Air Lease Corporation

Good afternoon. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Air Lease fourth quarter 2024 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. And if you would like to withdraw your question press the star one again. I would now like to turn the call over to Mr. Jason Arnold head of investor relations. Mr. Arnold you may begin your conference.

Thanks Krista and good afternoon everyone and welcome to Air Lease Corporation's fourth quarter and full year 2024 earnings call. This is Jason Arnold. I'm joined today by Steve our executive chairman, John Puger 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 2024 results. A copy of our earnings release is available on the investor section of our website at airleasecorp.com. This conference call is being webcast and recorded today, Thursday February 13th 2025 and the webcast will be available for replay on our website. At this time all participants to the 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, the impact of aircraft and engine delivery delays and manufacturing flaws, 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. Airlease 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, 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 in 10K we issued today. This release can be found in both the investors and the press section of our website. Similar to last quarter given ongoing litigation we won't be able to take any questions about our Russia fleet insurance claims. Lastly 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 Ploeger.

Well thanks

Jason.

Hello and good afternoon everyone. Thank you for joining our call today. During the fourth quarter, Airlease generated revenues of $713 million dollars and 83 cents in diluted earnings per share. Our results benefited from the continued expansion of our fleet offset by lower end of lease revenue as compared to the prior year. I'm also happy to report that full year 2024 revenue and ending fleet net book value reached record levels in the history of our company. We purchased 18 new aircraft from our order book during the quarter adding $1.3 billion in flight equipment to our balance sheet and we sold 14 aircraft for approximately $540 million in sales proceeds. The weighted average age of our fleet was stable quarter over quarter at 4.6 years while weighted average lease term remaining extended slightly to 7.2 years. Fleet utilization remains very robust at 100 percent. Our fourth quarter deliveries came in better than expected as the OEMs pushed to achieve their own delivery goals and objectives ahead of year end. On a full year basis, the $5 billion in deliveries we received hit the midpoint of the $4.5 to $5.5 billion range we outlined to you at the beginning of last year. For 2025, we expect to receive $3 to $3.5 billion of new aircraft delivered from our order book with around $800 million anticipated to deliver in the first quarter of 2025. I would also note that approximately 80 percent of our deliveries expected for 2025 are Boeing aircraft so any additional challenges emerging in Boeing's production efforts could be impactful. With the lower forecast expenditures on new aircraft deliveries for 2025 compared to 2024, ALC will have the ability to largely self-fund those deliveries from operating cash flow plus aircraft sales. This means reduced funding needs from the debt capital markets. In effect, for 2025, we anticipate debt funding of approximately $2 billion including refinancing of remaining 2025 debt maturities. So, we will have less overall financing in 2025 where it appears that financing rates will remain elevated. Greg will discuss this further. We believe, by the way, that the same situation will exist for 2026. Expected deliveries from our forward order book are fully placed through 2026 and the team is working diligently to achieve the highest possible lease rates on our remaining deliveries in 2027 and beyond. Our young fleet and sizable new order book with delivery positions well inside available from the manufacturers continues to position us exceptionally well in the current commercial aircraft supply constrained environment. This strong environment is also continuing to drive up lease rates. So, to that point, I would like to share some specific information that I hope you find useful as we report here on our full year 2024. Now, I won't be updating the specific comments or examples every quarter, but simply wanted to give you a flavor of what we are seeing in the overall context. First, during Q4, ALC executed lease extensions covering 23 single aisle aircraft including Boeing 737-800, Boeing 737-8 Max, A321 CEOs, and one E190. In aggregate, that pool of aircraft extensions resulted in higher lease rates and lease rate factors than those just prior to extension. This is very significant in that lease rates normally are lower during a lease extension compared