Air Lease Corporation

Good day, ladies and gentlemen, and welcome to the AIRLEASE Q2 2020 Earnings Conference Call. At this time, all participants are in 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 zero. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Marylise DePalma, Vice President of Investor Relations.

Hello, everyone, and welcome to Air Lease Corporation's earnings call for the second quarter of 2020. This is Marylise DePalma, and I'm joined this afternoon by Steve Hase, our Executive Chairman, John Pfluger, our Chief Executive Officer and President, and Greg Willis, Executive Vice President and Chief Financial Officer. Earlier today, we published our results for the second quarter of 2020. 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, August 6, 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 AIRLEASE team speaking today is in a separate location in their respective homes. However, we expect the format of the call 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 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, August 6, 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 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-GAP measures. A description of our reasons for utilizing these non-GAP measures, as well as our definition of them and the reconciliation to corresponding GAP measures, can be found in the earnings relief and 10Q 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. Before we proceed, I would like to make a quick announcement as it relates to our third quarter earnings call. Our third quarter earnings call would normally have been scheduled towards the end of the week of November 2nd. However, given the presidential election is that week, we will move our third quarter earnings call to Monday, November 9th. As usual, we will press release call details after the conclusion of the third quarter. I would now like to turn the call over to our Chief Executive Officer and President, John Pfluger.

