Air Lease Corporation

Good day, ladies and gentlemen, and welcome to the Air Lease Corporation First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today, Jason Arnold, AVP of Finance. He may begin.

Good afternoon, everyone, and welcome to Air Lease Corporation's earnings call for the first quarter of 2019. This is Jason Arnold, subbing in for Mary Liz DePalma, and I'm joined this afternoon by Steve Haase, our executive chairman, John Pfluger, our chief executive officer and president, and Greg Willis, our executive vice president and chief financial officer. This afternoon, we published our results for the first quarter of 2019. A copy of our earnings release is available on the investor section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, May 9th, 2019, and the webcast will be available for replay on our website. At this time, all participants on the call are in listen-only mode. The conclusion of today's conference call instructions will be given for the question and answer session. Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, and other income and expense, and stock-based compensation expense. These statements and any projections as to the company's future performance represent management's estimates for future results, and speak only as of today, May 9th, 2019. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we will be using during the call such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity are non-GAAP measures. A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q we issued today. This release can be found in both the investors and the press section of our website at www.airleascorp.com. Unauthorized recording of this conference call is not permitted. I'd like to now turn the call over to our Chief Executive Officer and President, John Pflueger.

Thanks, Jason. Good afternoon, everyone, and thank you for joining us. I'm happy to report that Air Lease enjoyed another solid quarter of performance. For the first quarter, we recorded diluted earnings per share of $1.23, a pre-tax net margin of 37.5%, and a pre-tax return on common equity of 14.7%. Our revenues were up 22% over the first quarter of 2018, and our portfolio metrics remain strong and consistent. Our balance sheet grew to $19.2 billion, with 280 owned aircraft at the end of this quarter. We continue to see healthy aircraft demand and operating trends in our business. To date, we've signed lease placements with 14 airlines covering 45 aircraft, including seven widebodies. The 14 airlines include six customers new to ALC, not all of which have yet been announced. The global reach and strength of our business continues. ALC continues to have significant forward visibility into revenue, with over $25 billion in total committed rentals. Although yesterday IATA reported modestly slower air travel demand in the March traffic data, impacted by holiday timing and other factors that Steve will discuss in a moment, the overall trend over the last six months remains healthy, and we continue to foresee passenger growth persisting at roughly two times global GDP. During the first quarter, we took delivery of 11 new aircraft from our order book, and sold six aircraft. Three of the sales went to Thunderbolt II, one to Blackbird Capital II, and two aircraft to third-party buyers. Deliveries totaled $1 billion, which, while representing one of the larger quarters of deliveries in our history, was $400 million lower than anticipated given delays at both Airbus and Boeing. Let me spend a few minutes talking about this. First, Boeing and the MAX grounding. We have 15 MAXs in our delivered fleet spread globally across six airline lessees. It's a relatively small portion of our current 280 aircraft delivered fleet. Before the grounding, we were scheduled to take 28 more MAX aircraft by the end of 2019, and two of those were supposed to deliver by the end of Q1. Sitting here today, we do not know and will not speculate on when the grounding will be lifted, nor when customer deliveries will recommence. Boeing, the FAA, and the World Aviation Authority are working intensely and closely to restore the MAX safely to the air with total confidence, and that is what we are looking for, and that's what we believe will be achieved. Our airline customers do need these aircraft badly, and we're working closely with them on alternative lift, including extending current leases where we can. The MAX situation has in fact caused a surge in single aisle demand to cover the temporary cessation of MAX deliveries, and that demand has generally increased lease rates, particularly on the 737-800s. However, our main focus and priority is helping our airline customers and not on lease rate premiums in this particular situation. When we first opened our doors here at