Air Lease Corporation

Good afternoon. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation Q2 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'd 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 the star and one. I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thanks, Kayla, and good afternoon, everyone, and welcome to Air Lease Corporation's second quarter 2023 earnings call. This is Jason Arnold. I am joined this afternoon by Steve Pazzi, 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 second quarter 2023 results. 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 3rd, 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 or forward-looking statements, will 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 other 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, August 3, 2023. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings in the Securities 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, 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 in our 10Q that we issued today. This release can be found in both the investors and the press section of our website at www.airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I'd like to turn the call over to our Chief Executive Officer and President, John Pugger. John?

Well, thanks, Jason. Good afternoon, everyone, and thank you for joining us today. I'm happy to report that for the second quarter 2023, ALC achieved quarterly revenues of $673 million, up 21% from last year's second quarter. We also achieved $1.10 earnings per share, up 16% from last year's second quarter. Strong fleet growth and a meaningful increase in aircraft sales were the primary drivers of the upside in our results. We purchased 19 new aircraft from our order book during the second quarter, adding approximately $1.5 billion of flight equipment to our balance sheet and sold eight aircraft totaling approximately $600 million of carrying value. Our fleet utilization rate remains very strong at 99.9%. As of today, we are 100% placed through 2024, and we've placed 58% of our total order book. Airline customer demand remains very strong. Despite some recent commentary from a few U.S. low-cost carriers about potential domestic demand softening, overall global strength in air travel demand and traffic volumes, high airline yields and load factors, concern over current and future Airbus and Boeing delivery delays, and focus on environmental sustainability are all driving airline demand for new aircraft. The growth in premium traffic remains surprisingly strong, as was pointed out by the Air France KLM group last week, as well as the IAG group, as does the resurgence in first-class travel volumes witnessed by some of the world's largest airlines. Record global temperatures will likely add further environmental pressure to replace older aircraft. So as a result of these factors and higher interest rates, ALC sees continued strengthening of lease rates and more lease extensions. The OEMs are enjoying record orders through the end of the decade. ALC's order book of aircraft extends out through 2029 inclusive of OEM delay expectations, positioning us to capture the strong demand environment for our unplaced positions. We are being prudent and patient in our order book placements as lease rates continue their upward momentum. We also see strong demand in the secondary market for our aircraft. As a result, we have resumed a normal course of aircraft sales after minimizing sales due to manufacturer delays and pandemic recovery. In fact, in addition to enjoying solid aircraft sales in the second quarter, we have a robust $1.7 billion pipeline of aircraft sales yet to close. Not all of those aircraft sales might close by the end of the year, but the pace is good. We expect that we should achieve attractive gain on sale margins throughout the remainder of the year and beyond. We expect approximately $1 to $2 billion of aircraft sales for the full year 2023, and we do expect aircraft sales volumes to vary from quarter to quarter. On the deliveries front, we guided new aircraft deliveries to be approximately $1.3 billion for the second quarter, but we actually achieved $1.5 billion. due to ongoing OEM delivery timing variability quarter to quarter. While we are pleased to have these deliveries come through modestly higher for the second quarter, we remain conservative on deliveries for the full year to be in the $4 to $5 billion range. This past Friday, we received a further incremental delay notice from Boeing on our MAX deliveries, and we are watching Airbus deliveries carefully in the face of RTX's announcement last week. on manufacturing defects uncertain of its gear turbofan engines. Although both Airbus and Pratt & Whitney state that they do not expect this development to impact production this year, we remain watchful given the strong pressure to support engine spares and replacements in the field versus the production line at Airbus. In the larger picture, we continue to see multifaceted developments in supply chain health impacting the entire manufacturing process, which are likely to persist for several years ahead. Let me expand a bit on the issues with the higher pressure turbine disk metallurgy for certain Pratt Whitney Gear Turbofan 1100 engines, which are the engines that power the 320 and 21 neo family of aircraft. As described by Pratt, this impacts over 1200 engines manufactured in 2021 and prior. and will require inspections over the near term and will potentially require replacement in case of the identification of defects. I'll remind you that all of our leases are triple net and therefore our airline customers are responsible for all maintenance. These issues will be covered under manufacturer warranty, so we at Air Lease would not be directly impacted in any case. Also, preliminary indications are that only eight engines out of our fleet are impacted across four airline customers. We have held top level meetings this week with Pratt & Whitney and RTX Corp and are confident in their full commitment and dedication to support their global customers. But this does have broader implications for the airline industry. We fully expect increased aircraft on the ground time for airlines as affected engines are inspected and would also expect MRO shops to be even more saturated than they already are in undertaking these inspections. For ALC, we believe this will also lead to further aircraft demand opportunities over the near and medium term, and we are dedicated to helping our customers through this, providing as many additional aircraft and further lease extensions as we can possibly manage. Despite these developments and ongoing delivery delays, which have become the norm, we expect our fleet to grow at a healthy pace. Additionally, a more limited supply of aircraft does benefit the value of aircraft delivered from our order book, as well as those already in our owned and managed fleets. As for expectations for third quarter deliveries, as of today, we anticipate $700 to $800 million for the third quarter. We'll update you again for the fourth quarter expectations on deliveries during our third quarter earnings call in early November. I'd like to wrap up on my remarks with a few key takeaways for you on the broader operating environment and our market positioning. All the factors I have highlighted support escalating lease rates and aircraft values. Lease rate upside takes time to manifest into our fleet and performance, given some lag as we've already previously indicated in the past, while strong aircraft prices should bolster our gains on sale prospectively. Second, OEM delays are still here and will likely be a factor for the industry for years to come. as this has now been a multi-year process, our overall new aircraft delivery capital expenditures are normalizing in that aircraft which were not delivered in one year are delivering in the next with the same repetition in subsequent years. So with over $23 billion in our forward order book and an existing fleet of almost $26 billion, we have a long runway of growth ahead. Third, We've always said that our forward order book is one of our most valuable assets, and I might go as far as saying it is an invaluable asset in the current environment. Airlines have limited access to the newest technology and lowest emissions aircraft over the next four to five years, other than from ourselves and a handful of lessors with forward order books. In addition to having access to aircraft, our bulk orders were strategically placed during less frothy markets with substantial volume discounts, bolstering our asset yields, as well as our sales gains down the road. Lastly, our young fleet and focus on new aircraft purchases continues to offer airlines the most direct means of reducing their emissions today, not by 2030 or 2050, but right now. Combined, we remain very positive in our outlook for our business given these perspectives. So now I'd like to turn the call over to Steve Haase, who will offer more commentary on the airline industry and our business. Steve?