Air Lease Corporation

Ladies and gentlemen, thank you for standing by and welcome to the AIR Lease Third Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mary Liz DePalma, Head of Investor Relations. Please go ahead.

Hello, everyone, and welcome to Air Lease Corporation's earnings call for the third quarter of 2019. This is Mary Liz DePalma, and I am joined this afternoon by Steve Haase, our Executive Chairman, John Kluger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our results for the third 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, November 7, 2019, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the Q&A 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, stock-based compensation expense, and other income and expense items. 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, November 7, 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 income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity are non-GOT measures. A description of our reasons for utilizing these non-GOT measures, as well as our definition of them, and reconciliation to corresponding measures can be found in the earnings release and 10-Q we issued today. This release can be found in both the investors and press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our CEO and President, John Plewer.

Well, thanks, Mary Liz, and good afternoon, everyone, and thank you for joining us. I'm happy to report the continued strength of our business, with revenues up 18% year over year for the quarter and up 19% year over year for the first nine months of the year. Our diluted EPS is up 9.2% to $3.67 for the first nine months of the year, and we continue to generate strong pre-tax margins and returns on equity. ALC's fleet at quarter end included 307 owned aircraft with a net book value of $18.9 billion, up 20% from $15.7 billion at year end in 2018. In the third quarter alone, we delivered 15 aircraft from our order book, representing approximately $1.5 billion in aircraft investments, despite the max grounding and ongoing industrial delays at Airbus. In the first nine months of 2019, we made approximately $4.1 billion in aircraft investments, 20% more than we did in the full year of 2018. And as we told you we would do in the third quarter, we proceeded with aircraft sales with more to follow in Q4. On that note, I'm very pleased to announce the successful pricing of our third midlife securitization, Thunderbolt 3. As most of you know, our Thunderbolt platform serves as a valuable tool to keep ALCs fleet age young, yet allow ALC to keep its hand in the valuable midlife space as these aircraft age, and to retain the important customer relationships. Thunderbolt 3 is a portfolio of 19 aircraft, including two widebodies, with an average age of approximately 10 years on lease to 18 lessees in 15 countries. Its structure is substantially similar to that of Thunderbolt 2, including ALC holding 5% of the equity. This transaction, along with Thunderbolt 1 and 2, demonstrates how ALC should be valued with a focus on long-term cash flows. The transaction will close tomorrow. meaning that the cash proceeds will be deposited into escrow with payout to ALC as each of the individual aircraft is sold into Thunderbolt 3, meaning title transfer and lease innovations are completed. As with our prior securitizations, we expect that this will happen over the course of Q4 and Q1. With the close of Thunderbolt 3 tomorrow, plus the other contracted sales we have for conclusion, ALC has reached its 2019 goal of securing about $1 billion worth of aircraft sales. Greg will provide some additional color on Thunderbolt 3 and our Q4 sales outlook in his commentary. As of today, our order book stands at 83% placed through 2021. Our forward delivery schedule assumes that we will not be taking delivery of any MAX aircraft until the second quarter of 2020. Now, we made this assumption because all of our MAX deliveries are to foreign carriers, and as you know, foreign carriers are likely to certify after the USFAA. Again, this is our own assumption, not Boeing's. Of significance, our placement percentage includes very recent placement of additional MAX aircraft, which we will disclose at a future date. Once the MAX does return to the air, we expect that it will take at least 24 months before all MAX aircraft are reabsorbed into the global fleet. Ultimately, any delays of the MAX back into service just shifts the timing of our aircraft investments into the future. We do believe that with Boeing ongoing financial assistance, we will retain most or all of our forward MAX lease placements. We also believe that once the MAX returns to the skies, It will be the most tested and critically reviewed aircraft flying, and we have full faith and confidence in that aircraft going forward. Let me also point out that the grounding of the MAX has resulted in a net global reduction in seat capacity after even adding back aircraft that came into the marketplace from airline bankruptcies. In fact, we believe the decline in passenger growth rate in 2019 has been influenced by the MAX grounding. Furthermore, as I just indicated, we expect that it will take at least two years to return all produced but undelivered MAX aircraft to their customers. For these reasons, we are not concerned about too many aircraft coming into the marketplace when the MAX grounding is lifted. Our focus and the focus of the Boeing company is getting these needed aircraft, and let me reemphasize needed aircraft, safely flying with customers. Stepping back and looking at the broader macro picture, we are monitoring trade matters, global economic activity, and competition in the marketplace, and any corresponding impact it's having on our business. We see trade tensions impacting freight volumes, but passenger traffic holding up relatively well. Boeing notes that global trade matters have impacted direct orders from Chinese carriers, but as we've previously stated, ALC's Chinese customers are actively seeking Boeing and Airbus aircraft through the medium of leasing. Our deliveries of aircraft to China remain on track. Most recently, at the end of September, we delivered a 787-9 on schedule to China Southern, the largest airline in China. As to aircraft tariffs, as a result of the World Trade Organization ruling, the United States has recently imposed a 10% tariff on Airbus aircraft being imported into the USA. As a reminder, ALC has well under 5% of our overall business in the USA. It is yet to be seen what the WTO ruling will be on the Airbus claim against the US and Boeing. Our view is that tariffs ultimately benefit no one. Boeing has aircraft going into Europe. Airbus has aircraft going to the United States. and the airlines do not want to pay the tariffs. We see this as a manufacturer problem, as aircraft buyers and operators will not carry this burden. In regard to competition, we see less activity from new Chinese leasing companies. In fact, I think it's fair to say we see some of the more recent entrants exiting the space. As evident from some of the more recently announced transactions, we are seeing renewed interest from Japan in the leasing space. But the teams running those businesses are seasoned veterans having been in the industry for some time. So the bottom line is that the fundamental need for aircraft remains strong and the market for both new and used aircraft remains robust. Accordingly, I can report that Air Lease has profitably placed all 11 aircraft consisting of seven owned and four managed aircraft that were on lease with the Thomas Crook Group including two that remained at Condor. In this situation, we were once again protected by our security package, and we experienced multiple bids for all of our Thomas Cook aircraft, including our A330-200. One further comment looking forward. With environmental considerations looming larger and larger in airline fleet decisions, ALC's order book represents the most fuel efficient, environmentally friendly aircraft that can be obtained in the world today. With Airbus and Boeing order books full years ahead, our delivery positions are highly valuable and needed. Environmental sustainability is now one of the largest global concerns, and the best way that airlines can address this concern is with adding the most environmentally friendly aircraft available. So despite any other macro supplier demand or economic set of circumstances, this fundamental need to protect our environment will not change. In fact, it will grow stronger. And with that, let me turn the call over to Steve for further remarks. Steve? Thank you very much, John.