Air Lease Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 10 speakers on the call.

Operator

Good afternoon. My name is Audra, and I will be your conference operator today.

Speaker 1

At this time, I would

Operator

like to welcome everyone to the Air Lease Corporation Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Mr. Jason Arnold, Head of Investor Relations.

Operator

Mr. Arnold, you may begin your conference.

Speaker 2

Thanks, Audra, and good afternoon, everyone, and welcome to Air Lease Corporation's Q2 2024 Earnings Call. This is Jason Arnold, and I'm joined today by Steve Hazy, our Executive Chairman John Pfluger, our Chief Executive Officer and President and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our Q2 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.

Speaker 2

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 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.

Speaker 2

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 pretax 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.

Speaker 2

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 Pflueger. John?

Speaker 3

Well, thanks, Jason. Good afternoon, everyone, and thank you for joining us on our call today. During the Q2, ALC generated revenues of 667,000,000 dollars 0.81 dollars 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 2 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 Q2 adding $940,000,000 in flight equipment to our balance sheet and we sold 11 aircraft for approximately $530,000,000 in sales proceeds.

Speaker 3

Deliveries came in $600,000,000 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 $20,000,000,000 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.

Speaker 3

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 relative to those witnessed prior to the global pandemic. As you are all likely now well aware, more delays have been announced by the OEMs, an outcome which we've highlighted is probable for some time now. We told you last quarter we were expecting about $1,500,000,000 in new aircraft deliveries in Q2. Our actual total was $940,000,000 Our estimate last quarter included several wide bodies that have now subsequently delivered.

Speaker 3

Boeing MAX delays are ongoing with a slowdown of production to improve process and quality control and FAA constraints on production rates. On the wide body side for Boeing, slow 77 production ramp up is also persisting as a product of supply chain constraints. Supply chain challenges of course are also impacting Airbus resulting in them recently pulling back delivery expectations for 2024 and further pushing out some of their production ramp up aspirations as well. Airbus cited issues with receiving engines from both Pratt and Whitney and CFM among other key components as a source of delays. While some have wanted to point fingers at one party or another for being a primary source of delayed deliberate delays, the fact of the matter is that the majority of the aerospace industry is experiencing ongoing supply chain challenges.

Speaker 3

We expect these challenges to persist to a greater or lesser degree for the next 3 to 4 years and we're not holding our breath for a major breakthrough or shortening of this time frame given the complicated moving parts faced by the industry. Accordingly, demand for commercial aircraft remains high. Given these added OEM delivery delays and production rate goals have not been achieved, airlines continue to scramble for lift wherever they can find it with the narrow body segment of course still the hottest though increasingly wide body demand is accelerating as well. So we continue to believe that supply chain dynamic points towards aircraft shortages for quite some time ahead. Despite the recent delivery delays impacting our Q2, we are maintaining our view that aircraft deliveries for us will fall in the 4,500,000,000 to 5,500,000,000 dollars range for the full year 2024 and we're expecting aircraft deliveries for the Q3 to be approximately $2,000,000,000 However, there are several variables, the biggest of which is a potential labor strike at the Boeing Company, which could result in changes to our Q3 delivery expectations.

Speaker 3

Based on current delay notifications from the OEMs and our internal projections, we anticipate deliveries to be about $5,000,000,000 total for the year, which is at the midpoint of our range. It's important to note that even though even at the lower end of our expected range, our deliveries will offer meaningful growth to our $27,000,000,000 owned fleet. As a plus, the commercial aircraft market shortage is offering us the benefit of robust secondary market demand for our aircraft and sales volume for the 2nd quarter came in line with what we told you to expect at around $500,000,000 Our sales pipeline remains robust at $1,500,000,000 including roughly $600,000,000 of flight equipment held for sale and $900,000,000 of aircraft subject to letters of intent with a great variety of buyers. Given the time required to close sales transactions, some of these aircraft are expected to close in the first half of twenty twenty five, though based on sales completed thus far in twenty twenty four, we continue to expect to close $1,500,000,000 in total sales for this year. Let me remind you that we use aircraft sales to optimize our fleet in terms of aircraft age, type, yield, customer concentration and geographic concentration.