to when the aircraft delivered new. Second, year to date in 2025, ALC has agreed to lease extensions on six Boeing 777-300ER aircraft across two airlines. The aggregate total lease rates and lease rate factors were largely in line with what they were prior to the extension. And I would add also significantly higher than the lease rates indicated currently for those aircraft by well-known appraisal firms. This points to the growing strength of widebody aircraft, which historically have always lagged narrowbody aircraft. In fact, we believe that widebody demand has surged faster than narrowbody demand over the past six months. Steve will comment on this further in his remarks. Third, our Q4 new aircraft deliveries represented the highest delivery yield in a quarter in over four years. Fourth, as you recall, during COVID, we had a number of leases that were restructured or signed at relatively low lease rate factors as a product of the challenges facing our customers at that point in time. Approximately $5 billion net book value of these lower yielding leases will mature by the end of 2026. As these leases mature and expire through 2026, we continue to be optimistic about lease rate extensions at significantly higher lease rates or releasing to the next let's see at significantly higher lease rates as we are seeing today. Now at the same time, we must recognize we are in an environment where interest rates have not fallen as rapidly as most of us expected a year ago. In fact, looking forward, it appears that interest rates will remain elevated for a longer period of time than we anticipated. Looking back over the past 24 plus months, it can still be said that overall interest rates rose more than lease rates from the historic lows. Let me also remind you that we undertook a program several years ago to reduce our China content and we have done so very effectively. That continued in 2024 wherein almost half of our aircraft sales were aircraft on lease to China. We made healthy gains on those sales, yet I want to remind you that those China leases were very profitable, in fact, some of our highest yielding leases. So this also affects our margins looking forward. With these factors, it is taking and will take a bit longer for increased lease margins being seen in our financial results. Nevertheless, we expect to see a moderately sized steady upward trajectory in fleet lease yields each year for the next three to four years based on our views of the market and assumptions around our sales activity and interest rate environment over the same period. At the same time, we are reaping the benefits of higher aircraft values and our aircraft sales. Strong commercial aircraft demand continues to support our sales efforts and gain on sale margins. Our gain on sale margins for fourth quarter 24 and full year 24 were very robust, reflecting this environment. Our sales pipeline remains solid at $1.1 billion, a consistently healthy gain on sale margins. We envision an overall sales outlook of about $1.5 billion for 2025, around $400 million of which is expected to close in the first quarter. Given this overall backdrop, let me discuss capital allocation. For 2025, it's going to be quite simple. We've told you that, besides funding our order book, our top priority is to get back to target debt to equity ratio of 2.5 to 1. We expect to be there by the end of 2025, perhaps even earlier. So in 2025, we are focused first on debt reduction. Once we hit our target debt to equity level, we will, as always, consider all capital allocation avenues, including incremental aircraft or fleet purchases, capital return to shareholders, M&A possibilities, whichever we deem the best deployment of capital for our shareholders. Let me conclude a bit off topic, but importantly, to comment on the tragic fires that devastated Los Angeles, our hometown recently. You all read and saw firsthand the unprecedented devastation in our city. Despite a number of our employees being evacuated, I am incredibly thankful, above all, that none of our employees suffered the loss of their homes or any other tragedies. During this period of crisis, I am proud that the ALC team maintained normal business operation during this time without skipping a beat. At the same time, we are all profoundly saddened by the loss of life and property of others less fortunate. Many of our employees spent time helping others in need, and while we offered financial assistance to all employees for any fire-related housing or other costs, most declined, wishing instead that ALC make a meaningful contribution to those who saved our homes and our lives. As such, I am pleased to advise that ALC is donating a half a million dollars to LA City and County Fire Departments with our profound gratitude and heartfelt thanks. So let me now turn the call over to Steve Hasee to offer some additional commentary.

Steve?

