Good afternoon ladies and gentlemen and welcome to the Air Lease Quarter 1 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to Mary Liz DePalma, Vice President of Investor Relations. Please go ahead.

Hello, everyone and welcome to Air Lease Corporation’s earning call for the first quarter of 2020. This is Mary Liz DePalma, and I am joined this afternoon by Steve Udvar-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 results for the first quarter of 2020. 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, May 7th, 2020, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. Please note that each member of the Air Lease team speaking today is in a separate location in their respective homes. However, we expect the format of the call to remain the same, including the Q&A session, for which instructions will be given at this conclusion of the call. 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 our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense items. These statements and any projections as to the company’s future performance, represent management’s estimates for future results and speaks only as of today, May 7th, 2020. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we will be using during the call, such as, adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on equity are non-GAAP measures. A description of our reasons for utilizing these non-GAAP measures, as well as our definition of them and the reconciliations to corresponding GAAP measures can be found in earnings release and 10-Q we issued today. This release can be found in both the Investors and Press section of our website at www.airleasecorp.com. As a reminder, unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chief Executive Officer and President, John Plueger.

Thanks, Mary Liz. Good afternoon, everyone and thank you for joining us. Before we begin the call today, I just want to acknowledge the profound impact globally COVID-19 has had on both businesses and individual, everyday lives, our hearts are with everyone impacted by this pandemic as the world navigates through this challenging time, including our airline customers, and our suppliers. We are deeply grateful for all those in healthcare and all individuals in the frontlines putting themselves at risk to get us through this crisis. Turning to the quarter, I’m happy to report that Air Lease grew its revenue by 9.7% year-over-year to $511.4 million. We achieved net income of $133.3 million, pre-tax profit margin of 33.6% and fully diluted earnings per share of $1.17. Our bottom line earnings and margins were slightly down compared to Q1 of last year, primarily due to end of lease revenue recorded in Q1 of last year, resulting from a prior year airline insolvency, and we didn’t have that in the first quarter of this year. Greg will walk you through more details on our numbers and provide additional color. Since we spoke to you in February, the airline industry has been navigating through uncharted territory with an uncertain timeline to recovery. It is difficult to speculate about what traffic levels will be, how load factors will adjust, and the list of questions goes on. Simply put in at the highest level, we continue to believe in the fundamental importance of air transportation as a vital industry to the global economy, as evidenced by approximately $100 billion of state support being offered to or received by the airlines to-date. We believe this figure could double prior to the end of this year, which offers substantial support for our customer base, given 75% of…

Thank you very much, John. I would like to echo John’s initial sentiments regarding the COVID-19 and express on behalf of our entire Air Lease team, our genuine gratitude for all the frontline workers, doctors, nurses, emergency personnel, really to everyone working to protect and help others right now throughout the world. We as a team say thank you to all of them. While implementing proper precautions with our own workforce, enabling remote work from home, our team has been working tirelessly, seven days a week to understand our customers’ individual situation as the outbreak broadened and escalated, while maintaining close dialogue with the manufacturers who are also experiencing significant issues. ALC has also been interacting with our investors, financiers, regulators and rating agencies answering their questions and providing the highest level of transparency allowed in each case. Not knowing what the next global event impacting the airline industry could be, we have worked diligently over the past 10 years to best position our business to succeed in any market environment. Simply put, we’ve employed conservative financial policies and practices since inception. We achieved our first investment grade rating three years after inception, and then managed our business in line with our financial targets. Over the years you’ve seen other lessors adjust our capital structure and strategies to achieve investment grade like ALC. However, today, ALC still remains the highest rated standalone aircraft lessor. Furthermore, since inception, we did not deviate from our core competencies even at times it would have been easy to do so. As a result, ALC is strong and resilient today, and while being conservative to ensure that we can manage through this pandemic, we also see opportunities to play offence. In fact, over the past few weeks, we’ve been in discussions with airlines regarding lease…

Thank you, Steve and good afternoon, everyone and thank you for joining. And in time that I have here today, I will first go through our quarterly results. Then I will spend some time discussing the impact of COVID-19, and then I will address our liquidity and funding position. In the first quarter of 2020, we achieved our third highest quarterly revenue number in our company’s history, despite having minimal sales activity during the quarter. The results were primarily driven by the continued growth of our fleet and we’re partially offset by a $20 million decline in end of lease revenue from an airline bankruptcy in the prior year. However, our key portfolio metrics of portfolio yield, age and lease term remaining were stable. During the quarter, fleet activity included the purchase of 8 new aircraft and 1 aircraft in the secondary market, representing $709 million of aircraft investments, as well as the sale of 3 airplanes to Thunderbolt for total proceeds of $65 million. This helped to increase our balance sheet by 18% year-over-year, which ultimately was the primary driver of our revenue growth. Turning to expenses, interest expense increased year-over-year, driven by the continued growth of our fleet, partially offset by the decline in our composite cost of funds. Our composite cost of funds decreased to 3.16% from 3.5% in the first quarter of the prior year. During the period we benefited both from a decline and prevailing interest rates, as well as our opportunistic low cost capital raising efforts, through which we raised a total of $1.4 billion in 5-year and 10-year senior unsecured notes in the second week of January 2020 at record low coupons for ALC. And at the same time, taking care of the $1.4 billion in maturities that we had scheduled for 2020…