ALC, The most common and gratifying comment we received from our airline customers was, hey, we remember when you guys really helped us out in this or that situation. So congratulations on starting ALC and let's see if we can get some business done. Neither Steve nor I will ever forget that. We, and in fact the global leasing community, play a vital role as buffers and facilitators for the airline industry. Turning to Airbus, we based our 2019 plan on updated aircraft delivery schedule provided to us by Airbus at the end of 2018. We have seen further delays from that schedule. In fact, six of the eight aircraft that did not make it into Q1 as originally scheduled were Airbus aircraft. While the Airbus Industrial Recovery Program is in progress, we now know from Airbus that the delivery schedules are subject to further delays. These delays are no longer just related to engine manufacturer issues. As we've said many times, we remain concerned about the very real supply chain constraints in the face of single-out production rate increases. We do believe that Airbus, under new leadership, has a viable plan for industrial recovery and production overhaul that will benefit long-term stability and schedule integrity, but will take time to complete. As such, we believe we will see continued delays and adjustments in our delivery schedules from Airbus likely through 2021. We're working closely with Airbus to minimize the impact of these delays with our customers. It's very important to keep the big picture in mind here, and that is that delivery delays from the OEMs, for the most part, simply shift our revenues further out on the horizon than previously planned, and in fact, a timing delay. The long-term leases are still in place. It's just a question of when they begin. With these overall delivery delays from both Boeing and Airbus, we have adjusted our full year 2019 estimate for aircraft investments from $6.5 billion to approximately $5.8 billion. Of course, our revised estimate of aircraft capex could further reduce depending upon return to service of the MAX and updated delivery schedules from Airbus as we receive them. And as is obvious from the MAC status, timing of some of these deliveries will shift later in the year. That said, while lower than our originally planned $6.5 billion in aircraft investments for 2019, our revised estimate of $5.8 billion still represents a major increase of 71% over the $3.4 billion added last year, thereby providing a strong growth platform which will be the case even if there are delays beyond our current estimates. So with that in mind, we will likely slow down, reduce, or delay somewhat our aircraft sales program for the year, depending primarily upon when max deliveries resume. We continue to see good demand from many buyers for our aircraft with profitable leases attached to them, and we foresee that demand to continue. Let me turn now to global airline health and airline bankruptcies. As I've said before, airline bankruptcies happen virtually every year. It's just a feature of the landscape. At ALC, I think we've done a pretty good job overall of assessing risk, and we've had no exposure to some of the larger, more recent carrier failures, such as Avianca Brazil or Jet Airways in India. We did have seven single-aisle Airbus aircraft on lease to Wow Air in Iceland. By the time of WOW's insolvency filing, we had already placed four of those aircraft and have since placed another two, leaving only one aircraft in which we are now awaiting signature with an airline for placement. There was strong demand for these aircraft in the marketplace, and we were pleased with the lease rates achieved for the follow-on placements. We had robust cash security deposits and reserves in place with WOW, which well exceeded the amounts owed to ALC. In summary, We acted quickly in advance of WoW's filing, placed the aircraft elsewhere, and are moving on. The last major point I want to cover is ongoing trade disputes, which are in the headlines again. I simply want to echo what we've told you during the past year. To date, ALC sees no material impact in lease placements from trade disputes. In fact, this week, ALC signed lease agreements on 10 new aircraft with a large airline in China which will be specifically announced at a future date. We remain vigilant and watchful on these matters, of course, and hope for successful resolution in the interest of global fair and open trade. To conclude, our team continues to execute and deliver strong, consistent results, and we remain bullish on the future. We remain highly confident in the strong profitability and continued growth of our business. With that, let me now turn the call over to our Executive Chairman, Steve Hasse, to provide his commentary in color. Steve?