Thank you, John. I'd just like to underscore John's comments and my thanks to our team for their dedication to our company and our colleagues in the LA Fire. I'm very proud of the way our team responded in offering help and assistance to each other, as well as family, friends, and neighbors in their communities to overcome the tragic destruction witnessed in Los Angeles during January. We are very pleased to report record revenues and fleet size during 2024, and VIEW Air Lease has very well positioned for the current environment as we move forward in 2025 and beyond. Demand for commercial jet aircraft is extremely high, and our own fleet and large audiobooks consist of some of the most attractive commercial aircraft types on the market. There's rarely an airline customer needing that goes by way of not having asked to find more aircraft for them, and nearly all of our leases maturing are being extended at very strong, profitable lease rates. The phenomenon of lease extension rates exceeding initial new aircraft rates is truly exceptional. Second leases are typically signed with a step down in the lease rate given the depreciation of the aircraft over time. So it's a pretty remarkable environment where lease rates are actually stepping up on a second lease to such high levels. As John noted, I do also point out that the drag of the lower yield of the restructured leases that we did during the pandemic and early deliveries in the pandemic season should begin to weigh less heavily on our overall fleet yield as the lower lease rate turns end and they're extended at market rates with the existing airline or with the new airline. Demand for our new commercial aircraft is being further supported by exceptionally strong passenger traffic volumes. According to recent data released by IATA, total passenger traffic volumes rose by more than 10% during 2024 versus 2023, reaching all-time record levels. International volumes were the strongest segment on the market, rising an amazing 14% year over year, and practically all markets growing at double-digit or near very strong double-digit rates. Asia-Pacific remains the leading international market globally, rising 25% during the year. While this dramatic pace of growth is likely to so somewhat in the years ahead, as growth rates normalize, we continue to see this region as being a significant source of expansion worldwide. Latin America, Middle East, Africa, and Europe were growth leaders in the international segment last year. Domestic volumes, meanwhile, delivered a solid 6% rate of growth in the last year, which is more or less in line with the longer-term industry averages of approximately two times the pace of GDP growth on a global level. Passenger low factors also continue to rise, reaching approximately an average of 84% for the full year of 2024. These are exceptionally robust levels, breaking records in a number of regions and markets. Asia-Pacific region low factors, for example, achieve their record all-time high in 2024. 15 to 20 years ago, developing markets and international low factors were exciting if they moved into the high 70s range. Well, now some are approaching, and in some cases, even exceeding 90% low factor levels. High demand and low supply of commercial aircraft is certainly a component driving low factors to achieve these record levels. As a reminder, air leaks clearly benefits from strong passenger traffic volume expansion, though we are not dependent on it, as we focus on replacing aging airline fleets with new technology fuel-efficient aircraft and economically profitable leases. Much of the market focus on recent years has been on narrow-body supply-demand imbalances, but I want to expand on John's comment highlighting wide-body demand as well. Wide-body demand was more muted during the period during which the industry was recovering from the pandemic. But now, things have changed. We are seeing extremely strong international passenger traffic over the last few years, and in particular, the shortfall of wide-body availability is becoming increasingly apparent. This combination of accelerating wide-body demand, relatively modest production rates, and continued aging of the in-place operational wide-body jets is developing into what we expect to be a protracted shortfall of good wide-body aircraft over multiple years to come. John mentioned on the call the extension of six of our -300-yard aircraft to date in 2025. We're also seeing the strengthening demand supporting similar dynamics to our other wide-bodies, including our A330s coming up for leaf exploration. This backdrop of strong demand and limited production is appearing to repeat the same characteristics as witnessed in the narrow-body market already, which should definitely support strength in the value of our wide-body fleet. It's very difficult to foresee a significant ramping up of OEM production rates that could address this expected shortfall, especially with the ongoing delays in the 777X program. Wrapping up my comments, I'm very excited about Ehrlich's prospects for 2025 and beyond. We look forward to enjoying the higher lease rates on our new aircraft from our very sizable order book, along with robust lease rates on new extensions as a further normalization of the yield curve over time, which combined should be highly beneficial to our operating performance ahead. I will also remind you of the deep underlying value of our own fleet, which is carried at historical depreciated cost, as well as our order book positions, which are for slots well inside of any available aircraft from the OEMs and at prices that could not be duplicated at present. A significant part of the order book that we have today that is still yet to deliver were contracts that we negotiated in 2021. Our order book has significant value, and none of that is carried or reflected on our balance sheet at this time. I would like to now turn over the call to our CFO, Greg Willis, for his comments on our financial situation.