Thank you, Greg. This concludes management’s remarks. I would now like to hand the call over to the operator to open the line for the question-and-answer session.

[Operator Instructions] Our first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.

Great, thanks. And thanks for all the incremental discussion and disclosures. I guess the question that I wanted to ask is, you know, you talked about the collection rate and talked about it in April, as you kind of look out at the, you know, deferrals that you’ve agreed to in those that you expect you might do. Around when does that trough and when will it start, you know, kind of moving back in the upward direction? And maybe if you can kind of put any kind of details around that? Thank you.

Thanks, Moshe. As we are not in the same room, we can’t see each other. I’m going to take the lead and determine which of us should first answer the question, if it’s not specifically directed to one of us. I’ll take the first stab of that, and then I’ll turn it over to Steve and Greg. And that is, look, this is still evolving. I would say generally speaking, that the pace of deferral requests has now started to decline. Some of the initial deferrals that we gave initially to some of our Chinese operators were starting to be replaced and repaid now at the end of May and going into June, but we are still in process and we don’t know what the trends in traffic recovery will be and the level in which our aircraft will be deployed and flying. So it’s really hard to speculate forward. It could be that the rate of deferrals and the percentage that we quoted will increase over the next couple of months, but then start to decrease. So we don’t want to speculate. We just say, here’s where we are. I expect it as we conclude deferral agreements as we’ve indicated with more customers to go up in the next 30 days to 60 days. But it does seem based upon the pace of the last several weeks that those deferral requests and the rate of those requests are declining. Let me open it up for any other answers from Steve or Greg, if not, just continue.

Okay. Well I guess the other thing is, you know, Greg, you talked a bit about not only having those $500 million of debt maturities maybe is there you know, an amount of capital that you’re thinking about in terms of allocating to the sale leaseback kind of opportunity. Is that or you know, maybe some just general thoughts about how you would think about, you know, capital allocation given the, you know, the reduced level of deliveries?

You know, this is Greg. We take capital allocation very seriously and over the last several weeks have been very much focused on building liquidity. We’ve evaluated opportunities and we expect that more opportunities will come. It’s hard to say, you know, when you look at all the choices that you’re faced with that capital allocation being buying back stock, repaying debt, dividend, sale leaseback and more orders and like, it really needs to be constantly monitored, evaluating all those options that you have. So it’s hard to say how much is it going to be in sale leaseback versus how much in direct or modified orders with the OEMs. I know that maybe all – maybe John or Steve can supplement on their views on allocation between the sale leaseback channel and the OEM side.

Yeah, we’ve looked at more than a dozen opportunities both on single aisle and wide body aircraft. And I think the general criteria that we’re looking for is that any incremental sale leaseback transaction that we would do, A, would have to be for aircraft that are younger than our average fleet age and B, the lease yields would have to be above our average portfolio lease rate for the whole fleet of Air Lease. So, anything we do in the sale leaseback arena financially has to have better metrics or above the metrics of our overall portfolio. And then from a qualitative point of view, we’re going to be very selective, which airlines we’re going to do sale lease backs with. And which of those airlines are already existing customers? What is our strategic positioning with that airline? What are future opportunities with that airline to place our own order book aircraft down the line in ‘22, ‘23, ‘24? So we take all of those things into consideration. And so it’s a highly selective and disciplined process. And it’s difficult to give you any projections on how many hundreds of millions of dollars we’re going to allocate. But I can assure you that if there are transactions that meet those criteria, we have the firing power and the ability to execute very quickly without having to resort to structured secured financing, which involve a lot of complexity.

Okay. Thanks, everybody.

Our next question comes from the line of Jamie Baker from JP Morgan. Your line is now open.

Hey. Good afternoon, everybody. I also have Mark Streeter on the line. I’ll take the first question. He’ll take the follow-up, if that’s okay and I’ll direct the question to John. So how is the Norwegian rent for equity swap not a potential negative for Air Lease? Or put differently, are you surprised lessors rolled over? And why wouldn’t every cash strapped Air Lease customer try and request something similar?