Speaker 3

So risk balancing and optimization is always part of the calculus and therefore there is a mix in our sales package of levels of gains on individual aircraft. As for the Q3, we believe around $350,000,000 in sales should close, though we continue to highlight the fact that sales timing can be impacted by factors outside of our control. Overall gains on aircraft sales packages remain healthy and continue to enhance the returns generated by our business. Keep in mind that there will be occasional fluctuations on the gains as we saw this quarter due to timing of closings of individual aircraft sales in various packages. I do want to add a brief comment on lease extension activity in our fleet.

Speaker 3

Lease extensions remain elevated and continue to benefit our business more broadly at present, particularly given reduced time off lease along with the attractive lease rates we are currently realizing on extensions that we believe create meaningful long term value. That said, we only have a handful of lease expirations for the remainder 2024, which is reducing end of lease revenue this quarter and likely for the rest of the year, particularly as compared to the prior year. But let me be clear, we prefer lease extensions with the current operator at healthy rates as there are no reconfiguration or transition costs or downtime associated with configuration changes for a new operator. As we look forward, funding costs for our business appear likely to benefit from anticipated Fed rate cuts. Clearly, the timing and magnitude of these cuts are outside of our control, but our business is a significant beneficiary of the normalization of the shape of the yield curve, following the longest period of the curve inversion on record even longer than witnessed in the late 1970s.

Speaker 3

Adding in the continued strong demand environment for commercial aircraft and industry supply chain dynamics that are not likely to resolve for some time, this overall backdrop should support strength for new aircraft lease rates and values benefiting aircraft gains on sales and bolstering lease rates on lease placements for our forward order book. Finally, I'd like to remind everyone that we are 100% placed on our wide body passenger order book. The only wide bodies we have remaining are our launch order for 7 new A350 freighters with deliveries now looking to commence in 2027. The airfreight and cargo markets have strengthened meaningfully over the past 6 months as the tax in the Middle East on commercial cargo ships have continued and the capacity for ships transiting the Panama Canal remains significantly reduced due to low water levels feeding the canal. We believe these factors will continue and as such we are getting robust inquiries from a variety of airlines on our A350 freighter positions.

Speaker 4

So similar to last quarter, I'd like to close

Speaker 3

by saying that we manage Air Lease Corporation with a mindset of long term benefit of shareholders. The factors I've outlined in my remarks give us confidence in our financial performance in the years ahead. So now I'd like to turn the call over to Steve Hazy, who will offer you some additional commentary. Steve?

Speaker 5

Thank you very much, John. We've just returned from the Farburo International Air Show 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 6 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.

Speaker 5

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 2nd 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.

Speaker 5

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-eighty percent range, which also constrains commercial aircraft supply, likely pushing beyond record levels on a global basis.

Speaker 5

Rising load factors typically benefit airline yields and profitability, though do eventually begin to challenge airline operations as aircraft become more completely full, further bolstering the need for new aircraft such as those from our forward order book. With delivery delays persisting, there's not much good news from the OEMs. We are pleased, however, to report that Airbus A321 XLR finally received the Tiasa type certification in mid July with the FAA to follow very soon. It is possible that this is an important step for the entry into service for this aircraft type. As most of you know, Air Lease is a launch customer of the A321 XLR, which is the extended range version.

Speaker 5

And we look forward to huge potential for this aircraft type in the coming years. A number of potential new city pairs that this aircraft can serve with its range and payload capability is extremely significant and can add to network flexibility, particularly on the transatlantic routes between North America and Europe, but also from North to South America and in a number of other international markets as well. We believe new city pairs will likely siphon some traffic away from larger hubs, but will also stimulate new demand as well. For example, travelers are very likely to think differently about taking a flight from South of France, say Bordeaux or Nice to various U. S.