Thank you very much, John. We are so pleased with our first quarter 2019 results. On the macro backdrop, global GDP growth remains healthy overall. And as John mentioned, the health of air travel demand picture remains very robust. I add I just reported year-to-date RPKs were up 4.8% over the same period last year, with load factors over 80.6 percent. Traffic growth slowed modestly in March, primarily due to the timing of the Easter holiday. IATA is still forecasting RPK growth for 2019 of 6 percent, with demand picking up pace over the remainder of the year. We look to our day-to-day business operation of our company and confirm continued favorable operating trends as well, with strong global air travel demand growth manifesting in high demand and strong placement of aircraft from our order book. We see these trends continuing, not just over the next several years, but over the next 20 years and beyond, as the global middle class continues to expand at a rapid pace with travel by air being the preferred mode of global transportation. The substantial need to replace aging aircraft is further driving demand for new modern planes, and our airline customers focus on the risk of rising fuel prices. We believe this creates a healthy environment, sustaining both twin and single aisle aircraft demand. As a result, we're seeing strong demand for long-term leases out to 12, and in some cases even longer, up to 14 years, illustrating the desire for airline customers to lock in their fleet planning with certainty for longer periods. ALC continues to have significant forward visibility into revenue with more than $25 billion of total committed future rentals. I'd like to remind everyone, again this quarter, that AirLease's $25 billion order book from Boeing and Airbus represents only about 3% of the total capital needed to fund the industry's $800 billion of aircraft deliveries between 2019 and 2023. Aircraft finance needs of our industry are clearly substantial, and we see these needs only expanding in the years ahead. Our new order model focuses mainly on meaningful competitive advantages as compared to operators focused on sale-leaseback market. We continue to see this as a key differentiator of our business, providing us access to in-demand aircraft earlier than available for purchase directly from the OEMs on attractive terms as compared to alternatives available to many airlines, and also affords us the ability to make very selective approach in determining which airline customers we want to do business with. As John highlighted earlier, we avoided exposure to two of the larger recent airlines that failed and experienced no credit losses from our exposure to WowAir. I think it's very important to reiterate the fact that over 200 airlines of all sizes and in all regions of the world have failed since 2010. And at ALC, we have not experienced any losses, a testament to our approach to managing credit risk as well as the diligence and expertise of our team. We remain highly focused on helping our airline customers around the world to modernize their fleets and most effectively address fleet planning needs as they expand and optimize their route structures. During the past several months, we announced a number of important deliveries and placements with both new and long-time airline customers. There are also more than half a dozen unannounced aircraft lease transactions, which you'll hear about in the weeks ahead. We completed deliveries of A320neo and A321neos to Air New Zealand. In April, we announced delivery of the first of five 7879s on long-term lease to China Southern Airlines, the largest airline in Asia. We also announced lease placement of three 7879 aircraft with an airline in Korea. We also announced several additional deliveries, including the first of six new A321neo LR aircraft to Air Arabia, our first delivery of the LR from our order book, and the first delivery of an A321LR in the Middle East region. We also announced the delivery of a new A33900neo to Air Mauritius, the first of two aircraft of that type to be delivered to that airline, and the first A330neo in Africa. The last item I'd like to highlight is I'm proud to report that we expect Air Lease Corporation's balance sheet to exceed $20 billion in total assets in the coming days. This achievement is noteworthy, not only in recognizing that it's a sizable number, but in reflecting how far we've come over a relatively short amount of time. We founded ALC in the spring of 2010, with no aircraft, but a bold vision of what our combined industry experience and knowledge could create for this business. I'm very proud of what we've achieved thus far and look forward to our consistent growth and the addition of our next $10 billion in assets and growing beyond. I want to sincerely thank our Air Lease team for their continued exceptional dedication and outstanding work that went into attaining this milestone and for the strength of our continued operating financial performance, which is the best among all aircraft lessors. And with that, I will turn the call over to our CFO, Greg Willis, to provide an update on Air Lease Corporation's financing activities for the first quarter of 2019.