So I understand your question, Jamie. And frankly, yes, we are a bit surprised that a number of lessors made that decision, they made that for their own reasons. We don’t criticize it, we don’t question it. I can only tell you that, you know, Air Lease would not be open to those sorts of situations, generally speaking. And we are confident in our remarketing capability in almost all situations. So the short answer is, I don’t think that’s going to be an avenue that many lessor. I can tell you, it’s not an avenue for us. I can tell you, and again, I’m not criticizing those other lessors, I’m just telling you what our position is. So, you know, we continue to work with our customers, but it’s not a situation that Air Lease will be open to.

Perfect. I appreciate that clarity. That’s what we were hoping to hear. Mark?

Yeah, just, Greg two quick questions for you. Can you confirm is Air Lease eligible for the Fed primary and secondary programs that are in the market right now?

Mark, I think we’re still looking through all of the Q&A that’s put out there by the Fed. But on the surface, it would appear that since we’re domiciled here in the US, and we’re a US company, that we would meet the initial requirements.

Okay, great. And just a real quick follow-up, when you quote the 90% and 86% figures for the first quarter and for April, there’s an adjustment or the language has calculated after giving effect to lease deferral arrangements. So what I’m wondering is, is that cash collected of the revised lower amount? Or is that cash collected of the original rent amount?

Now, it’s calculated based upon after all – giving effect to all referrals, because we thought it would be better to give people a more pure picture of what’s taking place in the market, right, because some customers we haven’t reached agreements with and we’re focusing very hard on collections on those customers. And then we very clearly quantify the amount of rents that we’ve agreed to defer, that was the $125 million number. So I think it’s important to look at those two things together.

So Mark, let me give you an example. Let’s say that in a given month, we had $200 million of contracted revenue in a given calendar month. And we say that we collected 90%, but let’s say that we’d given all of our airline customers collectively, a $10 million deferment of that $200 million. So really, if they lived up to their deferment obligations and all the other airlines are living up to their normal lease obligations, we would collect $190 million that will be 100%. So when we say 90% is collected, it’d be 90% of the $190 million. Does that make sense?

Yeah. It makes perfect sense. And Steve, just because, you know, I hear your voice and I love hearing you opine on this. And I want to ask you and John, just one more, if you would allow us. You know, do you think Boeing and Airbus are doing enough? Are you happy with the production rate cuts that they’ve done to try to keep the market in balance? Or, you know, should they be doing more and you expect them to do more? Thank you.

I think there’s a lag time when you have a huge organization like Boeing and Airbus, you know, which combined, they have what, over 200,000 employees and tremendous infrastructure. It is not as easy for them to make adaptations for the marketplace, as compared to a company like ours. So my feeling is that they will continue to make adjustments as they see the feedback from their airline and leasing customers. But it’s not an overnight process.

You know, I would echo that Mark. I would put a bit more specificity and that I think it would not be a surprise for us to see, especially on the Airbus side, a little bit of further softening in the production rates on their single aisles.

And I don’t want to be a spokesman from Boeing, but a lot depends of course, on the certification revalidation not only by the FAA, but also Canadian Authorities, Chinese Authorities, Brazilian Authorities, and then most importantly, IASA and to some degree, I think that will drive the ability of Boeing to liquefy the inventory that they have of the airplanes that are already built. And that also will drive to some extent their ability to get production ramped up. So our view is that at least in the back end of this year, if they get the plane certified. And in the first half of 2021, we think that production rates on the MAX will be very modest compared to anything we’ve seen before. And then hopefully they’ll progressively pick up in the second half of 2021. But we are probably a little more conservative than Boeing on what we think the output will actually be.

Great, thank you for accommodating our questions. Appreciate it.

Thanks.

Our next question comes from the line of Catherine O’Brien from Goldman Sachs. Your line is now open. Catherine O’Brien: Hi, good afternoon and thank you very much for the time. So, I know you called out that, you know, 75% of your net book value is on lease to 5 carriers for those that with some form of government ownership. I just was wondering, you know, have you been in contact with representatives in those governments? And have they given you any assurances that you know, outside of any mutually agreed to payment deferral, they will be backstopping leases? I guess just how do you think about those type of owners relative to some others in terms of how confident you feel on their contractual equipment deal? Thanks.

Thanks, Cathy, I’ll start with that. The answer is, especially for some of the smaller countries, we mentioned one example of an airline, Air Mauritius is one example. Yes, we have been in touch with the governments, not in all cases, but again, I stressed some of the smaller carrier levels. And in some cases, we’ve also been in touch with our own government, with our own state department and officials working in these smaller countries. So not broadly, but the simple answer to your question is, yes, in some smaller cases, we have been speaking directly to those airlines – to those, yeah sorry those government, those government representatives.

