Air Lease Corporation

Good afternoon, ladies and gentlemen, and welcome to the AIR Lease Quarter 1 2020 Earnings Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. I would now like to turn the conference over to Mary Liz DePalma, Vice President of Investor Relations. Please go ahead.

Hello, everyone, and welcome to Air Lease Corporation's earnings call for the first quarter of 2020. This is Mary Elizabeth Palma, and I am joined this afternoon by Steve Udvar-Hazy, our Executive Chairman, John Cougar, 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 first quarter of 2020. A copy of our earnings release is available on the investor section of our website at www.airleascorp.com. This conference call is being webcast and recorded today, Thursday, May 7, 2020, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. Please note that each member of the Air Lease team speaking today is in a separate location in their respective homes. However, we expect the format of the calls to remain the same. including the Q&A session for which instructions will be given at the conclusion of the call. Before we begin, please note that certain statements in this conference call, including clear 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, staff-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, May 7, 2020. 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 at 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 returns 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 VAT 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. As a reminder, unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chief Executive Officer and President, John Flores.

Thanks, Marylouise. Good afternoon, everyone, and thank you for joining us. Before we begin the call today, I just want to acknowledge the profound impact globally COVID-19 has had on both businesses and individual everyday lives. Our hearts are with everyone impacted by this pandemic as the world navigates through this challenging time, including our airline customers and our suppliers. We are deeply grateful for all those in healthcare, and all individuals in the front lines putting themselves at risk to get us through this crisis. Turning to the quarter, I'm happy to report that Airlease grew its revenue by 9.7% year-over-year to $511.4 million. We achieved net income of $133.3 million, pre-tax profit margin of 33.6%, and fully diluted earnings per share of $1.17. Our bottom line earnings and margins were slightly down compared to Q1 of last year, primarily due to end of lease revenue recorded in Q1 of last year, resulting from a prior year airline insolvency, and we didn't have that in the first quarter of this year. Greg will walk you through more details on our numbers and provide additional color. Since we spoke to you in February, the airline industry has been navigating through uncharted territory with an uncertain timeline to recovery. It is difficult to speculate about what traffic levels will be, how load factors will adjust, and the list of questions goes on. Simply put, and at the highest level, we continue to believe in the fundamental importance of air transportation as a vital industry to the global economy, as evidenced by approximately $100 billion of state support being offered to or received by the airlines to date. We believe this figure could double prior to the end of this year. which offers substantial support for our customer base, given 75% of ALC's customers have some form of governmental ownership or are flag carriers. Coupled with the most fundamental desire for people around the world to travel and be interconnected, we do ultimately expect passenger traffic to grow again, just as we have seen the reemergence of air travel after prior shocks and downturns. Given the extent of this pandemic and the global economic toll, it is difficult to predict when that will happen. We do believe that we will see different rates of recovery and growth regionally across the world. I know most of you have questions or are speculating about lease deferrals, cash collections, airline bankruptcy risk, and how we're dealing with those matters. So let me just walk you through our status and what we've done to date. As we indicated in our earnings release, most of ALC's airline lessees have requested some form of accommodation. To date, we've reached agreement with slightly less than half of our customers on such accommodation. Generally, this has taken the form of partial rent deferrals for a two- to three-month period, followed by a relatively short-term payback period either by the end of the year or, in some cases, repayment over nine to 12 months. And so far, where we have those agreements in place, our lessees are abiding by those agreements and payment schedules, and our cash collections remain strong, and we watch those strong collections every day. We also have many cases where we successfully extended our leases in conjunction with the accommodation we provide. As with all airline discussions, there is not a one-size-fits-all answer. We do our best to diligence each situation on its own merits. And a combination made by ALC on its own will not help the airline with all the issues that it's facing. It's important to understand what other steps our customers are taking to get through this difficult time, and we require detailed information before any combination is granted. We take into consideration the likelihood of the airline's ability to survive this pandemic, looking at shareholder and government support, lender support, and the likely strength of their current and future network. We also consider future business prospects with each airline. And finally, and perhaps most importantly, we look closely at our collateral package with each airline, including our cash security deposits, maintenance reserves, plus any letters of credit and shareholder guarantees. We do have a number of airlines paying us per their normal leases, but we also have a handful that are unable to pay awaiting further funding. While we are still in discussions with a number of our lessees working out details of their individual accommodations, Our collection rate for the first quarter was 90%. For the month of April, net of all agreements reached to date, our collection rate stands at 86%. As a reminder, this reflects cash as opposed to revenue recognition, and Greg will cover this further. Also, our aircraft utilization rate was 99.8% for the month of April and 99.7% for the quarter ended March 31. In summary, to date, we have agreed to approximately $125 million in lease deferrals. These deferrals account for approximately 6% of 2019 total revenues. Let me emphasize that Air Lease has maintained a strong balance sheet at all times and has a significant amount of liquidity. As a result, as the crisis unfolded and there was volatility in the debt market, we did not draw the full amount of our $6 billion bank revolver. We continue to use that revolver in the normal course of business as we have always