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Operator
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.
Greg
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.
Greg
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?
Jason
Thank you, John, and thank you to all of you listening in on the AIRLIS call today. I'd like to begin by congratulating, from deep in my heart, the AIRLIS team on achieving several key records, including the highest revenue and sales proceeds, as well as exceeding $30 billion in assets for the first time in our history. We've certainly come a long way from our start in 2010, when we had aspirations but no aircraft and only a handful of employees. ALC was built from our collective vision that airlines will require the newest technology, fuel-efficient commercial aircraft release, and that these aircraft would be needed well ahead of any availability from the OEMs. Right now, we're observing both of these trends in a position that has rarely been so positively skewed in our favor. Airlines are in immense need for the highest demand new aircraft, and both Boeing and Airbus are practically sold out through the end of this decade. Our volume discount pricing on our fleet and order book was achieved well before the recent spike in industry orders and pricing and gives us a tremendous advantage that few others possess. These factors also continue to support positive upside to lease rates, and aircraft values in our fleet. Global airline traffic volumes remain very robust. Full year 2023 IATA traffic figures released earlier this month continue to show very strong expansion with total volumes rising 37% year over year. Domestic traffic was up 30%. And, for example, domestic China in particular up a significant 147% versus the prior year. And most markets rose at a very healthy pace. In fact, global domestic traffic hit all new highs in December, with several markets like the U.S., India, Australia, and Brazil achieving mid to high single-digit year-over-year growth rates in the month. Total international volume, meanwhile, rose a substantial 42% for the year, with all major markets rising at double-digit growth rates relative to 2022. Similar to domestic traffic, the biggest gainers were in the Asia Pacific region again, which rose more than 100% year over year in international travel in that region. And there's a continuation of resumption of normalized international traffic patterns in Asia. Wide-body aircraft demand has really picked up pace as a result of economic strength in Asia, as well as growing international demand globally. We continue to foresee strong growth in the Asian market ahead, particularly opportunities in the Asia to North America and Asia to Europe routes, but we also see strong continued expansion in a number of other markets as well. Major traffic flows, such as North America to Europe and North America to South America, for example, continue to expand significantly. Many domestic markets worldwide also illustrate strength and further growth momentum. Passenger load factors also continue to climb, coming in at 82% in the latest month, as reported by IATA. And in a number of markets, it's already exceeding these levels. This is putting pressure on the airlines to find additional aircraft capacity to satisfy robust air travel demand, and we would anticipate load factors to go up even higher in the year ahead, given the limited supply of commercial aircraft and OEM delivery constraints. IATA is expecting industry load factors to reach 83% in 2024, which is in line with record highs, but a number of markets are either already well above their highs or are expected to meaningfully exceed these industry average levels, and these could certainly go higher. Continuation of this trend would further increase the need for more new commercial aircraft. Airline health, meanwhile, continues to improve overall, with airline industry revenues expected for the first time to hit a record of a trillion dollars in 2024. Strong traffic volumes and yields have also been a key to this expansion over the last few years. Profitability of the industry is expected to achieve $25 billion or so in 2024. We recently had extensive conversations with many of our airline customers while in Europe over the past few weeks. Each of them have echoed the view that operating conditions are attractive overall, and all of these airlines were asking us for more aircraft. On the credit front, we selectively avoided doing business with some of the larger airlines that went bankrupt over the last year, including Gola Brazil, Go First in India, and Viva Air in Colombia. In addition to being selective with our customers, I would like to remind you that our fleet is very geographically diverse with 119 customers in 62 countries at the end of 2023 with about a 1% average exposure position per customer. So our conservative portfolio management strategy further reduces risk to any individual airline. We also maintain significant cash security deposits and maintenance reserves