My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Air Lease Corporation Q2 Earnings Conference Call. [Operator Instructions] 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 Corporation's second quarter 2024 earnings call. This is Jason Arnold, and I'm joined today by Steve Hazy, our Executive Chairman; John Plueger, our Chief Executive Officer and President; and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our second quarter 2024 results. A copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, August 1, 2024, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. Before we begin, please note that certain statements in this conference call, including certain answers to your questions, 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 SEC for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, we may discuss certain financial measures such as adjusted net income before 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 and 10-Q that we issued today. This release can be found in both the Investors and Press section of our website at airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I'll now turn the call over to our Chief Executive Officer and President, John Plueger. John?

Well, thanks, Jason. Good afternoon, everyone, and thank you for joining us on our call today. During the second quarter, ALC generated revenues of $667 million and $0.81 in diluted earnings per share. Results this quarter were impacted by further OEM delivery delays, lower end of lease revenues compared to prior years as airlines continue extending the majority of their leases, a reduction in aircraft sales gains due to the timing of individual aircraft sales closings in various packages, and new aircraft deliveries that reflect lease deals concluded on average two years ago when aircraft demand was not as strong and interest rates were lower. We purchased 13 new aircraft from our order book in the second quarter, adding $940 million in flight equipment to our balance sheet, and we sold 11 aircraft for approximately $530 million in sales proceeds. Deliveries came in $600 million below our expectations, which I'll comment more in a moment, while sales were approximately in line. Weighted average fleet age remains young at 4.7 years, while weighted average lease term remaining was 6.9 years at quarter-end. The utilization rate on our fleet remains exceptionally strong at 100%. Currently, we are 100% placed on our forward order book through 2025 and 96% placed through 2026, with 64% of our entire order book placed. Our $20 billion order book remains a key source of strength, given Boeing and Airbus have very few delivery positions available until the 2030s, while the vast majority of our positions are set to deliver through 2028. As such, demand for our delivery slots continues to rise, supporting lease rates on our new aircraft placements delivering well inside of the timeline a buyer today could receive a new aircraft from the OEMs. We continue to see strong lease rates on new lease placements…

Thank you very much, John. We've just returned from the Farnborough International Airshow last week in the United Kingdom where we met with a large number of our existing airline customers as well as new potential customers. All the airlines that John, myself and our entire marketing team met with continue to ask and request more new aircraft. New order activity continued and push out the sold out status of many different aircraft types, which at six-plus years for several of the higher demand aircraft types is already at historically exceptional levels. These circumstances are expected to further bolster lease rates and the values of new aircraft that are the focal point of Air Lease's strategy. Airline traffic volumes remain robust globally, rising 9% year-over-year based on the latest IATA report that came out yesterday. Total international volume was up a strong 12% with all major markets continuing to rise at double-digit or high-single-digit percent rates. Asia-Pacific traffic remains the strongest market this year, expanding at 23% versus last year. We continue to expect Asia-Pacific growth to remain one of the strongest globally as travel momentum continues to build. Asia is Air Lease's second largest marketplace at 37% of our fleet with a very diversified exposure throughout the region instead of relying more heavily on China and just a few percentage points behind Europe as our largest geographic concentration. International traffic in Latin America, Africa and Europe also remained among the strongest markets for the period. Domestic traffic also rose at a still healthy 4% year-over-year with Brazil, China, India and the U.S. leading strength in IATA's domestic market segments. Passenger load factors also continue to expand with many markets achieving new record levels and we expect overall load factors to continue to climb from the mid-80% range, which also…

