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?