Air Lease Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Air Lease Corporation third quarter of 2020 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. And to ask a question during the session, you will need to press star one on your telephone. If you require any assistance, please press star zero. Thank you. And without further ado, I'd like to hand the conference over to Ms. Mary Liz DePalma, Head of Investor Relations.

Madam, you may begin. Thank you. Hello, everyone, and welcome to Air Lease Corporation's earnings call for the third quarter of 2020. This is Mary Liz DePalma, and I am 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. Earlier today, we published our results for the third 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, Monday, November 9, 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 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, November 9, 2020. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectation. 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 does not provide any full 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 issue sheet. This 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 Chief Executive Officer and President, John Kluger.

Thank you, MaryLiz. Good afternoon, everyone, and thank you for joining us. The encouraging news this morning on progress towards the development of an effective vaccine certainly bodes well for the airline industry, and most importantly, for humanity. And while the leasing community is certainly being impacted by the stress in the global airline industry, I am pleased to report that ALC's business to date is holding up well. And I believe this will continue to differentiate ALC from peers. Our year-to-date revenues are up 3.9%, but down 7% for the third quarter, primarily due to a switch from accrual to cash basis revenue recognition for five of our lessees, resulting in about a $25 million revenue and profit impact. Our fully diluted earnings per share of $3.46 year-to-date and $1.02 for the third quarter are down 5.7% and 23.9% respectively for the same revenue recognition reason. In addition, we told you last quarter we curtailed our aircraft sales efforts this year in light of much lower capital expenditures on our order book aircraft, resulting in significantly lower level of aircraft gains on sales in 2020 compared versus 2019. I'll touch more on capital expenditures later. Our cash collections remained healthy at 86% for the third quarter and 89% year to date with an equally strong lease utilization rate of 99.6% in the third quarter. During the quarter, we had no significant change to the 58% of our airline customers to which we have granted accommodations. The repayments of deferred amounts are proceeding on track with approximately $60 million, representing 30% of the deferrals having been repaid through today. Finally, as we told you last quarter, the pace of deferral repayments continues to exceed that of deferral requests. Right now, we are seeing limited requests for second round of deferrals or what in some cases are initial requests. The operating environment is evolving every day, so this could of course change, but our deferrals through today represent only 3% of our total available liquidity at the end of the third quarter. Furthermore, our lease placements continue to do well, with 90% of our order book placed on long-term leases for aircraft delivering through 2022. Looking specifically at forward deliveries from our wide-body order book through the end of our contractual purchase commitments through today, we are approximately 75% placed. Finally, with a young fleet on long leases, we have a low level of lease expiries over the next several years. In this challenging environment, our team has worked tirelessly to produce these results for our shareholders. and we believe our results are representative of the resilient business model we employ, focusing on new aircraft from our order book and the strong investment-grade balance sheet we built over the past decade. Most importantly, we remain confident in our ability to navigate the environment moving forward. With this in mind, and for the first time in our company's history, our Board of Directors has authorized up to a $100 million share repurchase program and we are increasing our quarterly dividend. As we have indicated previously, we have a disciplined capital allocation strategy. A share repurchase has always been evaluated in this context, and now is the right time to consider it. Our current debt-to-equity ratio net of cash is below our target. Our liquidity stands at an all-time high, exceeding $7 billion, and our capital expenditures on aircraft have been below our original plans due to the factors I've already cited. So, with this share repurchase authorization, we have the ability to invest directly in our own company, demonstrating our continued confidence in ALC and our ongoing commitment to increasing long-term shareholder value. While we're on the topic, let me expand a bit on capital deployment operationally. While we were hopeful to deliver $1.3 billion of aircraft in the third quarter, we took delivery of only seven aircraft from our order book in the quarter, totaling about 600 million. Our growth continues to be curtailed by ongoing max groundings, continued but improving industrial delays, industrial delivery delays on the Airbus A321neo, delivery delays or deferrals due to travel or other government restrictions, customer-related delays, and recent delays on several Boeing 787 aircraft due to