Good day and welcome to the AerCap Third Quarter 2020 Financial Results Call. Today’s conference is being recorded and a transcript will be available following the call on the company’s website. At this time, I would like to turn the conference over to Mr. Joseph McGinley, Head, Investor Relations. Please go ahead, sir.

Thank you, operator, and hello, everyone. Welcome to our third quarter 2020 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Pete Juhas. Before we begin today’s call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation, other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AerCap’s earnings release dated November 10, 2020. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Aengus Kelly.

Thank you, Joe. Good morning, everyone. And thank you for joining us today for our third quarter earnings call. There are four key points that we would like to address on today's call. First, while there are still many challenges facing the aviation industry, we have seen a significant increase in air travel and in our cash flows from the lows of April. The positive developments announced yesterday regarding the near-term availability of a vaccine should provide a further boost to the industry. Second, throughout the pandemic, AerCap has taken numerous proactive steps to manage through this environment, including executing over $12 billion of liquidity initiatives, which resulted in the company ending the quarter with our strongest ever liquidity position. Third, COVID-19 is accelerating the pre-pandemic trend of airlines moving into new technology aircraft, of which AerCap is the world's largest owner. And fourth, we are confident that as the recovery continues, there will be ample opportunities for AerCap to deploy its capital. In March and April, there was widespread concern about whether air travel had permanently changed. Similar concerns prevailed immediately after 9/11 and during the depths of the financial crisis. In those cases, we heard the same extremely bearish predictions regarding the imminent demise of air travel. But after each of these events, air travel recovered, and it is recovering today. Over the summer, we saw rapid and significant increases in air travel all over the world in a relatively short period of time. In Europe, the number of flights increased from 2,000 a day in April to almost 19,000 a day by the end of August. In the U.S., traffic increased from a low of 87,000 passengers a day in April to almost 800,000 a day by early July. And last month, there were over 1 million…

Thanks, Gus. Good morning, everyone. In the third quarter, AerCap had a net loss of $850 million or $6.66 per share. This included a number of special non-cash items, including a write-off of $915 million related to flight equipment, a write-off of $58 million related to goodwill, and $128 million of mark-to-market movement on our Norwegian shares. We also recorded a $43 million loss on debt extinguishment related to the repayment of near-term debt maturities, which will be offset by lower interest expense in future quarters. Excluding these special items, our net income for the third quarter was $158 million, and our earnings per share was $1.24. Our total revenues for the third quarter were $1.27 billion compared to $1.194 billion last year. Basic lease rents were lower due to lease restructurings, aircraft transitions and the impact of airline bankruptcies during the quarter. This includes the impact of cash accounting, which was around $100 million for the quarter. We have placed all of our lessees that are currently in bankruptcy proceedings and other restructurings or where we otherwise believe that the rent isn't probable of collection on cash accounting, which is where we only recognized payments that we received during the quarter as revenue. Our maintenance rents were $91 million in the third quarter, which was a little higher than last year due to lease terminations. In terms of aircraft sales, during the third quarter, we sold 7 of our owned aircraft for a total of $63 million. The average age of the aircraft we sold was 19 years old. Our net gain on sales for the quarter was $7 million, which was lower than last year, primarily due to the lower volume of sales in the quarter. Our other income was $31 million for the third quarter, mainly due…

[Operator Instructions]. We will move on to our first question from Helane Becker of Cowen.

Just a couple of questions. I know that you look at the values of the aircraft. Can you just talk me through the -- how you came to those numbers for the majority of aircraft that you wrote-down? Is it just the discounted cash flows that came along?

Sure, Helane. So when we do our impairment test, we're looking at the long-term cash flows associated with each aircraft. And so we're projecting -- you look at the lease rents that they're on today, you look at the future lease rents that we expect for those aircraft, maintenance rents, all cash flows related to it. And so you're evaluating those and comparing those to the book value. And basically, if you have a shortfall there and your expectations, then you write it down to the discounted value. And really, what we saw with the A330s and 777s, was airlines increasingly exiting those types of aircraft, and we expect that, that will have an impact on their lease rents in the future.

Okay. And then I don't know about the Norwegian investment. I think you have somebody from the company on the Board, and it looks like they're going to have some trouble getting through the winter. And I was just kind of wondering how you're thinking about that and if you're thinking about kicking your aircraft back there?

Let me talk about the aircraft first. And we have already leased 2 of the airplanes we have with Norwegian two 787s. They're under lease contract with a new carrier. And the remaining 787s we are marketing at the moment as well, as these are new technology wide-bodies, the most in demand, we will get those leased alone.

We will now move on to our next question from Jamie Baker of JPMorgan.