Thank you, Steve, and good afternoon, everyone. During the fourth quarter, Ehrlich's generated total revenues of $713 million, which was comprised of approximately $639 million of rental revenue and $74 million of aircraft sales, trading, and other activities. Rental revenue was in line with the fourth quarter of 2023, and lease yields remained essentially flat. Rental revenues have benefited from the growth of our fleet, offset by significantly lower -of-lease revenue. As a reminder, we recognized $60 million in -of-lease revenue in the prior period, which as compared to the current period was $6 million. As we have messaged before, we continue to anticipate lower levels of -of-lease revenue due to higher extension rates attributable to the supply shortage of commercial aircraft. As John discussed earlier, this environment has led to higher lease rates on extensions and has served to increase the value of these aircraft in our fleet. Sales proceeds for the quarter approximated $540 million from the sale of 14 aircraft. These sales generated $65 million in gains, representing roughly a 14 percent gain on the sale margin. We continue to expect to see healthy margins towards the upper end of our historical range of 8 to 10 percent, based on our current sales pipeline of $1.1 billion. These gains continue to reflect the significant value embedded in our fleet, which we carry on the balance sheet at depreciated cost. Moving on to expenses, interest expense rose by approximately $38 million year over year, driven by a 37 basis point increase in our composite cost of funds to 4.14 percent at year end. Increased financing costs and higher debt balances were the primary contributors to the -over-year increase in interest expense. However, as compared to the third quarter of 24, our composite rate declined slightly as we benefited from the Fed rate cuts in 24. At year end, roughly 79 percent of our borrowings were at fixed rate versus floating, just inside our 80 percent target. We continue to benefit from our largely fixed rate borrowings, which have meaningfully moderated the impact of the current interest rate environment. Depreciation expense continues to track the growth of our fleet. SG&A expense declined relative to the prior year, while also declining as a percentage of revenue relative to the prior year's quarter. It's also worth noting that we did benefit from a $67 million Russia insurance recovery in the fourth quarter of 23. Moving on to our financing activities for the quarter, in mid-October, we redeemed our outstanding $250 million Series A preferred stock, utilizing the proceeds from the lower cost $300 million Series D preferred stock that we issued in the third quarter. During the fourth quarter, we raised approximately $1.3 billion in debt financing. This was comprised primarily of a $1 billion three-year syndicated unsecured bank term loan, priced at $1.125. This capital was primarily sourced from new Asian banks, helping us to grow our bank group to a global base of 83 financial institutions. Additionally, I'd like to highlight that we have launched a $2 billion commercial paper program in late January this year. We believe our commercial paper program should serve to reduce our borrowing costs, as CP rates at present are approximately 80 basis points lower than the rate on our revolving credit facility. The CP program also represents another funding channel to further diversify our access to capital. Our -to-equity ratio at the end of the fourth quarter was 2.68 times on a gap basis, which net of cash on the balance sheet is approximately 2.6 times. Relatively flat quarter over quarter when adjusted for the impact of the timing difference of the preferred stock issuance redemption last year. And with our lower capex outlook for the next few years, we anticipate reaching our leverage target by the end of the year, which should increase our financial flexibility. Our strong liquidity position of $8.1 billion as of quarter end, $30 billion of unencumbered asset base, and $30 billion of contracted rentals remain key pillars of the strength of our business. As John and Steve outlined, we expect our portfolio lease yields to steadily increase at a moderate pace over the next several years. This is driven by an increase in yields on our attractively placed order book aircraft delivering over the next several years, higher than anticipated lease extension rates, given the strong market dynamics that we see persisting through the next several years, the continued seizing of our existing fleet, and a roll off of our COVID-19 leases. However, turning to margins, we still expect to experience some headwinds given the current elevated interest rate environment, which look to keep our adjusted margins in 25 generally around the levels we recorded in 24. With that, I'd like to turn the call back over to Jason for the question and answer session of the call.

Thanks very much, Greg. This concludes our prepared commentary and remarks. For the question and answer session, we ask each participant to limit their time to one question and one follow-up. Krista, please open the line for the Q&A session.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Katherine O'Brien with Goldman Sachs. Please go ahead.