as added installation from customers that could run into challenges. You can see this in our balance sheet at around $1.5 billion at year end. This is a meaningfully large number, almost 6% of the net carrying value of our fleet. These funds are paid into air lease by our airline customers for our benefit and effectively reduce our net interest expense and provide us meaningful credit protection. Returning to ALC's fourth quarter results, we delivered 22 new aircraft from our quarterbook during the period, consisting primarily of narrow-body aircraft along with two Airbus widebodies. We delivered six A220 aircraft in the quarter. Five were delivered to ITA Airways in Italy, and one A220-300 was delivered to a growing airline in southeastern Europe. We continue to see the A220 gaining traction globally with both new and existing customers, given its attractive economics and fuel efficiency. We delivered one A320-200neo aircraft to SATA based in the Azores, as well as eight A321-200neos, two going to ITA, joining the five A220 deliveries I just mentioned. two to LATAM Airlines, the largest airline in Latin America, and the first two deliveries of eight total A321s will be delivered to that airline. In addition, we also delivered one A321-200neo to each Air Astana based in Central Asia, Sky Airline based in Chile, and Sunclass Airlines in Denmark, as well as the first Airbus A321neo to Transavia in the Netherlands. On the Boeing side, we delivered five new 737s during the quarter, including two 737-8s to Malaysia Airlines and one 737-9 each to Aeromexico, Alaska Airlines, and Corendon in Netherlands. Lastly, we delivered two new A330-900neo widebodies, one to ITA and one to Sunclass Airlines in Scandinavia, joining their narrow-body sister ships, which were delivered in the quarter that I just highlighted. Lastly, I would like to emphasize a point from John's section on the value of our fleet and forward order book. Simply looking at our consistent gains on aircraft sales, it is clear that there is significant value embedded in the aircraft in our fleet as compared to the depreciated cost basis held in our books. With all that said, I'll now turn the call over to our CFO, Greg Willis, for his more detailed comments on our financial performance in 2023.
John
Thank you, Steve, and good afternoon, everyone. During the fourth quarter of 2023, Airlease generated revenues of $717 million, which was comprised of approximately $644 million of rental revenues and $73 million from aircraft sales, trading, and other activities. The increase in our total revenues was driven by the growth of our fleet, 59 million in gains recognized from our sales activities, and 60 million in end of lease revenue stemming from the return of seven aircraft. Let me remind you that the earnings model in aircraft leasing includes not only the base rental payments that we recognize on a straight line basis over the life of the lease, but also includes the earnings that we generate from end of lease payments and maintenance reserves as well as the gains that we record from the ultimate sale of the aircraft. These additional income streams serve to enhance the overall earnings profile of the business. Sales proceeds for the fourth quarter totaled approximately $440 million from the sale of eight aircraft. As I just mentioned, these sales generated $59 million in gains, representing a 14% premium to our carrying value. which was higher than our long-term average of 8% to 10%, further demonstrating the strength of the market and the underlying value of the aircraft that we have in our fleet. I do want to point out that our gain on sale margins will vary somewhat quarter to quarter based on aircraft sold and market conditions. But it's also worth highlighting that we have a robust aircraft sales pipeline aggregating $1.5 billion for future aircraft sales at accrued evaluations. This pipeline not only further reinforces the underlying value of our existing fleet, but also provides a meaningful addition to our liquidity position and is a catalyst to help us reduce our financial leverage, which I will discuss later in my remarks. Moving on to expenses, interest expense increased by $35 million and was driven by a 70 basis point increase in our composite cost of funds to 3.77%, along with an increase in our debt balance. we have significantly benefited from our largely fixed rate capital structure, which has helped to moderate the effects of the current interest rate environment. You should note that we ended the year with 85% of our debt at fixed rates. Depreciation expense continues to track the growth of our fleet. With regards to SG&A, our ratio of expenses to revenue remained in line with the prior year, and on an absolute basis, they increased along with the expansion of our leasing activities. It is also important to note that we disclosed in our AK filing in December, we recorded $67 million from a Russian insurance recovery as a benefit against our Russian ride-off line item in our income statement. This recovery