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spk04: Good day, ladies and gentlemen, and welcome to the Air Lease Q2 2021 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 follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Marylise DePalma, Head of Investor Relations. Please go ahead, Madam.
spk03: Hello, everyone, and welcome to Air Lease Corporation's earnings call for the second quarter of 2021. This is Marylise 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. Earlier today, we published our results for the second quarter of 2021. 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 5th, 2021, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. Before we begin, please note that certain statements in this conference call are 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 5, 2021. 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 may 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 release in 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. I would now like to turn the call over to our CEO and President, John Kluger.
spk09: Well, thanks, Mary Liz. Good afternoon, everyone, and thank you for joining us. Since our last call with you, the recovery of air travel has varied significantly by geography based on the status of the pandemic in each location, vaccine availability, and travel restrictions. In many parts of the world, like the U.S., China, Russia, parts of Europe, and Mexico, we're pleased to see that travel by air has been reinvigorated by passengers who are eager to fly thanks to the vaccine rollout, removal of travel restrictions, and the reopening of certain international borders. In other countries, including many in Asia, there remain headwinds to recovery with lower vaccination rates and more aversion to opening borders. Overall, given the Delta variant surge, we intend for you to hear from us today, as always, our balanced view on the state of the industry. Our optimism is rooted by the rebound in air travel we've all seen and the conversations we have with our airline customers who are adjusting to and planning for ongoing revival of passenger traffic. At the same time, given COVID-19 complexities and uncertainties which vary by country, we are realistic that we do have airline customers continuing to struggle with the most prolonged downturn in our industry's history, and that has continued to impact our results. For the second quarter of 2021, we're reporting $492 million in total revenues and diluted EPS of 75 cents a share, down 6% and 41%, respectively, compared to the prior year's second quarter, which for the most part was a pre-pandemic quarter. Our results this quarter were primarily impacted by approximately $87 million of rental revenues we did not recognize in the quarter due to cash versus accrual basis revenue recognition and lease restructurings. I'll discuss this more momentarily. While we took delivery of about $1 billion in new aircraft in the second quarter, that was $200 million less than we originally anticipated, and 50% of those deliveries took place in the month of June. providing a minimal contribution to the full quarter, but providing long-term rental contribution thereafter. We're pleased that our collection rate improved in the second quarter to 87% as compared to 84% in the first quarter, and our lease utilization rate was strong at 99.7%. Importantly, our net deferrals balance continues to decline to $115 million as of today, from $131 million as of early May when we last spoke, with now more than half of the deferrals granted to date having been repaid. The decline in our deferrals balance contributed to the increase in our operating cash flow, which is up nearly 30% for the first six months of 2021 versus 2020. Now, as I highlighted earlier, revenues were impacted by $87 million from cash basis accounting and lease restructuring agreements. $42 million of this quarter came from lessees on a cash basis where the lease receivables exceed the security package and collection was not reasonably assured. It's important to note that approximately two-thirds of the $42 million is attributable to one customer, Vietnam Airlines, where we have 12 young A321 Neos and four 7710s on lease, with one of those Neos being owned by one of our management vehicles. While we did receive a subsequent payment from Vietnam in July, we expect reduced level of rental payments to continue during 2021 as we work through these matters with the airline. We believe the country of Vietnam and the airline have a bright future despite the significant impacts the pandemic has had on them to date, and that is in the best long-term interest of ALC. for us to continue working with the airline towards payment and resolution. The remaining $45 million of the $87 million was related to lease restructurings. As I said in my initial comments, the recovery and health of our airline customers varies significantly by country and region, and as such, we expect that we may need to continue working with our airline customers on accommodation requests, including restructurings. However, as I told you last quarter, The frequency of these requests is declining meaningfully. We're very pleased to report that in the second quarter, we successfully sold our unsecured claim in the Aeromexico bankruptcy. Now, Greg will elaborate further on this in his remarks. But consistent with the original expectations we shared with you months ago, our 737 and 787s remain at Aeromexico. as these young aircraft combine the backbone of the airline fleet. In fact, we have three more 737-9s yet to go in future delivery to Aeromexico. As in this case, with others and many in our customer profile, our relationship with the airline and modern aircraft that they have on lease from ALC remains a key differentiator. Our lease placements remain strong with 93% of our order book placed on long-term leases for aircraft delivering through 2022 and 80% through 2023, and our order positions continue to position us very well for the future. I want to remind all of you that ALC has $27.1 billion in rental commitments on our current fleet and forward order book placements. We're having robust discussions with our airline customers on new aircraft placements. Specifically, we've seen increased interest in our new single aisle aircraft, including the A321neo and now placements of our A220s. In addition, we're seeing additional demand for the MAX and in fact have reinstituted previously canceled MAX aircraft for a few of our customers. Importantly, lease rates for new single aisles are showing improvements. Many of you have probably read, in fact, about the European Green Deal legislative package known as, quote, fit for 55, end quote, which aims to cut 2030 net greenhouse gas emissions by 55% compared to 1990 levels. An important proposal within this package is the integration of advanced sustainable aviation fuels, which can reduce emissions by up to 80% as compared to traditional jet fuel. Our young modern aircraft are equipped to handle sustainable aviation fuels. And