Gus, could you hazard a guess when you think the leasing industry crosses that 50% threshold of the global fleet? And also I agree with you that we're going to see greater use of leases as airlines try to variabilize their cost structures, recognizing that's not an actual English word, but you get the point. I suspect that CFOs are also going to gravitate towards shorter duration. Do you agree with that? And how does that change your business if duration declines by several years?

Related to the first question, Jamie, the pace at which operating leasing will hit 50%, the velocity has increased. There is no doubt in my mind that as airlines come out of this crisis that their number 1 focus will be deleveraging their balance sheet, particularly those who have taken on governments’ involvement. As governments involve, and so, of course, handicap their strategic capability and at a self-interest level, of course, their own ability to enumerate themselves. So that will definitely occur. We saw that happen in financial crisis with all the banks. I do not see airlines setting billions of dollars to falling in airline. I just don't see it. But what they will do because what we are seeing is an acceleration of the move into new technology airplanes, particularly on the wide-body side. So we will see an increased use of leasing there. How quickly they'll get to 50%? It could be -- I would say, Jamie, we will see it in the next 3 years. I'll say the next 36 months we'll see that because airlines also realize the massive value that leasing produces in terms of optionality for an airline fleet management strategy. So -- and around the world, airlines that used predominantly on almost all their fleet without question they said we will use more leasing, I think that will definitely occur.

And on lease duration?

On the lease duration, that will be a negotiated one, Jamie. Of course, it will depend on the bargaining position of both counterparties. The lessors will push, no doubt for the longest term and lessee will want the shortest term. I think that will just be a question of the varying leverage of the 2 parties.

That's great. And second question, and it's a bit of a follow-up to Helane's question. You decided to leave aircraft at Norwegian. But when we -- going forward, let me see how to ask this. I mean, are you -- how are you handling stress at this point? Are you inclined to pull out aircraft earlier? Has the playbook changed with the pickup in flights as you look at some of the airlines, particularly in the Eastern part of the world? I mean, basically, are you more courageous now given what you're seeing in the market?

Jamie, the approach hasn't changed. As you were going through April, May, June, it was very difficult to find a home for airplanes at that point. So if you could store them, keep them on an operating certificates, have the storage costs taken care of, the maintenance costs taken care of associated with the airplane, it made more sense, provided the airline was still operating to leave the aircraft there. And then as you found homes to take them out. We have taken -- we've already signed up two 787s out of Norwegian to a new customer, and we are marketing the balance of them as well.

We will now move on to our next question from Ross Harvey of Davy.

My question is on impairment charge. I'm just wondering, can you give us a sense as much as you can of the scale of future lease reductions or remaining useful life change that drove the impairment in this quarter and whether they were applied to all the 777s and 330s? And maybe Pete as well, you alluded to this, but more broadly, I wanted to clarify, did the review suggest to you that there may be impairments over the next, say, 6 to 12 months on the current tech narrow-bodies or new tech wide-bodies? Or was there kind of a very sufficient margin of safety there?

Sure. Thanks, Ross. So -- well, first off, we looked at all of the aircraft in our fleet on a plane by plane basis. So it was a comprehensive review. It wasn't just the A330s and 777s. It was every plane that we looked at. And as I said, we look at the cash flows for each of those aircraft. We stress those cash flows given the current environment, given lease rents today as well as what we expect the impact of the COVID-19 pandemic to be on lease rents in the future. And so as you would expect, that results in lower lease rents today and for most aircraft types, almost all, you see a recovery in the future. For those A330s and 777s, we believe that there's a permanent reduction there, and that's what we reflected. But there are a lot of other assumptions that go into it as well, as you mentioned, including useful lives, downtime on aircraft, maintenance reconfiguration costs, all of those things. And so really, it's the combination of all of those that go into it when you come up with this analysis. Now I guess turning to the second part of your question, in terms of the rest of our fleet. So those A330s and 777s are 9% of the fleet. When we look at other areas of our fleet, take current tech narrow-bodies, those are 29% of our fleet. We expect to see solid demand for these aircraft well into the future. And as Gus mentioned, current tech narrow-bodies won't be overtaken by new tech aircraft until well into the next decade. As for new tech aircraft, which make up 62% of the fleet, these are aircraft that airlines are transitioning into. They're most in-demand aircraft types. They'll form the backbone of the global fleet for the next 25 years. So really, as I said in my prepared remarks, looking out today, we don't see any more meaningful impairments in any parts of our fleet.

Great. And one quick follow-up, if I may. The expected 12 months operating cash flow now is $2.2 billion kind of average is about $550 million a quarter, which is kind of broadly in line with what Q3 was. I'm just wondering, does that include or not any material leasing in the receivables balance? And if so, have you baked in any additional deferrals? And that's it for me.

