Good afternoon, 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's Second [ph] Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [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 third quarter 2024 earnings call. This is Jason Arnold. 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 third quarter 2024 results, a copy of our earnings releases available on the investor's section of our website at www.airleascorp.com. This conference call is being webcast and recorded today, Thursday, November 7th, 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, including as a result of the Boeing labor strike, 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 we issued today. This release can be found both in the investors and press section of our website at www.airleascorp.com. Additionally, given ongoing litigation, I'd like to ask everyone to not ask any questions about our Russia fleet insurance claims. As a reminder, unauthorized recording of this conference call is not permitted. I'd now like to turn the call over to our Chief Executive Officer and President, John Plueger. John?

Thank you, Jason. Well, good afternoon, everyone, and thanks for joining our call today. During the third quarter, Air Lease generated revenues of $690 million, and we generated $0.82 in diluted earnings per share. Our results benefited from the continued expansion of our fleet, partially offset by lower end-of-lease revenue as compared to the prior year. We purchased 20 new aircraft from our order book during the quarter, adding $1.9 billion in flight equipment to our balance sheet, and sold nine aircraft for approximately $340 million in sales proceeds. The weighted average age of our fleet declined slightly quarter over quarter to 4.6 years, while weighted average lease term remaining extended slightly to 7.1 years. Our fleet utilization rate remains exceptionally strong at 100%. Our $1.9 billion in order book deliveries came in very close to the $2 billion we tell you to expect for the third quarter, as our outlook reflected anticipated impact from OAM delays, including the Boeing strike. Despite the strike, this was a record quarter for ALC by CapEx for new aircraft deliveries. We're pleased that the strike is now over, and Boeing can move forward. I do want to just remind you that it will take some time for Boeing to restart the max production lines and return to prior build rates. Deliveries of 787s are ongoing, and in fact, we took delivery of four of them, 1-9 and 3-10s, during the quarter. We currently expect to receive approximately $900 million of deliveries in the fourth quarter of this year. Assuming so, it would mean approximately $4.6 billion deliveries for the full year 2024, so within the $4.5 to $5.5 billion range we guided you at the beginning of the year, and in fact, very sizable relative to the $26 billion fleet we had at…

Thank you very much, John. Our team, as well as John and myself, continue to travel the globe extensively to meet with current and potential new airline customers, and we come away from these conversations very enthused by the steady and solid demand for the new commercial aircraft comprising of our fleet and our forward order book. Long-term drivers of this demand remain strong, which, as John mentioned, are supporting very attractive and improving lease rates on our new aircraft placements. Customer requests for additional aircraft, meanwhile, are consistently high in volume as well, all the way out to 2029. In addition to typically being the highest demand segment of the market, Air Lease’s new aircraft focus also meaningfully limits impairment risk of our business, while our cautious approach toward credit has limited exposure to some of the riskier airlines, including a few of the more challenged LCCs and ULCCs. We're excited about the value proposition of our fleet and our order book in this strong demand environment. Our new aircraft are directly purchased from the OEMs at significant volume discounts, providing us meaningful embedded value in these assets and boosting our lease yields. Our orders were placed well prior to the run-up in aircraft demand, further bolstering values in the current market. Underpinning aircraft demand is continued overall strength in passenger traffic, as seen in global air traffic volumes, which rose about 7% year-over-year, according to the latest IATA data report. Total international volume was up about 9%, with most markets continuing to use and rise at double-digit or near-double-digit rates. Asia-Pacific traffic remains the strongest growing market, expanding 19% year-over-year. We continue to expect Asia-Pacific international travel growth to remain one of the strongest globally, as international traffic in the region gains further momentum. International traffic in Latin…

Thank you, Steve, and good afternoon, everyone. During the third quarter, Air Lease generated total revenues of $690 million, which was comprised of approximately $625 million of rental revenues and $65 million from aircraft sales, trading, and other activities. Total revenues rose by approximately 5% as compared to the prior year's quarter, benefiting from the growth of our fleet, partially offset by lower end-of-lease revenue. Our portfolio yield, net of end-of-lease revenue, maintenance reserve revenue, and lease cost amortization remained relatively flat as compared to the second quarter. During the third quarter, we recognized a $12 million decrease in end-of-lease revenue as compared to the prior year period. As we've discussed previously, we've had very limited lease expirations in 2024, and most leases scheduled to expire were extended as a product of the strong demand environment that we are currently experiencing, resulting in very limited end-of-lease revenue recognized in the period. As John touched upon earlier, our strong lease extensions are supportive of our overall portfolio yield and add to the contracted cash flows, further enhancing the value of these aircraft. Sales proceeds for the second quarter totaled approximately $340 million for the sale of nine aircraft. These sales generated $42 million in gains, representing roughly a 14% gain on sale margin. As we've said in the past, gain on sale margins will vary from quarter to quarter based upon the mix of aircraft sold and market conditions. Based on our sales pipeline, we continue to expect to see healthy gain on sale margins towards the upper end of our historical range of 8% to 10%. These gains continue to reflect the significant value embedded in our fleet, which is carried on the balance sheet as historical costs netted depreciation. Moving on to expenses, interest expense rose by roughly $42…