when combined with the benefits already achieved by operating new aircraft, including lower maintenance costs, lower fuel burn, lower NOx emissions, smaller noise footprint, these elements only further aid an airline's business case to operate a young modern aircraft like those in our fleet and order book. Looking ahead, although we have OEM contractual commitments to take delivery of 52 aircraft, In the second half of 2021, you're all aware of Boeing's delivery pause on the 787. As the commitment table in our 10Q shows, we were scheduled to take delivery of 10 787s through the end of the year. It is unclear at this juncture how many 787s we will take for the remainder of this year, but our best estimate today is approximately three of these aircraft. Furthermore, we have recently been notified by Airbus of some slippage in our A321neo deliveries attributable to COVID or supply chain issues. Given these OEM delays, we currently expect to take delivery of approximately 36 aircraft out of the 52 contracted aircraft stream. And that translates to approximately $1 billion of deliveries to occur in the third quarter and $1.6 billion to occur in the fourth quarter of 2021. Given these OEM delivery delays, we will significantly scale back our aircraft sales for the remainder of this year and possibly into early 2022. And for our growth and to help fill this shortfall in aircraft investments, we see the current environment continuing to favor buying attractive assets versus selling them. I want to end my comments as I began by saying that we are encouraged by the resurgence in air travel occurring throughout many parts of the world and believe the aviation industry is well set for ongoing recovery. We will continue to work through any customer challenges, which are to be expected given that the Delta variant may temporarily dampen or prolong the recovery, and many countries are still battling through this pandemic. However, we strongly maintain our long-term view that international air traffic will follow the lead we've seen from domestic travel recovery, and that over time, global air travel will recover back to levels witnessed pre-pandemic, driven by the need and desire of people to travel around the world. Reflecting this continued confidence, our Board of Directors has declared another dividend of $0.16 per share for the second quarter of 2021. With that, let me turn the call over to Steve Haase for additional commentary. Steve? John, thank you very much.
spk12: We're all encouraged by what we've witnessed over the last several months, which indicates that the traveling public is eager to get back in the air once they feel safe and they're allowed to do so with minimum limitations. As we look around the world, there seems to be very much a two-tier recovery occurring. The first is in the developed versus emerging markets. with countries and regions with the highest incomes getting vaccinated as much as 30 times faster than those with the lowest income brackets. As the vaccination rates across the globe increase, we should see a steady reopening of air travel. IATA has cited research from medical organizations around the world, which has shown that vaccinated travelers pose less risk to local populations And data shows that pre-flight testing can help reduce risks associated with unvaccinated travelers. In a study also conducted by IATA, 85% of the respondents agreed in some regard that they will not travel if there's a chance of quarantine at their destination. Yet at the same time, 86% said we're willing to undergo COVID-19 tests as part of the overall travel process. So to the extent government can further move past broad border closures and quarantines and allow vaccinated travelers or those with a negative test, this could significantly benefit the further rebound in air travel. We are hopeful that increased vaccination rates in key markets will ultimately drive reopening in other locations, even if the vaccination rates in those areas are lower than in the most developed countries. The second recovery tier is domestic versus international travel. With domestic travel improving more quickly and international travel growth is lagging, domestic travel has certainly been afforded the opportunity of late to capture demand that international travel has not, as many travel restrictions remain in place. And we have seen proof of that in the latest travel data for the last two or three months. For IATA's latest release for June 2021, traffic industry-wide domestic RPKs were down only 22% as compared to June of 2019, whereas international, they were down 81% versus June of 2019. If we look at even more information from Eurocontrol, the same trend exists. For example, in the United States, one of the most recently reported weeks, U.S. domestic passenger airline departures were down only 18% as compared to 2019 levels, whereas international was down 37%. Similarly, in China, domestic traffic recorded an increase of 7% above January 2020 levels, whereas international flights were suppressed at nearly 70% below January 2020 levels. In Europe, domestic demand is driving traffic volumes within countries, including Spain, France, and several others. Obviously, we're eager to see how the progress as the summer comes to an end will develop. And we would be naive to think that recovery will not continue to go on waves depending on the evolution of COVID variants and government policies impacting reopenings. However, These data points reinforce our views that there is significant pent-up demand for air travel seen via domestic travel recovery. For the year 2019, global scheduled airline passengers were over 4 billion one-way trips. And I had a forecast that by the end of 23, we should be or could be at 105% of 2019 levels. We believe that the rebound in passenger traffic will ultimately be driven by continued vaccine rollout and the continuous removal of travel barriers and that we could see this forecast ultimately surpass perhaps even more quickly. Our airline customers are witnessing the same trends as we are. And as a result, we are having productive discussions with them on new lease placements and our deliveries are ongoing. In the second quarter, we delivered new single-aisle 737 and H320-H321neo aircraft in Europe, Middle East, and Latin America, and new wide-body aircraft to China, Europe, and the United States. We also continued to place used aircraft. For example, from our press releases, you saw the recent lease placement of 10 young H320 aircraft with Allegiant Airlines. one of the most successful ULCC carriers. These are the aircraft we agreed to purchase from Alaska Airlines when we placed a new MAX aircraft contract with Alaska in late 2020. We leased them back to Alaska, and these young A320s will become a meaningful component of Allegiant's fleet in 2022 and 2023. Airlines are continuing to choose to operate younger aircraft like those in ALC sleep, and delivering from our order book. In fact, as of the end of June, industry information indicates that 88%, I repeat, 88% of