Air Lease Corporation

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation Q4 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'd like to withdraw your question, press star one again. I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin.

Thank you, Regina, and good afternoon, everyone, and welcome to Air Lease Corporation's fourth quarter and full year 2022 earnings call. This is Jason Arnold. I'm joined this afternoon by Steve Haase, our Executive Chairman, John Ploeger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our fourth quarter and full year 2022 results. 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, February 16th, 2023, 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 rising interest rates and inflation, the impact of sanctions imposed on Russia and aircraft delivery delays, our future operations and performance revenues, operating expenses, stock-based compensation, expense and income and expense items. These statements and any projections as to our future performance represent management's estimates for future results and speak only as of today, February 16, 2023. These estimates involve risk 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 our 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 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 of our 10K that we issued today. This release can be found in both the investors and the press section of our website at airleasecorp.com. As a reminder, unauthorized recording of this call is not permitted. I'd like to turn the call over to our Chief Executive Officer and President, John Pfluger.

Well, thank you, Jason, and good afternoon to all, and thank you for joining us today. I'm happy to report that we generated $602 million in total revenue during the fourth quarter, a record level for ALC, while our fourth quarter diluted EPS was $1.21 per share. Fourth quarter performance benefited primarily from the growth of our fleet and uptick in sales, trading, and other income, along with the recovery of our one 737 MAX from Russia. This was partially offset by higher interest expense and higher insurance and other operating expenses. We purchased 16 new aircraft during the quarter, adding approximately $1 billion of flight equipment to our balance sheet and sold five aircraft. Our utilization rate remains robust at 99.6% for full year 2022, which is a testament to the high demand and utility of the new commercial aircraft in our fleet. As of today, 90% of our deliveries through 2024 are placed. Airlines are locking in our remaining 2024 and 2025 deliveries at an accelerating pace, and this scarcity has been a significant driver of the lease rate upside we've seen on many of these aircraft. The pace of our wide-body lease placements has also continued to accelerate. In fact, out of our entire order book, ALC now has only three remaining passenger wide-bodies, Boeing 787s, left to place in mid-2025. New aircraft deliveries in the fourth quarter were again somewhat lower than expected as a product of ongoing delivery delays from both Boeing and Airbus, which you've heard us speak about over the past two years. Boeing and Airbus have both just recently announced hiring campaigns for tens of thousands of new production employees, though clearly getting these new staff hired and trained will take time. We remain skeptical that Airbus and Boeing will meet their aspirational production rate goals over the next two to three years. In fact, today, Airbus announced a delay from 2025 to 2026 in reaching its single aisle production rate goal of 75 aircraft per month. And yesterday, Boeing advised at a conference of continuing parts and supply chain challenges hampering its production goals. As for our outlook for 2023, clearly it's going to remain fluid, given the situation with the manufacturers. As of today, we expect to receive approximately $45 billion of aircraft deliveries in 2023, with roughly $1.3 billion of deliveries expected during the first quarter. We will update you further on this outlook as the year progresses. Now turning to aircraft sales, we closed on five aircraft generating gains of approximately $28 million in the fourth quarter. As we look forward to full year 2023 sales activity, we expect to sell between $1 to $2 billion of aircraft as the sales market is healthy, even with higher interest rates. The reason for the broad range is continued uncertainty around the timing of new aircraft deliveries. After several years of constrained sales activity due to the max grounding, the pandemic, Boeing 787 delivery cessation for well over a year, we're returning to a more robust level of sales activity as the normal course of business. This allows us to harvest gains on sales, as well as to manage our fleet age, size, and composition, and finally, to demonstrate the value of our fleet. Looking forward over the foreseeable future, we believe Air Lease's proven business model is particularly well suited to benefit from the post-pandemic era due primarily to the five following fundamentals. First, passenger traffic growth and airline yields. Airline traffic continues to expand at a brisk pace in nearly every market globally. International traffic in particular has come back strongly in 2022, and this looks to continue in 2023 with China relaxing travel restrictions last month. Furthermore, The airlines are enjoying a healthy yield environment, which appears to be holding up nicely in the face of macroeconomic challenges such as inflation, energy costs, and interest rates. Fundamental air traffic growth and yield will continue to drive aircraft demand. Second, continued OEM delivery delays and inability to meet production rate targets is limiting the new aircraft supply to the marketplace. This is leading more airlines to extend their leases in today's escalating lease rate environment to support traffic growth and to serve as a hedge against new aircraft delivery delays. Certification of new aircraft types has also been delayed, such as on the 737-7 and 10 MAX, the Boeing 777X, and the Airbus A321XLR. Third, record orders, such as we've just seen this week with Air India, on the heels of large orders from United Airlines and others, have exasperated the lack of new aircraft delivery positions well into the future, making ALC's available delivery positions more valuable. ALC currently has delivery positions out through 2028. Fourth, most airline balance sheets remain constrained in the financial recovery from the COVID pandemic, especially in view of the higher interest rate environment. As such, leasing remains a sought-after mechanism to obtain aircraft. ALC, with its strong balance sheet and BBB investment grade ratings, has a significant funding cost advantage over most of its airline customers and leasing competitors as well. Fifth and finally, environmental sustainability grows more important with each passing day, adding further pressure on airlines to renew their fleets with the youngest, most technologically advanced and environmentally friendly aircraft obtainable. That is ALC's business model. delivering exactly those new aircraft from our order book, the largest combined Airbus and Boeing order book in the leasing industry. A question many of you have been asking is, is this increased aircraft demand environment with rising interest rates, in this environment, are lease rates overall accelerating as fast as interest rates? The short answer on an overall basis is not yet. However, Even in a high demand environment, it takes time for the market to catch up to rapidly escalating interest rates, and this has always been the case historically. There is a lag, and I remind you that we have a large existing fleet with a weighted average remaining lease term of 7.1 years. However, I will say that the overall increase in lease rates that we've been witnessing is on track with our expectations. And looking forward, we feel good about market lease rates catching up with interest rates over time. So with that, let me now turn this call over to Steve Haase, who will offer more commentary on ALC's positioning and accomplishments.