Air Lease Corporation

Good afternoon. My name is Paula, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation's third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. I would now like to turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thanks, Paula. Good afternoon, everyone, and welcome to Air Lease Corporation's third 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 third 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, November 3rd of 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 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 and aircraft delivery delays, our future operations and performance, revenues, operating expenses, stock-based compensation expense, and other income and expense lines. These statements and any projections as to our future performance represent management's estimates for future results and speak only as of today, November 3, 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, we may discuss certain financial measures, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity, which 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 10Q we issued today. This release can be found in both the investors and press section of our website at airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I would like to turn the call now over to our Chief Executive Officer and President, John Fluker. John? Well, thanks, Jason.

Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that ALC generated $561 million in total revenue during the quarter. up 7% relative to the same period last year, while our diluted EPS was $0.90 per share. Performance during the third quarter benefited primarily from the growth of our fleet and lower restructuring impact, partially offset by the loss of revenues and earnings from the 21 Russian aircraft we wrote off at Q1. We purchased 14 new aircraft in the quarter, adding approximately $843 million of flight equipment, and sold one aircraft, and I'll update you further on our aircraft sales shortly. We ended the third quarter with a lease utilization rate of 99.7%. The operating environment for ALC remains strong, with commercial aircraft demand robust, benefiting from the continued momentum of air travel demand recovery, which has more than offset the impact of macroeconomic and geopolitical headwinds to date. Domestic passenger traffic continues to improve globally. But the snapback in international markets has been particularly strong year-to-date, benefiting from the further relaxation of travel restrictions that had previously significantly constrained it. As a result, demand for wide-body aircraft continues to strengthen with a number of well-publicized large-scale global campaigns in process. The pace of our wide-body lease placements has also accelerated. ALC has now placed all of its A330neo and A350-1000 orders profitably, with only seven remaining passenger widebodies left to place through 2025, consisting of 787-10 and A350-900 aircraft. We expect both Airbus and Boeing to increase production rates meaningfully on 787s and A350s, although we do not see this improving the delivery delay situation through 2023. Narrowbody demand, meanwhile, remains very high, with limited remaining delivery positions from our order book through 2025 and beyond. At the OEMs, Narrowbody A320 family and Boeing 737 aircraft are more or less sold out through 2027. So airlines are only finding opportunities from our order book and those of other order bookless stores And those available aircraft are increasingly dwindling in number as placements accelerate, which is further benefiting the lease rate environment. And if you've been following our press releases, you've seen accelerating placements of our remaining A220 positions. So as of today, 99% of our deliveries through 2023 are placed, with about 70% of our deliveries in 2024 placed and 60% of our deliveries placed in 2025. we see a rapid placement pace ahead for our remaining single and twin aisle positions for delivery through 2025. While competition remains robust, we see diminishing aircraft supply from the aircraft leasing sector combined with interest rate and escalation rate increases continuing to drive lease rate factors up. I would just remind all of you that it takes time for increased lease rate margins to make their way on financial performance. Deliveries this quarter were lower than expected as a product of ongoing delivery delays from both Boeing and Airbus, which we've highlighted to you many times this year. Delays of several months on our Airbus and Airbodies and on the 737 MAXs are typical of what we have been experiencing. We continue to expect supply chain challenges to extend for the next couple years. Airbus and Widebody aircraft have been delivering more timely, and as highlighted last quarter, Boeing has resumed deliveries of 787s. We're very happy to report that we indeed took delivery of a 787 in early October, our first since April of 2021. I do also want to remind you that we still have a number of already built 787s awaiting delivery and that those will still take some time to make it to us as Boeing works through the airworthiness certification and maintenance checks for each and every one of the more than 100 aircraft 787s that they have in inventory yet to be delivered. We now expect to receive approximately $4 billion total of aircraft deliveries for this year, roughly the midpoint of our previously guided range. This outlook reflects roughly $1.2 billion of aircraft investments for the fourth quarter, subject, of course, to further OEM delays. We'll update you next quarter on our 2023 aircraft investment expectations. On the sales front, although we only closed one aircraft sale in Q3, we are pleased by the pipeline of aircraft sales we've built to date this year. As a reminder, ALC normally concentrates aircraft sales in the fourth quarter, so we may enjoy the least revenue and earnings on those aircraft for the majority of the year. Also, our aircraft sales program has been meaningfully lower than it would have been for the past several years as a product of the 737 MAX grounding delaying our investment activity the pandemic impact, and 787 delivery delays impacting our fleet growth plans. So we're looking forward to more regular aircraft sales activity, and we're now expecting to close approximately $150 million of total aircraft sales in 2022, with another $700 million of sales in the pipeline that we expect to close on during the first half of 2023. The timing of sales activity from agreement to ultimate completion has been taking a bit longer than expected, which is why we pushed out expectations that we had previously for 2022 into next year. I would also add that we are encouraged by the strong demand and healthy bids we're receiving for our aircraft. Lastly, we do have one update on our detained aircraft in Russia. We had one Boeing 737-8 MAX returned to us from Russia in early October. The aircraft was in storage since the MAX grounding in 2019, and we expect to see it come back onto our books at Fairview with a corresponding benefit to the income statement herein in the fourth quarter. I want to be clear that this was a highly idiosyncratic event that resulted in the return of this aircraft, and we do not anticipate the return of any of our other aircraft detained in Russia. And that's all we'll be able to comment on on that subject. So at this point, let me turn this now call over to Steve Haase from Additional Caller and Commentary. Steve. Thanks very much, John.