Thank you, Steve, and good afternoon. As highlighted earlier, we recorded another solid quarter of financial performance. The results benefited from the net growth of our fleet, with our key portfolio metrics of yield, lease term remaining, and average age all remaining relatively stable. In the first quarter of 2019, ALC generated total revenues of approximately $466 million, up 22% year-over-year, which includes $10 million of aircraft sales, trading, and other activities. As John noted, our fleet activity included the purchase of 11 new aircraft, representing approximately $1 billion of aircraft investment, and sales proceeds of approximately $264 million. Turning to expenses, interest expense increased year-over-year primarily due to the rise in our average debt balances, which tracks the growth in our fleet. Our composite funding rate rose only four basis points as compared to the fourth quarter and is up a modest 22 basis points relative to the prior year. Our fixed-rate borrowings represented 83% of our debt portfolio, and along with our interest rate adjusters on our lease placements, which continue to serve as a buffer to rising interest rates. We also benefit from our investment-grade credit ratings, which are the highest in the industry on a standalone basis. They have helped increase our access to capital and lower our financing costs, which I will cover in more detail later. Moving on, depreciation continues to track the growth of our fleet. SG&A this quarter was elevated primarily due to transactional costs associated with WOW, and we expect SG&A to return to a normalized level next quarter. Looking forward to the remainder of 2019, we expect to add 53 aircraft to our fleet, representing approximately $4.8 billion in aircraft investments. As John highlighted in his remarks, we are conservatively tempering our outlook for future deliveries for 2019 as a a product of the continued delays at Airbus and the temporary grounding of the Boeing 737 MAX. As of today, we expect 1.9 billion of aircraft deliveries for Q2, which does not include any MAX aircraft. Despite these delays, it is worth noting that we are still anticipating a record year for aircraft investments and growth. As discussed last quarter, we continue to evaluate sales opportunities in our fleet and still anticipate selling approximately $1 billion of aircraft in 2019. However, we expect the majority of these aircraft sales to take place in the second half of the year. Turning to financing, we announced today the closing of an amendment to our revolving credit facility. Through this amendment, we increased the size by $1.2 billion, representing a 27% increase to $5.8 billion. And based on publicly available data, this makes it the largest and lowest-priced facility in the industry. This facility remains priced at LIBOR Plus 1.05 basis points, percentage points, excuse me, and backed by a globally diversified banking group of 50 financial institutions. This achievement was due in part to our significant base of uncovered assets, low leverage, and low leverage, which serves as a key credit differentiator. This facility represents a major step forward in the evolution of our funding profile, aiding us in the continued management of our liquidity as we continue to grow the business. We also completed our inaugural preferred equity issuance in early March, raising $250 million of non-cumulative perpetual preferred stock at a yield of 6.15%. This security is callable in five years and is attractively priced as compared to other long-term debt financing alternatives. We also view the equity treatment applied by the rating agencies as appealing and appreciate the added funding diversity that this source of capital provides. Our debt-to-equity ratio declined quarter to quarter to 2.3 times below our long-term 2.5 times target, which is largely the product of our preferred issuance and continued aircraft delivery delays. We expect that we will return to our target debt-to-equity ratio later in 2019. And as a reminder, our debt-to-equity target is not a cap, and we regularly fluctuate above and below this level based on the timing aircraft investments and sales. We remain committed to our financing strategies of 80% fixed rate debt and 90% unsecured debt. This concludes my review of the results and the financing activities of the company, and I will now turn it back to Jason. Thank you, Greg.

This concludes Matt's remarks, so I'll now hand the call back over to Sonia to open up the line to the Q&A session. Sonia?

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered or you wish to make yourself on the queue, please press the pound key. For any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Moshe Orndach of Credit Suisse. Your line is now open.

Great. Thanks, and congratulations on reaching that $20 billion milestone. I was hoping that maybe you could just flesh out the kind of changes in the delivery schedules in terms of, you know, both Obviously, you know, you're talking about, you know, in the neighborhood of three-quarters of a billion dollars less this year, possibly offset by, you know, slightly less in sales. But are these deliveries, I mean, do you think that they get pushed into 2020? I mean, how should we think about that, you know, in terms of you think about it over kind of more of the intermediate term?

Thanks. Thanks, Moshe. When you look at it, we had some end of 18 deliveries that got delayed and spilled over into the early part of 19. What has happened, as they indicated in remarks, is that the best estimates we had provided by Airbus at the end of 19 have showed further slippage. So we will likely have some aircraft that were scheduled for delivery this year towards the end of this year that will spill over into 2020. It's hard to say what the average delays are. We are getting updated schedules from Airbus. And look, on the MAX, it's just, again, we won't speculate when those deliveries may resume, but it will just be dependent upon, you know, when those customer deliveries recommence for us. So it's really hard to speculate. I think our big message is, look, we're lower than we thought we would be at the end of last year for these reasons. but I think it's still a very healthy growth for us. And even if we have further slippage or don't take as many aircraft by the end of the year as we're forecasting today, it's still a pretty big growth for us.

Yeah, one more comment. On certain wide-body aircraft, for example, an A350 and a 787-9, we're actually accelerating the aircraft delivery one month. So the A350s and 787s are all on time And as I said, two of those were actually pulling forward to offset some of the delays on the single aisle aircraft. So we're making adjustments along the way. But as John said, some of our late 2019 deliveries could slip into 2020. But the length of the leases and the overall economics of those transactions will not change.

