AerCap Holdings N.V.

Please stand by, we're about to begin. Good day and welcome to the AirCap Holdings in the fourth quarter, 2023 financial results. Today's conference is being recorded and a transcript will be available following the call on the company's website. At this time, I'd like to turn the conference over to Joseph McGinley, head of investor relations. Please go ahead, sir.

Thank you, operator, and hello, everyone.

Welcome to our fourth quarter, 2023 conference call. With me today is our chief executive officer, Angus Kelly, and our chief financial officer, Pete Yuhas. 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 February 23rd, 2024. 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

for joining us for our fourth quarter 2023 earnings call. I am pleased to report another year of record earnings for AirCap. We generated gap net income of $3.1 billion and earnings per share of $13.78. Adjusted net income came in at $2.4 billion and adjusted EPS at $10.73. And we generated a record operating cashflow of $5.3 billion. We expect to see a continuation of the trends in 2024 that we observed last year in terms of the supportive supply demand dynamic, continued accretive capital deployment and demand for our assets, leading to an EPS range of $7.50 to $8.50. However, this does not include the impact of any gain on sale, which historically has been significant. Given the continued strength of the business and consistent cash generation, I am also pleased to announce another $500 million share repurchase program, taking total authorizations in the last 12 months to over $3 billion. We continue to see tremendous value in the stock today and this latest authorization underscores our confidence in the outlook for 2024 and beyond. As we have consistently said for some time, demand continues to outstrip supply for aircraft, for engines and for helicopters. We expect this dynamic to persist for many years. The largest global leasing conference was just hosted in Dublin and attracted over 5,000 people to the event. It was clear from the many conversations we had with airlines, aircraft traders and financiers that demand for aviation assets continues to grow. Unsurprisingly, the main concern for airlines at the moment is around sourcing lift and the reliability of their fleet. So in tandem with our engine leasing business, we are in a unique position to offer multifaceted solutions, putting us in a very envious position. On the trading side, we continue to see a healthy bid for aircraft from investors and other lessors and expect to see robust demand for aviation assets continuing throughout the year. The topic that dominates most conversations today is the global supply demand imbalance. And I'd like to spend some time talking about how we have reached this point. As we see it, there have been three substantial drivers of today's aircraft shortage. The first dates back to the grounding of the 737 MAX in March 2019, which resulted in significant cuts to Boeing's narrow body production rates, followed by COVID in 2020, where production rates across the board were cut by Boeing and Airbus. As a result, the 723 aircraft delivered in 2020 represented only 45% of 2018's output. Moving forward to 2023, it is clear from the chart on the left that production rates are still yet to fully recover and remain approximately 20% below 2018 levels. So whilst there was plenty of discussion about when the OEMs will return to their pre-COVID output rates, many seem to overlook the 2,700 new technology aircraft that simply have not been built in the last five years. This is one of the main reasons why I expect this favorable supply demand dynamic to persist for many years to come. Even if Boeing and Airbus do manage to resolve the many issues facing their supply chains and deliver on their promises for 25 or 26, that is really only the beginning. The second factor revolves around new engine reliability during their maturation phase. As the first batch of new technology engines come off the production line, they must undergo rigorous testing and checks following their initial entry into service. If these checks do not result in any issues, then longer and longer lead times are allowed between shop visits, increasing reliability and time on wing. This is a natural part of any new engine development. In an ordinary environment, this would be expected to cause some minor delays to the earliest equipment. However, as a result of the already stressed MRO network, the shortage of parts and labor, and further compounded by the recent Pratt & Whitney powdered metal issue, this is stretching engine turnaround times to over one year in some cases. As you can see from the chart on the right-hand side, this is leading to outsize storage rates for younger aircraft. Amazingly, there are currently more zero to -year-old aircraft stored than any other age group under 20 years. Outside the max grounding, this had not happened before in the last 25 years. Finally, the third major factor impacting supply today came as a result of the reduction in shop visit activity in 2020 and 2021. This is for both aircraft and engines. During that period, airlines did all they could to reduce capital expenditure on their fleet to preserve cash. Naturally, this had a significant impact on the MRO network, which reacted by cutting capacity and headcount to stay in business. That meant when demand for engine and aircraft shop visits returned in late 2021 and into 2022, there was a significant backlog of shop visits to be completed, but in a smaller MRO network. This has led to consistently longer turnaround times and time off wing and on the ground for many engines and aircraft. These issues persist today and will continue to do so into the future. Together, these three factors create sustained demand for our new slots, our used aircraft, and a wide array of engines. As the leading provider of all these assets in the market, AirCap is in a strong position to capitalize on this trend increasing returns across the portfolio and driving growth in earnings. The combination of these favorable conditions is most evident today on our gain on sale line, which is the most immediate way to take advantage of this heightened demand. We are of course also increasing lease rates, which support the continued strength in our operating cash flows and margins. I'll touch on those later. Before that though, let me take you through the math of how we recycle capital to create value for you, our shareholders. In 2023, AirCap sold 74 aircraft, 65 engines and 28 helicopters. These assets were held in our books for $2.27 billion. However, we sold them for $2.76 billion, generating a gain of 490 million. This equates to a 22% gain on the carrying value of the assets, but importantly, an 80% gain

