Air Lease Corporation

Good afternoon. My name is Rob and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Air Lease Corporation third quarter 2023 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 would like to withdraw your question, again, press the star one. I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thank you, Rob, and good morning, everyone, and welcome to Airlace Corporation's third quarter 2023 earnings call. This is Jason Arnold. I'm joined by Steve Haase, our Executive Chairman, John Plueger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier this morning, we published our third quarter 2023 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, Monday, November 6th, 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 within the meaning of the Private Securities Litigation Reform Act, This includes, without limitation, statements regarding the state of the airline industry, the impact of rising interest rates and inflation, the impact of sanctions imposed on Russia, the impact of the Israel-Hamas conflict, the impact of aircraft and engine delivery delays and manufacturing defects, our aircraft sales pipeline, and our future operations and performance revenues, operating expenses, stock base 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, November 6, 2023. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the SEC for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligations 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 our earnings release and in the 10Q that we issued today. This release can be found both in the investors and press section of our website at www.airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chief Executive Officer and President, John Pugger. John?

Well, thanks, Jason. Good morning, everyone, and thank you for joining us on our call today. I am happy to report that during the third quarter, ALC generated quarterly revenues of $659 million, up approximately 18% relative to the same quarter last year. We also earned $1.10 earnings per share, up 22% from last year's third quarter. Strong continued expansion of our fleet and higher sales activity as compared to the prior year were the primary drivers of upside to our results. During the third quarter, we purchased eight new aircraft from our order book, adding approximately $450 million in flight equipment to our balance sheet, while we sold eight aircraft totaling approximately $350 million in sales proceeds. The utilization rate on our fleet remains very strong at 99.9% during the third quarter. At present, we are 100% placed on our forward orders through 2025, and we've placed 67% of our entire order book. Airline customer demand for new and fuel-efficient commercial aircraft remains exceptionally strong and is only being exacerbated by OEM challenges, including RTX's announcement in September on the impact due to the Pratt & Whitney gear turbofan engines, which I do want to comment on for a moment here. As mentioned last quarter, Pratt Whitney 1100G engines that power a significant number of the GTF-powered A320neos and 321neos have been found to have a powder metal coating flaw. RTX now believes that a greater number of these engines will need to be removed and inspected on an accelerated basis, which ultimately will lead to a significant number of A320neo and 321neo aircraft on the ground over the next several years. So what does this all mean for Airlease? Well, as highlighted last quarter, more aircraft on the ground for longer will create significant operational challenges for airlines, will further congest MRO facilities, and boost demand for alternative aircraft and spare engines. We also believe that the circumstance will likely make for additional Airbus and Airbody delivery delays if new production engines and as new production engines are redirected to support aircraft in the fleet versus new aircraft production. So clearly a challenging circumstance for the industry and our airline customers. As a reminder, while we do try to ensure that our customers receive help from Pratt, our leases are triple net and lease payments remain the obligation of our lessees whether the aircraft is flying or not. On the other side of the coin, I think it's important to note that further reductions to the availability of commercial aircraft certainly creates even more scarcity value for ALC's fleet and our order book delivery positions. This, in turn, is already driving a further strengthening of lease rates and aircraft values and significantly bolstering lease extensions at higher rates. ALC's $23 billion forward order book of aircraft extends out from the present through 2029, inclusive of OEM delivery delay expectations, leaving us in a position of significant strength in the current environment for our remaining unplaced aircraft. We're being very thoughtful about placing these remaining positions in order to maximize lease rates and therefore returns on these valuable new aircraft delivery positions. Secondary market demand continues to be very strong and our sales activity continued at a healthy pace in the third quarter. We're pleased by the gain on sale margins we are realizing on these aircraft. ALC's pipeline of aircraft for sale stands at a solid $1.8 billion as of today. And that includes around $700 million of aircraft classified as held for sale and another $1.1 billion subject to letters of intent. We now anticipate approximately $500 million of sales to close in the fourth quarter, which means that we expect to hit the midpoint of our full year sales target range in 2023 at $1.5 billion. We'll update you on our expectations for 2024 sales at our next earnings call in February. So, while the rate of increases in lease rates still lags interest rates, our aircraft values are benefiting from supply-demand dynamics. It's important to emphasize that lease rates should not be looked at in isolation. The earning cycle on every aircraft is not complete until it's sold, and our aircraft sales are benefiting from the rise in aircraft values. So, the view must be taken of the total picture to include aircraft valuations and sales. Moving on to deliveries, we guided new aircraft deliveries to be approximately $700 to $800 million for the third quarter, and actual deliveries came in lighter at about $450 million given continued OEM delays. In the big picture, there is no change to our outlook for aircraft delivery delays to persist for years to come, which we've discussed many times before on our calls in the past. As for expectations for fourth quarter deliveries, At present, we anticipate approximately 900 million to 1.1 billion of aircraft deliveries, representing a total of about 4.3 to 4.5 billion of deliveries for the full year of 2023. While delays are clearly disappointing to us as large customers of Boeing and Airbus, as well as disappointing to our airline partners who are basing fleet planning decisions on timely deliveries, I would note that the scale of deliveries we've received has still contributed to a healthy fleet expansion over the past year. I'd like to conclude with a few final comments on the current operating environment. First, as to the current conflict in the Middle East, ALC has two aircraft on lease in Israel, two Boeing 787s leased to El Al. As you may know, the government of Israel has stepped in to provide the insurance on those aircraft. Most of the non-Israel based airlines have discontinued flying to Israel. We continue to monitor this region very closely with all of our airline lessees. Second, globally, air traffic demand continues to expand at a brisk pace with volumes up 25 to 30% relative to the prior year and expanding at an even faster pace in many key markets. Steve will comment further on demand in his section, but we see no major signs of macroeconomic crosswinds impacting aircraft demand from the airline industry. We remain watchful, but we feel that some travel softening and discounting of airfares in the fourth quarter and the next year's first quarter, as announced by a few US and European LCCs, may reflect a return to more normal seasonal fluctuation. And in contrast to some of these softening of demand comments, over the past several business days, both Southwest Airlines in the USA and Lufthansa in Germany report strong demand for this holiday season and the fourth quarter. Third, our fleet continues to benefit from high airline demand and market supply constraints. We've always viewed our fleet as having significantly more value than what's on our balance sheet, but we see this as especially true in the current operating environment, as can be seen in the gains we're recognizing on aircraft sales. Finally, with over $23 billion of high-demand Airbus and Boeing aircraft in our forward order book, we have a long runway of growth ahead on our $26 billion fleet. Our order book aircraft were purchased with attractive volume discounts and in many cases with launch customer pricing. At times, the market demand for commercial aircraft was far less robust than it is at present. 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 limited number of lessors with forward orders over this period. So we remain very positive in our outlook in our business and positioning for the future. I'd like to turn the call over now to Steve Haase, who will provide some additional industry and ALC commentary.