Yeah, just one other thing to add, Moshe. In my remarks, we guide it to $1.9 billion in capex for the next quarter. And at the next quarter call, we'll continue to update you as to the timing of deliveries. I think this is going to continue to evolve, and you'll continue to see a balance with sales as well.

And the $1.9 billion for this quarter does not include any maxes. So if the max deliveries for any reason were to begin toward the end of the quarter, that would obviously change the equation.

Gotcha. Thanks for that level of detail. I was just skimming. I didn't get a chance to read the entire 10Q, but there was a comment in there that said that as of today, May 9th, none of the orders that you've had for those planes that have been delayed are subject to cancellation. Is that something that does change at some point?

Typically, the contractual provisions of our agreements with the manufacturers have out to 12 months after the delay from the original delivery date. In some cases, it may be different. And we typically share that right with our lessees. So that's where that disclosure comes from.

So exactly whatever we're committed to contractually with the OEMs, Moshe, we pass on that same thing to our customers. I see. So if we're not on the hook, they're not on the hook.

Gotcha. All right. Thanks very much. I know it's a difficult thing both to manage and to describe, but thanks for the transparency. Thanks, Mo.

We're staying on top of it.

Thank you. And our next question comes from Michael Lindenberg of Deutsche Bank. Your line is now open.

Mike?

Yeah, hey. Yep, sorry. I just want to go back to, John, you talked about that line of, you know, if If they're not on the hook or if we're not on the hook, then they're not on the hook. I just want to, maybe this is slightly a separate different question. For those lessees that have MAX airplanes today, they have to remain current on their leases, even if they're grounded, right? So they're still making monthly payments to you, even if the airplanes are on the ground?

Yeah, all of our leases, regardless of MAX or Airbus, generally speaking, yes. There are hell and high water leases and payments have to continue. Now, I would also comment we have had a few – to your earlier comment, we have had a few Airbus aircraft that have actually delayed beyond 12 months. But in each case, our airline customers need those airplanes and took those airplanes, and therefore we did as well. So, you know, keep in mind contractual provisions are one thing, but what our airline customers need very much so is another. So we can point in the past to airlines that have had the ability, as we have had the ability, to opt out beyond 12 months. But those airline customers have chosen not to do so, and therefore we have chosen not to do so.

I see. Okay, so that makes sense. And then with respect to compensation from the OEM, is the onus on the airline lessee to have that negotiation with Boeing or Airbus – or is that something where you work in conjunction with the lessee in trying to mitigate them? I realize we're getting a little bit ahead of ourselves because I think at the end of the day, everybody wants to see those airplanes back in the air, and I know those conversations are probably, you know, not likely to take place until sometime down the road, but the fact is, you know, they have to happen, and somebody's owed something. Is that where you work with them, or do they do that on their own?

Jason, it's a bit premature, as you know. All I can say is we've been very transparent with Boeing with all of our customer matters. That's really all we can say at this point in time. To your point, we're all hoping for a successful return to the skies of the MAX. And until then, it's just premature to comment. We've just been very transparent with Boeing.

Okay. Very good. All right. Great. Thanks. Thanks, John.

Thanks, Mike. Thank you. And our next question comes from Scott Valentin of Compass Weight. Your line is now open.

Great. Thanks very much. Just with regard to secondary market demand, I think there was a comment made about the 737 MAX obviously having a positive impact for demand in the secondary market. But are you seeing any shift maybe to wide-body airlines opting to go maybe to a wide-body if they can't get it?

We have seen a couple of airlines operate wide-body aircraft on markets where they previously utilized MAX aircraft. For example, I was just down in the South Pacific, and there was an airline there that was flying MAXs, and they substituted A330-200s on some of their higher density single aisle flights. But most airlines are running their aircraft at pretty high levels of utilization. So I would say there's not a lot of cushion to be able to substitute smaller wide bodies for single aisle aircraft. But on a selected basis, it is going on.

Okay, thanks. And then just in terms of fuel price, oil prices are up a little bit. It seems like it's maybe a sweet spot where it stimulates demand for new aircraft or creates increased demand for new aircraft, but doesn't really have too much of a negative impact on airline operations. Is that a fair assessment?

