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.

Good morning, everyone. I'll start on slide seven. AirCap produced a strong financial performance in the first quarter with net income of $277 million, an increase of 18% over the first quarter of 2019. Our diluted earnings per share was $2.14, an increase of 27% from 2019. Our book value per share increased 14% over the past year,

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you've been reconnected okay thank you operator apologies for the for the technical confusion there I'll start again on slide 8 revenues and other income on slide 8 our total revenues for the first quarter or 1 billion 238 million dollars an increase from 1 billion 205 million dollars last year our basic lease rents were lower primarily due to downtime on releasing activity and and the write-off of $16 million of lease receivables in the first quarter. Our maintenance rents were $134 million in the quarter and were higher mainly due to lease terminations as well as higher end of lease compensation that we received during the quarter. Our net gain on sales for the quarter was $58 million, an increase over last year. And our other income was lower because we had higher interest income and some insurance proceeds that came through in the first quarter of 2019. On slide nine, our net interest margin for the first quarter was around $725 million. Our average cost of debt was 4.1% for the first quarter, a slight decrease from 2019. Our net spread was 7.7% for the first quarter, and our net spread less depreciation was 3.1%. The average age of our fleet remained just over six years. The average age of our new tech aircraft which represent 59% of our fleet today, is two and a half years, while the average age of our current tech fleet is 11 and a half years. Our average main lease term continued to be seven and a half years, which is one of the longest in the industry. Turning to slide 10, we sold 12 aircraft in the first quarter for a total of $265 million. Our net gain on sales was $58 million, which was an increase from 2019. During the first quarter, we sold 11 narrowbodies and one widebody with an average age of 14 years. Our gain on sales margin in the first quarter was 28%, which was due primarily to the sale of some older aircraft at a significant gain. On the purchasing side, in the first quarter, we bought seven new aircraft for total capex of $427 million. Slide 11, our SG&A expenses continued to decline and were about $65 million for the first quarter. Our maintenance rights expense was $16 million for the quarter, down from $21 million in the first quarter of 2019. This was due to lower maintenance activity and the continued decline of the maintenance rights asset balance as that asset continues to roll off. Our other leasing expenses were $87 million for the quarter, an increase from $70 million in 2019. This was primarily due to higher expenses related to lessor contributions and lease incentives during the quarter. asset impairments in the first quarter please stand by

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Please continue to stand by. The conference will resume momentarily.

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You've been rejoined to the conference, sir.

Okay. Thank you, operator. We apologize for the operating difficulty. There was some problem with the conference call. So, I'll turn back to slide 12, our liquidity position. We continue to maintain a very strong liquidity position. We're currently at the highest level of liquidity coverage we've ever had at two times sources to uses coverage, an excess cash coverage of $5.5 billion over the next 12 months. Our total liquidity is just under $11 billion. and you can see the components of that on the slide. Against that amount, over the next 12 months, we have $3.8 billion of debt maturing and expected CapEx of $1.7 billion. As Gus mentioned, our CapEx requirements for 2020 have come down significantly by around $2.3 billion, and we expect our 2021 CapEx to come down substantially as well in the future as we continue to have discussions with the OEMs and with our customers. Since the onset of COVID-19, our ratings have been affirmed by all three rating agencies, but they've placed us on negative outlooks along with the overall sector. However, all of the rating agencies have commented favorably on our liquidity and have also made the distinction between leading lessors, such as AirCap, versus smaller players with less experience and capability that they expect to struggle in the current environment. As we've said before, we're committed to maintaining our investment grade ratings and will continue to manage this business in a way that supports those ratings. That means putting our balance sheet first and continuing to strengthen our liquidity. We suspended our share repurchase program and have not used any of the most recent authorization from our board. Since March 31st, we've made significant progress in over a billion dollars worth of new funding initiatives. Earlier this week, we closed a $425 million secured bank loan, And we have a number of other facilities that we expect to put in place over the next few months. And, of course, we have over $28 billion of unencumbered aircraft assets, the highest amount we've ever had, that can be used for additional financing. So, in summary, the first quarter results were strong with solid earnings, cash flow, and EPS. This is, of course, a very challenging time for the aviation industry. But our balance sheet and our business are well positioned and prepared to weather this storm. We have a very strong level of liquidity, $11 billion in total, which is twice our cash needs over the next year. That's $5.5 billion of excess cash coverage. We came into this year with the strongest balance sheet we've ever had. Our debt-to-equity ratio of 2.5 to 1 is the lowest level it's been since 2014. Our secured debt-to-total assets ratio of 19.6% is an all-time record low, We've got over $28 billion of unencumbered assets. 70% of our customers are flag carriers, U.S. and Chinese majors, and other investment-grade airlines. Our order book is 100% placed through the end of 2021, and we have an attractive fleet with 59% new technology aircraft, the highest percentage of any major vessel. And finally, we have an unmatched operating platform that's done over 2,000 transactions over the last five years. With that, we'll turn it over to Q&A.

