Air Lease Corporation

At this time, I would like to welcome everyone to the Air Lease Q1 2025 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 the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, 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, Audra, and good afternoon everyone and welcome to Air Lease's first quarter 2025 earnings call. This is Jason Arnold. I'm joined today by John Ploeger, our chief executive officer and president, and Greg Willis, our executive vice president and chief financial officer. Earlier today, we published our first quarter 2025 results. A copy of our earnings release is available on the investors section of our website at .airleasecorp.com. This conference call is being webcast and recorded today, Monday, May 5th, 2025, 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, 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 assumes no obligation to update any forward-looking statements or any 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 Kent 10Q we issued today. This release can be found in both the investors and press section of our website at .airleasecorp.com. 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, an unauthorized recording of this conference call is not permitted. I'll now turn the call over to our Chief Executive Officer and President, John Puger.

Well, thanks, Jason. Good afternoon, everyone, and thank you for joining our call today. During the first quarter, Airlease generated revenues of seven hundred and thirty eight million and three dollars and twenty six cents in diluted earnings per share. Results benefited from the continued expansion of our fleet, strong gain on sale revenue and Russia fleet insurance settlements. We were very pleased to receive insurance proceeds of three hundred and twenty nine million during the first quarter, and we have received an additional two hundred and twenty seven million just last week. Relative to relative to last year's first quarter, results were partially offset by higher interest expense as compared to the prior year, along with recognizing expenses related to Steve Hodges retirement. Overall, total revenue, fleet net book value and book value per common share reached all time record levels in our company's history during the first quarter. Greg will provide more detail and color on our financial results in his remarks. We purchased 14 new aircraft from our order book during Q1, adding roughly eight hundred million in flight equipment to our balance sheet and sold 16 aircraft for 521 million in sales proceeds. The weighted average age of our fleet rose slightly quarter over quarter to four point seven years, while weighted average lease term remained unchanged at seven point two years. Fleet utilization remains at one hundred percent. Our outlook for deliveries this year remains consistent with what we told you last quarter at three to three and a half billion of new aircraft delivered from our order book, and we are expecting around eight hundred million of deliveries for the second quarter. I do want to note that we've recently received additional delay notifications from Airbus, primarily impacting our two thousand twenty seven and two thousand twenty eight A320 and three twenty one Neo deliveries by about a year, which you can see reflected in our expected deliveries table in our ten queue. Our sales pipeline remains solid at seven hundred and forty one million, all contracted at healthy gain on sale margins. We continue to expect around one point five billion of aircraft sales for two thousand and twenty five, with around three hundred million anticipated to close during the second quarter. Let me now address global passenger air traffic and tariffs. Subsequent to the US administration announcing tariffs and tariff policies, airlines primarily in North America began reporting softer passenger traffic with most airlines in the USA withdrawing or reducing their forward guidance. And United Airlines in particular provided two different forward guidance paths. Outside of North America, a couple of weeks ago, I was in Asia visiting six of our large airline customers in Malaysia, Vietnam, Taiwan, Republic of China and Thailand. The following week I was in Europe doing the same thing. The airlines in Asia all report continuing strong overall passenger traffic and forward bookings, but with some preexisting trans-Pacific economy for our witness, which well preceded the terrorist announcement. Fluctuating cargo demand was cited as the most notable impact after the US terrorist announcement. Their continued need and demand for more aircraft remains consistent. They expressed sentiment that it was highly unlikely their governments would enact reciprocal tariffs that included aircraft being imported to their respective countries. Turning to Europe, our largest top-tier airline, CXC, customers in France and the Netherlands advise continued strong passenger bookings, but with some slight fare discounting in economy class and a good summer booking, including travel to the US. The Lufthansa group earnings that which they released on April 29th cited improved positive adjusted EBITDA and Q1 and confirmed positive outlook for the full year. Carson Sporer commented, quote, global demand for air travel continues to grow. Despite all the geographical uncertainties, we therefore remain on course for growth, are optimistic about the summer and are sticking to our positive outlook for 2025, end quote. Both Ryanair and Wizz last week published positive results and good traffic levels as well. Like airlines in Asia, European airlines echo continuing robust demand for aircraft. The Middle East also remains strong. As a result, lease rates continue to trend higher while extension activity and forward placements continue to remain