Air Lease Corporation

Ladies and gentlemen, welcome to the Air Lease First Quarter 2022 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 touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason Arnold, Head of Investor Relations. Sir, please go ahead.

Good afternoon, everyone, and welcome to Air Lease Corporation's first quarter 2022 earnings call. This is Jason Arnold, and I'm joined this afternoon by Steve Haase, our Executive Chairman, John Pflueger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our first quarter 2022 results. A copy of our earnings release is available on the investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, May 5th, 2022, 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, 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 the state of the airline industry, including the impact of sanctions imposed on Russia, 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, May 5th, 2022. 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 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 definitions of them and the reconciliation to corresponding GAAP measures, can be found in the earnings release in the 10Q we issued today. This release can be found in both the investors and the press section of our website at airleascorp.com. As a reminder, unauthorized recording of this conference is not permitted. I would like to turn the call now to our Chief Executive Officer and President, John Pfluger. John.

Thanks, Jason. Good afternoon, everyone, and thank you for joining us today. I'd like to begin by expressing our sorrow on the war in Ukraine. The devastation and loss of life is a humanitarian disaster of horrific proportions, and our thoughts and prayers are with all those affected. To this end, just as we did with COVID relief for India, Air Lease Corporation, working and partnering with ISTAT, provided the leading $100,000 donation for the Ukraine Relief Fund, which supports Air Link and other non-governmental organizations who provide humanitarian aid to the country. We hope it helps. Moving on to our first quarter financial results, ALC generated $597 million in total revenue during the quarter, up 26% relative to the first quarter of last year, and achieved record quarterly rental revenue of $567 million. Our adjusted diluted EPS for the first quarter of $1.76 per share rose 71% year over year. First quarter performance on an adjusted basis benefited from the growth of our fleet, a significant reduction in cash accounting and lease restructurings, as well as end of lease revenue from the termination of our leasing activity in Russia. We purchased eight new aircraft and one used aircraft in the secondary market during the first quarter of 22 for a total of nine aircraft, adding approximately $490 million of flight equipment during the quarter. Our operating cash flow was up roughly 9% relative to the first quarter of last year, and I'm very happy to say that the impact of cash accounting and customer accommodations was minimal this quarter as compared to prior periods. We ended the first quarter with a lease utilization rate of 99.5%. So in summary, excluding the rush to write-off, our key operating metrics continue to trend favorably. We had no aircraft sales in the quarter, and as we commented to you last quarter, Our aircraft sales program still remains targeted to the second half of 2022, given OEM delivery delays, and more on the OEMs in a moment. Of course, as we disclosed in an 8K filing on April 22nd for Q1, we wrote off our Russia fleet and equity interests, which resulted in a recording of a charge of $802 million and drove us into a lost position for the quarter. While we were initially successful in retrieving several of our aircraft, it became increasingly clear that those remaining in Russia were not going to be returned. As such, we concluded that a write-off of these assets was the appropriate course of action. Nevertheless, and importantly, I want to underscore the fact that we are vigorously pursuing what we believe are strong and valid insurance claims. I know many of you have questions about the mechanics of the insurance process, but we hope you appreciate this is a complex matter and there's not a lot more we can comment on in detail at this point in time. Moving beyond Russia and Ukraine, we continue to see an acceleration of air traffic volumes globally as the pandemic subsides in most regions. Demand for new aircraft, particularly on the single aisle end of this equation, has been picking up pace significantly and only continues to strengthen as airlines look for near-term lift as traffic demand picks up. Wide-body demand also continues to improve, benefiting from continued relaxation of travel restrictions internationally and from the cargo market. Over the last few months, international traffic volumes have improved dramatically, including Asia, which had been the slowest geographic region in terms of recovery. In fact, according to IATA data just released, international traffic is up well above 200 percent year-over-year in many regions, for example, Europe is up a staggering 425%. The Middle East, 246%. Latin America, 240%. North America, 228%. And up 197% in Asia Pacific. We've said in the past that international traffic is the next market segment to take off as the world continues to recover from the pandemic. Accordingly, our order book placement activity directly reflects growing demand with 97% of our delivery through 2023 now placed, and soon we expect to be fully placed for 2023 and 2024 as those agreements are finalized with new customers. We've recently announced several larger scale new lease placements, which Steve will further comment on. The pace of these larger