Thank you. We'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question today is from Helen Bucker of Cohen. Please proceed with your question.

Thanks very much, Operator. Hi, everybody, and thank you for the time. I just have two questions. When you do deferrals, how do we reflect that on the income statement? So maybe that's for Pete.

Sure. Thanks, Helene. So when we have a deferral, we continue to reflect that as revenue as long as we believe that the amount is, that the lease rent is probable of collection. And as Gus mentioned, On the deferrals that we've got, our security deposits and other security will exceed those that we've done.

Okay. And then my other question is I know you don't comment on specific clients, and that's fine. But there have been some discussion that, you know, one of your biggest clients has asked for debt for equity swaps and things like that. And I just kind of wonder how you – Think about that conceptually. I mean, I know you're in the leasing business, not the airline business, but maybe you could just talk about your view on that and how we should think about that big picture.

It's extraordinarily rare for us to convert debt to equity. It will only be done in very unusual circumstances. We've done it with Norwegian Airlines as part of the restructuring of that airline as its business plan changed. and the government of Norway invested in the airline. But generally, we won't do that. And for AirCap to become an equity investor in an airline, what's happened is that the prior equity participants have lost everything effectively. So it's a very expensive route to go down, and it's certainly not the norm.

Okay, that's very helpful. Thank you.

The next question is from Kush Patel of Deutsche Bank. Please proceed with your question.

Hey, good morning, guys. Aside from rent deferrals, I understand that there can be multiple other avenues for relief for your customers. Could you talk to us about what some of those might entail? For instance, we've heard that some customers are recapturing a portion of their security deposits and maintenance reserves. Is that accurate?

Well, I can't speak to other leasing companies. I can only speak to ourselves. I would say the vast, vast, vast majority of things we do are around rent deferrals. When it comes to security deposits or maintenance reserves, you generally will only give those back if you receive letters of credit in return. So oftentimes that doesn't really help an airline because to get a letter of credit, they may need to put cash collateral up. So it will depend. But as Pete said, when we look at air cap deferral positions, we have entered into March 31 approximately $300 million. We have another $300 million, give or take, that we expect to put in place. But against that, there's $1.1 billion of security deposits and a multiple, again, of maintenance reserves.

Thanks. And then considering the 60 aircraft deliveries that are deferred for this year, is there any cost to you for this, or is that mostly a function of OEM production reduction?

It's not something we can really comment on with the manufacturers. Suffice to say that those airplanes that we deferred, we would not have deferred them unless the deferral was on competitive terms. because we had actually placed over half our max aircraft already. I don't believe any other leasing company had managed to do that. And I should just go back to talk on the deferrals. Just to be very clear, as I said in my prepared comments, we get paid every single day by our customers. Even in the second quarter, in the month of April, we received over $200 million in cash from our customers.

Great. Thanks a lot, guys.

The next question is from Jamie Baker of JP Morgan. Please proceed with your question.

Hey, good afternoon, gentlemen, and thanks for a very solid presentation. I think many of us also appreciate the other call that working from home is never going to be a special way of travel. A question on the deferral numbers, though, Gus, or repeating the release that you said as, quote, unquote, in progress. Does this presumably represent – You know, the peak is the reality or the assumption that airlines seeking a lease have already raised their hand. And also, on the percentage of recapture that you're assuming in 2020, is that also, is that only for the leases that have been granted? Or is that also your assumption for the in-progress discussions? Thanks. And I'll come to you tomorrow for a follow-up.

Sure. I think it was, Jamie, a little bit difficult to hear you, but I think you're asking, are we at peak deferral at the moment? And I would say that we certainly feel that mid-April was a low point for air traffic globally. That's what we feel based on what we've observed, what we see from Eurocontrol, as I mentioned in my prepared comments, and what we're observing in China. They're certainly on the road back. I can tell you that in the Chinese market, we are getting paid now, again, the regular rate rentals. You know, could we see airlines ask for another few weeks, a month of deferral in certain cases? Sure, we could. But from what we've seen at the moment, those that we granted deferral to in February, March, primarily in China, they are back on track at the moment.