on

the equity

component of those assets. So

after

repaying

the 1.66 billion of debt attaching to those assets to keep our leverage neutral, we have 1.1 billion to deploy into share repurchases. As the stock was trading at an average discount of 0.8 times our book value, we were able to buy back 1.38 billion of stock. So from the starting position of 615 million of equity we had against those assets, we were able to generate 490 million from the gain on the sale of the assets and a further 276 million through the discounted share repurchases. So in total, we ended up at 1.38 billion, adding those three together, the 615, the 490 and the 276. And this results in a 2.25 times book equity multiple. Gains on sale are not limited to aircraft. Engines and helicopters are also in demand, selling for gains in the period. Our engine leasing businesses in particular are benefiting from the widespread shortages of engines, increased turnaround times and time off wing as airlines scrambled for capacity to take advantage of the strong passenger yields available. Another pleasing aspect on the trading side this year was that the improved gain on sale performance was reflected across our entire fleet and not simply a few outliers or solely from the GCAS transaction. It was notable that the gain on sale margin from the sale of legacy aircap assets was actually higher in the year than the former GCAS assets. This should not be a surprise to you. We have demonstrated for more than 10 years in a row that the market value of our assets is much higher than our book values would imply as we generated over 1.9 billion of gains on sale in that period. To do this consistently across such a broad variety of assets and market dynamics reflects the inherent value created by the unique aircap platform and our consistent portfolio management strategy. So when we say that not all book values of leasing companies are created equal, this is what we mean and this is what we demonstrate. While gains on sale represent the strength of our portfolio, a trend we see continuing is our consistently strong cash flows which form the bedrock of our earnings and capital deployment. In 2023, we generated operating cash flows of $5.3 billion, our highest ever. Please bear in mind our operating cash flow does not include the 1.3 billion of proceeds from Russian insurance claims or the nearly half a billion dollars of gain on sale. These strong cash flows allowed us to buy back over $2.6 billion of stock or 18% of the company between March and December, 2023, while at the same time we delevered aircap's balance sheet in doing so. This is a key part of our strategy. As you know, we are incredibly focused on how to maximize the value of aircap for our shareholders and to do so in a prudent and sustainable way. Since 2015, we have returned $7 billion to you, our shareholders. And with today's announcement, it will exceed $7.5 billion. We have returned this amount of capital despite the impact of COVID in 2020, the conflict in Ukraine in 2022, and the completion of a $31 billion M&A deal in between, demonstrating the tremendous cash generating power and resilience of aircap. We have not taken a necessary risk to do this. In fact, the reality is that by selling our less desirable assets and recycling that capital into a stronger company at a discount, we are actually improving aircap's risk profile, assets and returns at the same time. In 2023 alone, aircap would have been in the 99% loan of the S&P 500 companies for share repurchases. And yet we delevered our balance sheet while doing so. This is leading to consistent returns for aircap shareholders and an upward trajectory in our credit rating, where we are on positive outlook with both S&P and Moody's. So to wrap up, aircap's book value per share ended the year above $83, growing by 25% last year. And as Pete will reference shortly, we remain confident in our ability to grow it even further in the year ahead. Aircap's platform is clearly the best in the business. We offer more services and products to our customers around the world with an unrivaled level of execution. We will continue to do what's right for you, our shareholders, and look forward to demonstrating the results of this strategy in the year ahead. With that, I'll now hand the call over to Pete to review the financials and the outlook for 2024. Thank you.