the aircraft under the age of five years were back in service, and 78% of aircraft in the age range of five to 15 years old were in service, whereas only 63% of aircraft over the age of 15 were back in service. As John mentioned earlier, with sustainability initiatives front and center, we believe operation of modern, fuel-efficient aircraft will continue to be the trend on a global scale. You are seeing this with announcements from airlines throughout the world. United Airlines recently placed an order for over 270 Boeing MAX and Airbus A321neo aircraft, which will replace older aircraft in their fleet and lead to significant improvement in fuel efficiency, reduction in carbon emissions, as they strive to reduce greenhouse gas emissions 100% by 2050. You have also seen similar announcements on the tackling of sustainability initiatives by the utilization and purchase of new aircraft from airlines including Korean Airlines, which committed to reducing greenhouse gas by introducing new generation aircraft like the 787-10. Korean has a number of 787-10 aircraft delivered from ALC over the next several years. Alaska Airlines also recently placed a direct order for a substantial number of new 737 aircraft to achieve better fuel efficiency and the airline is also leasing 13 new 737-9 MAX aircraft from ALC with deliveries beginning in the fourth quarter of this year. While the pandemic to some degree temporarily overshadowed the industry's commitment to advancing sustainability initiatives, it is still very much in the forefront in the minds of our airline customers, making our young fleet an order book of modern technology aircraft even more critically needed than ever before. I believe over time our industry will continue to evolve, tackle the critical changes we need in terms of fleet modernization, infrastructure investment, et cetera, to better our environmental footprint, lower aircraft operating costs, and increase overall operating efficiency. And with that, I will turn the call over to Greg Willis, our CFO, to provide more detail on the financial results for the second quarter of 2021.
spk10: Thank you, Steve, and good afternoon, everyone. I want to expand on the details underlying our financial results for the second quarter. And I would like to remind everyone that for comparative purposes, the second quarter of last year was not fully impacted by the pandemic. Over the past year, despite the pandemic, we have made over $3 billion in aircraft investments, which has benefited our revenue line. However, as John mentioned, revenues in the quarter were negatively impacted by $87 million from lease restructuring agreements and cash basis accounting, of which $42 million came from lessees on a cash basis. This compares to $49 million in the first quarter and $21 million in the fourth quarter of last year. Hopefully, we'll have a favorable resolution with Vietnam and other cash basis lessees by the end of the year. But until then, we expect that our cash basis numbers will remain under pressure In total, our cash basis lessees represented 10.9% of the net book value of our fleet as of June 30, which compares to 15.3% in the first quarter of 21, with improvement stemming from the resolution we reached with Aeromexico. I think it's important to expand upon John's commentary on the sale of our Aeromexico bankruptcy claim. The sale represents a full recovery of our past due receivables. So while our earnings were negatively impacted in prior periods, we were able to recoup these losses through this sale. It is important to note that not all situations will end in this result, but we are pleased with this outcome. Additionally, I want to highlight our rationale behind keeping customers on cash accounting. Instead of rushing to enter into restructuring agreements, while the earnings impact in a given quarter would be reduced if we simply accepted a lower restructured lease rate and returned to accrual accounting, but that would typically come at the cost of lower economic returns over the life of the new agreement. We prefer to negotiate rather than to settle, which we believe gives us a better chance at a higher financial outcome in the restructuring process, but this typically takes more time. So while cash accounting has been a meaningful drag on results, we are in effect taking short-term pain for the long-term gain in preserving economic returns and maximizing shareholder value. Turning to restructurings, as John mentioned, rental revenues were negatively impacted by $45 million in the second quarter, much of which was attributable to restructuring that took place in prior quarters. Finally, as of today, our total deferrals net of repayments are $115 million, which is a 12% decline from $131 million we reported on our last call. Repayment activity has continued, with the total repayments aggregating $127 million, or 52% of the gross deferrals granted. These receipts are reflected in our operating cash flow, which has increased significantly and reflects the continued recovery of our airline customers. Looking at aircraft sales, trading, and other activity, you will recall that we noted that we were not going to sell any aircraft in the second quarter. This compares to $18.5 million in gains recognized from the sale of four aircraft and the repurchase of $185 million in short-term debt maturities below par in the second quarter of 2020. Turning to expenses, interest expense increased year-over-year primarily due to the rise in our average debt balances, driven primarily by the growth of our fleet, partially offset by the decline in the composite cost of funds. Our composite rate decreased to 2.9 percent from 3.2 percent in the second quarter of 2020. Depreciation continues to track the growth of our fleet, while SG&A remains largely flat as compared to last year. Overall, I think it's important to note that despite the continued challenges, we are generating positive margins and returns on equity, which should improve as our customers come off cash accounting as the world continues to recover from the pandemic. Finally, I want to touch on financing, which continues to provide us a significant competitive advantage over our peers. We are dedicated to maintaining an investment-grade balance sheet, utilizing unsecured debt as a primary source of financing, and have over $24 billion in unencumbered assets at quarter end. We ended the period with a debt-to-equity ratio of two and a half times on a GAAP basis. We raised $1.8 billion in debt capital during the second quarter, beginning with a $1.2 billion senior unsecured issuance at 1.875 percent, which represents a record low for our company for a five-year issuance. Additionally, we raised another $600 million of floating rate senior unsecured notes at LIBOR plus 35 basis points, which represents another record low for ALC. We anticipate maintaining elevated levels of liquidity until the broader aviation market recovers. And with that, I will turn the call back over to Mary Liz for the question and answer section of the call.