was helpful along with our aircraft sales activities to help us reduce our financial leverage. All of these activities, along with the quality of our fleet, helped us to generate strong financial results in the fourth quarter and for the year ended 2023. which ultimately has resulted in the continued expansion of our adjusted pre-tax return on equity since 2021. Our cash flow from operations for the full year 2023 rose 26% relative to 2022, benefiting from our continued strong airline customer cash collections. These healthy cash collections further our ability to reduce our debt balance and fund aircraft deliveries. Transitioning to our financing activities, we raised $3.6 billion in committed debt financings during 2023. Much of this financing was completed in the bank market, which provides us with a substantial amount of flexibility as compared to the bond market. We did return to the bond market in the fourth quarter when we raised $500 million in Canadian dollars, maturing in 2028 at a rate of 5.9%, inclusive of the effect of our currency swaps. Then in early January, we returned to the U.S. bond market and raised an additional $500 million U.S. dollars maturing in 2029 at 5.1%, marking our lowest coupon in approximately two years. We are highly focused on maintaining our strong investment-grade balance sheet, utilizing unsecured debt as our primary source of financing, maintaining a high ratio of fixed-rate funding, and utilizing a conservative amount of leverage and targeting a debt-to-equity ratio of 2.5 times. Our liquidity position remains strong at $6.8 billion at the end of the fourth quarter, and our unencumbered asset base of $29 billion is a source of strength on our balance sheet. Our debt-to-equity ratio at the end of the third quarter was roughly 2.68 times on a GAAP basis, which netted cash on the balance sheet is approximately 2.61 times. As I mentioned previously, we continue to utilize the proceeds from aircraft sales and Russian recoveries to pay down debt and to help us reach our long-term target debt-to-equity of 2.5 times over the medium term. Echoing the key observations made by Steve and John, we feel very positive about the positioning of our business in the current environment, and we believe our fleet and order book of the newest, highest in demand commercial aircraft remain a key strategic advantage. We continue to foresee these high demand assets and the market supply demand imbalances as enhancing our performance in the years ahead. With that, I'll turn the call back over to Jason for the question and answer session of the call.
Greg
Thanks very much, Greg. This concludes our commentary and remarks. For the question and answer session, we ask that each participant limit their time to one question and one follow-up. Operator, please open the line for the Q&A session.
Operator
Thanks, Jason. And at this time, I would like to remind everyone, again, to ask a question, press star and the number one on your telephone keypad. Once again, star one. It looks like our first question today comes from the line of Catherine O'Brien with Goldman Sachs. Catherine, please go ahead.
Jason
Hey, good afternoon, everyone. Thanks for the time. Totally understand that quarter to quarter, you know, we should expect that gain on sale to bounce around, of course, but, you know, had a solid gain this quarter up from last quarter. With everything that's going on with the MAX and GTF, you know, should we expect supply to remain tight or maybe even get tighter as we move through this year? And should that translate to, you know, potentially keeping that gain on sale higher than the historical average. Just any color there on both supply and demand side and thoughts on the gain that Air Lease could enjoy in that environment would be super helpful. Thanks.
Greg
Thanks, Katie. The answer is yes. We do believe that the supply will remain constrained. As to the impact on forward sales gain, I really can't comment too much. We've got a robust pipeline of a billion and a half. All these things are taken in consideration, but I think there's no question in our mind that the supply will remain constrained.
Jason
For every airplane that we have for sale, we have multiple buyers. So it's been a very dynamic market, and it's led to a high level of liquidity in the secondhand market for aircraft. And Air Lease, having a high-quality fleet, will continue to enjoy significant gains when we dispose of these assets.
Jason
Okay, that's great. And then I was just hoping to get some more color on the returned aircraft and the end of lease revenue. Not sure if you can share this, but, you know, obviously which airline and what type of aircraft would be helpful. And then just, you know, how should we think about the turnaround on getting those aircraft back out the door? You know, as you just spoke to, I'm sure there's plenty of interest in taking those aircraft off your hands. But what's MRO capacity like? Is that still pretty tight just in terms of the timeline to get reconfiguration work?