recent notices on production aircraft requiring further inspection. Right now, we do not anticipate taking delivery of any MAX aircraft until the first quarter of 2021. And through today, we have canceled orders we had with Boeing for 19 MAX aircraft. For those MAX aircraft we have canceled, each has been made on a case-by-case basis after discussion with the airline and are in line with our contractual rights to do so. We do have a high degree of confidence now in the return to service of the MAX in the near term. and we continue to work with our customers and with Boeing towards successful deliveries of our aircraft commencing in 2021. In addition to our order book and stock buyback authorization, we are also starting to execute on additional capital deployment opportunities with respect to sale and leaseback transactions and the purchase of young single aisle aircraft. We have been very disciplined in our approach, having been patient to watch the landscape unfold with our customers and airlines globally. We hope to start announcing some of these transactions soon. Additionally, we are using our Blackbird Capital 2 venture as we evaluate and act upon these marketplace opportunities. This not only provides us with adjunct aircraft investment capital, giving us added tools with our customers, but helps us manage our risk profile in addition to generating management fees. So as we evaluate our exposures looking forward, we are utilizing Blackbird Capital Two on good opportunities, which we would otherwise have to pass due to our own conservative customer credit or aircraft limits, exactly fitting what Blackbird Capital Two was designed to do. Looking forward, we do see a continued difficult environment over the next several quarters with the airline industry as we go through virus resurgence and the winter season in the Northern Hemisphere. We expect to see further liquidity pressure on the airlines, which will likely lead to further insolvencies, restructurings, and deferrals. We are prepared for this. We believe our young fleet, strong balance sheet, unparalleled relationships, structuring tools, and creativity will see us through. At the same time, this morning's positive news regarding a potential vaccine could improve this short-term forward outlook. Also, we are monitoring the trade environment and political landscape. We learned today that the EU will in fact move forward on imposing a 15% tariff on imports of all Boeing aircraft to begin tomorrow. This reciprocal tariff imposed by the EU on the importation of Boeing aircraft is a threat to MAX deployment into Europe, a key MAX and 787 marketplace. ALC currently has up to five aircraft forecast for delivery into Europe between now and the end of 2021. However, as we've seen in recent history, these deliveries may not all occur. While our leases specifically say that such tariffs are the responsibility of the lessee, it is vital that the leadership at Boeing and Airbus talk with their governments to work out a solution that is in the broader interest of each country and eliminates tariffs on a severely damaged airline industry fighting for recovery. We are hopeful and optimistic that a solution eliminating tariffs on both sides of the Atlantic will be found. Despite all these challenges, now more than ever, we have absolutely no doubt that the airline industry will recover. The timing of recovery I leave to your own crystal balls. We believe there is growing pent-up travel demand. China domestic passenger traffic has neared pre-COVID levels, and Russia domestic traffic has recently exceeded 2019 levels. We see good domestic recovery trends in Vietnam, Korea, New Zealand, and most recently, even in Brazil and Mexico. And while Europe traffic has recently retreated due to the resurgence in cases and the state's restrictions, leisure traffic into Europe during the summer months was encouraging. Here in the U.S., in October, TSA traveler throughput reached north of 1 million per day for the first time since traveler numbers dropped off in mid-March. And we also see in the U.S. a trend supporting stronger bookings for the upcoming holidays. Country-to-country travel barriers due to quarantine restrictions and requirements remain the single biggest obstacle. Reflecting this long-term optimism, Our relationships with our airline customers and the young in-demand aircraft we own and have on order continue to be a differentiator for ALC. Our conversations with airlines around the world indicate that they are using this as a one-time opportunity to resize and modernize their fleets. Astute airlines are looking at this opportunity to accelerate efficiency and environmental sustainability goals. We are very much engaged in those conversations as airlines are focused on the modern, fuel-efficient, and environmentally friendly aircraft from our order book delivering in 2022, 23, and 24. This, coupled with airline balance sheets and capital resources significantly being handicapped in the foreseeable future, explains why we are witnessing a further shift towards leasing. In fact, one aspect of this pandemic crisis has emerged clearly, and that is the role of the leasing industry. It has strengthened considerably. For many years, I have said that the leasing industry provides a much-needed buffer and capital provider to the airlines and OEMs. We are seeing that unfold before our eyes today in a major way. Our role is stronger and our voice is stronger than at any time in the past. And with that, let me turn the call over to Steve for additional commentary. Steve?