spk03: Thank you, Greg. This concludes management's remarks. For the question and answer session, we ask each participant to limit their time to one question and one follow-up. Now I'd like to turn the call over to the operator to open the line for the Q&A session.
spk04: Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question, we have Catherine O'Brien from Goldman Sachs. Your line is open. Hey, good afternoon, everyone. Thanks for the time.
spk02: Hi. Hey, so I don't want to misquote you, but John, I think you said you think it's still a buyer's market out there as opposed to seller's market for aircraft. Where are you seeing the most attractive opportunities to acquire additional aircraft? You know, I'm guessing with the OEM delays, they don't have any open positions, but correct me if I'm wrong. So would it be Selly's back or secondary market? And if so, you know, which market looks better to you today and how aggressive might you be just given these rolling delays?
spk09: Thank you. Yeah, sure. Well, you've seen us, I think, in many quarters in the past by incremental aircraft, and we continued on the lookout to do that. We have some good prospecting opportunities as we sit here today, and I think you'll see more announcements from us on that over the coming quarter to two quarters. On the OEM side, yes, we continue to work with both manufacturers. Not a whole lot of product available or sitting on the shelf at Airbus on the single aisle, nor actually the same from the Boeing company. They've managed to sell most of their 737 available max inventory, and that's been good. Let me go back to a comment about it's a better time to buy than to sell. We have so many people coming to us, Katie, that want to buy our young aircraft that are on long leases with good credits. We have a ton of people coming to do that. But that's also the core of our growth and our earnings. In fact, you know, we have far more demand than we could even service if we wanted to. But on the other hand, given these delivery delays and therefore less aircraft investment, we really are making this conscious decision. We'd rather keep these good assets than sell them at this time. We need to grow our asset base instead of reduce it. And so, you know, We've made that decision. I think it's the right decision for the company. And it is still a good time to buy aircraft. I think there's good deals still to be had. But I want to be clear. We could sell aircraft quite easily if we wanted to. But for the reasons I have just set forth, we're going to hold on. They're great earning assets, and we need that for our growth.
spk02: Okay. So maybe a mix of market conditions and also managing ongoing earnings versus you know, short-term gain. Yep. Okay. Got it. And then, you know, in terms of leads for negotiations, you know, heard the comment that the requests for those are slowing in frequency. What inning would you say we're in across your fleet? And has the Delta variant changed your view on what inning we're in, say, versus a couple months ago? Thanks again for the time.
spk09: Dave, you want to take that?
spk12: Yeah. I don't think we received any specific feedback lease restructurings or lease deferrals because of Delta or any other variant. I think what we're seeing basically is airlines are looking at their revenue flows as compared to what they were projecting a few months ago. And in cases where they feel the recovery is slower, they're at least trying to adjust their own operating expenses. Since we have the youngest planes in their fleet, most of the time. We're kind of the last lessor that they approach because obviously the goal is to reduce the expenses on aircraft that are less desirable and at higher cost of operating in maintenance, fuel, landing fees, overflight charges and so on. So we're not really seeing deferral requests as much as we did last year. It has been coming down tapering since the fourth quarter of last year. And I think airlines have done a better job of adjusting to these new realities. They've laid off employees, they've furloughed employees, they've gotten government support, they've readjusted their infrastructure. So airlines have made a lot of progress in the last 18 months to kind of readapt their business model. And so consequently, Because of the quality of our fleet, the relationships that we have with the airline customers, we're seeing fewer and fewer requests for restructuring.
spk02: Understood. Thanks so much.
spk12: Thank you.
spk04: Our next question is from Vincent Kandick from Stevens. Your line is open.
spk11: Hey, good afternoon. Thanks for taking my question. So first question, just how to think about the rental income going forward. So I understand and I appreciate the two components of the $87 million of revenues that you recognize this quarter. The cash accounting part, I think I understand. The lease restructurings, I guess when you think about that, is that something where you anticipate the rental income to be suppressed for a while, but eventually that comes back, or how should we model that? Is that instead maybe the lease extensions offsetting that? Just how to think about lease rates going forward. Thank you.