Jason
Your question has really two parts. Let me explain the first part. We have two types of leases. Many of our leases, the airline pays a monthly overhaul maintenance reserve for the usage of engines, airframe components, landing gear, and so forth. So there's a monthly cash inflow over and above the rental. And then we have some leases where that compensation comes at the end of the lease. So it's kind of a catch up. And so some of these transactions that you refer to was simply where the leases had come to an end or where we agreed by mutual agreement with the airline to recover the aircraft. And then we were able to obtain additional funds, keep all the security deposits, and in effect get the present benefit of the maintenance reserves that accrued during the life of the lease. And then the second question, MRO capacity is very tight. So we try to keep those transitions to an absolute minimum. And we try to lay off those expenses on the next airline rather than having to use ALC's resources.
Greg
Let me just add, Katie, that where we do have an expiration, in my prepared remarks, I highlighted the fact that we have a very high rate of lease extension. And that continues to be the case. There's not all that many this year, but our historical average is 75% of our first-run leases get extended. I don't know what the current percentage is today, but I would strongly imagine it's well north of 90% to 95%.
Jason
And just by way of example, one of the aircraft that was in this category was an A321, and the new lease that we signed with another airline as a follow-on, is paying us a higher rental rate than the original lease. And the other aircraft, being a 737-800, we had the same phenomenon, with a new lease had higher lease rates than the lease that just expired.
Jason
That's great. Yeah, I guess I was assuming those maybe were early returns, but wasn't factoring in. Maybe some of that was just coming to their natural end. That was all super helpful. Thanks for the time.
Operator
Thank you, Katie. Thanks, Katie. And our next question comes from the line of Jamie Baker with JP Morgan. Jamie, please go ahead.
Katie
Good afternoon, everybody. First one probably for Greg on Russia. You know, if you look at what you initially wrote off, not what the insurance claim was, but what you wrote off, where are we in terms of aggregate recovery? inclusive of the 67 million disclosed in the fourth quarter? I mean, if you were to express recovery as a percentage of book, you know, we're hearing around 65, 70 cents on the dollar elsewhere. Just wondering if the air lease metric is consistent with that.
John
I think to date we've recovered about 10 to 12% of our $800 million charge that we took last year. I can't really comment about what the market is for claims in the marketplace. And ultimately, we're kind of limited about how much we can actually talk about our recovery efforts on the call.
Katie
Okay. Well, that's helpful. And then second, you know, if I back out sale proceeds in the end-of-life revenue, it looks like lease yields are uninspiring. So, you know, at or near the lowest level since 2021. which seems, I don't know, a little inconsistent with how bulled up everybody is, you know, on aircraft leasing. So what Mark and I were wondering, are lease extensions to blame for this? Is that what's potentially leading upside on the table relative to how strong market rates reportedly are?
John
No, I think it's really being driven by as you sell off older airplanes. They typically are at the highest point of their yield in our life cycle. And as you layer on younger airplanes, they start off at their lowest, and then as they age, the yield goes up. I think that is putting probably the main driver where it is, because you're right. As John mentioned in his prepared remarks, we are seeing lease rates really start to get going.
Greg
And let me just add that, as I stated in my prepared remarks, our lease placements are roughly two years ahead of the actual deliveries. So when you see this strengthening over the last year, You can just assume that what we're delivering, for example, this year was larger leases that we struck in 21, early 22.
Katie
Understood. Thanks for the color, John. Thanks, Greg.
Operator
All right. Thank you, Jamie. And our next question comes from the line of Hillary Cacanando with Deutsche Bank. Hillary, please go ahead.
Jamie
Hi. Thanks for taking my question. In the past, you used to break out China separately in your press release. It looks like this time around, You combined it with Asia. Could you just go over what the exposure to China was in the fourth quarter and, you know, if you're continuing to reduce the exposure to the country? Thank you.
John
Yeah, we consolidated the region because our exposure to China had gone down significantly below 10 percent. I think it was below 7 percent, actually, and that's disclosed in the details of the 10K, and I know that that just hit the wire at 1 o'clock Pacific time, so it's not It doesn't surprise me that you weren't able to find the detail there, but that's the main reason.
Jamie
Okay, got it. Thank you. Okay, got it. And then, you know, previously you said that the extension rate was, you know, about 90%, you know, given the tight market. You know, has that increased at all, you know, in the recent quarter? And are you seeing any differences between the extension rate for narrow body versus the wide bodies? And then just in terms of economics, you know, are you better off if the airlines extend And, you know, you have to incur the marketing costs. So are you better off, you know, if you market those aircraft and maybe potentially get, you know, higher rates just given the type market?
