. They don't create new ones. As we highlighted in prior calls, we were seeing a trend in certain variants of new technology aircraft and slowly out of current technology aircraft. Critically, we saw this trend out of current and older technology aircraft and we acted on it by selling over 600 aircraft in the last six years. Hence our barbell approach to minimize our exposure to current technology equipment. For example, we only have 12% of our portfolio by value in current technology widebody's. and many of them are on long-term lease to flag carriers. And 59% of AirCap's portfolio is in new technology aircraft. To put this in context, and as you can see from the two tables included in our presentation, there are approximately 20,989 large passenger jet aircraft in service. Only 12% of them are new technology. AirCap's fleet has more new technology aircraft than any airline or lessor in the world. Turning to demand for aircraft, there is no doubt that this has been impacted, but coming into this crisis, aircraft did not have a single new aircraft slot available until 2022. Furthermore, of the 55 used aircraft that Elyse is scheduled to expire this year, we only had six left to place, a manageable task for a company used to placing up to 200 aircraft a year. This is one of the key benefits of having longer than average lease terms, i.e. fewer expiries each year. Our average lease doesn't expire until 2027. Of course, some of these lessees will default, but Aircap's platform will find alternative homes for these aircraft. As I said earlier, airlines are deemed to be critical infrastructure by governments around the world. So one way or the other, the vast majority of airlines will continue to operate and fly our aircraft. As you can see from the actions of government, what might be good for creditors of airlines such as aircraft lessors may not be as advantageous for equity investors. That being said, there will be fewer aircraft operating in 2021 than expected. This will come from aircraft retirements by the airlines and a reduction in supply from the OEMs. To date, airlines have announced their retirement or possible intent to retire approximately 700 aircraft. Importantly, 240 of these aircraft are very large aircraft, such as A380s, 747s, 767s, and A340s. These large aircraft will take a disproportionate amount of ASMs, or available seat miles, out of the system. On the OEMs, as I've said in the past, A great advantage of this industry is the duopoly on the supply side. What we are seeing from Boeing and Airbus now is the same type of behavior that we've seen in past crises, where they ultimately do match supply to demand. The combination of the already announced OEM production cuts of between 33% and 50%, depending on the aircraft type, as well as the accelerated retirement of old technology aircraft by the airlines, will result in supply and demand ultimately. coming into balance. Now to what we are seeing in the market. There are three major markets in the world, China, Europe and the United States. I'm going to focus on China first because it was the first major market to deal with the coronavirus and the first to recommence air travel. For your benefit in the supplemental information to this presentation, we have included photographs that air cap staff in China have taken from airports around China on May the 1st so that you can get some sense of what is happening right now in active airports. At the start of the year, total flights in China reached a high of 15,885 flights on January the 23rd as we approach Chinese New Year. Then the concerns of the coronavirus took hold and the number of flights began to decrease and troughed on February 24th at 4,062, certainly a very significant decline. Over the course of the last two months, we have seen a steady increase in flight activity and load factors in China, where they are now running approximately half of the flights they were operating in 2019. They hope to get to approximately 65% during the summer. There was some very positive news from China last week when it was announced that the third session of the 13th National People's Congress would be held in Beijing on May 22nd, which had been postponed from March. Many representatives from the leadership of the Communist Party will go to Beijing from all over the country at that time. Also last week, the quarantine rules in Beijing were relaxed, which led to a surge in bookings on the online travel website. This demonstrates confidence in the safety of air travel and the desire of people to travel once authorities say they can. We are also seeing the first agreements on cross-border travel with the protocols being discussed between China and South Korea and other countries in Southeast Asia. In our discussions with European airline CEOs, we are hearing the same things we heard from China two months ago, which is that they expect to see flight activity to resume on a limited basis at some point in May. Right now, they are at the same stage that China was at in late February. The discussions I have had with European Airlines indicate a summer schedule for July and August equivalent to somewhere around 50% of their 2019 levels, moving to approximately 60% to 65% during the fourth quarter. Air France KLM has publicly said 70% by year end. Bear in mind that Europe is two to three months behind China. What is occurring in China today is what European Airlines expect to see in two to three months' time. In Europe, Eurocontrol, the entity that manages European airspace, yesterday observed that, quote, since mid-April 2020, a change of trend must be noted with a slight increase of average traffic in absolute terms compared to 2019, end quote. That said, the increases are slight and are coming off a low base in mid-April. I expect that we will see similar developments in the US domestic market. Another indicator we look at is hotel occupancy. In China, we are seeing this mirror air travel. Hotel occupancy has almost doubled from its February trough. This again shows that the consumer will get back on airplanes and will travel. It will take time to recover to the 2019 levels of traffic. But the crucial point to take away is that the consumer will travel and governments will support airlines. Also, AirCap closed the sale of 15 aircraft in March and April. Indeed, the value of aircraft sales executed in April alone was $150 million. In March and April, we also signed leases and lease extensions for another 15 aircraft. We continue to compete for RFPs for future placements from 2022 onwards, and our scale and reach does give us a competitive advantage in these processes. The execution of this number of transactions in this environment again demonstrates the unrivaled capabilities of AirCap's platform on both the asset and funding side of the business. Looking forward, we have provided consistent, stable returns over 15 years. And whilst this crisis certainly presents challenges, we continue to look forward. We will incur costs along the way. Not all of our customers will make it, but air travel will recover and people want to travel. As I said, we are observing this in China already. No doubt we are in unprecedented times, but you can see from the actions AirCap has taken to date that we are well positioned to weather this storm. With that, I will hand the call over to Pete. Thanks, Gus.