Speaker 5

East Coast cities if they no longer have to take a long trip by train or car from the airports to the larger hubs or make connections, which can be very frustrating. With a 4,700 nautical mile range, the possibilities are very exciting for the A321 XLR and is likely to invigorate travel demand in many markets. Airline profitability on these routes should also benefit given reduced fuel burn and more easily manageable amount of capacity and network flexibility for these aircraft. Lower fuel burn, of course, also equates to reduced emissions, which Airbus sites at 30% below prior generation alternatives, for example, the 757-two hundred. Our customers are very eagerly looking forward to receiving these new aircraft and putting them to work.

Speaker 5

We expect to receive our first A321 XLR in the late Q2 of 2025. And assuming all else remains equal on Airbus' production capabilities. As a reminder, Air Lease is one of Airbus' top A321 XLR customers with 49 aircraft on order. We're one of the largest orders as compared to those major airlines and we're by far the largest XLR customer among the lessor community. Returning to ALC's 2nd quarter results, we delivered 2 more A220 aircraft to ITA Airways, the national carrier of Italy.

Speaker 5

As you know, ITA's growth and expansion has been further strengthened by the recent EU approval of a major investment in the airline by Lufthansa. We also delivered 5 A321-200neos in the quarter, including 2 to Transavia Airlines based in Amsterdam, Netherlands, one to ITA as part of a 9 aircraft deal with the airline, one to a Danish operator Sun Class Airlines and one to LATAM Airlines, which is the largest airline in Latin America based in Santiago, Chile. We also delivered 2 730seven-eight MAX aircraft during the quarter, including 1 to Malaysia Airlines as part of our 25 aircraft 730seven-eight hundred placement with the airline and one of the Navy's, making it the 12 737-eight we have on lease as a national carrier of Poland. We also delivered a 767-nine to Korndon Dutch Airlines based in Amsterdam replacing a 730seven-eight 100. On the Wallaby side, we delivered 1 new A330900neo vehicles and 6 A350-1000s we have with that airline.

Speaker 5

This specific A330-900, which I just mentioned, was delivered to us and Virgin in June and was featured and displayed very successfully at the Farnborough Air Show. We also delivered 1 A350-nine hundred to Air France, another one of our key European airline customers. Lastly, we delivered 1 new Boeing 787-nine to Aeromexico, the national flight carrier, further enhancing the airline's international capacity expansion, particularly across the North Atlantic. We are continuing to pursue avenues of recovery for our aircraft that were retained in Russia. As you recall, we have multiple lawsuits pending against our insurers, including a case in California, which is set for trial in the spring of 2025.

Speaker 5

Given the lawsuits, we won't be able to speak further on the topic other than to say that we still feel very strongly about the validity of claims and we're pursuing our insurers vigorously. In closing, I'd just like to add that we see very strong support and tailwinds building long term momentum for our business. Aircraft supply demand remains strongly in our favor and given the production constraints and challenges that's unlikely to shift direction for multiple years ahead and potentially benefiting lease rates and also gains on sale of aircraft for many years to come. Additionally, the financing environment now appears set for improvement after a long extended period of abnormally high yield curve inversion. We feel good about these trends and remain overall positive in our outlook for the future.

Speaker 5

I will now turn the call over to our CFO, Greg Willis, for his more detailed comments on our Q2 financial results.

Speaker 6

Thank you, Steve, and good afternoon, everyone. During the Q2, Air Lease generated total revenues of $667,000,000 which was comprised of approximately $610,000,000 of rental revenues and $57,000,000 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.

Speaker 6

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 $2,000,000 in end of lease revenue as compared to $15,000,000 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.

Speaker 6

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 remained flat as compared to what we recorded in the Q1 of 2024. OEM delays also slowed our revenue growth during the quarter due to $600,000,000 of aircraft that were penciled for the Q2, which ultimately slipped to the 1st few weeks of Q3. Sales proceeds for the Q2 approximately $530,000,000 from the sale of 11 aircraft. These sales generated $40,000,000 in gains, representing a roughly 8% gain on sale margin.