very robust. Traffic volume growth globally remains above the pace of global GDP growth year to date. I also want to remind you that fuel prices have been trending down and the weakening dollar benefits our foreign lessees as our leases are paid in US dollars, as is fuel globally, as are most major maintenance and repair organization buildings, even outside the US. I highlight these discussions I had in Asia and Europe and our view on the Middle East to reemphasize to you that 87 percent of our business is outside of North America, which includes the US, Canada and Mexico. And there is no overall change in the aircraft demand picture. Also to highlight that with Airbus and Boeing being far from their aspirational production rates, the supply of new aircraft remains limited and well short of the rates needed to meet their order book commitments. Aircraft supply constraints look to continue for the next three to four years, if not longer. Tariffs would further weaken the supply chain to the air airframe OEMs. This means that global airline fleets will remain well behind the power curve, replacing older aircraft fleets. The cessation of max deliveries following the max crashes and fleet grounding accelerated the replacement shortfall. Tariffs clearly are a key focus in the markets and industry, and I do want to make a few comments. Air lease is not responsible for tariffs imposed on aircraft importation. As part of our lease agreements, tariffs are contractually the responsibility of the airline customer importing an aircraft into their country. The airline is the importer into their own country, not us. As of now, Air Lease has no aircraft delivered to countries where tariffs applicable to commercial aircraft exist or have been announced. We have no aircraft going to China, and in fact, our total China exposure is now de minimis. Also, many of our foreign airline customers are wholly or partially owned by their respective governments, and we do not believe it likely that those airlines would have reciprocal tariffs imposed on aircraft importation. Examples in 2025 include Royal Air Maroc in Morocco, Oman Air in Oman, Aerolinius Argentinus in Argentina, and Croatia Airlines in Croatia. Then there is the potential impact of increased pricing on aircraft, engines, and aircraft installed equipment such as seats. Air Lease has long-term forward purchase agreements covering pricing in all of these cases for new aircraft, including escalation caps with the airframe OEMs. Let me remind you that aircraft maintenance costs are the responsibility of the airline and our leases, so any escalating maintenance costs which might result from tariffs are the airline's responsibility. The potential impact from tariffs on wider economic recession or high inflation, and indeed, it would need to be global impact on air travel outside North America, remains to be seen. At this point, it's just speculative. However, I highlighted earlier the continued strength we are seeing broadly in Asia, Europe, and the Middle East. There is a great deal of uncertainty about tariffs and their impact, and as most of you know, news flow on the topic changes from day to day, if not hour to hour at times. However, I would urge caution on too much speculation at this juncture. I believe tariffs will get sorted out. Any measures that would seriously threaten deliveries of Boeing airliners to Europe, for example, on top of China, would be a serious challenge, even if it's the airline's responsibility. You saw recently that Michael O'Leary at the time of the 2009 era threatened cancellation of 330 Boeing orders if tariffs were imposed. If tariffs were to remain long term, it could ultimately serve as an incentive for US aerospace manufacturers to look outside the US to start additional production lines for product delivery outside the US. That would be the complete opposite to the US administration's stated intention for manufacturers to produce in the US, and I believe the current US administration wants Boeing and US aerospace companies to be global leaders with commanding market share. Turning back to air lease, the significant insurance recoveries we have received to date puts us at our target debt equity ratio. This now allows us to consider a wide range of capital allocation, and we are doing so, including organic and inorganic growth and returning capital to shareholders. We are awaiting potential further insurance recoveries and are also keeping a close watch on the debt capital markets during this time of great volatility. Carefulness and patience have been a hallmark of air lease that has served us well, and our ultimate goal is driving shareholder value over the long term. In summary, we remain very positive about air leases prospects for 2025 and beyond, in spite of recent geopolitical and potential macroeconomic crosswinds. And in closing, I'd like to recognize and honor Steve Hase on his retirement, which was effective last Friday, May 2nd. Few, if any, have had the impact and influence on our entire industry, on aircraft design, and passion for the airline industry that he has. He is one of a kind. His vision catapulted the entire aircraft leasing industry, and his impact will be felt for decades. You all know that Steve and I have worked hand in hand together since 1986, just about 39 years. Steve has been an amazing mentor, friend, and colleague. Most everything I learned, I learned from him. It's been an amazing ride, but that ride is not over. Steve remains our chairman for another year. We want to make Steve and our shareholders proud, and that is exactly what we intend to do. We could not have a better management team to make that happen. I'll now turn the call over to our CFO, Greg Willis, to offer his further commentary and details on our financial results.