Well, we've taken into account what we expect in terms of deferrals, I mentioned last quarter that we expect -- that I expected the deferral balance to grow over time to around $700 million to $800 million. As I look out today, I think it probably will peak at a lower level than that. So we have reflected those in there, Ross, in that $2.2 billion of next 12 months operating cash flow. And really, what that represents is just -- that's our estimate over the next 12 months of what happens. Obviously, you saw that we had a significant improvement in cash flow the past quarter, up 76%. We expect to continue to see a gradual increase in cash flows continuing over the course of the next year.

We will now move on to our next question from Koosh Patel of Deutsche Bank.

You commented a bit over the last several years, you've seen a lot of capital investment from what you referred to as tourist capital and you see some of that pulling back and creating opportunities in the market potentially for acquisitions and whatnot. How do you see that playing out? Do you see that in the form of large-scale M&A or more in this -- by way of asset portfolios or individual opportunities, which may come along?

I think it's fair to say that those people who have come into the sector, looking for yield over the last 5 years or 6 years, and thought this was a spread business, and they didn't need a full-scale operating platform to run the business, have found that, that is not a valid assumption. And that you most definitely do need a global platform to run this business. So we have already seen many able to take the decision, we are not going to build a full-scale operating platform. And in fact, it's too late for that. So what I believe we will continue to see from those type of participants that they won't deploy further capital into the sector. So I think there'll be further -- there'll be less new capital coming into the sector than was the case over the last 5 years. And on the other side, I believe that we will have a greater demand for the aircraft leasing product. So that's how I would see it take shape.

Great. And then you mentioned that there's 42 aircraft on lease 2 airlines involved in Chapter 11 like processes in your portfolio. I just wanted to see, could you clarify how many of those aircraft are new technology wide-bodies? And I guess, what can you tell us about what you're seeing in the marketing environment for those aircraft right now?

Most of those aircraft are new technology wide-body airplanes. And as I said, they include our Norwegian one. What we are seeing is that even though the airlines are in Chapter 11 or an equivalent thereof, they continue to operate the airplanes, which means they have an obligation to pay us as well for the operation of those assets. We would expect, as I said in my prepared comments, that those airlines will accept the -- will continue to lease the majority of those aircraft on acceptable terms.

We will now move on to our next question from Catherine O'Brien of Goldman Sachs.

Maybe just a quick one on the sale-leaseback opportunity. Do you feel that we've reached a point where it's okay for you to start moving forward with some of these transactions? You have a good sense of what airlines are capitalized well enough to continue making payments, or is rise in cases making you take a little bit of a further pause? Just wondering like what would lead to us seeing some transaction announcements from you guys?

There have been a very limited number of sale-leasebacks executed over the course of the last few months, some of them have been in the public arena. And of course, we look at those. Now what I do expect, however, is that as production and delivery ramps up from the OEMs, the demand for sale-leasebacks will become much more urgent. And I believe the leverage dynamic will be more in our favor. Right now, we have all-time lows of deliveries from Boeing and Airbus. Boeing isn't delivering anything really except a handful of wide-bodies a month. And Airbus' own production is significantly down. So Catherine, I think that as we go into the New Year and the OEMs start to deliver more aircraft, there will be a more pressing demand for the sale-leaseback product.

That makes a lot of sense. And then maybe just two quick follow-ups, potentially both for Pete. Is the reason you expect deferral to peak -- so first one being is, is the reason you expect deferral to peak lower than your prior expectation? Is that because repayments have come in better? And then apologies, just one more on Norwegian. But should we be expecting any further headwinds to financials as you remove the remaining aircraft? Or is everything already on cash accounting, so that impact is what Norwegians are usually accounted for?

Yes. Sure. So on the first one, Catherine, the -- it's really because we've seen less deferral activity. We've seen a slowdown in that. As you saw in the second quarter, the increase there was only $59 million. So it was much less than what we saw during the second quarter. So that's really -- given that trajectory, that's why I think that the peak is likely to be below that $700 million to $800 million that I mentioned in the second quarter. In terms of Norwegian, so we do have shares in Norwegian and perpetual securities that are on the balance sheet. We've also got an offsetting provision for those -- against those. And so we don't expect to see a net impact from Norwegian going forward -- a negative net impact.

We will now move on to our next question from Ron Epstein of Bank of America.

Just a couple of small things. During the quarter, last quarter, you guys mentioned 15% of your revenue, where you had a number of lessors on cash accounting. How did that compare to this quarter?

It was about the same, Ron, again, 15%. Not really many additions to what we had from last quarter.

Okay. Great. Great. And then maybe another question on the product front. Does the narrow-body shift towards the A320 family away from the 737 family given Airbus' market share pickup? Does that play pretty well for you given your fleet and what you're planning for the future?