Good afternoon, everyone. Thanks so much for the time. I think your comments on some of the puts and takes around lease margins and ROE, China's a bit of a headwind this year, some of the lease renewals are going to be a tailwind over the coming years. Obviously, it's a bit of a slow moving ship as you turn through the portfolio, but can you just walk us through, you know, what do you think gets you back to mid-teen adjusted pretext ROEs that you saw before the pandemic, or do you think that's achievable? And just any rough sense of a timeline would be great.

Sure. Thanks, Katie. I'll take that, and then I'll ask Greg to comment. I think, yes, I do think we are going to be able to change that mid-teens level that you spoke about, but it's going to take two to three more years. We've outlined the factors on the positive side and any headwinds, but given all that in consideration, I do believe that that's a reasonable timeframe outlook in the two to three year timeframe.

Yeah, and I think obviously the big question is around the timing of interest rates and lease rates as well. I mean, but at the end of the day, obviously when it comes to capital allocation too, those are other factors that we have, but I don't see any impediment of reaching our ROE targets over a longer period of time. It's just a question of how lease rates and interest rates evolve.

That makes sense. And then, you know, I'm assuming your comment on reaching your leverage target is based on just core business trends, but correct me if I'm wrong. You know, based on what you see in the market right now between incremental aircraft, M&A, or the value of AL shares, if you were to get back to your target debt equity faster than you currently expect, what would be the right choice for AL shareholders? Thanks.

We'll make that determination at that time, Katie.

But they're all on top of our list. Ideal capital allocation is very important with a view toward maximizing the value to our shareholders. And once we get to the 2.5 area, which will hopefully happen sometime in the second half of this year, our board will consider multiple scenarios, including initiating a buyback program.

And one other appendage to that, Katie, I mean, it should be obvious, but also, you know, when you're looking at capital return to shareholders, our current stock price has a major bearing on that. And so we never predict where that will be, but obviously, as you know, that's a key consideration.

Thanks, additional caller. Your next question comes from the line of Kerry Ma with Barclays. Please go ahead.

Hey, thank you. Good afternoon. So I appreciate the comments on the direction of the overall lease yield over the next few years, but when you kind of factor in the forward curve and your planned funding needs, should we expect the net spread margin to go up by a similar amount, or is that going to be kind of depressed by just overall funding or interest rates?

Greg? Yeah, I think for 25, we thought that we'd be around the same levels as we did in 24. A lot of that depends on what happens with interest rates. I mean, it's nice to see a nice steady up of the lease yields over time, which I think is a pretty powerful lever, but it does take time to make its way through the business.

Got it. Okay. And then on the leases that you extended in the fourth quarter, like, should we expect kind of the incremental pickup and yield, a rental revenue to kind of flow through in first quarter? And then any more color on the cadence of the remaining renewals? Thank you.

Yeah, I think those that were signed in Q4 will roll through in 25. And then as we work through the $5 billion of airplanes that are rolling off for the next two years, I think that will also provide an uplift to lease yields. So I think you should expect a steady grind higher on the top line. And then I guess finally, you need to factor in, we don't see the market changing given the supply, demand, dynamics that are in play. So we still see airplane shortages for long, extending three to four years based upon what's going on on the production side. So I think that's going to create a shortage of airplanes that is going to contribute to both aircraft values and lease rates being strong for the next several years.

Got it. Thank you. Yeah. And coupled Greg and John with the explorations of those leases that were renegotiated during COVID, as those progressively liberate us and allow us to get back to market lease rates, either by extension or repositioning those aircraft to USC, that will have a continual upward trend on the overall corporate lease yield.

Your next question comes from the line of Jamie Baker with JP Morgan. Please go ahead.

Hey, good afternoon, gentlemen. So an argument that well, a debate that Mark Streeter and I are having, because we don't really argue. Have you thought about even greater aircraft sales into this strong market, you know, as a means of, I don't know, potentially proving the value proposition of the equity? Or is the preference just to maintain the current level of sales and then, you know, wait for that, you know, pick up and deliveries at some point down the road? Does that make sense? Yeah.

Look, I think as I tell you, I think we are looking at that carefully.