Greg
Yeah, the rates of lease extension have not softened. They continue to remain really, really very strong, well north of 90 percent. I don't have the specific calculation in front of me. I believe that's that's pretty accurate. Lease rates in the extensions are going up for single aisle and on twin aisle aircraft. And, you know, on that level, I wish we had more of them coming up this year. But we're seeing a nice appreciation in lease rates. Steve gave some specific examples in answer to a previous question that we've experienced where in a few cases we've had leases extend, either extend at higher rates or to a new lessee at higher rates than the original leases.
Jamie
Okay. And then just I guess in terms of economics, are you better off if they
Greg
you know just extend because you don't have to be you know incur the remarketing costs or could you get better rates if you remarket them that's a good question and it's very much a case-by-case basis we do look at that question on every single extension versus um transferring to another carrier so that that is very much a part of the calculus i got it thank you so much sure all right thanks hillary
Operator
And one more reminder, if you'd like to ask a question, again, star 1 on your touch-tone phone. Once again, star 1 on your telephone keypad. And our next question comes from the line of Terry Ma with Barclays. Terry, please go ahead.
Terry Ma
Hi, thanks. Good afternoon. Thinking of 10K, you called out 22 returned aircraft this year. Any color you can give on how many of those have actually transitioned versus aircraft that are waiting to transition?
John
Yeah, Terry, what I'd point you to is our Utilization percentage, that's at 99.9%, and almost all of our airplanes are subject to lease at the current moment. I think a lot of these were regular returns, so we had a customer lined up to take the airplane at the return check, so it's a pretty seamless operation.
Terry Ma
Got it. So even the seven aircraft that were returned this quarter, they should be earning rental revenue in Q1? Yes. Okay, got it. That's helpful. And then you mentioned lease rates on new deliveries are higher. Is there any color you can give, even ballpark, how much higher the lease rates on 2024 deliveries and 25 deliveries are relative to what's on book today?
John
You know, what you can do is you can look at, there's a lot of appraisal data out there that has shown what's going on with lease rates. And I'm a little hesitant directing you to the appraisal data because they typically lag the market by six to 12 months, but they've been very, vocal in their views on what's happening with lease rates. And you can see some very significant 10% to 15% increases in lease rates over the last period of time.
Jason
Well, also, please be reminded that many of our leases that we wrote in 21-22 had interest rate adjusters. So when the aircraft delivers, we look at the five-year treasury or seven-year treasury or some benchmark, and then the lease is adjusted not only for the escalation from the manufacturer, but also for the prevalent interest rates at the time of delivery. So based on the current interest rate situation, you can mathematically derive that aircraft delivering today are at a higher lease rate than they were 12, 18 months ago.
Ron
Got it. Thank you.
Operator
Okay. Thank you, Terry. And our next question comes from the line of Ron Epstein with Bank of America. Ron, please go ahead.
Terry
Yeah. Hey, good evening guys. Hey Ron. Hey Ron. A couple quick ones if I can. And you mentioned this a little bit in the prepared remarks before, but how long do you think it's going to take until the max gets back to some sort of regular rate of cadence? Meaning, you know, And I guess this was asked in a sense before. I mean, how long do you think the supply and demand imbalance is going to be in the narrowbody market? Right. I mean, it could be years and years. Right. I'm thinking about this wrong.
Greg
No, you're right. I mean, the supply, demand and balance, we do believe will go on for years. And, you know, Boeing is delivering maxes today. The only question is, is how many production rate increases and at what pace they'll be able to increase that rate. As it's been publicized, the FAA has put a limit on that rate until it is more satisfied. So we really can't judge, Ron, when that's anybody's guess as to when that restriction on production rate might be lifted. But Boeing is delivering MAXs. We're taking delivery of MAXs. But the single aisle shortage is going to be going on for quite some time.