Greg? Thank you very much, John, and good afternoon, everyone. During the first quarter, Air Lease generated total revenues of $738 million, which was comprised of approximately $645 million of rental revenue and $93 million of aircraft sales, trading, and other activities. Rental revenue rose 5% relative to the same quarter last year, and lease yields remained essentially flat relative to that period, though rose modestly relative to the fourth quarter. Rental revenues benefited from the growth of our fleet, offset by approximately $13 million less in -of-lease revenue as compared to the prior year. We continue to anticipate lower levels of -of-lease revenue due to higher extension rates, though as an offset we should continue to benefit from these assets as we negotiate higher lease rates on extensions, which ultimately support higher values when it comes time to sell the aircraft. We continue to expect the portfolio yield observed in our financial statements to continue to trend higher over the course of this year, as well as trend steadily higher over the next three or four years. Sales proceeds for the quarter totaled $521 million from the sale of 16 aircraft. These sales generated $61 million in gains, representing roughly a 13% gain on sale margin. We continue to expect to see healthy margins towards the upper end of our historical range of 8 to 10% based on the current sales pipeline. Strong gains continue to reflect the significant value embedded in our fleet, which we carry on the balance sheet at depreciated cost. Outside of gains on sale, the remainder of the sales trading and other line items are consisted primarily of managed fee revenue and income earned from sales type leases during the quarter. Moving on to expenses, interest expense rose by approximately $28 million year over year, driven by a 23 basis point increase in our composite cost of funds to .26% at quarter end. Increased financing costs and modestly higher debt balances were the primary contributors to the year over year increase in our interest expense. It's worth noting that our debt balances have declined from year end as a function of the deleveraging effects of our insurance recovery. Our composite investment rates remained elevated. At the end of the first quarter, roughly 78% of our borrowings were at fixed rates versus floating, just inside of our 80% target. We continue to benefit from our largely fixed rate borrowings, which have meaningfully moderated the impact of the elevated interest rate environment. Depreciation expense continues to track the growth of our fleet, excluding the effect of $17 million in one-time expenses related to Steve Hossie's retirement, $9.2 million of which was included in the SG&A line item and $7.4 million in Stockholm. SG&A and Stockholm rose only modestly year over year, excluding these expenses. SG&A as a percentage of revenue was flat relative to the fourth quarter and down compared to the prior year's quarter at around 6.8%. We expect this number to trend lower over time as the fleet continues to expand and elevated legal expenses are expected to decline. As John mentioned earlier, we received approximately $329 million in Russia fleet insurance settlement proceeds along with $3 million related to the equity interest in our managed fleet during the quarter, in total representing $2.36 per share, helping to increase our book value per share to $62.32. At the additional $227 million received last week, we reflected in our second quarter earnings and will serve to further increase our book value per share and our overall capital position along with additional recoveries that we may receive. Moving on to our financing activities, as we have previously stated, we are able to largely self-fund our order book with expected operating cash flow and aircraft sales in 2025 and 2026. We now believe that we are largely able to self-fund our order book with expected operating cash flows and sales. Therefore, the primary financing needs that remain are related to the refinancing of existing debt. Additionally, I'm pleased to report the upsizing and one-year extension of our revolving credit facility. We are able to increase the size of the facility to $8.2 billion from $7.8 billion with a final maturity in 2029. I'd like to thank our 52 bank partners in the facility, many of whom have been with us since the inception of the facility, along with a number of new banks that we have added over the years for their support. This facility provides critical liquidity to the business that allows us flexibility as to when we look to access the debt capital markets to attractively refinance our existing debt. As John just noted, we have reached our -to-equity target ratio at the end of the first quarter. We do expect to see some movement in this ratio from quarter to quarter as we continue to take delivery of aircraft from our order book and the timing of aircraft sales. But nonetheless, it is an important milestone for us as a company. As we look forward to receiving additional insurance recoveries, we should have a more complete view of our capital allocation or capital position. We anticipate having more financial flexibility over the next several years as compared to the constrained position that we were previously in. As always, our strong liquidity position of $7.4 billion, $30 billion of unencumbered asset base, and $29 billion of contracted rentals continue to remain key pillars of our financial strength for our business. As John highlighted already, we are very excited by the shifting direction of two headwinds that have negatively impacted our business over the last several years, the drag of lower yielding COVID-19 leases and the Russia fleet write-off. As these headwinds continue to resolve, we would expect profit margins in our ROE to expand in the years ahead. With that, I'll turn the call back over to Jason for the question and answer session of the call.