Okay, that's helpful.

Mark? Yes, I just wanted to jump in. Pete, question for you. In the fourth quarter presentation for the sources and uses walk, there was a mention of $3.1 billion, a forecast of $3.1 billion of operating cash flow for the next 12 months. In this quarter's deck, it's $2.7 billion. So it's gone down by $400 million. Is that just a function of lower CapEx, or is there a rent deferral number as part of that $400 million reduction?

Yeah, thanks, Mark. So that reflects a few things. Partially, it reflects lower CapEx. It also reflects all of the deferrals that we've done, what we expect to do. And it also reflects our expectations around maintenance revenue, things like that. But those are the three .

Okay, great. And then just one last one from me, and we'll turn it over. I think there's a lot of confusion about your relationships with Boeing and Airbus from the perspective of if you have aircraft that are being built, obviously, and are in that order book, and I realize everything is placed right now, but what happens if the airline just says, we're not taking delivery. And I realize that, you know, in this environment, this is a concern investors have. So, I mean, will AirCap take delivery of aircraft that simply go directly into storage, or is that just not part of the business model, if you will? Will you work with the OEM in a situation like that to defer that delivery? Thank you.

Mark, you will normally work with the OEM and the airline to defer the delivery. The only exception would be where the airline is in bankruptcy. And then it's different, of course, but that's very rare of the airlines that are in bankruptcy. We don't have any airplane scheduled to deliver to them. But, you know, at this point, if there's an airplane up for delivery, you will generally work with the manufacturer. And as you can see, Mark, we have already pushed out over 60 airplanes in the near term. And as I mentioned in my prepared comments, I would expect that 2021 and 2022, you'll see significant amounts move out. So what's always happening is is that the three parties concerned are trying to work together to avoid those types of situations. I'm not saying they can't ever exist, but what you'll see is that the three parties are working together to prevent those situations from happening.

Great. Thanks for the time.

Pleasure.

The next question is from Mos Orenbock of Credit Suisse. Please proceed with your question.

Great, thanks. I wanted to kind of return to the question about the estimated operating cash flow. So the $2.7 billion that you have in this chart includes the deferrals that you've done, the deferrals that you expected. And could you talk about what it assumes for those airlines who have received deferrals to start repaying both their regular rents and the back rent and any kind of thoughts there? Thank you.

Sure, Moshe. So, as Gus mentioned, the deferrals tend to be two to three months in duration. Then the airlines start repaying those afterward over a period of time, you know, basically during the remainder of the year. And so, that's what that reflects. And as I said, it's not just the deferrals that we've executed to date, but also the ones that are where we've had discussions with the airlines on them. So, that $2.7 billion number reflects those. It reflects, as I mentioned before, the changes in CapEx that we're expecting during the year. It reflects leasing expenses that we'll have, maintenance revenues, that type of thing. So it basically reflects everything that we can see to date as we look forward over the next 12 months.

And I guess just to follow up on that, Pete, the – Like, how will we be able to kind of, you know, observe how that's tracking? Like, are you going to tell us what your receivables are at the end of next quarter? Like, I mean, I guess, how are we going to know that that's, you know, that that forecast either, you know, as we get into the second quarter is either better or worse than that?

Yeah, I mean, it's a 12-month forecast, Moshe. You can see our operating cash flow, like in the first quarter, our operating cash flow was $628 million. So you'll see that on the cash flow statement. You know, as Gus mentioned, I think the second quarter should be the nadir for this, just given what's happened with the industry. So we should see gradual recovery, you know, in subsequent quarters. But even this quarter, we're going to have, you know, several hundred million of that, of operating cash flow.

Okay, thanks very much.

Sure. The next question is from Catherine O'Brien of Goldman Sachs. Please proceed with your question.

Hi, good afternoon, everyone. Thanks for the time. So just a couple questions on your airline customer portfolio. Are there any airlines you would categorize as through the worst, either in terms of demand, sounds like maybe some geographies in Asia, you're already seeing that, or just in terms of liquidity concerns being behind them? You know, if so, what percentage approximately of your customers or lease revenue would you say is in this category? And I guess really what I'm trying to get at is, are there a subset of your customers that have come back and confirmed that they are really confident in their lease commitments with you? Thanks.