And the second part of your question, this is Steve. The government support of either directly liquidity or guarantees that they provide to commercial banks, which then can provide liquidity to the airlines, is not specifically toward any aircraft per se, that’s lease from airlines. It’s a broader injection of capital into those airlines, either in the form of equity or debt to be able to service their lease obligations on their desirable aircraft. So, these governmental actions encompass all of the aircraft that those airlines want to retain in their operations. Catherine O’Brien: Okay, understood. And maybe just starting a little bit where you left off, but can you help me think about what recourse you have as the lessee stops paying leases, you know, is it mainly repossessing those aircraft? Are there other legal options you have, you tend to be repaid some portion of their contractual obligation to you. Of course, you know, if they cease operations may be less recourse. But there’s been a lot of investor concern that there will be, you know, widespread aircraft being put back to lessors as even carriers that are continuing to operate are doing everything they can to reduce cash outlay. You know, so just wondering what your recourse would be in that situation? Thank you.

Sure. I’ll start with that. As we said before, we have a lot of financial recourse in terms of our collateral package. But I think the important point here is that, this is a time when we have to work very closely with each and all and every one of our customers and we do. But to answer your specific questions, we take things in steps. For example, a step may be to give notice to an airline to stop flying our aircraft for a lack of payment. And we do have that capability now. You might say, well, does it matter if an airline is not flying? Well it matters, because some airlines are flying. For example, some of our aircraft, as Steve mentioned in his prepared remarks are being used for cargo flights. And the other aspect is at some point the airlines will start flying and telling them they cannot fly our aircraft does limit what they can do in the future. And then thirdly, of course, we have, ultimately we’re not hesitant, if we need to exercise our deregistration power of attorneys, which generally are a feature in our leases that allow us that we have the lessee sign as part of the lease documentation where, if there – if for example, in a country that we have to deregister an aircraft, and if it normally requires the operators’ approval or involvement or acquiescence in that process. We already have a document a deregistration power of attorney signed by the airline in our favor that we can take to the airworthiness authority in that country presented on a table and say here, we’re going to deregister our aircraft. So these are just some of the examples that we do have and the built-in protections we do have in our lease agreements. Catherine O’Brien: Okay, great. Thank you. That was really comprehensive. I might just squeeze one really quick last one in to Greg. You know, can you just walk us through your preferences in raising additional liquidity? And any thoughts on you know, liquidity needs now, it seems like balance sheet’s pretty topped up, but just thoughts on maybe tapping the markets, because any opportunities that arise? And then, you know, do you feel that there’s appetite right now on the unsecured market? Thanks so much.

Yeah, sure, this is Greg. The way I look at it, when we go to the capital markets, we always want to make sure that we’re treated fairly and we’re pricing our bonds in light of where we think they should be traded in and in comparison, to other similarly rated entities. That’s how we look at and it is whether or not we’re getting a good deal or a bad deal. Right now I don’t think it’s the right time to go do a bunch of secured debt. I think the unsecured bond market is open. There’s also XM and ECA initiatives that are out there too, they can help. So right now we have a lot of liquidity. The big question is, you know, how much CapEx or aircraft investments are we going to be able to make the rest of the year and balancing that against, you know, the $6.3 billion in liquidity that we currently have today. So we have a lot of runway, we want to make sure that we’re opportunistic and really fund in the right windows. Catherine O’Brien: Thank you.

Our next question comes from the line of Vincent Caintic from Stephens. Your line is now open.

Hey, thanks. Good afternoon and thank you for taking my questions. First, wanted to discuss the CapEx reduction and maybe if you can talk about your discussions with the OEMs when we think about the $2.5 billion for this year. Is that pretty much just be, I guess the manufacturing delays? Or are you looking at and thinking about pushing back some orders from this year and next year?

Steve, you want to take that?