spk09: Vincent, I think you've got a handle on it. Look, anytime we do a restructuring, we usually get quite a bit of added additional terms so that over the balance of time, those leases get extended probably at a lower rate. But over a much longer period of time, we hope to achieve equivalent recovery. I think the point that Greg was making with our customer requests is, you know, we just don't, a customer comes to us and says, hey, we need lower release rates. We don't just roll over tomorrow and say, okay, here you go. We know that our aircraft are flying. One of the first things we do is we look at our utilization. Are our airplanes flying? And if so, how much? And that gives us a very good idea of how much and how dependent the airline is with our aircraft. So we try and approach it first from a deferral point of view and say, hey, look, we'll give you a little break. We'll reduce your lease payment so much or X percent for a period of time, but you pay it back. That's always our first stab. We're not so easy on the restructurings. But having said that, because it's usually easier to keep the original lease And if you do a deferral, you still keep the original lease and preserve those economics. I think that's what Greg's point was. But where we do have to do restructurings, yes, we do lengthen out the lease term. And we try. We don't always get. But we try and get, over time, an equivalent economic recapture, as the aircraft appreciates every year, every year. We try and get an equivalent result. But as you can imagine, with lower lease payments over a longer period of time, the present value of that is less. That's basically how we look at it.
spk12: Okay, that's very helpful.
spk11: Thank you.
spk12: I just want to add that with the quality of the way we handle these arrangements can also lead to incremental business. We've had a number of situations where we've worked with airlines in 2020 and in the first half of this year to help them out temporarily, and they were very appreciative and grateful for what we did. not only on our aircraft, but helping them with other suppliers, with the OEMs. And consequently, they entered into commitments to lease additional aircraft from us for future delivery. So the way we handle these things are very, very much based on relationships and how we can enforce the financial viability of that airline in the future, which could then lead to incremental business for air leases.
spk11: Okay, great. That's very helpful. Thank you. And then a related follow-up question. So on the cash accounting, it was very nice to see the Aeromexico full repayment of what had previously been cash accounting. When you look at sort of the rest of the airlines that you've accommodated or that you're talking to, do you see more claims recoveries or anything else happening for the rest of the year for the next couple quarters? Thank you.
spk09: Well, that's really hard to predict, Vincent. I can just say that right now there's really no imminent bankruptcies that we're looking at. So remember, we sold this claim pursuant to a bankruptcy action. And so we're really not in that situation imminently with any of our customers. And we, of course, can't make any assurances going forward that we would get a similar result. I think Greg made that comment in his remarks. So But generally speaking, I think airlines going into bankruptcy and restructuring is not new just to this pandemic. We've seen this over decades in our business. Certainly the pandemic has accelerated it, but I think we know how to manage this process. And in the case of Aeromexico, we were able to get a nice payout from that claim. But there's really nothing on the horizon that I can point to that just says, well, We're going to get X claims from X number of customers because most of them, you know, really the ones that have entered into bankruptcy are in bankruptcy. We have a few smaller ones, very smaller ones like Air Mauritius. They've been in bankruptcy for a while. But there's really nothing imminent on their horizon that we're aware of today.
spk10: I think, John, just to add a little bit to that, the reason why we don't have that many bankruptcy claims that we're working right now is that we did miss a majority of the world's bankruptcies. So a lot of the other major trouble situations that other people are selling off is because they had exposure there. So I think we did pretty well from a credit and underwriting perspective, missing a lot of those large ones. I mean, we weren't perfect, and we were able to monetize our Aeromexico claim. But outside of selling bankruptcy claims, our team is working really hard on collecting on those cash basis numbers. And over time, we hopefully will be able to recoup a good portion of that. We're unable to say what percentage that we're going to be able to recoup, but believe me, that's a very high focus point for our team in terms of working with our customers and figuring out ways to collect upon those past due balances.
spk11: Very helpful. Thanks very much.
spk04: Our next question is from Hillary Takenando from Deutsche Bank. Your line is open. Hilary Canando, your line is open, ma'am. Going to the next question, we have Moj Orenbach from Credit Suisse. Your line is open.
spk08: Great, thanks. Maybe just to follow up on that prior question, I think there are obviously three categories of where your income or cash flows have been impacted in some way over the course of the pandemic. The deferrals, there it seems like that's kind of now coming back to you, so it's becoming a cash flow positive. The cash basis loans, I think, John, you had said that you did receive – a partial payment from Vietnam during July. So is it reasonable to think that that's going to be a reduced drag in the future, or is there something that I'm missing there?
spk09: Well, look, it's hard to predict where the outcome will be with Vietnam. We thought it was important to point out we, in fact, did get a payment in July. But, you know, this is an airline that's owned by its government. And at this point in time, if you just look at the flight statistics for Vietnam, all of the carriers in Vietnam from Vietnam Airlines, Vietjet, Bamboo, and others basically stopped flying for the most part in June. And so that cut off their cash flows. And so they, you know, the function of how we can work this out with Vietnam is very much also tied to their governmental support. And the government has just announced a $350 million intended equity injection into the airline, and that has to go and service a lot of their debts and that sort of thing. So being 100% governmentally owned, really we are at a pace that really comes down to their government funding. And that is still a bit of an unknown yet. It's just really hard. I'm not trying to evade it. I just don't know. I just don't know. We're having ongoing discussions, but they need help from their government. And we have been assured that the government is working hard with them to satisfy their obligations. But frankly, it will just come down to when that funding comes through, the timing of that funding, and how much, and how much is allocated to the various different creditors. It's really hard sitting here today to predict it looking forward. But I do say this. Look, our airplanes are young. They've told us over and over that they very much need these aircraft. They view this shutdown for COVID as a temporary phenomenon. Their government, for example, has issued statistics saying that by the end of the year, they estimate almost 70% of their population to be vaccinated. That's their government's estimate, not ours. So we continue to look at these things and monitor it. It's just really hard to give you a prediction.