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

Thank you. [Operator Instructions]. We'll take our first question from Jamie Baker at JPMorgan.

Thanks, everybody. Good afternoon. So, John and Steve, just thinking back to Farnborough, you know, one interesting conversation that Mark and I had with one of the OEMs was, I mean, the idea being thrown around was that maybe, and I emphasize maybe, the OEMs had given too much business to all the various lessors, you know, around the world. And once production eventually, you know, begins to ramp up, you know, perhaps the OEMs will concentrate their efforts on just the largest platforms out there. And obviously, you know, Air Lease would make that cut. But as you think about the interplay between the OEMs and some of the smaller platforms, I mean, do you think anything changes between now and, I don't know, the end of the decade?

That's a really good question, Jamie, because, as you recall, during the time when John Leahy led the global aircraft sales and marketing activity at Airbus, he was very, very focused on expanding the number of customers, both airlines and lessors. And he was also very focused on gaining market share vis-a-vis Boeing, particularly in the single isle area. So, consequently, Airbus did a lot of selling at the end of the previous decade, leading all the way up to the pandemic, and expanded their customer base of lessors by more than double of where it was, say, 10 years ago. At the same time, of course, they brought in a lot of customers and, in fact, replaced a lot of 737 operators with Airbus A320 family aircraft. However, now, with the huge demand from the airlines resulting from traffic growth and the fact that we have this stagnation during the pandemic, I think both OEMs are now focused on quality with lessors rather than quantity. And I think they're meaningfully looking at the placement capability of the lessors to airlines and to broadening the market base for their products, not just a quantitative increase in selling to lessors. So, we're seeing this trend, and we believe it's very, very beneficial to Air Lease since we're the only lessor that has launched a whole range of both Airbus and Boeing airplanes as a first customer. And secondly, we have brought a lot of new airline customers to both Boeing and Airbus that theretofore did not operate those types of aircraft.

Steve, I appreciate that. Thank you very much. And then second, and admittedly, I sort of come from a U.S. airline perspective or bias, but, you know, I've often thought about sale-lease tax as more of a, I don't know, reserved for times of strain. You know, I'm thinking back to the Southwest deal that they had to do when fuel prices collapsed, Delta during COVID, you know, that sort of thing. But it's increasingly, it seems to be part of the regular way of doing business. Obviously, Frontier are heavily dependent on sale-lease tax, Southwest leading into it. Just curious how you're thinking about that broader sale-lease tax market as it relates to Air Lease. Thanks in advance.

Yeah. Well, I'll take that one. Thanks, Jamie. Look, it's a reasonable question. I don't think there is going to be really that much departure from kind of your historical view in that we're now in a period where airlines have ordered a lot of aircraft or taking deliveries. At the same time, there have been some profit warnings from a few of the airlines around the world, which, by the way, we don't see in terms of demand to us at all. But with that, I do expect that the airlines will look to sale-leaseback financing because they have more to finance. There's more to get done. And so that's really, you know, of no surprise. At the same time, you know, we're constantly asked for more aircraft from all of our customers globally. So my point here is that that need for them to finance larger numbers of aircraft is not impacting our order book business at all. The demand remains very, very strong.

Yeah, just to add a couple of. Observations to what John just said, if you look back over the last five years or six years, Jamie. And you look at those airlines that grew the fastest. And they were low cost and carriers like with their and easy jet. And airlines in the U. S. like Frontier and Spirit relied almost totally on fairly fast transactions. And one of the attractions was that. These airlines order large quantities of aircraft and volume. And then they sell those assets that delivery at a higher price. So they actually have a cash game. Indigo in India is probably the best example of that. A big part of indigo's balance sheet. Was the games that they were able to generate to the sale leasebacks right up front in terms of cash. Now, yes, they have to amortize that gain over the life of the lease. But the liquidity benefits to these airlines. From say, leaseback significantly added to their growth. And some of the carriers, like, Frontier and Spirit, almost every one of their airplanes is lease. They have very few own their craft. Same thing with Wizz Air in Europe. So it was an interesting trend and as John said, with the insatiable appetite. For aircraft and capital airlines will continue to use the sale-leaseback methodology as a powerful tool.

