AerCap Holdings N.V.

Good day and welcome to the AirCap third quarter 2020 financial results call. Today's conference has been recorded and a transcript will be available following the call on the company's website. At this time, I would like to turn the conference over to Mr. Joseph McGinley, Head Investor Relations. Please go ahead, sir.

Thank you, Operator, and hello, everyone. Welcome to our third quarter 2020 conference call. With me today is our Chief Executive Officer, Ingus 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. ERCAP 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 ERCAP's earnings release dated November 10, 2020. A copy of the earnings release and conference call presentation are available on our website at ercap.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 today for our third quarter earnings call. There are four key points. that we would like to address on today's call. First, while there are still many challenges facing the aviation industry, we have seen a significant increase in air travel and in our cash flows from the lows of April. The positive developments announced yesterday regarding the near-term availability of a vaccine should provide a further boost to the industry. Second, Throughout the pandemic, AirCap has taken numerous proactive steps to manage through this environment, including executing over $12 billion of liquidity initiatives, which resulted in the company ending the quarter with our strongest ever liquidity position. Third, COVID-19 is accelerating the pre-pandemic trend of airlines moving into new technology aircraft, of which AirCap is the world's largest owner. And fourth, we are confident that as the recovery continues, there will be ample opportunities for AirCap to deploy its capital. In March and April, there was widespread concern about whether air travel had permanently changed. Similar concerns prevailed immediately after 9-11 and during the depths of the financial crisis. In those cases, we heard the same extremely bearish predictions regarding the imminent demise of air travel. But after each of these events, air travel recovered, and it is recovering today. Over the summer, we saw rapid and significant increases in air travel all over the world in a relatively short period of time. In Europe, the number of flights increased from 2,000 a day in April to almost 19,000 a day by the end of August. In the US, traffic increased from a low of 87,000 passengers a day in April to almost 800,000 a day by early July. And last month, there were over 1 million passengers in a single day. And in China, they are now back to 100% of pre-pandemic domestic demand. all of these rebounds occurred in less than four months. So it is evident from these numbers that once they are allowed to fly, millions of people will quickly get back on board an airplane. As we look around the world today, we see the airline industry at various stages of recovery depending on the region. In the U.S. and Europe, we are currently between 35% and 45% of pre-pandemic flight levels. This is a significant recovery from the April lows, but there has been a pause in the recovery recently due to the resurgence of COVID-19 infections and the imposition of new quarantine periods. Yes, in China in October, 600 million people travelled by air, road and rail during Golden Week. And in Latin America, passenger numbers continue to increase steadily. The one region of the world where we have not seen a material increase in passenger numbers is Southeast Asia, due to the significant restrictions on international travel that are still in place in these countries. We have also seen a stabilization in the financial condition of many airlines. Buoyed by government support, significant funding in the capital markets, and the ability to reduce costs, airlines have significantly extended their cash runway. Since the coronavirus outbreak, we have seen an extraordinary response from governments around the world to support their airlines. This includes almost $200 billion of direct assistance in the form of loans, payroll support, and other initiatives, as well as billions more of indirect support provided by many countries. Governments around the world recognize that airlines are a critical part of the global infrastructure. and country-specific economies. Airlines have also raised a record amount of funding from banks in the capital markets. The U.S. airlines alone have successfully raised over $40 billion since March. These factors, combined with the rise in passenger traffic and the reduction of their expenses, will enable the vast majority of the world's airlines to navigate through this crisis. We at AirCap have experienced the improved conditions as well in the form of a significant increase in our cash collections and a marked slowdown in rent deferral requests. So where do we go from here in terms of the airline industry's recovery? In our view, the key metric that we are using to gauge the industry's health is the point at which airlines are able to cover their cash operating costs. With today's low fuel prices, and the cost reduction programs that airlines around the world have implemented, we believe that airlines' cash operating costs can be covered at around 60% of 2019 traffic levels. In contrast, AirCap does not need to see anything like the levels of airline profitability we witnessed in 2019 or otherwise over the last five years for our company to be successful. This