spk08: Okay. And then just to follow up on the restructurings, because I'm still a little bit unclear on this. You had mentioned that there are fewer requests, but the balance has increased. So what is the process for that $45 million request? balance to actually turn around and start to decline? I mean, is that, you know, how should we kind of think about that?
spk09: Greg?
spk10: Yeah, I mean, a lot of it is working through things with the airlines. A lot of it, I would point to Steve and John's comments about West slowing. Clearly, with
spk08: Right, but Greg, you said the request slowed, but that number is a bigger number in Q2 than it was in Q1. So I guess that's what I'm trying to understand. Is it that there are step-ups in the leases, in the lease factors? What is the factor that causes that number to turn around?
spk10: It's the organization of timing of when these restructurings go into play. Some of them went into effect at the very end of the quarter and the like.
spk09: So Moshe, let me just jump in here and also add that on the restructuring side, when we say we have less frequency, we do. We have less airlines coming to us. But part of that restructuring amount is also depending upon how many airplanes we have to restructure with that airline. So if the number goes up, usually the restructuring amounts are larger. They have to do with larger, sometimes they're wide-body aircraft, sometimes they're more aircraft. But when we say the rate of frequency is reducing, we're talking about from individual customers. The actual number itself is much more dependent upon how many airplanes we are restructuring the type, how big they are, how expensive they are, and that sort of thing. So I think that's the best way to think of it.
spk08: We are experiencing... That would probably have been better information to have for us, I think.
spk09: Okay. Well, anyway, we've told you now, and that's really the best way to think of it. So in summary, we're having less requests from the airlines, but the number could go up or down. It went up a little bit just based upon simply the amount of aircraft we might be dealing with the restructure and the capital value of those aircraft.
spk12: Yeah, but keep in mind that the $45 million is 2% of our annual revenues. So let's keep that in perspective.
spk04: And our next question, we have Jamie Baker from J.P. Morgan. Your line is open.
spk01: Hello, Air Lease Team. It's Mark Streeter, actually, with Jamie. He's on the line internationally. So just wanted to make sure we got our questions in. John and Steve, Cutter announced that they're grounding their A350 fleet due to fuselage degradation. Degradation, if I say that correctly. So just wondering what your – view is on this breaking news in terms of your relationship with them. I don't know if you have any of your A350s with them or just your thoughts on the A350 in general. Is this something we should be concerned about? We don't have any A350s with them.
spk12: The headline should be Fuselage Renegotiation with Airbus.
spk09: So, Mark, just from a technical perspective, if you read through, the concern that they have expressed has to do with painting the and how the paint is degrading, I guess, over time, which leads them to be concerned about some kind of structural element. We have no A350s on lease there, but we have not seen this concern shared by any other airworthiness authority or by any other airline, nor has Airbus told us that there's any reason for concern there. I'm not minimizing what they're saying. I'm just saying we have not heard this from anybody else. We've not heard from Airbus. We've not heard it from any other aviation authorities. I don't know the basis for it, so I really can't comment further, but this is a new development, and we'll just have to see what other aviation authorities and what, in fact, Airbus says.
spk01: Okay, great. And then just a little bit more early specific here. I'm just wondering if we can take a step back and think about sort of lessons learned from the pandemic and how things have played out the last year and a half or so. I mean, clearly, you know, Greg talked about this, your balance sheet strategy gave you a competitive advantage, having a higher credit rating and unencumbered portfolio. That was something that, you know, was clearly, you know, the market valued and you valued. I'm just sort of wondering about sort of the single aisle versus twin aisle mix. And I know that you're more exposed to twin aisles today than you wanted to be because of the production delays. But I'm really trying to take it a step further and think about have you taken a step back and thought about how much twin aisle risk you want to have going forward? versus single aisle and really trying to get at like if today's collection rate, if you disclose, I know you don't do this, but maybe you can talk to it directionally, like what your collection experience has been if we were to just simply divide your portfolio into single aisle versus twin aisle, given everything going on with international travel and restrictions and so forth. So big open-ended question, but wanted to throw it out there.
spk12: That's a good question, Mark. I don't think there's an appreciable difference in our collection rates. on wide body versus single aisle. Remember that a lot of our wide body aircraft are with airlines that also leave single aisle aircraft from us. Airlines like Air France, Air New Zealand, KLM, and I could go on and on. So we're not really seeing a credit issue that is driven by wide bodies. We are making corrections in the composition and percentages of our fleet But bear in mind that the biggest reason we have this situation today mathematically is because for a year and a half, we did not have any MAX deliveries, and we had significant delays from Airbus on particularly the A321neos, where ALC is the largest flat-store customer of Airbus. And we had some aircraft that were as much as a year late. So in our CAPEX program, we wound up with taking delivery of a higher proportion of aircraft that are twin-aisled and single-aisled from a dollar point of view. But this is going to be corrected as we go forward because the great majority of our forward orders are single-aisle. We have contractual ability to convert some wide-body orders to single-aisle, and we will utilize those rights. And going forward, obviously, we're going to make corrections in the ratio And our goal long term is to be around 20% to 25% wide-body and the remainder single-aisle. But remember that many of our best customers, as I mentioned earlier, lease both single-aisle and wide-body aircraft from us. And our ability to have loyalty from those customers and to penetrate markets is very much dependent on our ability to offer a wide array of aircraft types.