Even John, I appreciate it. Thank you for the perspective. Take care.

Very thanks, Jamie.

We'll move next to Terry Market at Barclays.

Hi, thank you. Good afternoon. So your profit margin this quarter was right in line with your guide of flattish for the year. But I'm thinking, as we kind of look forward and think intermediate and long term, is very normalized or through the cycle profit margin, we should be thinking about? And kind of what are the drivers and timeframe of kind of getting there?

Greg?

Thanks, Terry. We haven't given a guy for 2025 yet. There's some things that are working on the positive side, which I'll go through shortly. I mean, very clearly we have the delivery of airplanes in our order book, which have great leases on them. We have the extension or the lease expiry opportunity where we have a significant amount of airplanes that are coming up for renewals, which we think a lot of them will stay with the existing customers. And we think we're able to use that as an opportunity to increase lease rates there as well. We have a great pipeline of aircraft sales with very healthy valuations on those as well. And the last piece of the puzzle really is with interest rates. We have 80% of our debt fixed. We're benefiting from the 75 basis points and Fed cuts so far this year, which should help. But if you look at our debt book of $20 billion and you say, call it, 20% of it being floating, that's almost $3.8 billion, 75 basis points on that will save us roughly $28 million, $29 million annually. So I think those are all very positive things. We do have some refinancings to do, but today's finance, long term financing rates are a lot lower than they were 18 months ago. So I think there's benefits on the financing side as well to take out some of that floating rate bank debt that we put on as well. So I think those are all positives and we'll hold off on giving further guide on where long term margins should be. But over time, we'd like to see them continue to improve.

Got it. That's helpful. And maybe as a follow-up, if I ask this a different way. If I look at your profit margins pre-pandemic in 2019, they were in excess of 30%, 35%. Has anything structurally changed in the industry or your business, whether it's geographical mix or anything else that would kind of prevent you from getting back there?

No, I don't think so. I think we're having to work through some COVID era restructurings, COVID era lease placements that we're working through. But over time, we're continuing to push yields higher. And I think the thing that we have working for us is we have a great demand environment, right? We have a huge demand for airplanes. There's a scarcity due to the supply, demand and balance with what's going on with the OEMs, creating a ton of value for the airplanes that we have on our fleet, in our fleet plus on order. So I think all of those things are positive. I think it just takes time to work our way through some of those COVID era deals I mentioned earlier.

Great. Thank you.

We'll move next to Hillary Cacanando at Deutsche Bank.

Hi, thanks for taking my question. You mentioned that market lease rates are continuing to go up. Do you think that there will be a point where airlines push back and say, no, these rates are just too high, we're not taking them? Or from your experience, do you think it's more important for these airlines to get the aircraft and so, they'll take the aircraft no matter how high the lease rates?

Hilary, thanks. I'll take that. Hilary, I can tell you that for 39 years, airlines have consistently told me my lease rates are too high. And the short answer is, no. Leasing, the leasing element is a relatively small portion of the P&L cost to all airlines. There still remains a competitive environment across lessor. So airlines do have their choice. But even a 10% increase in lease rates is absolutely, it's nothing to even talk about. So, no. Airlines will always say lease rates are getting too high. But the behavior of our placements and the continued appetite that we have and the deals we're achieving would argue otherwise.

Great. That's great to know. And then recently, we saw Avalon buying Castlelake's leasing portfolio, and it looks like there may be some other portfolios that could be up for sale. Just wanted to get your thoughts just regarding M&A and just, you know, just consolidation, broader consolidation in the industry. Either as an acquirer of another lessor, what your thoughts are there, and then maybe even like as a seller, just what your thoughts are regarding consolidation in the industry as a seller.

Yeah, Steve, you want to take that?

Yeah, I didn't quite get the full tone of the question.

Just wanted to get your consolidation, like would you ever be interested in participating as an acquirer of another lessor, or even as a seller of -- of a maybe piece of your portfolio, just your thoughts on the consolidation aspect of the business.