is an important differentiator between leading lessors like AirCap and the airlines. In order to make progress towards the traffic levels at which the industry becomes profitable, there will be two key drivers. These are the standardization of pre-departure testing as well as a successful vaccine. On both of these fronts, very significant progress is being made, particularly with regards to the vaccines. The very positive news yesterday from Pfizer on the 90% effectiveness of their vaccine in preventing COVID-19 infections will give travelers much greater confidence in booking flights, which will be a major positive for our airline customers. And on the testing side, there are various initiatives underway at airports around the world to support this goal that avoid placing pressure on existing national testing systems. Key among these is the European Union's recently introduced traffic light system, which all EU countries have signed up to. Once implemented, this will standardize measures across the continent and will either remove or significantly reduce quarantine periods, thereby removing the uncertainty that is currently constraining passenger travel. Hong Kong and Singapore have also reached a preliminary agreement to establish an air travel bubble to reopen borders between the Asian financial hubs that will exempt travelers from current quarantine requirements. These systems may take several months to be fully implemented, just as it took time after 9-11 for governments to agree on new security protocols. But it is an important step, and it will get done. The same is true in the U.S., where progress is being made on the implementation of rapid testing capabilities at airports such as San Francisco and Dallas. Another example of this from October was when Hawaii dropped its 14-day quarantine requirements, provided the passenger had a negative test within 72 hours of departure. Progress is also being made on both sides of the Atlantic to reopen the North Atlantic market, which is the most important long-haul market in the world by far. Governments have spent far too much on their airlines, not to make sure their most valuable routes reopen. We expect the measures taken to facilitate the reopening of these North Atlantic routes will likely serve as a template for other lucrative long-haul routes. As I said at the beginning, we believe that once consumers know for certain that they can fly, they will fly. Turning to Aircat, as I referenced earlier, our relentless focus on cash collection continues. we have collected significantly more cash month after month over the five months since April. This is evidenced by the improvements in our Q3 operating cash flow, which was up by more than 70% versus Q2. Of course, there are individual airlines that present challenges, but the vast majority of our customers continue to pay us every month. We have also seen a significant reduction in the number of new deferral requests, Our deferral balance itself increased by 56 million in the third quarter, compared to a 288 million increase during the second quarter. Our placement activity also picked up in the quarter, and whilst we are not at the levels we saw in prior years, we continue to place our aircraft. Coming into this crisis, one of aircraft's advantages was that we had been significantly extending our average remaining lease term through the sales of older equipment and the purchase of new technology aircraft on long-term leases. As a result, only 7% of our leases are scheduled to come off lease in the next two years. In addition, of the 933 aircraft in our fleet, only 42 are on lease to airlines involved in a Chapter 11-style process. This includes Norwegian Airlines. We expect these airlines to emerge in Chapter 11 and to keep the vast majority of our aircraft on acceptable terms as they are predominantly new technology aircraft. This is evidenced by the fact that even now, many of these aircraft continue to be operated by the airlines every week. It is worth noting that just because an aircraft is on lease to an airline in Chapter 11 or subject to a restructuring discussion, It does not mean that it won't be leased again. Any aircraft that we do take back would, of course, be leased to other airlines on long-term leases. These are long-lived assets that will generate cash well into the future. Please bear in mind that the AirCap platform has leased over 1,000 aircraft in the last five years. This is what we do. On the balance sheet side, we continue to actively manage our CapEx and debt maturities, leaving us with a record level of liquidity. As I noted previously, AirCap has already executed over $12 billion of liquidity initiatives in 2020. Our ratio of cash sources to cash uses for the next 12 months is currently 2.9 to 1, the highest level we have ever had. Turning to the asset side of the balance sheet, As we mentioned on the Q2 call, we felt it was important to take a detailed and conservative review of all of our aircraft in light of current events and changing outlooks. As you can see from the slide, our fleet consists of 62% new technology aircraft, being the A320neo, Boeing 787, Airbus A350, and the Boeing MAX. 29% current technology narrowbodies being the A320 and the Boeing 737. And 9% current technology widebodies being the Airbus A330 and the Boeing 777. Our new technology aircraft are the most in-demand models in the world and will form the backbone of the world fleet for the next 25 