Yeah, I think we're in a band on fuel prices. where the current generation of 737 NGs, A320, A321 CEOs kind of coexist with the new generation aircraft without any major sort of impact either way. We're sort of in that range right now where we don't see a degradation of values on the older planes, nor do we see the new planes being out of favor.

All right. Thanks very much.

You're welcome. Thank you. And our next question comes from Jamie Baker of J.P. Morgan. Your line is now open.

Good afternoon, gentlemen. Follow-up to one of John's prepared remarks. So the pace of airline bankruptcies and, you know, the types of aircraft that are being affected, you know, it does appear to Mark and me that the, you know, elevated failures are common. cause for concern insofar as they potentially disrupt the equilibrium between aircraft supply and demand. Do you agree with this? Are the failures driven by any particular shared catalyst or is this just regular way business that does not in any way indicate that we're nearing the end of the economic cycle?

Jamie, while I agree it does seem, if you look at these things, perception is We've had a few more than one would expect. But the truth is, if you look at each one of these situations, these situations have been involving in each case for years. Let's look at jet airways in India for a while. I think from a timing perspective, I would call it more coincident than anything else that these are happening at this point in time. I don't really see any fundamental, we don't see any fundamental macrocauses which is going to precipitate a further round or rash of airline solvencies. Look, big picture, you as well, you more than anybody else, you and the other lines who follow the airlines know that the business models are evolving, and largely you're either more on the full service side or you're at LCC or ULCC. So airlines in the middle are kind of stuck and really need to, identify where they're going, or if they have a special niche, stay in that niche. Some airlines will stay in that niche. Some airlines will not. So I think we're going to see this continue, but I would just simply say we don't see any large macro trend that points towards multiple more or greater rates of airline failure than not. You know, we'll see how it goes, but no, there's no fundamental global or economic trend matters, I think, that really precipitate anything like that.

Jamie, we looked very carefully at the failures of Air Berlin, Germania, Monarch, Jet, Avianca Brazil, and Huawei. And if you look at every one of those cases, and the Air Berlin one even involved wide-body aircraft, A330s, the planes were absorbed very, very quickly. In every one of those cases, homes were found for the displaced aircraft very rapidly, and they were redistributed and released to other airlines very quickly. So we believe that the resilience of the industry and the growth of the industry actually absorbs very quickly the aircraft that are sort of freed up by these airline failures.

So to my comment on we and the leasing community being a buffer, we are. Let me just give you an example. Let's look at Jet Airways. We had nothing at Jet Airways in India. We knew the founder quite well, Naresh. He was a lovable guy, and he really built a great empire, but it ended where it ended. The fact of the matter is most of that fleet was leased, and a lot of those were 737-800s. So guess what? Over 50 leased 737-800s now are are being helpful and migrating to help, in fact, mitigate the max grounding situation. So in an ironic sense, you have a pool, a reservoir. It may be coincidence. It certainly is. But nevertheless... You have the leasing community having these aircraft available, coincidentally right now, to help the very critical problems on the max shortfalls of lift. So not every single lessor there. I can't speak for all of them what they're doing. But for sure, for sure, a number of those 737-800s are going to be migrating to plug problems associated with the lack of max deliveries.

We appreciate that. Second question on that MAX issue and air leases exposure, and we're obviously all in agreement that the plane is ultimately recertified, but does the situation overall make you question the duration of the 730 program? Could this end up driving a sooner rather than later replacement at Boeing. I'm just asking for your view as to what this may portend for the life cycle of the overall 7-3 program, since that would obviously have an impact on whatever residual value assumptions you might have initially made.

The short answer, Jamie, is no. Okay. It's premature. I like short answers. But, you know, I could give you a long-winded answer, but the short answer is it's premature and no.

I'll leave it there. Thank you, gentlemen. Take care. Thanks, Jamie.

Thank you. And our next question comes from Helene Becker of Cowan. Your line is now open.

Hey, guys. It's actually Connor Cunningham in for Helene.

How are you?

Good to see you, Connor. So just to stay on the MAX and the NEO delays, just given the ongoing issues there, Have you given any thought to changing your long-term craft investment strategy? Like, would it be beneficial for Air Lease to make more smaller orders than larger ones and kind of being able to navigate around, like, delivery mishaps or take advantage of, like, unique opportunities that may arise?