Thank you, Steve. And good afternoon, everyone. During the second quarter, Air Lease generated total revenues of $667 million, which was comprised of approximately $610 million of rental revenues and $57 million from aircraft sales, trading and other activities. Total revenues declined by approximately 1% as compared to the prior year. This was driven by a few items, including the sale of older higher yielding aircraft, the addition of new aircraft at lower initial lease yields, lower end-of-lease revenue and OEM delays. As a reminder, when we purchase new aircraft, they come on our books at the lowest yield point in the aircraft's earnings cycle. And over time, with our fixed rate leases, the yield accretes up as a function of depreciation. Strategically, we remain focused on minimizing residual value risk while maximizing returns via the purchase of the highest in demand, most fuel efficient new aircraft. We continue to believe that this will generate a substantial amount of shareholder value for years to come. During the quarter, we recognized $2 million in end-of-lease revenue as compared to $15 million in the prior period. This was driven by fewer lease expirations during the quarter and us continuing to experience a very robust market for lease extensions, given the strong aircraft demand environment. These lease extensions are supportive of our overall portfolio yield and add to our contracted cash flows, further enhancing the value of these aircraft. Excluding the effects of end-of-lease income, our portfolio yield remains flat as compared to what we recorded in the first quarter of '24. OEM delays also slowed our revenue growth during the quarter due to $600 million of aircraft that were penciled for the second quarter, which ultimately slipped to the first few weeks of the third quarter. Sales proceeds for the second quarter…

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

Thank you. [Operator Instructions] We'll take our first question from Hillary Cacanando with Deutsche Bank.

Hi. Thanks for taking my question. I'm just trying to understand gain on sale. I guess it was 8% this quarter, which was at the lower end of your historical range. Was it because maybe you sold -- I just wanted to understand why. I guess this was because of the product mix? Was it because you sold maybe younger aircraft with higher book value or was this the type that -- yes, just more color.

Yes, this is John. As I said in my prepared remarks, the timing of individual sales and packages vary. The packages themselves as a package are nice, healthy gains in the double-digit area. But we do use aircraft sales to moderate and look at our risk portfolio geographically, by customer, yield by aircraft type and age. So we do have individual aircraft within these packages, some are at different levels of gain, higher and lower. And so, really, you're just looking at simply the timing of closings as they happened this quarter.

Okay, got it. That's helpful. And then the other question is, one of your competitors have said that -- they have actually showed in their presentation a couple of months ago that, next year, they expect maybe -- I think it was like 85% of leases coming on their book to be -- to have been executed during 2023 and beyond. And then, in 2025, that number goes up to 20% -- 95%. So I was wondering -- I was wondering if -- because you've in the past also talked about a lag in interest in revenue, about a three year lag. So could we think about it the same way for your revenue as well with the leases coming online next year maybe around the same percentage, like 85% or so and then maybe higher the following year?

I don't think we can give you specific percentages right now, but we do -- as you would expect, we typically sign our leases 18 to 24 months in advance of the actual delivery date. So as we move further and further away from the COVID-era lows and the low-interest rate environment period, you should expect to see higher lease rates on our delivered aircraft continuing to help support our overall portfolio yields.

Continued with lease extensions at higher rates. So, overall, as airlines come to the end of their lease periods -- and they're all extending, as I said in my prepared remarks.

Okay, got it.

And then incremental -- as incremental borrowing costs hopefully will decline as we go into 2025, it means our spreads between the cost of financing and lease yield will improve.

Okay, great. Helpful. That's very helpful. And looking forward to seeing you guys in September at a conference soon.

Absolutely. We will. Look forward to it.

We'll move next to Terry Ma at Barclays.

Hi, thanks. Good afternoon. So, last quarter, you kind of guided to a flattish profit margin for the rest of the year. Looked like it was kind of modestly down this quarter. I guess, are you -- do you still feel pretty good about that guide? And then as we kind of look forward to 2025, maybe can you just help outline the major drivers that maybe help you kind of get back to a normalized profit margin?

Right. I think going forward, that guide still holds around these same sort of levels. This quarter was a little lower due to the fact that we had lower end-of-lease revenue coming through, but that was due to the timing of extensions and the like. I think looking forward to '25, it's a little unclear because of what happens with, as Steve mentioned, with the rate environment. As rates come down, I think that should help the business as well. And also the taking on of higher initial lease yields on some of those order book plans as they come through.