Jason
Ron, one other point. The lease rates we're seeing for new Max 8s and new A320 NEOs are almost neck and neck. We're really not seeing a worse lease rate environment for a new Max 8 versus an A320. Now, obviously, the A321 is a different animal. And then the 737 Max is between the Dash 8 and the A321 rates. But the Dash 8 rate, for new 737s and A320neos, they're almost at the same level.
Ron
Got it, got it. That was actually my next question, so thank you for that.
Jason
I know, I read your mind.
Terry
Yeah, you did. It was quite successful. That was a good one. So the next question, the follow-on from that would be, if this is going to last for a long time, does this open the aperture for more A220s out there or more E2195s? be it that there's some lift available there in the more near term?
Greg
Yes, I think it does. You know, we've been successful on our 220 placements. And at the same time, we're watching how the engine improvements are weaving into the gear turbofan, the Pratt 1500 that powers those airplanes. So I think, yeah, there is some acceleration on both those aircraft types.
Jason
Yeah, Ron, just to give you an example, if I look back in the last, say, year and a half on our A220 placements, for example, in Europe, they are replacing A319s, A320s, 737-700s. So they're replacing aircraft in that 130 to 180 seat size. In some cases, they're replacing larger aircraft. Like in ITA, for example, they're replacing some of their older A320 CEOs with A220s. We have a deal in the Czech Republic. Well, all their A320s are being replaced by A220s. In Bulgaria, we have seven A220s replacing a combination of A319s and A320s. So the airplane is really catching on. With the recent orders from Lufthansa, you've got really now a very strong customer base here with Delta, JetBlue, Air Canada in North America. The airplane is catching on, but it is production constrained.
Terry
Would you be supportive of a 220-500, the kind of mythical stretch of the airplane?
Jason
What kind of engines are you going to put on it?
Terry
You tell me.
Greg
I think, Ron, at this point in time, we're not overly optimistic or favoring an A220-500. We think that the production of the A220-100 and 300 and the continued maturation of the engine on that airplane is sufficient for most markets these days. There's one or two airlines that would like it, but frankly, I think with all the strain and production rate pressure that Airbus is under. It's still got to deliver and certify the A350 freighter and the XLR. These are two big certification programs. Let's not put another pressure on the development or the supply chain that could take away time and attention or quality from Airbus.
Jason
And Ron, also, if you look at the infrastructure in Mobile and in Montreal, I just don't see that Airbus could build 30, 40, 50 of these a month. It just doesn't appear to be achievable with what's in place currently.
Ron
Got it, got it. Well, thank you very much, guys. Thanks. Thanks, Ron.
Operator
Thanks, Ron. All right, our next question comes from the line of Katie O'Brien again with Goldman Sachs. Katie, please go ahead.
Jason
Oh, hi again. Thanks so much for the follow-up. Just was listening to some puts and takes of the other questions and had one on net spread. You know, you timed the market really nicely in January with that unsecured deal, but you do have some sub-1% maturities, I think, rolling off this year. So, guessing we'll continue to see the average cost of that move higher. And on the rental side of the equation, as you noted, most of the aircraft we're taking delivery of this year would have leases written in 2021, 2022, when we weren't quite yet in this really strong period we're speaking to on lease rates. So I guess what I'm getting at, would it follow that we should expect to see net spread perhaps compress a little bit before the tailwinds of the current lease rate environment drive expansion, 25, 26? Just any high-level thoughts there would be super helpful. Thanks again for the time.
John
I think it's really hard to say right now, especially given what's going on with the Fed and where interest rates are going to go. I think it's really hard to predict. We do have pretty good visibility of what's coming on the lease rate side, but we've really shied away from giving guidance on what direction our lease spread is going to go.
Jason
And we do have, what, about a $19 billion book of fixed rate liabilities already. and those are not gonna change too much. So even if we issue another 500 million or 700 million bond in the fours or low fives, it's not gonna change the overall dynamics of our balance sheet.
Greg
Okay, the year estimation of how many Fed rate cuts there will be before the end of the year is probably much better than ours. All I can say is going into the end of 23, it's clear that the market had priced in probably too many, too aggressive of Fed rate cuts, but we do expect them this year. So again, your guess is as good as ours.