Yeah, the reduction in CapEx is 98% or greater, because of delays from the OEMs. So currently, as you know, the MAX production line up in Renton, Washington is shutdown, 737 line. And we have no idea when it’s going to be reactivated. And I think a lot of that will be dependent on the progress that Boeing makes and recertifying the aircraft with the FAA and the other regulators so that’s that. The 787 lines you know, were shut down both in Everett, Washington and Charleston, South Carolina. And they’re just now starting to kind of slowly get back to some level of activity. I wouldn’t call it, normalcy, some level of activity. So as a consequence, we have some 787s that were originally scheduled to deliver in the fourth quarter of this year like in, you know, October-November timeframe. And now there’s the very high probability that those 787s will slip into 2021. But that’s the Airbus. I mean, that’s the Boeing situation. With respect to Airbus, the biggest delays that we’re seeing which have impacted our CapEx this year, is our Hamburg Germany facility, which currently manufactures all of A321neo and there we’re experiencing delays that can be anywhere from 4 months to more than 12 months. So many, many of our A321s have slipped and we’ll continue to not be coming to us at the rates we were hoping for, because once again, you know, a lot of their production workers and suppliers are not able to meet their delivery commitments. So I would say that virtually all of our CapEx adjustments are as a result of manufacturer issues. We do have 1 or 2 airplanes, where we moved them back maybe a very short period, you know, 1 or 2 months. And that has to do primarily with the fact that pilots and government officials are not allowed to go to these factories without going to quarantine. So, for example, if we have an Asian customer, they can’t come to the US and take delivery of a Boeing plane, because they go into quarantine for two weeks. And then when they go back to Asia, they have to go back in the quarantine. So we’re having difficulty getting crews and regulatory personnel from government agencies to come to the US. And then we have the same issue in Europe, where a lot of countries have travel restrictions which limit the crews and the, again government regulators to come to the manufacturing facilities to actually go through the process of getting the airplanes checked out and the delivery process is therefore delayed. Even though the airplane might be ready, there’s just not the human workforce that can deal with taking delivery of the aircraft.

That’s very helpful. So is it safe to say that they were actually some of your airline customers who would have preferred to take those deliveries and are sort of being delayed even if they do want to take those deliveries?

Yeah, we have a few of those where the airlines would like to take delivery. But they can’t logistically accomplish that, because of these various governmental restrictions on flight crews and government personnel that have to attend to and facilitate the actual delivery process.

Let me just add a specific example for you, Vincent, China Southern we have 2 787-9s ready to go. But because of these problems, they can’t come and get them.

Yeah, so Department of Homeland Security has just authorized the pilots to come. And they don’t have to go through a two-week quarantine. But the civil aviation officials from China that have to come to the US to actually certify that the aircraft meets all the requirements to be imported into China. We don’t have exemptions for those personnel. So our hands are kind of tied right now, because of some of these health induced restrictions at both sides of the, you know, on the US side, as well as the European side and in Asia. But I think it’s going to get better. We’re seeing some positive signs in the coming week. So hopefully some of these restrictions will be lifted so that airlines can facilitate these deliveries in a normal manner.

Okay, that’s very helpful. Thank you. Just one quick one. So appreciate the detail on the $125 million of commendation, 6% of the year 2019 revenues. When you think about that, is there a way to compare that $125 million against what the security and maintenance reserves you might already have against those airlines who were asking for the deferments?

Greg?

That’s a good question. I mean, we have approximately $1 billion in total security between security deposits and maintenance reserves. We haven’t broken it out across which airlines we’re giving deferments to. But I can tell you this that are – the airlines that are requesting the deferments, the airlines that are in arrears, I think it’s fair to say that we’re substantially covered by our security packages.

Well, just to do a back of the envelope math, if let’s say that 50% of our lessees are in some form of deferral, and let’s say $125 million of deferment for a few months. If that’s half of our customers, and we have over $1 billion in cash, security deposits and reserves that where there’s no claims, that means, that mathematically we’d have roughly around $500 million plus of cash collateral. So if you put $125 million against that, it’s roughly a fourth of what we hold already. So it’s really not a meaningful number in the total equation.

Okay, that’s very helpful. Thanks so much guys and then stay safe.

Our next question comes from the line of Helane Becker from Cowen. Your line is now open.

Thanks very much, operator. Hi, everybody. And thanks very much for getting me in here. I think, John, this is a question probably for you. As you know, you look at your diversification, your fleet, your geographic diversification, you know, do you think this is an opportunity for you to adjust some of that and market to customers who may be in different jurisdictions that you’ve kind of wanted to do business with but haven’t been able to?

Oh, we’re looking for those opportunities. So let me just say broadly, Helane that we’re actually quite happy with our customer distribution. It’s you know, not only is it a nice bell-shaped curve, but we have a lot of, you know, our top 10 customers are all some of the biggest flag carriers in the world. And as I’ve mentioned earlier, 75% of our customers have some form of government ownership or a flag carrier. So we always are looking to do new business with a few carriers that we wanted to target. And that very much is on our radar scope. But having said that, there’s not a whole lot of “adjustment” that we need to do to our credit profile. I think we mentioned in our earlier comments or maybe Greg mentioned there were no single customer is greater than about 1.2% of our net book value. So there’s not a whole lot of adjustment that needed from the beginning, but I do take your point that, yes, we are seeing opportunities with forward customers. But I would only temper that by saying our main job today in terms of financial accommodation is to, of course, address our current customers who have our current aircraft on lease. So, we will always be opportunistic, et cetera, et cetera. But I think our focus is primarily and necessarily making sure our current customers get back to health and our help in doing that.

Okay. And then just one other one, did you have to repossess any aircraft from customers so far?