years. Aircap has more of these aircraft than any other airline or leasing company in the world. By comparison, only 12% of the global in-service passenger fleet was comprised of new technology aircraft at the beginning of the year. We expect to see solid demand for current technology narrowbodies well into the future. One of the reasons for this is the late entry into service of the new technology narrowbody aircraft. Indeed, it can be said that the MAX has yet to enter service, and the ramp-up of A320neo production was much slower than anticipated due to its production problems. Based on the OEM's own production forecasts, new technology narrowbodies will not make up the majority of the global narrowbody fleet until well into the next decade. In contrast, on the widebody side, the Boeing 787 entered into service almost a decade ago, in 2011. The Boeing 787 was followed in quick succession by the Airbus A350, the Airbus A330neo, the Boeing 777X, and the Boeing 747-8. This represented an unprecedented replacement wave of so many wide-body variants in such a short period of time. In response to this, beginning six years ago, AirCap implemented a deliberate portfolio strategy of reducing the number of current technology wide-body aircraft in our portfolio. We did this because we could see that over the course of the next decade, airlines would increasingly replace these types of aircraft with new technology versions that are more fuel efficient and environmentally friendly. COVID-19 is accelerating this trend. When you see a trend where airlines begin to move out of a particular aircraft type, you need to get ahead of it and reduce your exposure to that asset type, especially the younger versions. we have been highlighting this to you for several years. In 2014, we had 33% of our fleet in current technology wide-body aircraft. To our focused portfolio strategy, since then we have reduced these aircraft types to only 9% of our portfolio today. Looking back on the last six years, where we sold almost 600 aircraft, generating consistent and significant gains on sales, we could see that our aircraft were prudently valued on our balance sheets and reflected our conservative approach to asset valuation and thoughtful approach to asset selection. This gave us significant headroom coming into the crisis. Given the impact of COVID-19 and airlines accelerating the move out of current technology wide-body aircraft, we felt it would be prudent to update all of our assumptions. In Q3, we reviewed each aircraft line by line with a critical eye to ensuring that our assumptions were reflective not only of conditions today, but importantly, the conditions we believe are likely to prevail for the remaining useful life of each aircraft. As a result of this comprehensive review of our entire fleet, we have taken an impairment of $915 million that is focused primarily on current technology white bodies. Now switching to the future. You may have heard the saying about the aircraft leasing industry, when times are good, the airlines need our airplanes, and when times are tough, the airlines need our financing. I can tell you that over my 20-plus years in the industry, financing has been a much more profitable activity for leasing companies. Based on our experience of prior downturns and the conversations I'm having with our airline partners around the world, I am confident there will be significant opportunities for aircraft to deploy capital attractively as the industry recovers. Importantly, we are in the fortunate position to have the financial wherewithal to do so. As airlines emerge from COVID-19, we expect that their main priorities will be to restore their balance sheets and unwind themselves from government involvement. This means they will need to focus on repaying debt rather than directing capital towards new aircraft purchases. Prior to this year, there were still airlines whose strategy was to own their entire fleet. That strategy has proved itself to be redundant. We have already heard from a number of airlines that going forward, they plan to rely more on leasing. When you look back over Aircat's history of capital deployment, you will see that our strategy has been consistent for decades. It is simply the opportunity set that has changed each year. At different points in the cycle, we have been involved in large-scale M&A, sale leasebacks, share repurchases, and debt reduction in order to generate value for our shareholders. Take the sale leaseback market as an example. During the financial crisis, we completed two of the largest sale leasebacks ever done. However, as that market segment became more competitive, we found more attractive ways to deploy our capital. Over the next few years, as the industry recovers and airlines focus on repairing their balance sheets, we expect to see significant sale leaseback opportunities, in particular as the OEM production rates start to ramp up again. Given the broad impact of COVID-19 on sectors outside of aviation, I believe that the tourist capital that came into the leasing sector in recent years will exit and find other avenues elsewhere to be deployed. This may create opportunities for leading aircraft lessors like AirCap. Moving forward with a strong balance sheet, record levels of liquidity, and airlines that are motivated to lease aircraft, we believe that AirCap is well positioned to come out stronger from this crisis. Pete will now take you through the financials.