Air Lease Corporation

Good afternoon. My name is Greg 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'd like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations. Mr. Arnold, you may begin your conference.

Thanks, Greg, and good afternoon, everyone, and welcome to Airlace Corporation's fourth quarter and full year 2023 earnings call. I'm joined today 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 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, Thursday, February 15, 2024, 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 meeting of the Private Securities Litigation Reform Act, This includes without limitation statements regarding the state of the airline industry, the impact of aircraft and engine delivery delays and manufacturing defects, our aircraft sales pipeline, and our future operations and performance. These statements and any projections as to our future performance represent management's current estimates and speak only as of today's date. 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 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 gap measures can be found in our earnings release in 10-K that we issued today. This release can also be found in the investor's section and press section of our website at airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I'll now turn the call over to our Chief Executive Officer and President, John Plucker.

Thanks very much, Jason. Good afternoon, everyone, and thank you for joining us on our call today. I'm pleased to report that during the fourth quarter, ALC generated record quarterly revenues of $717 million, up approximately 19% relative to the same quarter last year, and we achieved $1.89 in diluted earnings per share, up 56% from last year's fourth quarter. Revenue for the full year of $2.7 billion was also an ALC record. Strong continued expansion of our fleet, increased sales activity at healthy gains, and higher end-of-lease revenue were the primary drivers of upside to revenue as compared to the prior year quarter. During the fourth quarter, we purchased 22 new aircraft from our order book, adding approximately $1.2 billion in flight equipment to our balance sheet, while we sold eight aircraft totaling approximately $440 million in sales proceeds. The utilization rate on our fleet remains very strong at 99.9% for the full year 2023. In addition to revenue expansion during the fourth quarter, we also benefited from approximately $67 million net from the insurance settlement we received on four aircraft seized in Russia in the prior year, plus the equity interest in our managed fleet. We continue to vigorously pursue further insurance settlements as well as our insurance claims and litigation, but given these are largely legal matters, there's not a lot of extra color we can add on this topic. I will note that we believe strongly in the validity of our claims and continue to pursue all available options for recovery. Global air traffic continues to gain altitude and there are no signs on the horizon of volumes weakening dramatically. Steve will expand upon this in his remarks. We're also seeing in recent months a rebound in the cargo and air freight markets, owing largely to cargo ship traffic risk, time delays, and concerns from the Middle East. We believe that this uptick in air freight trend will continue given geopolitical realities in the Middle East. This bodes well for our order of seven A350 freighter aircraft, as does further and impending additional orders for the A350 freighter from airlines such as Cathay Pacific. Demand for fuel-efficient aircraft, meanwhile, continues to be very strong across both new and used aircraft. At present, we are 100% placed in our forward orders through 2025, and we've placed 65% of our entire order book. Given Boeing and Airbus are practically sold out through the end of this decade, and that we have $22 billion of deliveries pending through 2028, which will likely slip into 2029 as well, We are being patient with additional order book placements to further bolster the upward trend in lease rates you've heard us regularly highlighting. These delivery slots hold immense value and we're very cognizant of the position of strength we're in. As to our current fleet, we are taking advantage of the market lease rate increases on our lease extensions, although we do not have a high number of lease expirations or extensions this year. We are still experiencing a very high rate of lease extensions as most airlines are anxious to keep their aircraft given the short supply of aircraft. Used wide-body lease rates including A330-200 and 300 and Boeing 777-300ERs are accelerating from the supply-demand imbalance with single aisle 737-800s and A320 and 321 CEOs reaping the highest premiums for prior generation aircraft in the used aircraft marketplace. During the fourth quarter, our $1.2 billion of deliveries came in higher as compared to our expectations for the quarter, and for the full year, deliveries came in at $4.6 billion. As you may recall, third quarter deliveries were lighter than expected, so some of the pickup in the fourth quarter came from those delivering, while others that we thought might push into 2025 were brought forward into December. Looking forward, the supply of new commercial aircraft remains highly constrained, both by the supply chain as well as aircraft and engine production quality issues. Delivery volumes have improved over the past couple of years following the pandemic, but challenges persist around the pace of improvement and the ability of both Boeing and Airbus to ramp up and achieve production goals. The recent action by the FAA to limit Boeing's max production rate is a main reason why we at ALC are forecasting a relatively wide range in our 2024 new aircraft investments of between $4.5 to $5.5 billion. Prior year's history also provides some uncertainty on our total Airbus deliveries for 2024. We expect around $1 billion of those deliveries to occur in the first quarter of 2024. That said, I do think it's important to point out that at the low end of the range, deliveries would provide significant fleet growth, representing approximately 17% of ALC's 2023 year-end fleet, which would be even higher after aircraft sales and depreciation are taken into account. We are continuing to see lease rates catch up with interest rates in the marketplace. As to the impact on lease yields, let me remind you that the increase in lease rates we are seeing on new placements will primarily benefit our results in subsequent years, as our new aircraft placements generally occur two years prior to delivery. Our aircraft sales activity remained healthy in the fourth quarter, and we continue to see strong sales demand for our aircraft. Important to highlight in our business is the fact that the earning cycle on every aircraft is not complete until it's sold. So earning a healthy gain on exit is a critical part of the investment cycle as well, and bolsters our profit margins and return on equity. Healthy gains also demonstrate the value of our strategy of purchasing aircraft at the best possible prices from the OEMs. ALC sales pipeline totals 1.5 billion as of today, inclusive of roughly 600 million of aircraft classified as held for sale, and 900 million subject to letters of intent. As for 2024 sales expectations, we currently anticipate approximately a billion and a half of aircraft sales. As a reminder, the sales proceeds from letter of intent to deal closure takes time and is dependent on a number of factors outside of our control, So sales volumes tend to be lumpy in any given quarter as a result. Based on sales activity so far this quarter, we would expect closing around $200 million in sales for the first quarter of 2024. Now switching gears to a different topic, there has been much publicity and commentary on the recent Alaska 737-9 MAX incident, along with Boeing quality control and regulatory oversight. Let me just say that ALC is a believer and supporter of the 737 MAX and of the Boeing company. We are keenly aware of Boeing's intense 24-7 efforts to rectify and address quality controls, enhance safety measures, and restore confidence to the flying public, their customers worldwide, and the regulators. We fully believe that Boeing will be successful in these efforts and will be a better company for it. The 737 MAX is a core component of global airline fleets and will remain so. We do not believe that the MAX residual value is diminished whatsoever. We continue to see very strong lease demand for the MAX as well as high demand from buyers for the MAX. We're also encouraged by Airbus' perspective on the Alaska 9 MAX matter, with Guillaume Faure recently commenting that it, quote, makes us very humble, end quote. It is a strong reminder to all OEMs and suppliers to always put quality and safety first, never at the expense of production rate or economic goals. We all want our aircraft on time, but without compromise on quality. Quality and safety must take precedence over all other considerations. So while extremely unfortunate, we believe the Alaska-9 MAX incident serves as a reminder to all OEMs and their related supply chains as to what is most important. In closing, let me just summarize that the dynamic of strong aircraft demand, constrained supply, and ample fleet growth is a robust and prevailing tailwind for our business here at Air Lease. And we see these factors offering continued support for aircraft values and lease rates for the foreseeable future. As such, we see a strong flight path ahead for our business. Now I'll turn the call over to Steve Haase, who will add some additional commentary. Steve?