Fairly broad question, Catherine. I guess, as I said, look, if we look, It started over in China where Southeast Asia, in fairness, of course there's some problem spots down there, but they seem to be coming out this side slowly. And the level of activity is approximately half of what they were doing last year in China, if not more. And so most of our exposure to China is with airlines that have significant state ownership in them as well, have received significant state support. So we're not seeing any more requests from that part of the world. In Europe, then, we are seeing vast amounts of state support also come in on a par with what's been announced in the U.S. for the U.S. majors. We're seeing that with clearly the Air France KLM announcement, what we're likely to see out of Germany as well, and what we've seen from smaller carriers and smaller carriers around Europe, too. In the U.S., we saw very large amounts. But, Catherine, look, I suppose the overall point I would say is that, of course, Some guys just aren't going to make it here. And we'll have to see how that progresses through the year. But, you know, the vast majority of our operators are going to make it through and they'll be flying our airplanes at the end. But no doubt there will be a bunch of defaults. It's just very hard to say at this stage and what they'll be. But you have to look at who you're talking to here. It's air caps. We've moved 2,000 airplanes in the last five years. If we get an airplane back, we'll find a home for it. and also the security position we have as well. Thank you.

I appreciate that. Thanks for entertaining a pretty broad question there. So maybe just a follow-up to that. I feel like there is some confusion out there as to what actions you can take if a lessee defaults on payments. Can you just walk us through the actions you would take? And if you were thinking about taking those actions at a different pace than you would normally today, given maybe there's a little bit less demand for those aircraft coming out of repossessions? And maybe, correct me if I'm wrong, is there demand for those aircraft coming out of repossessions? Thank you.

Well, let me start. You know, look, AirCap repossesses airplanes very quickly. Historically, as you can see from listening to us for the last 15 years, we are generally, I can't remember a situation where another lessor was faster than us to pull airplanes out. So where someone stops paying, we will enforce our security rights. We may seize assets of the airline in different jurisdictions. We may put liens on their cash flows. There are many things we will do. And that generally, if you want to get the airplane back, you'll get it back. There's never been a jurisdiction in the world ever that we could not take an airplane out of. Now, generally, what you will do is you will move extremely quickly because your concern is that when the airline stops paying for the aircraft, they will continue to fly and burn green time off the airplane. The second reason you want to move very quickly is you're in a hostile jurisdiction, you want to get it out before liens can attach it to your airplane, which has never happened to us in any material level. So in this instance, there are airplanes, of course, that we're taking back, or that we want to, I should say, put in our control. You will have seen publicly some airplanes that are under our control from Interjet, and there are other airlines as well. We have taken airplanes and put them under our control, even in this environment. However, the instance of where an airline is going to use the airplane and burn green time off the engines, that clearly isn't a risk at this point in time. So if you have a consensual agreement with the airline and you have all your records, you may as well leave the airplane there rather than go to the effort and expense of moving it in this environment. But be under no illusions. Look, if we don't believe in the airline and we're in a hostile jurisdiction, we'll take the airplane out.

Okay, great. That's very clear. I appreciate that. And maybe if I can just make one quick follow-up to Helene's question earlier on Norwegian. You noted that this is very unusual. I don't think in my time covering the states I've seen something like this, so it definitely seemed unusual to me. What are the circumstances that have led to this, if you can say? Is it something about the jurisdiction? Is it something tied to COVID? I imagine you're not envisioning many more of these types of deals happening over the next couple of years. Thanks. That's it for me. Appreciate it.

No, we won't see many of those types of structures happening. In the case of Norwegian, what we had was an airline that had entered into a huge growth phase that was stopped, obviously, over the course of the last few months completely, and it's been retreating. We have a new management team in place in the airline also, and we also have the conditions under which the Norwegian government would come into the airline. So the combination of those factors was the reason, and obviously the environment we're in, was the reason why Aft and other lesser was proceeding with this Norwegian arrangement, which is highly unusual, and I can't think of one like this ever before.

Thank you very much.

The next question is from Ross Harvey of Davie. Please proceed with your question.