done. With these deferrals to date, we foresee minimal impact on our rental revenue line, but they will be reflected in our operating cash flow. However, we will also have significantly less cash expenditures on the purchase of new aircraft this year, and Greg will further walk you through that information. As to potential airline insolvencies now and in the future, ALC currently has six aircraft on lease, with three different airlines that are in some form of insolvency proceeding, and those are Alitalia, Air Mauritius, and South African Airways. Now, Alitalia's bankruptcy well preceded the COVID-19 disruption, and ALC has reached agreement with the administrator of Alitalia for the continued operation of our three A330 aircraft, and we believe that the renationalization of Alitalia brings security to our leases there. Air Mauritius is in the initial stages of determining reorganization with our two A330neos, and we are removing one mid-life A319 from South African Airways. ALC has no aircraft with Virgin Australia or Norwegian. We won't speculate as to further potential airline insolvencies, but in these conditions, we do believe there will be further insolvencies and airline consolidation. As always, the young age of our fleet... our global reach and relationships, and our creativity in structuring leases appropriate to each airline's facts and circumstances, and our strong balance sheet and liquidity help us navigate these situations. As we shared last quarter, we're open to outright cash purchase or purchase of aircraft or such offers or sale leasebacks to assist the airlines and supplement our deliveries, but they must be attractive and make sense for ALC. Interestingly, very few airlines have shown interest in outright sale of aircraft and removal from their fleets, and we have not yet concluded any sale leasebacks. We have a very disciplined approach. We are not looking to invest in aircraft that are significantly older than our average fleet age, nor that have returns inferior to our overall average fleet, nor to purchase aircraft where the subsequent lease payments are immediately deferred thereafter for several months. To the extent we do any sale leasebacks, we are focused on those where we can link the transaction to a new aircraft delivering from our order book at the end of the leaseback term. We believe that our patience and discipline will bear fruit as the marketplace for sale leasebacks continues to evolve. We're not looking to add forward future deliveries of new undelivered aircraft via sale leasebacks, as we believe there remains uncertainty as to when those aircraft may actually deliver with the lower production rates that we see from both Airbus and Boeing. And we think there is still production rate uncertainty in the near to medium term, which also impacts our own order book. ALC's business model continues to focus on the purchase of new aircraft rather than sale leasebacks, and we're not changing that model. The late delivery compensation that we're receiving in the form of pricing credits and concessions, coupled with further pricing incentives from the manufacturers, coupled with the natural delivery delays and deferrals adjusting to market condition, and our strong balance sheet and investment grade ratings serve us well as the airline industry recovers, even if that's at a slow pace. Although we're in a difficult environment, I think it's important to share some of the themes we are experiencing and expecting. First, it is important to note that discussions and negotiations on new aircraft leases have not stopped. We do have a number of leasing campaigns on new aircraft particularly for delivery in the 2022 to 2024 timeframe. Our challenge there, frankly, is assurance of delivery dates from the OEMs, but the airlines are continuing those discussions with us. Second, many airlines are now revisiting fleet planning decisions made prior to COVID-19's pandemic. Despite low fuel prices, it is clear that airlines are prioritizing younger aircraft with better dispatch reliability and lower maintenance costs. Furthermore, environmental sustainability is growing ever more in importance. In fact, some of the airline bailouts by governments in Europe require improving environmental sustainability and specifically include acceleration of fleet replacement with more environmentally friendly aircraft. Air France is a good example of this. In the press, you've seen mention of accelerated aircraft retirements from Lufthansa, American, Virgin Atlantic, KLM, and Delta, just to name a few, as they respond to a decline in passenger traffic and look to retire their least efficient aircraft. These accelerated retirements, coupled with the max aircraft production halts and Airbus delays, both of which result in significantly less aircraft entering the marketplace in 2019 and so far in 2020, all of that will lend some support to the supply and demand equation as our industry recovers. opening doors for our new aircraft deliveries over the coming years. Third, we have always said that in good times, airlines need our aircraft, and in bad times, airlines need our balance sheet. Going forward, in an environment where the airlines' cost of financing increases, or they are simply unable to finance aircraft, particularly now with airlines receiving state aid, that they'll be prioritizing payoff, we believe leasing demand will increase. At the same time, we believe a shakeout of the leasing industry is inevitable. Those who entered our space in the past few years for quick returns without a large global fleet presence, strong relationships, remarketing creativity, and strong balance sheets are not likely to remain. As we sit here today, ALC has a strong balance sheet with over $22 billion in assets, 93% of which are unencumbered. We have ample liquidity at over $6 billion. We have a diverse customer base of 108 airlines across 61 countries, which, while they do not need short-term assistance, they want to work with us keeping the aircraft young that they have from ALC. And we are providing such short-term assistance. We have aircraft on order, which continues to garner interest from airlines focused on modernizing their fleets or preparing their future fleet needs. And we have relationships throughout the industry which span decades and will again allow us to maneuver and help each other through another global crisis. In the near term, the growth of our business will likely be slower, although we remain vigilant on potentially significant opportunistic moves. But the core philosophies that put us in the solid position we remain in today remain intact and more important than ever. Over the coming months, we will stand on those key principles to protect our strong balance sheet, continue being the partner to the airline industry we have always taken pride in being, and we will further find opportunities to differentiate our business along the way. And with that, let me turn it over to our Executive Chairman, Steve Haase, for additional commentary. Steve?