Thanks, Gus. Good morning, everyone. Aircap had a record performance for the fourth quarter. Our gap net income was $1.1 billion, or $5.37 per share. This included recoveries of $614 million related to our Russian aircraft, which has included net recoveries related to the Ukraine conflict. The impact of purchase accounting adjustments was $83 million for the quarter. This included lease premium amortization at $40 million, which reduced our basic lease rents, maintenance rights amortization of $25 million, which reduced maintenance revenue, and maintenance rights amortization of $18 million, which increased leasing expenses. The tax effect of the insurance settlement proceeds and these purchase accounting items was $66 million. So taking all of that into account, our adjusted net income for the fourth quarter was $641 million, or $3.11 per share. I'll talk briefly about the main drivers that affected our results for the fourth quarter. Basic lease rents were $1,576 million. That reflects continued strong cash collections, and we also continue to benefit from power by the hour rents from our lessees that are on PBH arrangements in their leases. As I mentioned, our basic lease rents reflected $40 million of lease premium amortization, which reduces our basic lease rents. Lease premium assets are amortized over the remaining term of the lease as a reduction to basic lease rents. Maintenance revenues for the fourth quarter were $142 million, and that reflects $25 million in maintenance rights assets that were amortized to maintenance revenue during the quarter. So in other words, maintenance revenue would have been $25 million higher, or $167 million without this amortization. Net gain on sale of assets was $94 million for the quarter. We sold 35 of our owned assets during the fourth quarter for total sales revenue of $625 million. That resulted in a gain on sale margin of 18% for the fourth quarter. And at the end of the year, we had $297 million worth of assets held for sale. For the full year 2023, we sold nearly $2.8 billion worth of assets and recorded a total gain on sale of $490 million, which is an average unlevered gain on sale margin of 22%. As I mentioned earlier, net recoveries related to the Ukraine conflict were $614 million, which primarily consisted of recoveries of insurance claims on our Russian aircraft on lease to four Russian airlines. Interest expense was $496 million for the quarter, which included $19 million of -to-market losses on interest rate derivatives. Our leasing expenses were $135 million for the quarter, including $18 million of maintenance rights and organization expenses. Income tax expense for the fourth quarter was $39 million. We recognized tax benefits of $85 million that included valuation allowance releases and other items. We may have to reduce test rates from local tencent market because of debt or because we're currently able back to July. where our projects are in during the pandemic. aredhar tax draußen net recursion to the particular non-보chter funds dollars, which resulted in the next 12 months sources to use as coverage ratio of 1.4 times. That's well above our target of 1.2 times coverage and represents excess cash coverage of around $6 billion. Our leverage ratio at the end of the quarter was 2.47 times. That's lower than last quarter and also lower than in the beginning of 2023. So even after taking delivery of 80 aircraft, 76 engines, and 17 helicopters, $6.2 billion of cash cap x for the year, and after $2.6 billion of shared purchases during the year, we were still able to deliver. And that really demonstrates the significant amount of cash flow and capital that AirCap generated over the past year. Our total operating cash flow was around $1.4 billion for the fourth quarter, driven by continued strong cash collections, and as I mentioned earlier, it was $5.3 billion for the full year. Our secure debt to total assets ratio was around 14% at the end of December, which is basically in line with prior quarters. Our average cost of debt was .7% for the fourth quarter. Our book value per share was $83.81 as of December 31st, which represents an increase of 25% over our book value per share at the beginning of 2023. During the fourth quarter, we repurchased 10.3 million shares at an average price of $62.86 for a total of $649 million. And for the full year, we repurchased 44 million shares at an average price of $59.09 for a total of $2.6 billion. So clearly, 2023 was an outstanding year for AirCap, with adjusted EPS of $10.73. As we look out into 2024, we remain confident about the future. For 2024, we're projecting adjusted EPS of $7.50 to $8.50 before any gains on sale. I think