Hi, good afternoon. Thanks for taking the time. Three questions for me. The first is, the likes of ESA Jetta said it will take in about half a billion from sale-leasebacks in the post-COVID environment. I'm wondering, are you looking at any such transactions and do you see any of the excess cash coverage being deployed in such a way? Secondly, highlighted in the CMD deck that there were 63 used aircraft requiring placement in 2021. I'm wondering, is there any update on that particular figure? And finally, more of a long-term question, but there has been speculation about the pace of recovery in air traffic over the coming years. And I'm wondering, do you believe there will be structural effects post-COVID, above and beyond the more cyclical and time-limited health-related impact?

Just a good few questions there, Ross. Let me deal with the easy one, your 2021 placement. That was a capital market day last November. Many of those aircraft are already placed. The vast majority will be placed already. In turning to sale, leasebacks, look, our focus at the moment is just making sure that we understand completely the extent of the crisis, the impact it will have on air cap. making sure that we maximize our liquidity. As Pete mentioned, and I said in my prepared comments, we were able to put in place a seven-year debt facility with a group of our long-standing banking partners. That closed, actually, this week. As a matter of fact, it finally signed yesterday. The credit committee approvals were taken in the depths of this coronavirus in early April. So that demonstrates the extent that we have access to capital But at the moment, when it comes to sale-leaseback transactions, I believe there'll be plenty of those there. The reality on the far side of this, to talk about the industry after, is that airlines will need less doors a lot more than they did over the last few years. And I do believe there'll be fewer less doors. In this environment, not having a global platform is a massive disadvantage. And those who've entered the space on the basis of trying to pick up yield over the last few years. I suspect that they will retreat from the space over the coming years, and they'll be reluctant to reinvest. So I think on the far side of this, opportunity will not be the issue, and there's no need to rush into it. There'll be plenty there. And because airlines will be focused on retiring desk or government aid, and we've seen clear evidence of this behavior from the financial crisis, once the banks receive significant government aid, the priority want to retire that government support as fast as possible because it's strategically impaired and tactically impaired the ability of management to run the business. And I do believe we'll see the same behavior here. And so there'll be a greater focus on using operating less doors when we get to the far side of this, then spending billions of dollars of their own money buying airplanes and Boeing and Airbus.

That's very helpful. Thank you, Gustav.

Welcome. The next question comes from Vincent Cantik of Stevens. Please proceed with your question.

Hey, thanks. Thanks for taking the question. Just a few quick ones. On the CapEx, the remaining $1.2 billion of CapEx for this year, just wondering if that's confirmed or if there's a chance that that might get pushed back, and then how are discussions that you're having with the airlines on confirming 2021 orders?

Look, I think it's likely that most of that capex will occur, of course, as they restart production, because some of that slide to the right, yes, I think that's obviously a real possibility out there. The 2021 deliveries, again, of course, as I mentioned earlier in the call, the idea is to work with the manufacturer and the airline to see what can be taken and what can't be taken. But as I said, I would envisage that most of our slots will be taken by the airlines. at this point. But no doubt we are in discussions and a significant portion though will get pushed out to the right from 2021 to 2022. That's just a fact given the numbers we gave you are before the cuts that were announced by Boeing and Airbus last week on the 320neo, the 737, the 787 lines. So no doubt some of our CapEx, a good chunk of our CapEx in 2021 and 2022 is going to move out to the right.

Okay, very helpful. Next on the aircraft sale margins. So they're very strong this quarter, and I'm impressed that you had April sales of $150 million. If you could maybe share what sort of margins are you seeing today on sales and how much demand is there and kind of generally who's buying in this environment?

The April sales would have been – the margins would have been consistent with the March sales. Look, I mean, in today's world, you have to have an infrastructure and knowledge and experience to execute sales. I'm sure many lessors won't have executed 150 million of sales in the last three months, let alone in April. And that just is a differentiation in the capability of this platform versus others.

Okay, very helpful. And last one from me, just an update on your funding initiative. So I'm encouraged you've returned $3 billion of the facility. What sort of priorities are you thinking in terms of financing? Are you looking more at the other encumbered aircraft portfolio, or are you able to do – still unsecured debt, and sort of what sort of the costs are for the various sources of funding you have.