And also, remember that we had a large number of aircraft that should have delivered before June 30 that slid into July and August. So that's really an OEM issue and it means we lost revenue on those aircraft that we expected to receive back in April and May.

Yes. Got it. Okay. That's helpful. And then maybe just on the funding you guys issued in the unsecured market this past quarter, termed out a portion of the revolver. I guess, are you comfortable with rates and spreads today to maybe tap that market again or will you just carry some excess on your revolver going forward? Just trying to figure out the right funding mix in the near-term.

Listen, we maintain a high level of liquidity. We have $8.2 billion. So we tend to be very opportunistic as we look to the market. Spreads have been very low, very, very attractive right now. And today, with the recent drop in base rates, it sets up a very nice environment. But again, we're going to be very selective as the market windows that we tap into. There is, of course, a benefit of terming out our unsecured revolver because those floating rates are probably in the area of 6.7%, 6.75% all-in. And then you compare that to fixed rate funding costs in the high 4s, low-5s. So, I think that also creates a lot of value as well.

Okay, great. Thank you.

We'll take our next question from Jamie Baker at JPMorgan.

Hi. Steve and John, let me start with a question that I asked AerCap this morning. So Mark and I are just trying to reconcile the global aircraft shortage with the growing phenomenon of airlines siting overcapacity. On one hand, we've got this really positive narrative on tight supply and Steve just spoke to his experience at Farmborough. But then you've got just about every U.S. airline citing overcapacity. We've seen discouraging prints from several European airlines. Singapore took it on the chin yesterday, Wizz a few hours ago. How do you square these two seemingly competitive narratives with one another?

Right. Jamie, let me start. Really two overall comments. Yes, of course, the industry responded to strong traffic demand and continues to by adding capacity in the marketplace, no doubt about that. But overriding all of that is still a great concern about getting aircraft for the future and their deliveries sliding out, being able to replace older aircraft. So by far, the overriding demand despite some of these commentaries is that there is a need for aircraft and we are still getting all these requests. And the second comment I would make is, just remember that, historically, as airlines start to experience any financial squeeze, historically that has always favored leasing.

Yes, fair points, fair points, John. And then as a follow-up, we saw AerCap step in to spear its order book today and, obviously, Spirit being a somewhat weak credit at the moment. Should we think about this strategy possibly being an avenue for Air Lease's incremental growth or is placed -- are placing new orders still your preferred avenue? Thanks in advance.

Steve?

Yes. Well, Jamie, we already have a long, long relationship with Spirit. It even goes back to ILFC days when we replaced our MD-80 fleet with A319s and A321neo aircraft. So we currently have eight new A321neos delivering to Spirit in the next six to nine months. We recently delivered two new A321neos from our order book. So, very soon, we'll have 10 A321neos there. We previously delivered to them five A320neos and all of those aircraft we have sold to third-parties over the last 24 months. So we looked at that transaction and we felt that the overall package, due to our existing relationship with Spirit and the other backlog aircraft we have coming from Airbus, being really the largest A321neo lessor, we felt that that was more of a transaction for AerCap than for Air Lease.

Okay. I appreciate the color, Steve. Take care.

Thanks.

We'll move next to Moshe Orenbuch at TD Cowen.

Great, thanks. Maybe to kind of piggyback on Jamie's question, are there -- putting one particular airline aside, are there any other kind of strategies that you're thinking about in this current environment of low deliveries where you could either increase purchase airline -- aircraft purchases or in fact kind of reduce your capital, given that it's been a somewhat lower growth environment?

Yes. Well, the answer is yes. Although you -- the prior question was around Spirit Airlines, there are a number of competitive campaigns over the world that we're looking at both with Airbus and Boeing, whereby we could incrementally add aircraft pursuant to the OEM's strategies and competitive environment in those campaigns. And that's not really anything new from us -- for us. We continue to take advantage of that, just as we did in prior years, but we do see potential future there as well as alignment along our managed business using that as a platform to add additional aircraft as well.