it's useful to walk from 2023 to 2024 to call out some of the major items. In 2023, we had gains on sale of $490 million or $1.88 per share after tax. We also had over $200 million of -the-hour rents that we received on leases that had a PBH period at the front end of the lease. As I've mentioned on previous earnings calls, most of those leases have now converted to regular fixed-rate rents. In almost all cases, the fixed-rate rents are higher than the PBH rents we were receiving, so we expect cash receipts from these leases to increase by over $40 million this year. However, from an accounting standpoint, during the PBH period, we recognized both the straight-line fixed rent, which is the average of the fixed rent, across the entire term of the lease, and the PBH rent. Once we move out of the PBH period, we only recognize the straight-line fixed rent. So as a result, we'll record lower revenues from these leases in 2024, even though we're receiving more cash, and the effect of those revenues is around $0.70 a share after tax. As I mentioned, we also recognize a number of significant tax benefits in 2023, which led to a low effective tax rate of only 8.9%. In 2024, we expect to have a higher effective tax rate, which I'll talk about in a moment, so that's a headwind of around $0.57 a share in 2024 compared to 2023. Those are the major items to call out. The other column includes everything else, including higher lease revenues, higher interest costs, the impact of share repurchases, and other items. We expect the net effect of all of these will be about $0.42 positive in 2024. That takes us to an EPS range of $750 to $850 for 2024, again, not including any gains on sale during the year. On the next slide, you can see a breakdown of our projected income statement for 2024, showing the major line items. For the full year of 2024, we expect to have lease revenue of around $6.3 billion, maintenance revenues around $700 million, and other income of around $300 million, for total revenue of around $7.2 billion. We've assumed that we will have cash capex of around $7.2 billion for the year, and asset sales of $2 billion. As you know, these figures can vary significantly. Cax is largely dependent on OEM deliveries, and sales volume depends on the demand for assets and the time it takes to close those sales. We're projecting depreciation amortization around $2.7 billion and interest expense around $2.1 billion. We expect leasing expenses, SG&A, and other expenses to total around $1.2 billion for the year. On tax, we've assumed a tax rate of 16.5%. So I'll talk about that for a moment. Historically, we've generally assumed a tax rate of around 14%. The corporate tax rate in Ireland, where we own the vast majority of our assets, is 12.5%, but we're subject to taxes at higher rates on assets in other countries, which is why we typically projected an overall tax rate a little above the Irish corporate rate. At the beginning of this year, we became subject to global minimum tax under Pillar 2 of the OECD's Minimum Tax Directives, which results in a top-up tax for jurisdictions such as Ireland, where the company is paying an effective tax rate of less than 15%. We expect Pillar 2 to increase our tax rate by around 2.5%, so that's why we've assumed a .5% effective tax rate for 2024. In 2024, we expect to recognize earnings around $200 million from our equity investments, which is primarily our Engine Joint Leasing Joint Venture, SES, but also includes some other smaller equity investments. And altogether, that gives us projected gap in income of around $1.2 billion. After purchase counting adjustments around $400 million after tax, we expect to have adjusted net income of around $1.6 billion for the year. That gives us an adjusted EPS range of $750 to $850 for the year, again, not including any gains on sale. So overall, we're coming off a record year for AirCap in terms of revenues, earnings, EPS, operating cash flow, and return of capital to shareholders. As we look forward into 2024, we continue to see a strong supply-demand imbalance that shows no signs of ending anytime soon. We believe we can continue to produce strong results and outperform, and we'll continue to vigorously pursue insurance settlements with the Russian insurers as well as our own insurance claims. You can see this confidence in the future of our business demonstrated by the new $500 million share repurchase authorization that we announced today. And with that, operator, we can open up the call for Q&A.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to lie or signal tree to our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go first to Ross Harvey with Davey.