So I’ll answer that as well. So we have, you know, as I mentioned in my remarks, we are taking back 1 A319 from South African, they appear to be in liquidation.

All right.

And then I will also mention that in our managed vehicles, we did take back 2 A320s from Interjet. One of them is one owned by TBO 1 and one is owned by TBO 2 that was done very cooperatively, I would say to Interjet’s credit that was a lot of difficulties. So, you know, that was a mutual return. If you want to call that a repossession, go ahead and call it, but it was done in a very good manner, I would say. So, those are just really the two examples that come to my mind. There’s nobody else beyond that where we’ve had to actually go back yet and repossess. We did have one other operator in Europe that was operating a single 737-700 again for one of our managed vehicles that again that we mutually agreed to take back and you know, we are looking to place that aircraft. So, you know, when you say repossession, I guess I would throw that liberally into that definition. But again, that was a very mutual cooperative thing. So it’s actually a very, very few number of aircraft.

Got you, okay. Well, thanks very much.

Our next question comes from the line of Koosh Patel from Deutsche Bank. Your line is now open.

Hey, good afternoon guys. Over the years, you’ve always stressed to us the importance of having a robust security packaging in place on each of your leases. But could you give us a little bit more detail on what exactly that entails? And, you know, I realized there’s no one size fits all solution here. But I’d be curious to know how many months of on average, an average security deposit may consist of [technical difficulty]?

Greg, you want to start with that?

Yeah, sure. The way I look at it is the security package grows over time, especially if you have maintenance reserves. So I mean, at the highest level, as we mentioned earlier, we have roughly $1.1 billion in total security maintenance reserves and security deposits and that represents about 50% of prior year revenue. But if you look at it on an individual basis, we typically collect between 1 to 3 months’ worth of cash security on a lease. And if they pay maintenance reserves, that number can grow to be a very substantial amount of collateral by year 4 or year 5, whereby you’re sitting on in the aggregate you know, close to 17, 18 months of security as compared to the rental rate.

I would give you – I’d offer one other example in my remarks and in Greg’s remarks, to remind you that last year, in Q1 of last year, we took slightly over $20 million into revenue as end of lease revenues precisely from that kind of a situation. In this case, it was at the Wyler bankruptcy. And so other lessors do the same, but that further demonstrates the value of these security deposits and maintenance reserves that you referenced.

Great. And just one follow-up. Do you still think that narrow body aircraft such as the A321neo XLR still make sense for longer haul travel in the future with people being a little bit more concerned about social distancing?

Steve?

Yeah, I mean the seat width is generally the same on an A321neo LR, XLR as on a wide body aircraft. So the only – you know, a lot of the wide body aircraft like 777, 787 A350 in the economy class section, where you obviously have a closer density. You have 3 seats on each side and then you have 3 seats in the middle and then you have 2 rows separating them. So most of the economy class seats on 787 A350s and 777s are triple seats, there are dimensionally about the same as on the A321 neo. So it’s kind of a hard question whether a passenger is willing to sit on an A321 going Transcontinental from New York to San Francisco. He’s willing to do that, is he willing to go another hour and a half or two hours to go across the Atlantic from Dublin to Boston. So I don’t think there’s been enough of passenger surveys to make that determination. But our belief is very strongly that once there’s a vaccine that could have a major positive impact on people’s willingness to travel. And then the social distancing will be significantly reduced. So while we expect that social distancing to be the flavor of the month for a period of time until we have an effective proven vaccine, I think subsequent to that, I think a lot of this will fade into history.

Yeah that makes sense. Thanks a lot guys. I appreciate it.

Sure.

Welcome.

Our next question comes from the line from Ross Harvey from the Davy. Your line is now open.

Hi, there and thanks for taking the time. Touching on the sale leaseback opportunities once more. We have seen other lessors like you know BOCA comes to mind that have transacted and scaled with flag carriers recently and, you know, we’ve heard from European Airlines that negotiations are ongoing on their existing fleets to sale lease back in those areas. Did you look at all of these deals and should we read into your non-involvement that maybe are keeping your powder dry for better deals down the line? Or did those deals not live up to your value conditions that you said earlier?

I think you’ve answered your own question. So I’ll just –

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Yeah let me just further expand. So we did look, I’m not sure that we looked at all of them. But we did look at a number of them and based upon the criteria that we laid out, we decided to keep our powder dry. And I think that’s one reason in my prepared remarks. I said specifically, that I think our patience will bear fruit going forward.

Okay. And a follow-up if I can. How are you thinking about the 25% of the customers that aren’t government supporter or flag carriers? I’m wondering is that where most of the deferral requests are coming from? And how do you see that prospects for these airlines?