spk01: Great. Thanks very much. You're welcome.
spk04: Our next question is from Mark DeVries from Barclays. Your line is open.
spk06: Yeah, thanks. You know, it seems like this has been a particularly bad year for some of the more visible destructive impacts of global warming. So my question is, how are you thinking about the probability that some of these emissions reduction targets get pulled forward and and normal replacement cycles are accelerated among your customers?
spk09: Well, look, I think that's a good question, but keep in mind airlines have to operate daily, weekly, monthly, and years ahead of time. The goals can be moved forward, but if they can't be met, what's the consequence? So I think the industry overall, and particularly IATA, has been very good about setting timetables that are achievable, aggressive but achievable, and can be done. It's one thing to say, well, let's just advance this goal, I don't know what that might be, any goal you want, by five years or three years. That's a great, nice sounding thing to say. It resonates politically, people like to hear it, all good. But if the industry cannot achieve it, if the OEM manufacturers can't get there, there's going to be a result that that goal gets moved back or it's not compliant. So I think the aspirational goal setting is one thing, but actually achieving and meeting it is much more difficult. And I think that we are in an environment where these goals, it's very popular to set these goals. It's very popular to have these programs. And by popular, I'm not trying to demean it. I'm saying these are important. Our planet is under a huge environmental threat. But they have to be achievable, and this is less up to Air Lease Corporation. This is more up to the OEMs and people who built and innovate in new technologies and aircraft. I mentioned in my remarks about sustainable aviation fuel. We are, of course, watching the developments in eVTOL electric aircraft, hybrid aircraft, hydrogen. But sustainable aviation fuel certainly seems to be the best, most achievable path towards accelerating some of these efforts, along with replacing older aircraft by younger aircraft. So the answer is none of us sitting here today can tell you what's going to happen if the goals advance and the industry is not able to get there. We will have to see.
spk06: Yeah, so I guess at the root of that question was they clearly can, while it may not be the longer-term objective, just by buying a new aircraft, right, and retiring an older one. So I guess the question is, does it make sense at all to think, you know, if that becomes a necessity for airlines to think about going even bigger in the order book on, you know, new aircraft to be in a good position to kind of meet that demand?
spk12: That is under serious consideration. Yep.
spk06: Okay. Great. Thank you.
spk04: Our next question is from Ron Epstein from Bank of America. Your line is open.
spk07: Hey, Ron. Hey. Hi, Ron. So can you give us some more color on what's going on with 787?
spk09: Sure. Well, look, I think, as you know, there was a finding of a notice of escapement in the forward pressure bulkhead segment of Section 41 of the 787. That was found out, it wasn't found by the FAA, it was found by Spirit Aerosystems and the Boeing Company. And so all parties are working with the vendor where that forward pressure bulkhead comes from. And I believe that there are solutions that have been in place to replace that. those forward pressure bulkheads in aircraft that are sitting there in part, and I believe Boeing and Spirit are working very hard to make this happen. I think it's important to note that it's my understanding that as long as that pressure bulkhead is delivered in conformity to drawing and spec, there's no further work required. And that's, I think, the effort that's going on now is to make sure that those forward pressure bulkheads get replaced with units that meet their criteria. And I would just simply add that what we're talking about here is a very, very thin, you know, a little more than a human hair, a little less than a coat of paint spacing issue where shims apparently were not put in by this vendor from the very, very beginning of the 787 program. That hasn't affected anything in the fleet. This is not a safety of flight issue. The fleet leader is over 12,000 cycles on the 787. we're talking about a very, very small gap. But the cure is just to restore production based upon putting in units in those pressure bulkheads, which meet the original design spec and have those shims in them.
spk07: Now, is there going to be an impact on your installed fleet already? Like, are they going to have to get fixed on some D-check or something like that?
spk09: No, it does not appear so.
spk07: Okay, okay. And then maybe just kind of following up on that previous question about the environmental stuff, do you guys have any thoughts on kind of eVTOL and that whole thing? I mean, some of your peer companies have dabbled in it. I mean, what do you guys think about it?
spk09: Look, these are interesting technologies to watch. As you know, Ron, there are many, many companies now looking at this. Frankly, we've lost count. Having said that, we continue to look seriously. We're evaluating. We're looking at all these different things. But I think where we pause and hold short yet is we just don't see the business case yet. We don't have enough information to really make a meaningful determination of whether or not of what we could do on a business profile here. That needs some seasoning to come, but we're certainly watching it.
spk12: And this is more, Ron, for mobile users. Mobility in an urban environment for very short haul operations. So in the business segment that we serve, which is aircraft essentially north of 150 seats that can go between 2,000 and 8,000 miles, we just don't see any current technology that can address that. So yes, it's very interesting. We don't know what the residual values of these products will be. Technology is growing so quickly. even quicker than electric cars and trucks. So it's just hard to see where this is going to be in three to five years. Once we identify projects that make long-term business sense for us, obviously we're going to be a party. We're going to attend a party. But at this moment, it's in the very early embryonic stages and only addresses very short-haul opportunities from an operational point of view. Got it, got it. All right, cool. Thanks, guys. Thanks, Ron. Thanks, Paul. Take care.