Hi, Catherine, Gus, Pete, Joseph. Congrats on the very strong results. Two questions for me. Firstly, it appears that your net spread less appreciated may have tightened in Q4. Can you address that? And secondly, I guess the 2024 guide might look quite conservative relative to how you finished from 2023. So can you just talk us through that again? Thanks.

Sure. Thanks, Ross. So on the net spread, the net spread decreased in the fourth quarter because we brought forward some interest costs through the early refinancing of some bond maturities. It's also worth noting that we're earning higher interest income on our cash balances at the moment, but that comes through other income, not through the net spread. Similarly, our net spread less depreciation also went down because we accelerated depreciation on some older aircraft during the quarter where we eliminated the return condition and the leases. So while that leads to a higher depreciation expense, it also leads to higher maintenance revenue, which is also not part of net spread. And just by the way, as we look out to the year ahead, I think that after the effective PBH, which is around 30 basis points, we'd expect the net spread to be stable in 2024. And it's worth keeping in mind just on net spread that we don't manage the business to maximize net spread. We do it to maximize EPS. So for example, when we sell older assets, that brings down the net spread, but we're reinvesting those proceeds, as Gus mentioned, at higher returns to maximize EPS. As we look at the guidance for next year, so look, last year, our initial guidance for 2023 was EPS of 7 to 750, and we ended up producing EPS of 1078. This year, we're guiding to 750 to 850. So you can make an estimate as to where we'll end up. It's the same management team running the company. We did the projections on the same basis that we did last year. And of course, we'd hope to beat those numbers. The guidance excludes gains on sale. It includes estimates for default costs and higher interest rates. And there's good reason to think that we could outperform on all of those items. Because fundamentally, it's not like everything has changed when we entered a new year. We're still seeing the same industry supply demand issues that we saw last year. We're still seeing the same strong demand for assets. And we're still pursuing the same strategy to maximize the value of our assets and produce value for our shareholders.

That's great. Helpful, thanks. Sure.

We'll go next to Hillary Cochnendue with Deutsche Bank.

Hi, thanks for taking my questions. First is, are you including any in your guidance, are you including any buyback assumptions? And then my second question is, last quarter you talked about very strong lease extension rate, especially for wide bodies. I was going to talk about what the extension rates were for this quarter and what the difference is between the narrow body and the wide body in terms of the lease extension rate. Thank you very much.

Sure. Thanks, Hillary. So look, I'll take the share your purchase question. So, so far this year, we've bought back around $170 million worth of stock. And we have a little over $100 million left in our existing authorization. And you saw we've announced a new authorization for $500 million. So we'd expect to deploy all of that this year. Beyond that, we have assumed some additional share your purchases in the projections. And those are based on the earnings, the capbacks, and sales assumptions that we've laid out here. But if we do better in earnings, then we'll have more excess capital that we can deploy. If capbacks gets delayed, we'll have more excess capital. And likewise, if we can sell more assets or produce gains in those sales, that will also lead to more excess capital. And, and I guess, of course, that's all before any mention of additional insurance proceeds, which we would hope to recover, but can't count on. So it's really a function of all those things, how much we would ultimately do. Gus, do you want to talk

about- The market's extremely strong. There's hardly any aircraft that we have with customers that they don't want to extend. They have to pay the going rate, of course. But I think, particularly on wide bodies, nearly everything extends in the last quarter. And on the narrows, it's very strong as well.

Got it. Thank you very much.

We'll go next to Jamie Baker with JP Morgan.

Oh, good afternoon, Abe. So, Pete, a follow-up to the net spread question that we already took during Q&A, you guided to stable trends next year. You talked about the drivers for net spreads coming down sequentially in the fourth quarter. But Mark and I are still curious what impact lease extensions and asset sales might be having on this particular metric. And maybe the answer is they're not really contributing. But are those factors that we should also factor in, in addition to what you articulated in response to the first question?

Sure. Yeah. So, Jamie, you're right. Both of those can affect it as well. Fundamentally, if we're selling older assets that may have higher yields, you lose that revenue, right? So that can affect the net spread. But obviously, as we laid out, we're redeploying that capital. So we think that makes sense. On the extensions front, so that can have an impact on it. Because essentially, if you're extending more aircraft, and particularly if you're extending aircraft that are further in advance, further in advance than you normally would, as we've been doing, then that affects you because you have to straight line those rents over the existing lease and the new lease. And so that can have an impact on net spread all else equal. I think those are contributing factors too. But fundamentally, we do expect to see it. I think it will stay flat based on what we see for the next year. Yeah.