Yeah, that's a good question. So, we're constantly selling packages of aircraft. In many cases, those packages are meaningful to smaller lessors and investors and represent a significant growth in their portfolios of aircraft. We have looked at every leasing company acquisition opportunity in the last 14 years. And we have not found any thus far, including those that were acquired, where the acquisition of those companies would have been accretive to our financial position. We already have a very strong management team, a very strong marketing technical team. So, we don't really need to acquire another company to gain that talent. Secondly, none of the other lessors can replicate our order backlog, because we bought those aircraft in large volumes at very nicely discounted prices in 2020, '21, and '22. At a time when people were not buying airplanes, they were in stress, and that's when we placed the bulk of our backlog orders. So, those things we cannot replicate using a third-party lessor. So, therefore, we have not really been able to pursue a transaction that makes sense for us. So, we continue to sell assets, particularly our older assets, at significant gains, as you saw this past quarter. And we'll continue to enjoy the benefits of the aircraft that we ordered years ago, where we're taking deliveries now at extremely attractive pricing that cannot be replicated by our competitors.

Hillary, I would just add to that, that we always, as a management team, as a board, we always continue to look at all opportunities on the M&A side as well. And I do think, as the industry continues to grow, there's just going to be an ongoing consolidation, naturally, that has been and will continue to take place within the industry overall, especially as some of the smaller lessors consolidate and ramp up their scale and size. So, nothing unusual here.

Got it. Thank you. That's helpful.

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

Great. Maybe following up on a couple of the earlier questions. The 50 or so planes that you have that end their lease terms in 2025, that's up significantly from 2024. You mentioned that a lot of them will stay with the current lessors. If those had been renegotiated during COVID, will the leases step back up? How does that work? And how should we think about, I get that may not be end of lease revenues, but if they were to renegotiate it lower, would they go back to where they were pre that renegotiation?

Yeah, it's really simple. We reprice the market. We have to mutually agree on an extension rate. And that gives us a great opportunity to reprice the best that we possibly can to much more current market levels. So it's not a question of just going back to what it was pre-COVID, etc., It's we want to take advantage of the strong market today. And that's our focus.

Got it. Okay. Well, that's great. And I know you said that you didn't really want to talk, John, about the deliveries in 2025, but maybe if you could just talk about some of the factors that have gone on in the last few months, now that you've got the Boeing strike at least over, in terms of the process, I guess, of getting back to normal or more normal in terms of deliveries. Maybe just talk about that a little bit, a little further out than Q4?

Sure. Look, on the risk side, one element that's in the back of our mind is while the Boeing strike is now over, we had a work stoppage for a prolonged period of time. That work stoppage flowed through to the second and third tier suppliers, and much with a lot of negative financial consequences. So it could be that as we look forward, not today, not the airplanes that are already sitting in line ready for delivery, but as we look forward three months or four months or five months, that may have a further impact on the supply chain to both Airbus and Boeing. So I would say that is something we're looking at on the risk side. On the positive side, we think Boeing is being very deliberate and being very careful in its production resumption and with a super, super eye towards quality. And we applaud those efforts a lot. And if it means that the ramp-up is a little bit more delayed because of a focus on quality, so be it. We count on quality. Our aircraft customers count on quality. Steve mentioned it earlier in his remarks as well, and that applies to Airbus as well. And so hopefully, Boeing will be able to meet a reasonable acceleration time frame. I don't know what that's going to be. Perhaps it's a little quicker than what we might have originally considered. But if not, so be it.

Thanks very much.

We'll take our next question from Stephen Trent at Citigroup.

Good afternoon, gentlemen, and thanks very much for taking my question. The first, I'm curious how you guys are thinking about sort of long-term optimal mix of free versus -- excuse me, fixed rate versus floating rate that I think you said it's currently 20% floating. And when you think about this over time, just trying to get a high-level handle, how you're thinking about locking in those spreads versus making a call, at least in a tacit sense, on where interest rates you think are going to go?

Greg?

Sure. I'll take that one. Our long-term fixed floating rate target has been 80-20 for at least 10 years, maybe 15 years. We typically reserve that 20% floating rate debt for our revolver draws and bank financings to work as working capital to buy airplanes from our order book. And then we typically, as we approach, we build a lot of liquidity, and then we access the bond market to take those short-term borrowings out on a longer-term fixed rate basis. That's how we've been running the business all along. We had been running a little higher, but over time, we reverted back to our long-term target of 80-20.

Appreciate that, Greg. And just one more as my follow-up. When you, not you guys, but the lease market around the world, you've had some events here and there with problem airlines per se, the most obvious one in Eastern Europe, of course. But has anything in the market that you've seen over the last two years given you a sense as to maybe taking a second look at your risk management policy, any sort of sense as to whether you might pull the trigger more quickly, taking your lease team off an account and putting a risk management team onto an account?