Thanks, 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. Audra, 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, press star, then the number one on your telephone keypad. Again, we ask that you please limit yourself to one question and one follow-up till everyone an opportunity to ask a question. We'll go first to Catherine O'Brien at Goldman

Sachs. Good afternoon, everyone. Thanks for the time. So, John, I know you gave a detailed account of the latest encouraging conversations you've had with lessees around the globe post tariffs. But are there any real-time examples of lease extensions or order book placements you could share that bolster your confidence that the airlines are continuing, you know, with business as usual on their longer-term fleet planning post some of the tariffs noise, you know, just on extensions rates or any encouraging on where lease rates are on extensions or new lease placements? Thanks.

Sure. Well, I can give the example last week. For example, we signed an extension term sheet with a major airline in Asia on two A330-300s and one A321. With those A330-300 lease rates being, oh, I would say a full 50 percent or so above what they were previously. Now, previously, I have to note that those those leases were extended during COVID. So 50 percent sounds like a lot. But I want to tell you that it's reflecting effectively of a lower rate that was enacted during COVID. So that's just a recent example from last week. And we have others. We have currently some additional wide body extensions that we anticipate closing this coming quarter, which will which will tell you about. And those have also a similarly nice step up from where they were before or as a percentage of or above the current appraised lease rate estimates for each of those aircraft types.

That's great. Thanks. I know you said you can't take any questions on the ongoing litigation of your Russian insurance claims, but you've made several references to, you know, any potential future settlements in the press release. You know, you know, you've got 82 percent already recovered. I guess we assume that that's not the final number is the intention to pursue the full remainder of the claims. Thanks. All I can

tell you is that we have a process that's ongoing and we are in litigation. So I really can't comment any further. However, a total additional capital that we would be looking for allocation is dependent upon totally what we have available and that the insurance recoveries have been significant. And we therefore want to remain. We wait and see how much more if any we'll be getting during the course of the next several months or year, whatever, however long it takes.

Thank you.

Sure.

We'll move to our next question from Hillary Caccanando at Deutsche Bank.

Hi, thanks for taking my question. In terms of capital allocation, would you be able to just talk about like your priority, whether it would it be buyback or M&A or increased dividends or, you know, et cetera? And, you know, what are you watching or considering to make that decision? And with that decision coming the third quarter or fourth quarter? Thank you.

Well, I would say we are still considering all of the above. I said in my remarks, you know, we're including organic and inorganic growth as well as share repurchase. So it's hard to indicate where we would fall on those. We have a lot of things that we're that we're looking at. Just requires a bit more patience and we are awaiting some more insurance developments as they may happen. So I can't really tip the hat today as to which way we would be looking to. But suffice to say that everything is under consideration today.

Got it. Thank you. And then just regarding tariffs, you know, as you mentioned, you said, you know, airlines are the ones that have to pay the tariffs, you know, as they take delivery and cross the border. But do you do you expect airlines to reach out to you and, you know, kind of ask you to work with them to kind of, you know, ease the burden and kind of, you know, provide some sort of solution with tariffs?

Well, do you

expect to work with them?

Let me reemphasize what I said in my prepared remarks that as of today, we have no aircraft delivery scheduled to any country that's announced a reciprocal tariff on Boeing aircraft. Should that come in the future? You know, airlines could ask for anything and we will talk with those airlines, but clearly it's their contractual responsibility. In terms of Airbus deliveries, for example, this year, we have three airplanes going to the US airline, but those airplanes are all being built in Mobile, Alabama. So they're not being imported. They're domestic purchase aircraft. So, so far, the answer is no, nobody has come to us. I don't anticipate it, especially I don't expect it after my travels in Asia and Europe, because I think demand is very, very strong. So, look, we'll have to see as the time comes, but that's why I also cautioned about too much speculation looking forward. This is a very unfolding situation. But I do think it's going to be resolved.

Okay, that's great to hear. Thank you very much.

Sure.

We'll go next to Moshe Orenbach at TD Cowan.

Great, thanks. John, you talked a little bit about the potential for share repurchase. And you also in your prepared remarks alluded to like organic growth opportunities. I was hoping you could maybe drill down on some of that, some of that possibilities. I mean, it felt like in the past, you kind of shied away from a lot of that just because you had to keep the capital there in case the order book delivered, you know, in line with expectations. Now you'll be, you know, a little bit more flexible, I would assume in terms of pursuing other sorts of things. And if you could kind of just talk about that a little bit.