Sorry, let me just quickly start. And then Steve will turn it over to you. As I said in my remarks, we're looking to be about one and a half billion dollars in sales in 2025. That's pretty close to the 1.7 billion we had in 2024. You know, sales programs are largely also opportunistic. In the prior quarter, I also talked about the fact that we're being approached from fairly significant buyers who want to do larger scale managed portfolios. So with all these factors, we have to look at opportunities and what's in front of us. But generally speaking, I think we're biased towards keeping about the same level of sales proceeds. It seems to be a good balance every year. If there is a strongly compelling reason why we should sell X amount of more, we'll take a look at it. But I think currently our plans remain about our current levels.

Okay.

Steve, anything to add to that? Yeah. Jamie,

that was that. Go ahead. I think we're also very interested in developing structures where we still maintain the relationships with the airline customer and bring in passive institutional investors into a managed structure vehicle. Where we have a small equity stake, but we have a large portion of the profitability and the lease, this position of those aircraft and a sizeable management seat during the tenure of these arrangements. So that could be an avenue where we may add some additional assets to and transfer them to these new entities.

Okay. That's helpful. All the good points. Thanks guys. And then second, and I guess this back to the comment that Greg made in the prior question about the steady grind. AirCap had this slide that showed the percentage of, let's call it, cold, medium and hot leases as a percentage of total for each year. The cold leases being the least profitable and reflecting aircraft that were placed at the bottom of the market. And again, Steve, you commented on this just a moment ago, but if we were to focus just on those less profitable leases at AirLease, would you have an estimate for 2024, 25 and 26 as to what percentage of the book they represent? Just trying to put a visual behind the burning off of these as they are being overtaken by the stronger deals that you've been talking about ever since John's prepared remarks. Hope that's clear. Thanks in advance.

Greg, you want to talk about that?

Yeah, we don't have the page in front of us, but we're familiar with the numbers and that's why we tried to give the color and the prepared remarks about a $5 billion worth of aircraft that were COVID era leases that are rolling off over the next two years. I think you can take that as a ratio of the overall fleet. That was our attempt to give some color about how quickly the lease yield can move forward. Okay, very helpful. Thanks everybody.

Thanks, Jamie.

Your next question comes from the line of Mushi Orenbach with TD Cowan. Please go ahead.

Great, thanks. Apologize for some of the background noise here, but as you look, John, at these lease renewals that are going on, are those getting better in this environment? In other words, if you think about where they'll be in 25 and 6 versus what you mentioned in terms of up slightly for narrow bodies and flat for wide bodies, is that improving in this environment? Yes,

the answer is unequivocally yes. The examples I gave on the extensions we executed in the fourth quarter on the single aisles where the lease rates were higher than the initial terms and about flat on the wide bodies, both of those are against the backdrop of typically lease rates stepped down after the initial lease term on new aircraft. This is a very significant element that we see and we see it continuing to strengthen in 2025 as we look at our leases that are subject to extension and that we're discussing right now. So we look at it on a very robust level.

But if you were at your leverage target today and everything is as it was today, in other words, a lower level of deliveries into 2025,

what

would be at the top of your list for deploying capital? Would you be looking at sale leaseback? Would you be looking at a stock buyback where the stock is? Could you maybe talk about that from a hypothetical standpoint?

Well, from a hypothetical standpoint, I would just say based on where our stock is today, we look at that very, very strongly and it's a compelling value today. Having said that, as I said earlier, we'll make that determination at such time when we get to our debt equity ratio, but just know very certainly that this is a very strong possible avenue for the company. But again, we withhold our decisions on that until such time as where we want to be.

Especially when you're selling aircraft at a 14% premium to their carrying values and your stock is trading below book. Right. Thanks.

Your next question comes from the line of Hilary Coconando with Deutsche Bank. Please go ahead.

Hi, thanks for taking my questions. So this question is more high level and not specific to your insurance situation. So I'm hoping you could answer it. But I was wondering if there's a ceasefire agreement between Russia and Ukraine, could there be any impact to the lessor? I guess, more specifically, do you think there's any chance that Russia can try to return the aircraft to the lessor, which I don't think the lessor would want? I don't know if that's even a possibility, but I wanted to see if there's any high level thought you could provide on a possible ceasefire.