But I really focus, Jamie, on the fact that the real focus is there. If we manage to net spread, I would not have sold any older aircraft. And so what we look at is, what's the metric we want to focus on? Value creation, earnings per share, and the right risk profile of our fleet. So therefore, I'm selling older aircraft at massive gains. I'm redeploying them into the buybacks at a massive gain. You saw from my example, on the trades we did last year, we turned book equity of one time into 2.25 times. So if I was worried about net spread, I wouldn't have done something like that. So we're here to make money for the shareholders. And that's the way we drive it. And in the meantime, as you sell those assets, the residual business is actually better than it was before with a lower risk profile.

That's great, Gus. No pushback from us on this. I'm just trying to articulate things for some investors. And then just a quick follow up on Russia. Can you remind us in aggregate what your average recovery has been as a percentage of the book that you initially wrote off? It looks to be around, I don't know, 65, 70 cents on the dollar, at least for the aircraft that have been settled. Is our math accurate on that?

Yeah, that's about right. 70% is right, Jamie. But remember that we still retain the insurance claims for the full amount on our own policy. So it's not as though that money is necessarily lost.

Got it. Got it. Okay, Pete and Gus, thank you very much. Appreciate it. Sure. We'll go next to Terry Moth with Barclays.

Hey, good morning. So I wanted to see if you can provide an update on your cargo conversion program. I think you guys called out some one-time costs last year. So I was hoping you may be quantified the revenue opportunity and how much of that's actually factored into the 24 guide.

Well, as relates to the cargo program, the development, we have several triple sevens currently in conversion. We expect that in our guidance, we expect that the triple sevens start rolling out of the conversion program in the first half of this year and into the second half and from there on. So yeah, our guidance does not include any revenue from those triple sevens in the first part of this year.

Got it. And then on your sales guide of what's the mix of assets we should assume in terms of aircraft, engines and helicopters, and how should we think about the gain on sale contribution to each of those?

Well, as it goes to the mix of assets, I mean, generally speaking, it'll be similar to what we've done in the past with a focus generally on older assets. As it pertains to the gain on sale, we don't give guidance to gain on sale. However, you can look at our historical performance and you can see that we have generated very significant gains there, but there are zero gains

in

our forecast.

Right. Got it. Thank you.

We'll go next to Katherine O'Brien with Goldman Sachs.

Hi, good morning, gentlemen. Thanks for the time. Not to keep harping on Leasefield, but even if the market was expecting, haven't we not even really seen the impact here Leasefield from the strong lease rate environment that kicked off, you know, with how tight supply and demand was, and maybe it was called second half 22 all the way through next year accelerating? You know, how many years out are we from your delivery slots or how many years out of your delivery slots booked at this point? And when do you start taking delivery of aircraft, you know, the majority being signed, you know, to half 22 and later?

Okay. You could think about two to three years out, Katherine, you're right in that, in that aircraft that were signed in 2021 would have delivered in 2023, aircraft that are signed in the first, even into the first half of 2021 would have been 2023, 2024. You get to 2022 placements back half of 2022, be back half of 24, Q4, 24 into 25, 26, et cetera. So you're correct in saying that there is the lag in that regard. But again, I'd make the same comment about lease yields that other portfolio basis that I do about this net spread. Of course, as we sell the older assets, we of course, reduce our lease yield because they're higher yielding at the last two years of a lease than they were at the front two years of the lease. But why are you pick it all up is the EPS and that's the key thing to look at.

I totally agree. Makes sense. You know, kind of wanted to make sure I wasn't thinking about that inflection incorrectly, just in terms of what we're going to, you know, actually start to see. I think,

you know, what if you, if you can keep the lease yield flat, improve the quality of your portfolio and drive up EPS, you're achieving a far better risk adjusted return on a higher quality business. And that's what Air Camp has been doing for 10 years.

Right. Totally makes sense. And then can you speak to how lease rates have trended since you last spoke, you know, realize it's only been a couple of months, but just given the incremental issues with the max and the GTF, is it fair to say supply has gotten even tighter and, you know, you've already seen that translate to lease rates, you know, if yes, is that mostly on narrowbodies or are we seeing it slower to widebodies as well? Thanks.