Yeah, we are very flexible. Thanks, Moshe on considering, you know, other things. You know, there's just a wide variety of possibilities. And you've cited organic growth, that is a possibility, but I won't say it's a probability necessarily. You know, we buy airplanes when the time is right. There are some used aircraft fleets or segments of fleets, which may in fact become available, we would be compelled to look at that as another example, not just order book editions. So I would just say that we are we are very carefully considering all these categories of forward capital allocation. We're very happy to have that flexibility. I don't know, Greg, you have any other color you'd like to add?

I would just add that on the order book side, it's a little bit more challenging, as John indicated, just given the how full the Boeing and Airbus backlogs are. Right. I think you look to see us have a lot of discipline about the purchase, ordering around ordering new aircraft. And we order when the pricing is right. And when the order books are full with airline orders, it's hard to extract the best the most amount of value. So of the options, that one's harder to get to, but we have to look at everything.

Let me add one more comment, Moshe. You know, of course, China's position on taking Boeing aircraft, and you know that Boeing is reacting accordingly. So for example, I'll just give you a hypothetical. There could be some air some of the Chinese aircraft that were built or nearly completion being built. And if we were to be approached, or have a discussion with a Boeing company, and or other airlines who may want those aircraft, you know, given the right deal, that's an example of an opportunity that we might we might explore for organic growth.

Got it. And maybe just as a follow up, I know it's early since this is only the first quarter since you announced kind of the expectations of yield improvement over, you know, a multi-year period. But can you maybe, you know, you or Greg put in context, you know, how you feel about Q1 relative to that and how we should think about, you know, the progression and, you know, calendar 25?

Yeah, Q1 was tracking our models nicely and things are the new placements and the extensions are all going according to plan. So we're turning very nicely towards our internal targets that allowed us to make those longer term projections. Okay, thanks very much.

Our next question comes from Jamie Baker at JP Morgan.

Hey, this is James on for Jamie. First question, just a simple two part credit question, I guess. Is the leverage target reaffirmed at 2.5 or is that going to come lower now that you've met it? And then just on the revolver upsize, was that procedural or was it opportunistic? Is there anything to read into that there?

Sure, I'll take it. The revolver, we tend to amend and extend every single year. We've been growing it every single year and we've had a lot of bank demand and that's why we increased the size to 8.2. It provides us a ton of liquidity. So we feel very good about that. And then James, can you remind me of your first question?

Yeah, just on the leverage target.

Yeah, no, our leverage target has been 2.5 since we accepted the company and there's been no change to that target.

Great, thanks, Greg. And then my second question, on the last earnings call, you mentioned the opportunity for a new managed structure vehicle. I'm just wondering if there's anything in the macro that would impact timing of that structure being set up or, you know, just anything, any color you share there?

All I can say is that the managed vehicles take a long time to put together. We look at a lot of options and it's something that we've been wanting to do for a while is to increase our management, manage fleet, especially as some of the older vehicles mature.

Okay, that's it for me.

Thanks. Thanks, James.

And next we'll move to Stephen Trent at Citi.

I guess, good afternoon, gentlemen, and thanks very much for taking my question. The first kind of a follow up on Mochi's question, could you help me understand on the net margin expectations? You've sort of previously telegraphed that they should be kind of flattish year on year, I know, and Mochi, they actually improved a little bit. But, you know, any high level view on how you're thinking has changed there or maybe not changed, you know, excluding the the receipts from the insurance and what have you. Thank you.

Stephen, there's no change to our expectations for profitability this year.

Okay, appreciate that. And just as a follow up, I was trying to understand your, your pre-tax margin went up year on year. But if I'm reading this correctly, your pre-tax return on common equity went down a little bit. And I was just wondering if that's timing related with the, you know, the Russia claims that that came in or if there was something else happening. Thank you.

Yeah, I think it's important to look at the adjusted numbers. But I think what's driving the differential between margin and ROE is the fact that ROE is a trailing 12 month figure and that gets skewed by the timing of aircraft sales.

Oh, perfect. Thanks for the color.

No problem.

And that's that concludes the question and answer session at this time. I'll turn it back over to Mr. Arnold for any closing remarks.

Thanks, everyone, for joining our first quarter call. We look forward to speaking with you again next quarter. Audra, thanks very much for your assistance.

You're welcome. And this concludes today's conference call. Thank you for your participation. You may now disconnect.