scale placements continues. On the OEM side, both Airbus and Boeing are experiencing rising challenges in delivering aircraft on time, primarily due to supply chain and labor issues. We continue to experience delays on our Airbus and Airbody deliveries. In addition to these supply chain and labor challenges I just mentioned, 737 MAXs continue to be delayed as Boeing still contends with clearing its remaining inventory while simultaneously producing new aircraft. On the wide-body side, the biggest challenge clearly remains with Boeing on the 787. Boeing recently submitted its certification plan to the FAA for the 787, which now is currently under review. Approval for resumption of customer deliveries will occur only under the FAA's own timeline and terms, and therefore we're not expecting delivery resumption in the near term. ALC's own outlook for 787 deliveries this year remains unchanged relative to last quarter, with only one of our contractual 2022 deliveries expected to occur this year. Again, these are our estimates. Boeing clearly has its hands full at present, with also significantly delayed certification and entry into service of the 777X, the delayed certification of the 737-7 and 10 variants, and a sizable backlog of previously produced 737s in inventory, which, while sold, are yet to be delivered. Any one of these challenges alone would prove burdensome, but to have all at once is clearly taxing for the organization. One comment I'll add on the 777X delay, we do believe that that delay adds support for existing 777 aircraft and their lease rates and values on top of the demand for air freight. So OEM delays are overall strengthening demand for used aircraft, and we are seeing increased requests for lease extensions across the board for both single and twin-aisle aircraft. Despite current and forecast future delays, the last time we spoke in February, we discussed our Airbus order, the largest in ALC's history, along with the new order and conversions for 50 Boeing 737-8 and 9 MAXs. We remain very excited about these orders as we feel the timing was right, and we're seeing this decision bear fruit as the inbound interest for these aircraft has been strong. With Airbus effectively sold out on A320 and 21 neon airbodies through the end of 26, and Boeing quickly heading that way as well on the MAX, we see these positions likely to only increase in value to us over time. When combining rising demand with production delays, the route to a potential shortage of commercial aircraft is clearly laid out in our minds, and we believe this is a likely outcome that will manifest in 2023 and beyond. Taking into account OEM delays, we continue to expect $3.5 to $4.5 billion of deliveries over the course of 2022. We expect $1.2 billion of aircraft deliveries and investments in the second quarter, also, of course, subject to delays. We will continue to look for opportunistic sale-leaseback transactions in combination with our management platforms where we can combine sale leasebacks with simultaneous future placement from our own order book aircraft, and as well pursuing one-off aircraft acquisition opportunities in the secondary market, as illustrated with the U-737-800 we purchased in this first quarter. While the sale leaseback market has become overheated and return opportunities unattractive over the past year, we believe that the rise in interest rates may result in the excess capital dedicated to this segment cooling off, giving increased cost of funding and reduced access capital for some of the smaller new entrants in this space in particular. Given continued strong financing needs for the airline industry and appeal for leasing, this could yield an uptick in incremental investment opportunities for us. Whether the OEMs surprise us by getting back on track with deliveries or opportunistic investments arise, we remain well positioned for either outcome. We're also well positioned on our funding with a strong liquidity position of $8.3 billion and significant ongoing access to the investment grade capital markets. During the first quarter, we issued $1.5 billion of notes in January at a blended rate of approximately 2.5% prior to broader market interest rates spiking higher. Our composite cost of funds at the end of the first quarter of 22 was 2.77%, the lowest in our company's history. and we remain well-positioned for further increases in interest rates, as 95% of our funding is fixed rate, and we expect that our strong balance sheet and credit metrics will allow us to continue funding ourselves at competitive rates as compared to our customer base, which should further support demand for leasing versus other forms of financing. The interest rate escalator is built in the majority of our leases, which provide for a one-time upward lease rate adjustment at the time of delivery of the aircraft offered upside to lease rates as benchmark interest rates rise, and we are already beginning to see these benefit us as new aircraft are delivered. So we feel very good about our liquidity and funding access as well as our positioning for a rising interest rate environment. In summary, we're excited to continue to see traffic improving globally and especially to see international traffic finally showing more meaningful signs of recovery. We have the largest combined order book of Airbus and Boeing aircraft in the industry, and demand remains robust for both new aircraft as well as lease financing, which, along with our strong balance sheet and unmatched customer relationships, positions us well for continued success for this foreseeable future. I'll now turn the call over to Steve Haase for additional commentary and to update you on our stock repurchase program.