Air Lease Corporation

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.

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.

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.