I wouldn't say in 90 days, there's been a dramatic move to be fair, Cath, but there has been a move upwards. There's no doubt about it. For sure there has. And what's very important, of course, is we've seen a bit of a fall in interest rates in that 90 day period, but we have not seen a fall in lease rates. And that's what you're really interested again, is to say, okay, what happened with the headline lease rate is interesting, but what happened with underneath with the interest rate? So what we like to see is falling rates and steady lease rates or even slightly increasing lease rates. And I say over the last 90 days, lease rates, you know, probably similar, but interest rates fell, so we didn't have to pass on the fall in interest rates.

That's great. Maybe I'll squeeze in one really quick third one for Pete on the guidance. You know, in your third quarter, 6K, you had, I think, $6.4 billion in purchase obligations. You're guiding the 7.2 cap ex for this year. Were you able to lock in incremental aircraft or is that just a function of, you know, I understand there's so many moving pieces in the skyline, just trying to figure out what drove that delta. Thanks so much for the time.

Yeah, some of that is engines, Catherine, engine purchases in 2024. I mean, there are a bunch of things that move around here. And I think, you know, as we look out at the 7.2, we do have some, you know, significant questions about that. That's our estimate today, but it could clearly move around a lot given the OEM issues.

Yeah, if I was a betting man, Catherine, I'd imagine that some of our cap ex is inevitably going to move to the right.

Great. Thanks for all the time.

Sure.

We'll go next to Chris with SESQA HANA International Group.

Cory, thanks for taking my question. Angus, thank

you for the walkthrough on how you're thinking about the supply and demand dynamic of points, three points you outlined. But on points two and three, so you spoke to the stressed MRO network backlog of shop visits. As we think about those two points and we think about resolution here, which of those might persist longer, we'd like to hear your view on how you see that moving into perhaps mid or end of the decade. Is it sort of MRO perhaps resolving faster or is this or these both pressure points that for any number of reasons and if you have those, love to hear them, that we should expect to extend closer or into end of decade.

Thank you.

Sure. And on your right on MRO, on airframe MRO, I would expect that issue to get resolved sooner. It's easier to conduct airframe MRO than it is to do engine MRO. To do engine MRO, you need to have a test cell, a very big workforce of highly trained engineers. It's a little bit different. So I think the airframe MRO will get solved first. The engine MRO though, here's the big issue. There's a finite supply of parts to build and repair engines. Those parts, when a part is made or manufactured, it can go number one to production aircraft engines, i.e. an engine that's going to go under wing of an Airbus or Boeing aircraft. Number two, instead of that, the part could go to spare engines. Now, if the fleet was staying on wing longer than it currently is, you would need as many parts to go to spare engines, but you do. And then third, engines have to go into the shop to get repaired. So the shops, the MRO shops also need that part. So there are three sources of demand for every engine part being produced today. And the manufacturers of those parts way back up the supply chain, who do the castings, are not going to increase that significantly anytime this decade, as far as I understand. So I think we will see the engine issues persist through the decade. And bear in mind that AirCap is the largest marginal supplier of spare engines to the world, which gives us, of course, an enviable position when it comes to engine leasing. But as it pertains to aircraft leasing, it gives us a unique advantage over all of our competitors because they cannot offer the vital products that we can in conjunction with our aircraft.

Okay, thank you. And as a follow up, so as

we think about the secondary market here for 2024, I think you said in response to an earlier question, there's been a slight fall in interest rates. Sounds like lease rates are steady to up,

but we

have had news here around the MAX and growing concerns around quality control issues with certain aircraft and types, as well as some carriers recently signaling a potential change in composition of their order book. So given all that, could you put perhaps a finer point or detail of what you're seeing in the secondary market, any sort of color you have around aircraft types or residual values that have perhaps meaningfully a shift or not since you last updated a few months back? Thanks.

Sure. Well, it's worth again just splitting the family up. So we all know that Airbus is outselling Boeing and has been for some time. But it's not enough just to say the 320 family outsells the Boeing family. Airbus wins in one particular aircraft. It's the A321 product. It does not win as much on the A321. The A321 product is the 220, 230, 240-seater even in some instances. So the MAX 8 is the 180 competitor from Boeing. That airplane is an excellent aircraft. And many operators will say it's as good, if not better, than the competing Airbus A320 aircraft. Where Boeing fall down, though, is that the MAX 10 has not yet been certified and it's not as capable an airplane, even when it is, it's unlikely to be as capable as the A321 currently is. So from our perspective, we are very bullish on the MAX 8. In fact, we bought a few of them around Christmas that just popped up. And we think that is an excellent aircraft. But because of the 321 superiority over the larger Boeing product and the fact that it's so early to the market versus the Boeing product, we are going to see a significant majority of the market heading towards the Airbus product line for the long term.