Hilary, we're just not going to comment on that. Sorry.

Okay. Okay. I figured that's much. And then I guess when you talked about taking two to three years to get to the mid-teen level of return, are you assuming that interest rates remain at the same either at the current level? If there's an interest rate hike or if there's more cuts this year, will that two to three year assumption change?

Greg? I think a lot of it depends on where interest rates are. I think the mid-teen target is more of a longer term target because there's nothing fundamentally different in our business today. It's just going to take a little bit of time for that stuff to make its way through our $30 billion balance sheet. So if anything, I would emphasize that it's going to take time to make it work its way through. And some of it, of course, will depend on how quickly and in which direction interest rates move.

Also, the cuts in interest rates only affect our incremental borrowings. All of our existing bonds that were issued two, three, four years ago and do not roll off during this period, the interest rate on those bonds is what it is. We can't change that. But if interest rates improve for us, it will affect all of our short-term bank borrowings and any new bond offerings. But as Greg said, that number would have to be pretty substantial to have a major impact on the portfolio debt coming down proportionally.

Got it. Great. Thank you very much. Thank you.

Your next question comes from the line of Steven Trent with Citi. Please go ahead.

Yes. Good afternoon, gentlemen, and thanks for taking my question. A quick one here, or two quick ones here. First, when you think about what we know about tariffs today, I know there's not a lot of information, but is it conceivable that leasing could actually gain a little favor over aircraft purchases in the case of Airbus or Embraer customers here, that the impact of a tariff could be rolled over the long life of a lease as opposed to a one-time hit from purchasing on spot? And I know there's not a lot of information. I'm sort of high-level trying to get my brain around it. Thank you.

Well, the first answer is that any tariffs or taxes on these types of transactions involving leasing or financial lease, operating lease, the airline, the Leslie Airline operator, is responsible for any such tariffs or duties or taxes. The second point I want to make is that a very large percentage of Airbus aircraft are either manufactured in the US, components, engines, avionics, and same goes for Boeing. A lot of the components that go into Boeing aircraft are manufactured outside the United States. So it's going to be a pretty complex calculation to figure out what percentage of an Airbus H321 is US made, even if it's built in Europe versus being built here in Mobile, Alabama. And the same thing with Boeing. I mean, big components of the 787s and 737s are manufactured outside the US.

Very helpful. Definitely appreciate the color. And just one other high-level. One for you here. I think on some of the previous calls, you guys have not expected aircraft supply to normalize for a couple of years. And what you're seeing in the tea leaves from your suppliers, have your views on that changed at all? Do you still think we're a couple of years away from normalization of aircraft production? Thank you.

No, views have not changed whatsoever. We see this as a multi-year. Over multi-years, we don't see any change at all. We think aircraft are still going to be a short supply. The manufacturers are not going to achieve nearly the rate of production that they would want to achieve or that would need to make up for the last several years. So we're quite convinced we're in this for a fairly long period of time.

Okay. Appreciate the color. Thank you.

Your next question comes from the line of Ron Epstein with Bank of America. Please go ahead.

Hey, good evening, guys. Hi, Ron. So maybe just following up on Steve's last question, do you have any sense when the industry will actually be back in equilibrium? I mean, how long is it going to take the industry to dig itself out of the hole in terms of the shortage of supply?

If anything, Ron, we have been stretching out that time frame, not shortening it. I'll give you an example. The appetite of the airlines for spare engines to cover for engines that are in the shop for much longer periods and with longer lead times to a overhaul facility to even just get in, creates a shortage of new engines because today a larger percentage of the production of CFM leak, GTF engines, and even Rolls Royce Trent engines are being allocated to cover airline operations today, AOGs today. And so that is a constraining factor on both Boeing and Airbus getting enough engines to be able to increase production rates. So that's one factor. The second factor is that during the pandemic, a lot of the smaller subcontractors for both airframe engines and avionics and BSE seats and galleys reduced their staffing and cut back on their infrastructure. And now they're being asked again to ramp it up, which means they have to invest more in machinery and digital tools, get their hands on labor that's trained. And so those are all factors that are limiting the ability of the supply chain to get back to what you said was pre-pandemic. And it's not an overnight process, as you can imagine. But I would say the engine situation is the most visible to us in all the discussions we have with airlines.