Speaker 6

As we have said in the past, gain on sale margins will vary from quarter to quarter based on the mix of aircraft sold and market conditions. However, looking at our aircraft sales pipeline of $1,500,000,000 we expect to see healthy margins towards the upper end of our historical 8% to 10% range. I would like to remind everyone that in addition to enhancing returns for our business, attractive gains also highlight the embedded value of our $27,000,000,000 fleet. Moving on to expenses. Interest expense rose by $18,000,000 year over year driven by a 50 basis point increase in our composite cost of funds to $3,990,000 This was a primary contributor to the uptick in operating expenses relative to last year.

Speaker 6

Our funding costs did decline slightly quarter to quarter as we completed attractive fixed rate financings in June. We continue to significantly benefit from our largely fixed rate capital structure, which has helped us to moderate the impacts of the interest rate environment witnessed over the last couple of years with now over 88% of our financing at fixed interest rates at quarter end. Depreciation expense continues to track the growth of our fleet. SG and A meanwhile declined slightly relative to the prior year's quarter and was flat relative to that period as a percentage of revenue, while down as a percentage of revenue as compared to the Q1. Moving on to our financing activities for the quarter.

Speaker 6

In June, we completed a successful dual tranche senior unsecured notes offering totaling 1,200,000,000 This transaction was several times oversubscribed and was comprised of a $600,000,000 notes offering at a fixed rate of 5.3 percent maturing in 2026 and another $600,000,000 in notes at a fixed rate of 5.2 percent maturing in 2,031. This offering further bolstered our strong liquidity position of $8,200,000,000 as of quarter end. In addition, let me remind you that our 29,000,000,000 dollars in unencumbered assets and our $30,000,000,000 of contracted rentals remain a key source of strength for our business. Our debt to equity ratio at the end of the second quarter was 2.69 on a GAAP basis, which net of cash on the balance sheet is approximately 2.63 times, both roughly flat as compared to the prior quarter. We will continue to utilize proceeds from aircraft sales to pay down our debt with the goal of reaching our long term debt to equity target over the medium term.

Speaker 6

To conclude, we remain confident in the demand for aircraft in our fleet and order book given the shortage of aircraft supply in the market driven by the persisting OEM production challenges as well as the long term secular trends that are driving passenger traffic, both of which we believe will ultimately benefit our business. With that, I'll turn the call back over to Jason for the question and answer portion of the call.

Speaker 2

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

Operator

Thank you. We'll take our first question from Hillary Canaccano with Deutsche Bank.

Speaker 1

Hi. Thanks for taking my questions. I'm just trying to understand for gains 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 book value? Or was it the type that yes.

Speaker 3

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.

Speaker 3

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 happen this quarter.

Speaker 1

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 books to be to have been executed during 2023 beyond. And then in 2025, that number goes up to 20 95%.

Speaker 1

So I was wondering if you've in the past also talked about a lag in revenue, about a 3 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?

Speaker 6

I don't think we can give you specific percentages right now. But we do I mean, 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.

Speaker 3

Continue with lease extensions at higher rates. Absolutely. Overall as airlines come to the end of their lease periods and they're all extending as I said in

Speaker 2

my prepared remarks.

Speaker 1

Okay, got it. Thank you very much.

Speaker 5

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

Speaker 1

Okay, great. Helpful. This is very helpful. And I'm looking forward to seeing you guys in September at our conference.

Speaker 5

Absolutely. We will. Look forward to it.

Operator

We'll move next to Terry Ma at Barclays.

Speaker 4

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?

Speaker 4

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?

Speaker 6

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 'twenty five, 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.

Speaker 5

And also remember that we had a large number of aircraft that should have delivered before June 30 that slid into July 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 May.

Speaker 4

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?

Speaker 4

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.

Speaker 6

We maintain a high level liquidity. We have $8,200,000,000 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.

Speaker 6

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, I think that also creates a lot of value as well.

Speaker 5

Okay, great. Thank you.

Operator

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

Speaker 7

Hey, 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 citing overcapacity. On one hand, we've got this really positive narrative on tight supply and Steve just spoke to his experience at Farnborough. But then you've got just about every U. S.

Speaker 7

Airline sighting over capacity. We've seen discouraging prints from several European airlines. Singapore took it on the chin yesterday, Wizz a few hours ago. I mean, how do you square these 2 seemingly competitive narratives with one another?