spk04: And our next question is from Hilary Gaconando from Deutsche Bank. Your line is now open.
spk05: Hi. Sorry about before. I had some technical difficulties. You mentioned before that you're seeing additional demand for the MAX and have reinstated previously canceled MAX aircraft for, you know, But I know that you have previously restructured your purchase agreement with Boeing on the 737s, which lowered your acquisition costs. So with the reactivation of those orders, did you have to go back to Boeing and renegotiate the rates with Boeing, or were you able to reinstate the previously canceled aircraft orders based on the lowered acquisition costs? How does that work?
spk12: Yeah, the aircraft that we reinstated, had two components. One, the airline themselves that initiated the cancellation because Boeing could not deliver the aircraft within 12 months had a change of heart and made a determination that they actually could use the airplane. And at that point, we went back to Boeing and said, look, there is interest in this reactivation, but the pricing on those reactivated aircraft will have to be either at or below the renegotiated price as we have on the other comparable 737s. So that's exactly, I think, what you were referring to.
spk05: Okay, gotcha. Okay, that makes sense. Does that help? Yeah, yeah, that definitely makes sense. And then I just have an accounting question for you. I know, I don't think you've taken any impairment or write downs of any of your aircraft since the company started in 2010. So I was wondering if you could just kind of remind us what the process and accounting guidelines that you're using in trying to assess you know, whether or not an asset should be written down.
spk09: Sure. Greg, you want to take that?
spk05: Greg, Greg, that's really an accounting question.
spk09: Yeah, that's fine. I got it.
spk10: Yeah, the impairment test for GAAP is an undiscounted cash flow test. So if you experience a change in your situation, you're supposed to then go and look at the undiscounted cash flows associated with that aircraft. And we have a fleet that's three to four years in age. We're allowed 22, 23 years' worth of cash flows to aggregate up less estimated residual value. And you put it all up on a discounted basis, and you compare that to your carrying value. And from that perspective, it's pretty difficult to get to a point in time where you have an impairment, because at the end of the day, we buy our airplanes through bulk purchase contracts, driving volume discounts, so we're buying the very best you possibly can and and giving us an advantage there on our entry point. And then also you have long-term leases that are associated with these contracts that have a lot of value. So from that perspective, it's not overly surprising that we haven't had any issues with impairment.
spk05: Okay. So it's based on discounted, not discounted. Yes, correct. Okay. And this is FAS 144, right? Yes. I think now it's...
spk10: 40, I believe, but yes, it's old fast.
spk05: Okay. Got it. Okay. No, that totally makes sense. Great. Thank you. Thank you so much.
spk09: Thank you. Thanks.
spk04: And presenters. So we have a followup from Ron Epstein, bank of America. Your line is open.
spk07: Yeah. Go ahead. Yeah. Just quickly. Yeah, that's better. Um, back on seven, eight, seven, um, How should we think about, I mean, some of those airplanes have been delayed pretty substantially at this point, right? Our estimate is maybe a third of them could have triggered some sort of MAC clause in terms of delivery. How do we think about that? I mean, do you guys have an opportunity here to get a better acquisition price on some of those airplanes given the delays on the airplane? In particular, if deliveries really don't start up, you know, in earnest until late in the year, you know, probably upwards of half of their airplanes that they've built are sitting around or going to be pushing nine months to a year late.
spk12: We're looking at that on an airline-by-airline basis, and there could be situations where we may have to face the reality of giving notice to Boeing to cancel an aircraft, and then we'll just have to see what the response is from Boeing and whether we can satisfy our airline customers accordingly. So right now it's a fluid situation. It's very difficult to predict when the eight sevens will begin deliveries, but as more and more aircraft hit that 12 month point where the customer has the right to cancel, it's going to certainly increase pressure on Boeing to come up with solutions, uh, not to have white sales.
spk09: Yeah. Ron, let me just add, it's entirely possible that that, If that were to happen, we could have a similar situation to what we had in the MAX. We could be, I don't know how many far months from now we could be, but we could have an airline say, you know what, hold off, and then three or four months, we're going to exercise that 12-month clause. And then three or four months later, we could reinstate it. And so I have to say, I think we've got a great relationship with Boeing on this kind of thing. They've been very accommodating, very flexible with it. pretty flexible, and they want to get their airplanes delivered, and we want to get the airplanes delivered. So I think it's, you know, we work in our best interest and our customer best interest with Boeing collaboratively, but it's certainly possible some of these 12-month cancellation points could be triggered. I have no idea how many of the 100-plus airplanes could be subject to that. We have a few that could be subject to that in forward-looking months, but it's just hard to say right now.
spk07: Okay, great. Thanks, guys. Thanks, Ron.
spk04: There are no further questions at this time, presenters. I would now like to turn the conference back to Ms. DePalma for closing remarks.
spk03: Okay. Thank you, everyone, for joining. That concludes our call for today. We'll look forward to speaking with you again after the conclusion of the third quarter. Operator, thank you. You may now disconnect the line.
spk04: Thank you, presenters. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.
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