Look, that's something we manage daily and weekly here. I mean, there's really nothing new. I think in our management and board-level discussion, as I imagine in most global companies all over the world, we are looking more at geopolitical risk, take that very much into consideration. We see a growing appetite for aircraft and opportunities, for example, in Central Asia. That is emerging stronger than it was a year or two year or three year ago. And we think it's actually a pretty good area for development. And we have reduced by design our exposure in China quite substantially over the past four years to five years because we started from a point where we were over-invested in China and we've now come down considerably to less than 5%. So I would say that we have an ongoing process here. Broadly, the regional outlooks have not changed all that much. Steve identified from IATA, for example, that the Asia-Pacific region is showing the strongest growth at 19%. So we're concentrating our efforts there and in Europe. The Middle East has been rapidly growing as well. So I would just say, it's part of our ongoing calculus. With any and all political and geopolitical events, very much on the forefront as we go day-by-day. And we'll be looking at that, obviously, as we enter a new administration in Washington, D.C.

Just to add to that, John, I think it's no secret that our customer base is high-yield in nature. And it has been for many, many years. And we've designed the business to deal with that, the credit quality of our customers by maintaining strong security packages, having incredible asset diversification. So our average customer hold is less than 1%. Our average country exposure is less than 2%. And I think it goes without saying, our biggest credit mitigate in itself is the aircraft that we have on our fleet, the youngest, most fuel-efficient, most technologically advanced, highest-in-demand aircraft. Those are assets that tend to do best in times of stress with our airline customers. And right now, we're sitting in a pretty good position, but we're always watching that to John's point.

We really appreciate the color. Thank you.

We'll move next to Ronald Epstein at Bank of America.

Hey, good afternoon, good evening, guys.

Hi, Ron.

I have a question. When would we expect to see the net interest margin reverse and start to rise?

Greg?

I mean, as I mentioned earlier, we haven't given guidance on long-term margins, but I think as our lease yields continue to improve, the Fed continues to ease, the big question is what happens with the yield curve, but I think we're moving in the right direction. So I think we'd like to see some expansion in the near term.

Okay. And then, I mean, just for Steve and John, what's your thoughts on the possibility of a third OEM? If there was a third OEM who could actually deliver airplanes right now, and maybe that's just a pipe dream because everybody's held up by the supply chain. Would you be supportive of that or no?

Steve?

In some respects, yes, Ron. I mean, we do have two number three OEMs right now. Neither one is on a scale or level where they're truly able to compete in terms of quantities and breadth of customers, Embraer and Comac. So we're going to watch that carefully. And to the extent, Ron, that Boeing is not in a position right now from all appearances to launch in the near term a new family of aircraft to replace the 737, 757 size market, it could be tempting for someone to perhaps look at the feasibility of doing something that also has some technological leapfrogging of the A320neo family. But that is an extremely difficult, complicated, and capital intensive. And you know as well as I right now, the regulatory climate both in the US and Europe on new aircraft are extremely difficult and challenging. Even the A321neoXLR took a lot longer to certify. Look at what's happened to the 737 MAX 7, which to me is probably the easiest derivative of the MAX 8. And Boeing has not been able to secure FAA certification. Not even talking about the MAX 10 or the 777X. So I think for a wealthy enterprise like a Tesla, for example, to launch a new aircraft would be a very courageous and risky step. So what we look forward to is perhaps Embraer looking at ways to draw upon the fact that they've already built a worldwide product support, airline, AOD support, spare support organization. And if they could leverage that to some kind of a partnership with another entity, they could certainly become a number three player. Comac, I'd say we'll have to watch two things. What the geopolitical climate, vis-a-vis China, the US, and Europe. Bear in mind that a big value portion of the 919 is US and European manufactured equipment, including the engines, and a lot of the avionics and landing gear and APU and so forth. So that's one to watch. They certainly are committed to becoming a major player, but that's going to take a long time for them to build up a global airline support organization, logistical network. Look how long it took Airbus. Probably took Airbus 15 years to 20 years to get to the scale that they needed to be at to compete with Douglas and Boeing at that time. So it'd be nice to see a third player to keep everybody honest, but right now I'd say the headwinds, Ron, are greater than the tailwinds to do that.

Got it.

I don't know how you feel, but that kind of summarizes our impression.

Cool. Thank you.

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

Thanks, Audra. Thank you everyone for participating in our third quarter call. We look forward to speaking to you again in February on our fourth quarter call. Operator, please disconnect the line and thank you again for your assistance.

You're welcome. And this concludes today’s conference call. You may now disconnect.