I do think there's going to be a large opportunity, though. The airlines have definitely over ordered and a lot of them don't have quite the access to capital as we do here as an investment-grade public company. So I think there's going to be a search for financing on behalf of the airlines and there'll be a lot of airlines that will need help. And I think that's one avenue that we could look at in the future.

Great.

Yes, for example, if an airline ordered 20 aircraft and they might wind up buying 15 of them, they will probably approach us and say, 'Air Lease, can you take 5 of those 20 and either do a sale leaseback transaction or even divert some of those aircraft to another airline. So we're always opportunistic. We're always looking for transactions that are accretive, but we don't want to overpay for aircraft. We don't want to pay a premium above what we can buy those same aircraft for from Boeing and Airbus.

Great. And maybe just as a follow-up, the total lease revenue obviously had been affected by a number of things, the slow deliveries, late deliveries and the lack of end-of-lease revenue. But the lack of end-of-lease revenue is probably going to be with you for the balance of the year. So as you kind of look forward for the next couple of quarters, have you sold planes that had been renegotiated during COVID with lower yields? Is that something that's gone on? And as I think about the $2 billion number that you talked about, I don't recall quarters of late where you've had $2 billion of delivery. I think, Steve, you had mentioned that $600 million that fell in, some of that had already been received. How confident are you in the level of deliveries for Q3?

Well, let me just say --

Yes, go ahead, John.

Yes, I'm just going to say, as I said in my prepared remarks, there is a huge big contingency out there, Moshe, and that is a potential Boeing strike. So while we put a $2 billion estimate, frankly, it -- that's a huge contingency. And so, yes, we had a $600 million shortfall in deliveries compared to what we told you all last quarter as a result of these ongoing delays, but there's so many factors that it's really hard to put a pen on it. And I think the first part of your question is, yes, we have sold some aircraft that we renegotiated or restructured during the pandemic. So I think, overall, it's a very difficult challenge for us. Our whole business model is taking delivery of brand new aircraft and putting them out on lease. And when there are these contingent events, it's really hard to put a pen on CapEx expectations. So just by way of summary, we did say we still expect about $5 billion for the whole year. That's mid-range of our $4.5 billion to $5.5 billion. And we, based upon our best judgment, are looking about $2 billion, but that's going to be dependent somewhat about whether Boeing continues its deliveries and whether they go on strike.

And part of that $2 billion was the spillover from the first quarter.

Yes.

So to illustrate a couple of examples, we had an A350-900 that should have delivered in the quarter and it didn't. And that's a $150 million airplane. Then we had a 787-10, the largest 787, which again was supposed to deliver in May, and we just delivered it on Monday this week. So right there, there's two aircraft that are about $310 million. It should have been delivered in the prior quarter.

Okay. Thanks very much.

Sure.

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

Yes, good afternoon. Can you hear me by the way?

Yes.

Yes.

Oh, great. Thank you. I'm sorry, I'm having some trouble with my phone. Thank you for taking my question, gentlemen. Two for you. I appreciate the geographic color and you mentioned Southeast Asia and what have you as a growth area. Would you happen to refresh my memory as to what percentage of your book is in China these days?

Under 5%.

Perfect. Thank you for that. And just as my follow-up question, when we think about Air Lease's aircraft sales, any high-level color regarding what proportion of your equipment you're selling to airlines versus maybe making sales to other aircraft lessors? Thank you.

Yes, most of our aircraft sales are to other aircraft lessors at the current moment. Very few of them have been to the airlines. You typically see older -- you typically see end-of-life aircraft being sold back to the airlines at the very last part of their life to take advantage of the maintenance reserves that are there. But given that we have a very young fleet, we're selling airplanes that are about eight years old, most of them are being sold to other lessors.

Okay. Appreciate it. Thanks very much.

Sure.

And there are no further questions at this time. Mr. Arnold, I'll turn the call back over to you.

Thank you, everyone, for participating in our second quarter call. We look forward to speaking with you again next quarter. Audra, thanks for your assistance and please disconnect us.

You're welcome. This does conclude today's conference call. Thank you for your participation. You may now disconnect.