Okay. Thank you.

We'll go next to Ron Epstein with Banks America.

Hey,

good morning,

guys. Maybe

following up on that last comment, I guess, when you look at Airbus's narrow-body backlog of the approximately 11,000 airplanes, 70% of them are A321s. I mean, it's an overwhelming majority of their backlog. And it, I mean, for lack of better words, really kind of crushes Boeing's offering. I mean, isn't your sense that Boeing kind of has to do something or they're really going to just lose out on that larger segment? And it does seem like carriers are, and tell me if I'm reading this wrong, are trying to migrate the narrow-body product to larger shells.

Yeah, by and large, there's been up-gaging, Ron, for sure in the market. And that's where, you know, when the 737-800 and the 320 were the heart of the market, the 16180s, Cedar, Boeing had the majority of the market. That's clearly changed now, as you rightly point out, the A321 is a dominant airplane. But, you know, the Max-8 still has a very significant user base and is in good demand, actually. But, you know, just the target market for the Max-8 is not as big, as you rightly point out there, Ron, as the A321, because many customers are up-gaging. But we still see very strong demand for Max-8, and there's very limited supply of them.

Got it, got it. And then what's your sense on the 220? Is there much demand there, particularly the 300? And if they were to do a 500, which I guess is speculation, they may or may not, was there demand for that?

Listen, I think the manufacturer should focus on making what they have. I honestly think that they should focus on any of the OEMs to contemplate a new platform with new engines, given the troubles they've had with the 380s, the Rolls-Royce engines, the 787 grounding 19 months after entry into service, the Max issues, the delays that were year after year for Airbus's 320 program. I think they should focus on their customers now and delivering the promises they have made and delivering them on spec, on time.

And then maybe one last follow-up to that. How are you planning your own delivery horizon with your customers on the Max-8, given all the uncertainty with the FAA inspections and everything that's going on?

We just work with them, Ron, you know, and we work closely with Boeing. The customers want the aircraft as soon as they can deliver them. And we try and get them with Boeing the most accurate delivery dates we can. At the moment, that's not possible. But hopefully we'll have clarity as to what the delivery profile will be for 24 and 25 by the time we talk again.

All right, got it. All right, thank you. We'll go next to Stephen Trent with Citi. Good morning, everybody. Can you hear me okay? Yep.

Oh, great. Thank you. Because I'm having some terrible phone problems. So I apologize if I drop and I missed part of the call because of these issues. But just if I could understand, you know, sort of your long-term view on the credit rating, you know, do you sort of have an idea in mind in terms of, you know, where you guys would like to be rated by, you know, Moody's and S&P over

the long term? Sure. Thanks, Stephen.

I don't know if you got cut off there. But in any case, yes, look, we're on we're triply flat across the board now. We're on positive outlook with S&P and Moody's. And we hope to get those upgrades from them. And really, that's a function of how the business has performed. It's both the resilience that we showed through COVID, through Russia, through all of those things, the improved the improved credit profile of the business coming out of the GACS acquisition, but also the fact that if you look at any operating metric, whether it's operating cash flow, net spread, whether it's FFO to debt, any of those things that are meaningful for the rating agencies, we're outperforming the competition by a big stretch. Right. And so when you look at other companies that may be rated the same, and they look at us and say, okay, there's a big difference there, we think that that warrants an upgrade. And really, that's what we're pushing for. So I think if we can get to triple B plus that across the board, that would be great. And, you know, look, can we get into the single days? I mean, that's a different category, I think. But but certainly, I think there's a good reason to think that we could get to triple B plus.

And as a reminder to ask a question on today's call, that is star one on your telephone keypad.

And at this time, there are no further questions.

Thank you, operator. And thank you all for joining us for the call. I'd like to let you all know that we will host a capital markets day in New York on May the 8th. And we look forward to seeing you all there. Thank you very much for your time.

This does conclude today's conference. We thank you for your participation.