Well, in fact, we have been doing that, you know, in 2017 and even in 2018. We did purchase some additional used aircraft in the marketplace just to cover these CapEx timing delays. But the answer is no. Even if we ordered less quantity of aircraft, you know, we're still subject to any delivery delays, and we would not get nearly the pricing that we get. So overall, this has absolutely no impact, and we have no intent whatsoever to change our business model. going forward. We believe in its long-term resilience, and we believe that the residual values that we were able to achieve when we sell aircraft, you see our gains when we do so, all point to the bigger picture that for us, the new aircraft model remains the way to go and will continue to remain the main focus of our capital allocation.

I think there's a misconception on Wall Street that when Air Lease orders a group of new airplanes from Airbus and Boeing, that that's somehow casting concrete forever. The truth is, that we enter into these multi-year contracts and almost on a weekly and monthly basis we evolve and modify and change and update and fine-tune these agreements to meet the needs of our customers, to meet the needs of our own circumstances. So please don't look at these purchase agreements as some kind of a set of concrete things that cannot be amended. We're continually evolving, changing, fine-tuning these to sort of optimize the ability to meet our customers' needs.

So Steve gave an example of that earlier on when we're trying to accelerate forward some wide-body aircraft that, in fact, are on time just to help mitigate that. So that's just one example. So, you know, in the big schema thing, again, if we go from $6.5 billion this year to $5.8 or $5.7 or $5.5, it's still a heck of a lot more than the 3.4 we did last year or any prior year. So we're pretty confident ongoing in the large picture here.

And we also regularly convert wide-body aircraft into single aisle aircraft. We change delivery dates. We convert wide-body aircraft into single aisle aircraft. We go the other way. We're continually modifying and updating the portfolio composition so that it best suits our own requirements and those of our customers.

Appreciate that detail. And just on the sales proceed guidance, I appreciate why you're doing it and understand why you're slowing the sales, but isn't this the type of environment that you should actually be selling a lot of aircraft into, just given elevated demand for used planes? And then, like, you're relying more so on your order book for growth in the future. Thanks again for the time.

Yeah, the point is that we just don't have that many aircraft that are true sales candidates, right? So that gives us the ability to be more selective when it comes to actually exiting these airplanes. With our average age under four and the growth pipeline that we have coming, our fleet age will stay quite low even if we sell no aircraft. And I think we earn a great deal of profits by harvesting the rentals over our whole period. So we are going to continue to sell. I think it's important to do so. But I think John's comments earlier point to the fact that we have a lot more flexibility now as to when we do to make sure that we maximize value for our shareholders.

Look, we're always looking to optimize our financial results. And the aircraft sales is a lever, but they're very profitable leases as well. So, you know, it's a good dynamic and it's a good lever for us to have. I think the key is that we forecast this demand to continue. I think I comment in my remarks, we have a lot of buyers that continue to come to us to buy these aircraft, and we just see that continuing on. So we don't see a change in demand environment, et cetera, et cetera.

Last year we sold more than $850 million worth of used aircraft. So we are very focused. on selecting those airplanes from our fleet that are good candidates for sale and will yield a good profitable result of selling versus keeping them.

Thank you. And our next question comes from Catherine O'Brien of Goldman Sachs. Your line is now open.

Good afternoon, gentlemen. Thanks for the time. So maybe a quick follow-up to that last question. You know, has there been any shift in who you're selling these aircraft to over the last six to 12 months? Is there any one category of buyers that's driving the lion's share of demand for your current fleet, like between, you know, other leasing companies, et cetera?

No, I think if you look back, Catherine, we've been pretty clear. The majority of our sales have been into the structured products that we've actually – innovative. Thunderbolt One, Thunderbolt Two, that's the largest thing. Blackbird Capital One before that. So that continues to be the largest single avenue of aircraft sales. And then we pursue third-party buyers as well. So no real change from that platform. We like the managed platforms. We like selling to the T-bolts, the Blackbirds, because we continue to manage those assets. And we retain, really importantly, we retain all those customer contact points. That's extremely important for us, as well as the ongoing management fees.