No, I don’t think the deferrals and the ratio of government ownership are connected in any way, shape or form. We have seen a large cross section of airlines that have looked for some level of accommodation, irrespective of their ownership structure. So I think it’d be wrong to say that it’s the non-government owned airlines that have asked for help. That’s not really the case. Look, we have a lot of independent airlines that are not government owned that are doing very well. And have not even asked for any assistance. We have some that have asked for 2 or 3 months of partial deferment. But I wouldn’t necessarily put the non-government owned airlines into a different bucket of risk or greater exposure for us, because many of those companies are performing. Some are obviously having some difficulties. But we don’t want to imply that just because an airline is government owned or partly government owned, there are better credit. It just means that there is usually a greater strategic value of that airline to the national government. But we have business with a lot of small and medium-sized airlines that have only private ownership or they’re publicly owned that are very well run airlines.

Let me just also add, I don’t want there to be also a false assumption based upon our 75% of our customers have some form of government ownership. I need to be clear that we’re not saying that that means they’re all going to be fine, that they’re all going to get aid and everything’s going to be rosy, that’s not what we’re saying. We’re just saying, as Steve indicated that, it does indicate the importance or a vital importance of air transportation. These loans and support packages are going to the airlines are not allocated to specific creditors or lessors and that airlines all have to put in there, you know, how it’s going to be used and what they’ve done with other creditors, et cetera. So, you know, yeah, we’re glad to see this very much so, but please understand, we’re not saying that this guarantees that everything’s fine with all these 75% of our customers. Some of them might not get any governmental support, but it is encouraging to see that going across 75% of our customer base.

And we’re also seeing some government support for privately owned airlines that have no government shareholders.

Yep.

Okay, great. Thank you for the time.

Our next question comes from the line of Ron Epstein from Bank of America. Your line is now open.

Yeah. Hey, good afternoon, guys. Maybe going back to the prepared remarks, you mentioned about some of the newer entrants into the aircraft leasing market in recent years kind of chasing yield. How do you expect the aircraft leasing market to look when we get through this thing? You know, as you know, I mean, the market for aircraft leasing changed pretty dramatically through the financial crisis. So when we’re standing on the other side of this, you know, a year from now or 6 months or 2 years – however long it takes, how do you expect the landscape to be different among your competitors?

Thanks, Ron. I think I made that comment in my remarks. So I’ll start with that. Look, it’s just quite simple. I can’t predict quantitatively how many percent lessors will be et cetera. But suffice to say that we do believe that as we’ve seen, you mentioned the prior financial crisis. We think there’s a shakeout and we just think that there’s going to be fewer players ahead. Now, you know, speculating that the sort of top 5 or 10 players who have been around long time our seasoned management teams have been through difficulties before, I expect largely to stay. But there’s a whole cadre of, you know, 40, 50, 60 leasing companies globally, many of which have started recently that don’t have that experience. And so, there will simply be fewer leasing players and therefore, at all levels, starting with Boeing and Airbus, there’ll be fewer people to sell to. And I think one big lesson that both Boeing and Airbus are taking away from this is, they’re looking at going into this crisis, who had the best placement percentages. In other words, who had their marketing act together and had a really good level of placements going where they weren’t sweating bullets over what lessors going to specify, how to build this aircraft, because they were behind the power curve. And I think, in particular, I can tell you that the Boeing Company, I think has done a good job of moving a lot of those lessors, eliminating or moving them out of that chain. And I think that’s been a conscious effort. And I believe Airbus is doing the same thing. So simply to say, I can’t quantify it, but I can tell you that I would be very surprised if we didn’t see quite a bit a few players you know, two, two and a half, three years from now. Major guys will probably still be there and we need a strong aircraft leasing industry like we need a strong supply engine chain, engine suppliers and airframe suppliers. And I think that will still stay.

I think another factor, Ron will be the financing markets, because a lot of these smaller newcomers relied on either one of two things, either heavy dose of secured financing. And I believe that in this environment, the commercial banks will lower their advanced rates based on the most recent appraisers. So that’s going to affect the ability of these smaller lessors to finance aircraft efficiently and come out with competitive lease rates. And then we have a lot of bank owned smaller lessors that came into the marketplace in the last 8 or 9 years, particularly from Asia, where those banking institutions now because of the global financial stresses will redirect their resources to other things than financing airplanes that was more important priorities. So we think a lot of those bank owned lessors from Asia will throttle back and we’ve already seen that with their cancellations of orders and deferments with both Airbus and Boeing. And then the smaller boutique lessors I think will have more challenged access to both debt and equity capital.

Yeah, that makes sense. If I can just follow on with another question. In your remarks, and it seems pretty much consensus that domestic markets will probably recover quicker than international markets due to all the constraints with international travel. And going into this downturn, right, it definitely seemed like there was a bit of an overcapacity of wide body aircraft anyway. When you think about your portfolio going forward, do you think you’ll be even more skewed towards narrow bodies and wide bodies?