And would you say the airlines are getting accustomed to flying older equipment, meaning that maybe your leases will just last longer for the foreseeable period? Yeah,

we're seeing that particularly in North America, where with the refurbished old Northwest Airlines A320TO that's more than 25, in some cases 30 years old, with a refreshed interior, the customer who gets on a jetway doesn't have any clue how old that aircraft is because most of them have been freshened up. So a lot of the 767s, earlier generation 737s, A320s, A321s are staying in service longer than what was originally anticipated. And this is to cover growth in traffic as well as the delays and the deliveries that they've contracted for us. All of that leads to us being asked to provide more aircraft than we have. Where supply is limited and demand far outpaces our ability to get enough new airplanes.

And then maybe just one last related question. And again, this would be constrained by the supply chain, of course, but kind of all else being equal. Do you think that the industry needs a third supplier now? Because it seems like two isn't enough.

Well, if you look at the size of the overall commercial jet population and the forecast that it's going to grow to about 40,000 airplanes in the next six or seven years, there's definitely room for a third party. But I think that third party, and the ones that that's talked about most of the Embraer, would need a partner in that program that has financial key pockets. But that is one possible alternative. And I know the guys down in Brazil are working on that very hard. The big question in our minds, Ron, is what engines would go on that airplane? Because if it's the same old catalog, Leap, 1A, 1B, or the current GTF, which hopefully will get upgraded in 2027, what engine would somebody put on that? Because that is a big factor. There needs to be a steps change improvement in the propulsion system. Not so much on fuel burn, but more on reliability, dependability, and life on the wing.

And that's the big question. And I think that's the big question.

That makes sense.

Cool. All right. Thank you. Thanks, Ron. You're

next. Your next question comes from the line of Katherine O'Brien with Goldman Sachs. Please go ahead.

Oh, thanks so much for the follow up. I just wanted to come back to the 5 billion number you gave. It was really helpful just helping us think through what percentage of book values tied to COVID and releases over the next couple of years. Just in very rough numbers, understanding the backdrop might be different today. It doesn't sound like that's what you guys think. Sounds like you think it might even be better. But if you could snap your fingers and write those leases at today's lease rates, what would the upside be on that pool of aircraft? Thanks so much for the extra time.

It's hard to say because it depends on the airline, the length of the lease extension, or the economics of shifting the aircraft to another airline. But the numbers could be anywhere from 30 to 50% higher than the lease rates we currently enjoy. So as these leases come off that sort of charity period, I call it, to our customers to keep them alive and kicking, as those progressively come off between now and the fourth quarter of 2026, we are going to see marked improvement in the lease yields on those aircraft, especially since they're being depreciated. So the factor of the depreciated cost versus lease rate is going to be improving every quarter once these charity periods are over.

Yes, so doubly beneficial to lease yield. Greg

can give you color. Greg can comment on how much of this comes off every quarter or every six months.

Yeah, I mean, we gave some color that we thought that would modestly increase over the next four years. I think what that means is somewhere between 150 to 200 base points in yield improvement over that period of time, over the four year period.

Per year, Greg, or the total period? No, the total.

Keep in mind, Katie, we've got basically just about a $30 billion net book of aircraft. And so these significant lease rate increases are very, very helpful. But it's trying to steer a pretty big aircraft carrier. So it just takes a little bit more time to push the carrier around versus a little speedboat.

Understood. Thanks again for the extra time.

Sure. And that concludes our question and answer session. Mr. Arnold, I'll turn the call back over to you.

Thanks, everyone, for participating in our fourth quarter call. We look forward to speaking to you again next quarter. Krista, thanks for your assistance. Please disconnect the line.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.