Jason
Yeah, I'll leave that to the people smarter than me in the macro department here, but okay. Thanks for the caller. Thanks, guys.
Operator
Okay. Hi, Katie. And our next question comes from the line of Stephen Trent with Citi. Stephen, please go ahead.
Katie
Hey, good afternoon, everybody, and thanks very much for taking my question. Most of them might have been answered, but I was really curious about your aircraft procurement. I mean, not just for you guys, but for the industry broadly. Would you say, for instance, that lessers could start leaning more on obtaining planes through a little more through sale leaseback activity versus what's previously been the case? Or is that not so relevant for you guys because you already have such strong order books from the OEMs? Just was wondering what you see as the opportunity for the space as you procure aircraft. Thank you.
Greg
Thanks. Yeah, our business model has always been and will remain primarily as an order book driven lessor. We have a very large order book that will go out through 29. So we are not large players. I never have been in the sale-leaseback marketplace. I don't see, in terms of the broad distribution, it's those who don't have order books, by definition, will have to do sale-leasebacks. But it's never been a huge part of our business, except for we do participate indirectly in some of the managed vehicles that we run for other investors. In some cases, the sale-leaseback marketplace presents certain opportunities for them. Classically, the returns and the lease rates and the sale-leaseback part of the business has been lower than on the order book part of the business. So we guided a little bit towards our managed vehicles, but we will always remain primarily new aircraft order book lessor.
Jason
And we believe that that business strategy results in a lower acquisition cost of aircraft than when you step into an airline's order with a markup to do a sale-leaseback. So we believe we have significant capital cost advantage in the acquisition of these portfolios directly from the OEMs rather than to a third party.
Katie
Great. Makes sense. And thanks very much for the color. Sure.
Operator
All right. Thank you, Stephen. And our final question today comes from Doug Runty with Deutsche Bank. Doug, please go ahead.
Doug Runty
Yes, thanks very much for taking a question from the fixed income side of the balance sheet. A question on the order book. There's an interesting split in the market among large thoughtful lessors as to whether you should line up at the tent at the air show to place orders or whether it's okay to place orders extending over the horizon past 2030. I'm wondering where you come down on that given that your order book commitment ends towards 2028, 2029.
Jason
Yeah, we don't believe that joining this order frenzy is really a good strategy for us. If you truly believe that every one of those orders that have been placed in the last two years are going to get delivered on time and to the very airlines and institutions that have ordered it, then our strategy is probably flawed. But we don't believe that those hundreds of aircraft will wind up exactly where they were intended. There will always be pockets of opportunity. There will be airlines that will not be able to honor their obligations. So we think we can supplement our backlog as and when needed to cover that period, 2028 and 2029. We're in really good shape over the next four and a half years. So we're less worried about new aircraft in 2030.
Doug Runty
Great. Thank you very much for that, Culler. And a quick follow-up, a little more granular. You have quite a few 777-300ERs coming off lease in the next two to three years. Have you engaged in placement talks with that? Does it look like they'll be extended, or is there potentially going to be a need to reposition those to new operators?
Greg
Those are going to be extended for the very most part, Doug. We're well underway on several several large carriers in that process.
Jason
We have pulled every one of our 777-300-ER lessees, Doug, and not a single one has expressed any interest in returning them.
Doug Runty
Wow, that's terrific news.
Jason
Whether we extend them for three years or five years or eight years and at what rate, that's the variable. It's not an if question, it's at what rate are we extending and for what term.
Doug Runty
Terrific. Thank you for sharing that color. And we'll see you at ISTAT.
Jason
Okay. See you there. See you in Austin.
Operator
All right. Thank you, Doug. And that concludes our question and answer session today. And with that, Mr. Arnold, I will turn the call back over to you.
Greg
Thanks, everyone, for your time participating in our fourth quarter call. We look forward to speaking to you again in May. Greg, please disconnect the line. Thanks for your assistance.
Operator
Thank you. This concludes today's call. You may now disconnect. Have a great day, everyone.
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