Yeah, I think if we take a snapshot of where we were a year ago? Where we are now? Where we’re going to be in two years, three years. I think on a relative scale the percentage of single aisle aircraft will definitely increase.

All right. And then maybe just one last final one, if I may. With the deal between Boeing and Embraer, you know, kind of falling apart given everything that’s gone on. Do you see a future for the E2?

With the Embraer – the air generation sorry. Sorry the current generation Embraer I suppose it has a good market base and a good market share. We do believe that, you know, there is a role for the two. There's a lot of those current customers on the current generation there, but clearly, there has been a handicap placed with the Airbus ownership of the 220 and now Boeing and Embraer are not coming together. So that clearly handicaps I think to some extent Embraer, I wish them well. I think they make a good product and I think you will find players taking the E2 especially amongst the existing 190s and to the extent that smaller gauge aircraft, generally speaking, are viewed favorably during the return to service or the recovery of passenger travel. You know, I believe Embraer will be successful in some of those places, but nevertheless, it is a handicap.

Yeah and the other thing, Ron, Embraer has a problem with right now it’s not their own making is that because of the pilot agreements and scope clause agreements with the US domestic airline, which by the way the sale of Embraer airplanes, the greatest number of sales and production has been the E175 to supply the US market, but unfortunately, the E2 175 is above the maximum takeoff weight that’s allowed by the scope agreements with ALPA and the large us carriers. So basically, whereas the 175 has been their hottest airplane in the last five years for export into the US, the E175-E2 is not eligible for any of these US domestic operations under the scope clauses that they had currently in effect. So that means that, in effect, only the E2 190 and the 195 are the really only two strong candidates that they have in their product line –

Thank you very much. Yeah, thank you.

Our next question comes from the line of Catherine O’Brien from Goldman Sachs. Your line is open. Catherine O’Brien: Thank you so much for the follow-up and really appreciate all the time tonight in this unprecedented time. So a follow-up to Koosh’s question just, you know, given you have upwards of a year of rentals covered by security and maintenance packages for some lessors, linking that back to your comment that you want to avoid being for sellers, would you consider parking aircraft to avoid taking a lower release rate if you can’t remark it at a rate you’re happy with in the very short-term or you know, sell that asset at a price you’re happy with? And then if so, you know, what’ll be the cash costs for parking the aircraft early? Thank you again so much.

Well, let me start and then I’m going to turn it over to Greg and of course, Steve, if he wants to comment on. Look, I think generally speaking, there’s a couple of fundamental premises you’ve heard us talk about extensions, et cetera, et cetera and many of them are at their current rates. A few were reduced in the normal course if you have a lease expiry coming up in a year and they’ve had the airplane for 6, 7, 8 years you’re going to extend at a lower rate anyway. But generally speaking, Cathy, during a time, where our least rates were under pressure and that is this time, we tend to go shorter on our lease extensions, you know, Steve referenced maybe two to three years as a general number. So our first line of tactical execution on the lease rate side and the yield side is to go short during periods where we have to lease aircraft out from – for less than what we think is their longer-term lease rate factor or value. The second part of your question as to at what point in time, we would take action. It’s hard to give you – the answer is yes, we would take an aircraft and park it. There is a minimum threshold that which we don’t think leasing the aircraft makes sense. But there’s also other tools that we can use to bridge the gap. And that is specifically for example, power by the hour arrangements which have been used in the industry commonly. And we use those tools occasionally here. So for example, an example might be that we come up on a solution with an airline where you continue to pay a much smaller amount on a fixed rate basis, but you…

I think, John, just to add I think it’s pretty clear that storage costs are really insignificant if you think about it. But I think the key here is that we have the airplanes that the airlines want to have, right. So what you see and what we mentioned in the prepared remarks is that you see a lot of early retirements in some of these old ageing aircrafts. You’ve seen lots of announcements from a lots of major carriers. You see airlines gravitate towards the lease and they gravitate towards the airplanes, the younger airplane that they have in their portfolio or their fleet, many of which are the airplanes that we have. So I think that’s really what you see happen when they get a fresh start when they want to recapitalize and they want to refocus on what plans they want to operate, many times are focusing on our aircraft which puts us in a really good position. And we had a bunch of 757, 767 A340, 747, you know story might be different. Catherine O’Brien: Thank you very much.

That brings us to the end of the Q&A session of today’s call. I will now turn the call over to Mary Liz DePalma for closing remarks.

Okay, thank you everyone for joining today. That’s it for our call. We look forward to speaking with you again after the conclusion of the second quarter. Operator, thank you so much. You can now disconnect the line.

Thank you.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.