Great. And then last quarter, you noted on the call that you hadn't seen any large new entrant carriers in the sale-leaseback space coming out of China. Does that continue to be the case today? And then are you seeing any changes to existing less-for-growth outlooks that give you any optimism about where sale-leaseback rates might be headed over the medium term? Thanks.

We do not – we continue to not see – additional Chinese entrance into the marketplace in our business or in the sale-leaseback side. I think if it looks pretty well, that's been tempered. The new entrance part has very much been tempered. The sale-leaseback market is as it is. I do believe we continue to sleep. Although it's still a good environment for airlines who wish to finance that way, I think lease rates are still low. But I do think we have seen a tempering and continue seeing a tempering in the appetite of investors and other lessors in sale leaseback. I just, you know, the rates in some cases have gotten so low, I think that it has tempered a little bit the enthusiasm by the investor community for that product.

And one thing I want to point out is the lease rate factors that you're hearing is a two-part equation, right? It's the rental as well as the underlying purchase price. So both those variables, it's difficult to know what's actually driving the low lease rate factor, but those are two variables that drive that LRF lower.

Totally makes sense. So do you think it'd be fair to say that we could be seeing the bottom here in this market and maybe over the medium term it could be something that Air Lease would explore?

Yes, we think so. Yeah, we think the lease rate trends are now going in the northern direction.

Thank you very much for the time.

Sure.

Thank you. And again, ladies and gentlemen, if you would like to ask a question, please press star then 1 on your touch-tone telephone. Our next question comes from Ajit Lawania of Morgan Stanley. Your line is now open.

Hi, good afternoon. Hi, Rajiv. First, a question for John, Steve. In terms of the MACs getting certified, obviously lots of uncertainty out there, but how concerned are you that trade issues, global tensions, things like that can maybe drag on the process and maybe not lead to some sort of uniform or global lifting of the grounding, i.e., politics essentially getting involved?

I would like to think, and actually I do believe, you may think this is naive, but I don't think so. Look, I think safety is safety. And I think most countries' regulatory authorities disassociate and don't, either in a backdoor or other way, try and make this a part of the global trade equation. I think the major regulatory agencies, I would say the FAA and EASA and others, you know, I think they take their mandate for safety quite seriously. And I think that they're, you know, I think they're pretty well insulated. And you can make sort of that common sort of, or maybe it's a Wall Street, you know, leap for that concern. But I don't think so. I think our regulatory agencies are pretty dedicated to their primary mission of safety.

Okay. And Greg, actually a question for you. In terms of tapping the preferred market and some of the comments you made earlier, Can you tell us a bit more about what that does in terms of your ability to maybe move your debt-to-equity numbers around? Does it open up an opportunity to get more aggressive as the market normalizes in terms of CapEx? Just trying to understand where that fits into your overall commitments on balance sheet and investment opportunities, et cetera.

Yeah, sure. I think it provides us with a lot of financial flexibility there. It comes with 50% equity credit from S&P and 75% from Fitch. I think it's very attractively priced if you look at it relative to our 10-year financing costs. So I think that was very positive. I think it opens up another source of capital. And frankly, having that extra cushion for rating agency debt to equity, I think it gives us a lot of flexibility when we sell or when we buy more aircraft. Okay.

I'll leave it there. Thank you.

Thank you.

Thank you. And we do have a follow-up question from Scott Valentin of Compass Point. Your line is now open.

Thanks for taking my follow-up. Just, Steve, you mentioned that lease rate factors now are – you believe a trend is now moving higher. Is that materially changed from where it was, say, a couple of quarters ago?

No. I think we saw the lease rates kind of bottom out. And this is very general because there are differences between different types of aircraft. But I think we saw things sort of hit their low point after the summer season last year in the fourth quarter of 18. I think this year what we're seeing is demand for aircraft is so robust and so strong that there's actually shortages of certain aircraft types. And we are seeing positive signs of elevation on lease rates in general. We're also not seeing some of the irrational sale-leaseback rates that we saw in 2017 and 2018. Okay. All right.

Thanks very much.

You're welcome.

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Jason Arnold for any closing remarks.

Thank you, Sonia, and thank you very much, everyone, for taking the time to join our call today. Please don't hesitate to reach out after the call to answer any further questions. Otherwise, we look forward to speaking to you all again next quarter. Operator, please disconnect the line. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.