Well, it does, Ron, because we saw it a long time before anyone else, and that's why we're the biggest lessor in the world of A320neos. And we could see that coming, like we also saw on the current technology wide-bodies. Because we are the biggest in the world, we get more information than anyone. We see trends before anyone else sees them, and we could see that, that was happening on the A320neo, the A321neo, and we could see it on the 777 family and the 330 family.

Now in your view, do you think Boeing has to do something to counter the A320neo XLR?

The way it works in the aircraft market is that the Boeing 737 MAX 10 can do a lot of the missions that the A321 XLR does. Not everybody wants to fly a narrow-body from Dublin to Miami. It's a long way to go in a narrow-body tube. So well, we could say to themselves, you know what, we're just going to concede that niche end of the market. And yes, we have an airplane that's less capable. But by reducing the cost of the aircraft, we can make it a very competitive airplane, which is exactly what Airbus did with the A320 for many years against the 737NG when the NG had a superior operating performance, but the Airbus airplane was good enough that with a slight price reduction below the competitor airplane, it was a competitive aircraft.

And then if I may, just 1 last question. On a typical 777-300ER middle-aged, how much do you think the residual value has been impacted because of what's going on in the market on top of the pandemic?

Well, look, Ron, it's hard to say specific numbers, but we saw it 6 years ago, again, because we see more data than anybody else in the world. We see more of what airlines are doing. And that's why we acted so much on it over the course of the last 6 years, reducing the fleet from a third of the fleet to [9%], and that wasn't done by balance sheet growth. In fact, the value of our assets stayed constant or shrank slightly. So what I would say to you is that it's very much case by case, but we have our own view of it, and we have acted accordingly with our own airplanes.

We will next question from Moshe Orenbuch with Credit Suisse.

Gus, both you and Pete talked about this kind of being comfortable with the level of the charges that you took in terms of value in the portfolio. So I guess, number one is, can you talk a little bit about the discussions you had with the rating agencies around that? And then second part of that question is, does -- at what point does it now make sense for you to be able to go more on offense than defense?

Sure. So yes, we've discussed those with the rating agencies and previewed them with them. I mean, from the rating agencies perspective, their main focus in this regard has been on where our leverage ratio is, if we take an impairment. And so as you see, we've done this comprehensive review on the fleet, I don't see anything else out there. And having done that, we're at 2.67 to 1. So that's below our target ratio of 2.7 to 1. It's in line with or below, where all the rating agencies want us to be in terms of our leverage ratio. So I think from that standpoint, I think that, that should be fine. I don't expect any negative reaction as a result of that. Gus, do you want to comment on offenses?

And as we said, look, the company is in the strongest liquidity position as it has ever been in. We do believe that there'll be ample opportunity as we get to the other side of this crisis. And the focus of airlines, as I mentioned in my prepared comments will be to delever the balance sheet and, in particular, unwind themselves from government debt. Also, I believe there will be fewer competitors for us. I think the tourist capital that came into the sector, as I said, that believe it was a spread business, they are leaving the sector. So I do think that there will be ample opportunity. And if you look at our track record, over the course of the last 10 years, we've engaged in the larger sale-leasebacks ever done, the largest M&A ever done, the largest ordering, the largest buybacks ever done. And so we're always looking at the alternatives that are there to maximize the value of the business for our shareholders.

Pete, just a quick follow-up on the cash flow question. Given that you now expect the deferral balance to kind of peak at a lower level, are there other things? I mean, in other words, your forecast out 12 months is really kind of the current -- the Q3 cash flow kind of annualized, what are the other puts and takes? Or could it be better than that $2.2 billion?

It could be better. I mean, as we look out at it, Moshe, it's -- we are projecting, as I said, a gradual recovery and a gradual recovery of air travel generally. As you know, the winter tends to be weaker for airlines. So we'll have to see what happens over the next couple of quarters there. But we're also seeing some positive developments in terms of pre-departure testing protocols, co-ordination among different governments around quarantine periods. And then obviously, we'll have to see what happens in terms of the vaccine development. So really, those are all of different variables that factor into that. We haven't -- I would say, we haven't been aggressive about, in our view, on assuming a rapid recovery there in terms of cash flows.

It appears there are no further questions at this time. I'd like to hand the conference back to Mr. Aengus Kelly, CEO of AerCap.

Thank you all for joining us today. To sum up, the 4 key points I hope you will take away are: one, we are witnessing a significant increase in air travel and in our cash flows from the lows of April; two, AerCap has a strong balance sheet and the strongest liquidity position we've ever had; three, COVID-19 is accelerating the pre-pandemic trend of airlines moving into new technology aircraft, and AerCap is new technology aircraft in the world; four, we are confident that as the recovery continues, there will be ample attractive opportunities for AerCap to deploy our capital. Thank you all for your time. We look forward to talking to you in 3 months' time.

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