Thank you. Yeah, thanks, Vincent. It's Pete here. So on the funding side, our plan is to continue to fund the business in the way that we have before, which is primarily on the unsecured side, although, you know, as we've talked about many times, you know, we have a number of funding alternatives that we use. We do it in a number of different markets. That's one of the benefits of having the 120 bank relationships that we have. And so when we look at that secured funding that we just talked about, that was done with a number of European banks, and it was done at levels that were consistent with where we would have been pre-COVID, right? So very little disruption in that market. So that's something that we'll continue to do. But fundamentally, as I mentioned, We're committed to running this business as an investment-grade company, and that means we're going to do a lot of unsecured funding. We will be doing that and looking at other alternatives, too. So I don't see any real change in our funding profile going forward. Obviously, as we look at it now, spreads are wide in the unsecured bond market, and we think that's unwarranted. We'd hope to see those come in, but we're going to maintain strong liquidity for this business.

Okay, great. Thanks very much, guys. Thank you.

Sure.

The next question is from Ron Epstein of Bank of America. Please proceed with your question.

Good morning. Good afternoon, guys. Just a couple follow-on questions. When you look at the production rate decisions at the OEMs, one of the things that seemed to jump out and strike me was the 787. Getting back up to 10 per month in the current environment seems aggressive.

I don't know.

I mean, are you seeing that kind of demand for that airplane?

Well, the 10 they're talking about is ones that they have already had on order. I think you saw United's confirmation they were going to take 787. You saw American's confirmation they were going to take 787. So I don't think this is about selling new airplanes in this market. It's airplanes that are built or in the production system that are going to deliver. And I think what the rate reduction down to seven is more reflective of where they think demand is. Because what they're selling today is what they think demand will be in two years.

Gotcha, gotcha. And then moving on to the 737 program. They completed 50 more airplanes in the quarter, so they now have about 450 in inventory. And on top of that, there's what, the 400 approximately that have been grounded by the airlines. So you've got effectively 850 737s that have to enter into service, you know, either through delivery at Boeing or back at the airlines. I mean, how do you think about that as a headwind when you think about demand for the 737?

Well, I think timing matters. is the key there ron first of all when will they be certified on a global basis now one certification for a global product is not enough yeah uh certification so that's just the first you gotta have global certification um we'll have to see when that occurs thereafter I suspect that the delivery profile will be very low, as Boeing have indicated themselves. So I think you'll see a slow reintroduction of those airplanes, and I think Boeing have made that clear, both from the store fleet that's already delivered, or that's in the Boeing field at the moment. But I do think, to be fair to the MAX 8, that in a couple of years' time, if that airplane will be seen as a very desirable aircraft to be had by airlines. I don't think, assuming that's premised on a successful reentry and global certification of the airplane.

Yeah, that makes sense. And maybe just another quick one, if I may. What do you think about the future of the E-2 program now that it appears Embraer and Boeing are kind of going their separate ways.

The E2 is the only alternative in the world from the regional jet business now, apart from Airbus and Boeing. And what Embraer needs to look at is over the next three or four years, because Airbus will make changes to the 220 to make sure that it is compliant with our – that a pilot flying a 320 can fly a 220, and that there'll be commonality in the cockpit. That's where Airbus will trend. And so Embraer should have a decent-sized market there that they can sell into over the medium to long term due to the fact that the Airbus product will be very standardized with the 320 and – That will take time. It will take time over the next three to five years. But there's a market there for the Embraer product. No doubt about it. Yeah.

And then maybe just one last one. When you look at, you know, these disruptions create opportunities, right? When you look at what's out there now, are there some interesting opportunities for you guys to pick up some assets at, let's call it the fire sale prices?

Yeah. Look, as I said on that, Ron, what you need to do now is just make sure you take stock of the impact of this crisis, what impact it will have on Airtap, what we need to do. Clearly, we have a huge amount of liquidity and we've significantly reduced any outgoings and the platform that we have. I do believe, though, that on the far side of this, it is likely that those big lessors will be far more in demand than they were over the last three or four years. I think it's likely that we'll return to the situation that we've had for most of the last 30 years. And that airlines, certainly coming out of this, will be extremely focused on repaying debt, particularly for government aid. That will be the number one focus of management teams. And as I said, the evidence of that is what occurred after the financial crisis with financial institutions around the world. And I saw that firsthand in dealing with AIG on the sale of ILSC. So I think we'll see a repeat there, which will mean that there will be less motivation for airlines to be ordering airplanes from the two OEMs and far more motivation to use a leasing product that doesn't chew up money that they can use to repay government debt and get control back of their airlines.

Thank you very much.

You're very welcome.

There are no additional questions at this time. I'd like to turn the call back to Angus Kelly for closing remarks.

Thank you all very much for joining us on the call, and we look forward to talking to you again in three months' time. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.