Well, thanks, Mary Liz, and good afternoon, everyone, and thank you for joining us. I'm pleased to share that today, Air Lease is reporting another strong quarter of financial performance. Our revenues for the second quarter grew by 10.6% year-over-year to $521 million, with net income of 144 million, up 15.9% year over year. Our fully diluted earnings per share for the second quarter was $1.26, up 14.5% over the second quarter of last year, and we continue to generate strong pre-tax margins and returns on equity. Since our last earnings call in May, the airline industry has continued to navigate through an unprecedented, extremely difficult environment. we are seeing signs of recovery. More than 65% of the world's commercial passenger fleet was in service at the end of July, as compared to mid-April, where nearly two-thirds of the world's passenger aircraft were stored. In the United States, TSA checkpoint numbers this week have been seven to eight times greater than that of early April. And just today, the U.S. State Department lifted its advisory on avoiding international travel. Eurocontrol reported this Tuesday that flights reached 46% of 2019 levels as compared to roughly 10% of 2019 levels in early April. In China, which was ahead of Europe and the U.S. in terms of the pandemic, domestic daily flights have significantly improved. While all those updates are progress when compared to where each region was at the start of the pandemic, we still have a very long way to go and airlines are adjusting schedules on a weekly basis. We know that many of you remain focused on lease deferrals, cash collections, airline bankruptcies, and the status of how we're dealing with each. So let me provide a quick update on these matters. When we last spoke to you in May, we had agreed to accommodations with approximately 46% of our lessees to defer $125 million in lease payments. Since then, we have agreed to an incremental $65 million in lease payment deferrals, 50% less than the amount of deferrals granted from the start of COVID to early May. To date, in total, we have agreed to accommodations with 59% of our lessees to defer approximately $190 million in lease payments. The lower level of deferrals granted over the past three months speaks to the slower pace at which we received additional requests and reflects the amount of time we spend to diligence each request and understand which customers really need our help. As I shared last quarter, most of our deferrals are partial lease deferrals for payments due in the first and second quarter of 2020. typically with a short repayment period. In fact, the majority of those we granted will be repaid over the next 12 months. Our team has been making a concerted effort to do our best for each airline customer, and we believe that help is appreciated and, in addition to the support they are seeking elsewhere, is making a difference. Our airline customers are largely abiding by the deferral arrangements in place. As such, our collection rate for the second quarter and month of July were at 91% and 89%, respectively, compared to the first quarter and month of April, for which our collection rate was 90% and 86%, respectively. We believe our asset strategy, focusing on young, modern, fuel-efficient aircraft, has made a difference in our negotiations and discussions with our airline customers as they want to operate our aircraft. For this reason, in many cases, we successfully negotiated lease extensions along with the deferrals. Now, we understand this is all in the rearview mirror stuff, and we, for that reason, many of you want to know how we expect this trend to look going forward. Airlines have, in many cases, negotiated and agreed to the terms of the first round of deferrals and have also done their part to seek out other forms of support with their governments, financiers, etc. There is still some of that in the works. As we sit here today, we believe many of our customers are better positioned than they were at the start of this pandemic, financially speaking, given the support they've received so far. That said, most airlines are still constrained by lower levels of passenger traffic, and some now need additional liquidity measures. For this reason, we are starting to see limited requests for another round of deferrals from certain customers. So far, I can tell you the volume of those inbound requests is much lower than it was for the initial requests. Of course, the impacts of COVID are evolving real time and therefore the status of deferrals can change day by day. Our deferrals through today represent only 3% of our total liquidity position at the end of the second quarter, placing us on strong footing moving forward. As it relates to airline bankruptcies, we had no aircraft, I would remind you, at Virgin Atlantic, Norwegian, Avianca, LATAM, or Thai Airways. We do have five aircraft at Aeromexico, which filed for voluntary restructuring at the end of June. Aeromexico has been a longtime customer of ALC, and we are working with the airline. At this point, our expectation is that each of our aircraft will remain with Aeromexico. Also, you've likely read about Virgin Atlantic, which filed under Chapter 15 for, in effect, a prepackaged stay and reorganization. We have no aircraft at that airline today. However, we do have wide-body aircraft scheduled for future delivery through 2024. As such, ALC fully participated in the restructuring, and we do expect those aircraft to deliver as planned, as the airline deems our new aircraft integral to their recovery and environmental sustainability goals. Many times, such as in the case of both Aeromexico and Virgin Atlantic, we see airlines restructure with the full intention of keeping the ALC aircraft in their fleet. This goes back to the point I just mentioned about our young aircraft being differentiated in times of stress. As such, we are seeing continued health in our utilization rates, which for the second quarter and month of July was 99.6%. This is largely in line with the first quarter. We're seeing minimal impact on our revenue line as the result of the deferrals, but our cash flow will continue to be impacted. At the same time, we also expect lower levels of aircraft investments than originally expected pre-COVID, of course, as our deliveries continue to get pushed into future quarters. On our last call, we told you that our growth would likely slow and that while we were hopeful to deliver $250 million of aircraft in the second quarter, the level of aircraft investment was ultimately dependent on how the environment evolved. As such, we took delivery of only one aircraft from our order book in the second quarter. We anticipate that although our scheduled aircraft investments for the second half of the year could be about $2.6 billion, that number may be lower due to further delivery delays. Obviously, the continued delay in the return to service of the MAX has resulted in a number of our MAX placements being more than 12 months delayed. In fact, we believe that ultimately the majority of our MAX forward order positions will be delayed more than 12 months. We continue to work with the Boeing company and our customers to address these delays and to look at deferral or cancellation on a case-by-case basis. We hope that FAA certification of the MAX will occur this year. And just a few days ago, the FAA released their Notice of Proposed Rulemaking for the MAX Airworthiness Directive. However, we want to remind all of you that only one of ALC's forward MAX delivery is to a U.S. airline customer. We have somewhat less confidence that certification by the end of the year will be achieved by all foreign regulators, including EASA and China. We do still expect that once the MAX returns, it will be one of the most tested aircraft flying, and we, as well as many others, look forward to its safe return to the skies. But big picture, as you can see from the second quarter announcements of both Boeing and Airbus, they, like the airlines, are under significant stress, and this leads to further uncertainty. While production rate decreases have helped the demand-supply equation, we would not be surprised to see further production cuts ahead. To date, most of our airline customers continue to want the aircraft which they have on order from ALC. It's become clear to us that airlines are downsizing their overall fleet sizes by retiring older aircraft. At the same time, they are taking this opportunity to advance their environmental sustainability goals through replacement with a smaller number of modern, environmentally friendly aircraft for the recovery phase. Furthermore, we believe the financial strain on the airlines today and in the foreseeable future is charting a clear course towards more leasing by airlines to obtain the aircraft needed to achieve their sustainability targets and enhance their own liquidity. Right now, there are many unknowns largely all due to the COVID pandemic. Virus resurgence in the United States and select other parts of the world poses challenges to recovery. Yet we do believe that globally there is a growing pent-up demand for air travel and that over time we will see a recovery of transatlantic and business traffic as countries work together to find safe ways to allow people to cross borders. Such relaxation of border restrictions should also facilitate easier aircraft deliveries from Boeing and Airbus to our airline customers. During this time, as always, Airlease continues to maintain a strong balance sheet with significant liquidity, and that remains our top priority. In mid-June, you saw us access the investment grade unsecured bond market, raising $850 million to five-year notes. Now, at the end of the first quarter, we had ample liquidity of more than $6 billion. Yet, we chose to take additional advantage of a favorable bond market for ALC, and this transaction further strengthened our liquidity position, which is now $6.9 billion at the end of the second quarter. Since inception, we have built our business to withstand difficult market environments. And it's because of our conservative approach over the years we're able to manage through today. I'm very proud of the ALC team and the way we've been supporting our airline customers and working with the manufacturers, suppliers, and financiers. This has indeed been a unique and extremely difficult time in our world, our country, and for the aviation industry. And our team's professionalism has once again allowed our platform to differentiate itself in the marketplace. So with that, let me turn the call over to Steve Haase, our Executive Chairman, for additional commentary.