Speaker 3

Right, Jamie. Let me start. Really 2 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 grave concern about getting aircraft for the future and their deliveries sliding out being able to replace older aircraft.

Speaker 3

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.

Speaker 7

Yes, fair points, John. So and then as a follow-up, we saw AerCap step into Spirit's 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?

Speaker 5

Yes. Well, Jamie, we already have a long, long relationship with Spirit. It even goes back to ILFC days when we replaced our MD-eighty fleet with A319s and A321s. So, we currently have 8 new A321neos delivering to Spirit in the next 6 to 9 months. We recently delivered 2 new A321neos from our order book.

Speaker 5

So very soon we'll have 10 A321neos there. We previously delivered to them 5 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 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.

Speaker 5

Take care. Thanks.

Operator

We'll move next to Moshe Orenbuch at T. D. Cowen.

Speaker 8

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 aircraft purchases or in fact kind of reduce your capital given that it's been a somewhat lower growth environment?

Speaker 3

Yes. Well, the answer is yes. I mean, 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 OEMs strategies and competitive environment in those campaigns. And that's not really anything new 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.

Speaker 6

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.

Operator

Great.

Speaker 5

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, say, 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

Speaker 8

and Airbus. Great. And maybe just as a follow-up, the total lease revenue obviously had been affected by a number of things, 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. As you kind of look forward for the next couple of quarters, I mean, have you sold planes that had been renegotiated during COVID with lower yields?

Speaker 8

I mean, is that something that's gone on? And as I think about the $2,000,000,000 number that you talked about, I don't recall quarters of late where you had $2,000,000,000 of delivery. So I think Steve you had mentioned that $600,000,000 that fell in that some of that had already been received. I mean is it how confident are you in that in the level of deliveries for Q3?

Speaker 3

Well, let me just say Well,

Speaker 5

I think, Paul, yes, go ahead, John. Yes, I'm just going to say, as I said

Speaker 3

in my prepared remarks, there is a huge big contingency out there, Moshe, and that is potential Boeing strike. So while we put a $2,000,000,000 estimate, frankly, it that's a huge contingency. And so, yes, we had $600,000,000 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.

Speaker 3

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 these are contingent events, it's really hard to put a pin on CapEx expectations. So just by way of summary, we did say we still expect about $5,000,000,000 for the whole year. That's midrange of our $4,500,000,000 to $5,500,000,000 And we based upon our best judgment are looking about $2,000,000,000 but that's going to be dependent somewhat about whether Boeing continues its deliveries and whether they go on strike.

Speaker 5

And part of that $2,000,000,000 was the spillover from the Q1. Yes. So to illustrate a couple of examples, we had an A350-nine hundred that should have delivered in the quarter and it didn't. That's $150,000,000 airplane. Then we had a 787-ten, the largest 787, again, was supposed to deliver in May and we just delivered it on Monday this week.

Speaker 5

So right there, there's 2 aircraft, there are about $310,000,000 that should have been delivered in the prior quarter. Okay.

Speaker 8

Thanks very much.

Speaker 3

Sure.

Operator

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

Speaker 9

Yes. Good afternoon. Can you hear me by the way?

Speaker 5

Yes. Yes.

Speaker 9

Great. Thank you. I'm sorry, I'm having some trouble with my phone. Thank you for taking my question, gentlemen. 2 for you.

Speaker 9

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?

Speaker 3

Under 5%.

Speaker 9

Perfect. Thank you for that. And just as my follow-up question, when we think about Air Leases 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.

Speaker 6

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 airline to 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 8 years old.

Speaker 6

Most of them are being sold to other lessors.

Speaker 9

Okay. Appreciate it. Thanks very much.

Speaker 6

You're welcome.

Operator

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

Speaker 2

Thank you, everyone for participating in our Q2 call. We look forward to speaking with you again next quarter. Audra, thanks for your assistance and please disconnect us.

Operator

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

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Earnings Conference Call
Air Lease Q2 2024
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