AerCap - Earnings Call - Q2 2020
July 29, 2020
Transcript
Operator (participant)
Good day and welcome to the AerCap Holdings N.V. second quarter 2020 financial results call. Today's conference is being recorded and will be available for replay on the company's website after the conference is finished. At this time, I would like to turn the conference over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir.
Joseph McGinley (Head of Investor Relations)
Thank you, Operator, and hello everyone. Welcome to our second quarter 2020 conference call. With me today is our Chief Executive Officer, Aengus Kelly, and our Chief Financial Officer, Pete Juhas. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AerCap's earnings release dated July 29, 2020. A copy of the earnings release and conference call presentation are available on our website at aercap.com.
This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Aengus Kelly.
Aengus Kelly (CEO)
Good morning, everyone, and thank you for joining us for our second quarter 2020 earnings call. Clearly, the environment remains very challenged, but I am pleased to report that the AerCap platform continues to perform well and reported net income of $246 million and earnings per share of $1.92 for the second quarter. Turning to the market and the global environment, we have just gone through what was the worst six months aviation has ever experienced and I hope ever will. The positive is that the industry is very much alive and is starting to recover in certain parts of the world. In other parts, this is not the case. Starting with where the virus was first detected in China, we see that the recovery is well underway. Last Friday, there were over 11,500 domestic flights, which is equivalent to 90% of the pre-COVID levels in January.
This demonstrates that once customers believe it is safe to fly and they have clear procedures to follow, they will and want to travel. Next, in the U.S., we saw the bottom on April 14, and we observed a steady improvement that began to accelerate into June. Since the beginning of July, the U.S. recovery has run out of steam and retreated. It will take control of the virus to get the U.S. recovery back on track. In contrast, in Europe, we are seeing the largest recovery. Europe bottomed on April 12 with 2,099 flights. Last Friday, July 24, there were 16,300 flights in Europe. The recovery in this critical market is well underway. No doubt there will be setbacks, but the willingness and desire of the consumer to travel is very clear. In terms of scale, the European market is leading the global recovery.
In Latin America, we are still in the throes of the crisis. In Southeast Asia, some large tourist markets such as Thailand and Vietnam appear to have extremely low levels of infection, but they are effectively closed to air travel, which of course means we are not seeing any meaningful recovery in international travel in those markets. This information I just quoted is actual public data. Now, what we are seeing in our business is reflected in the numbers I just quoted. We have begun leasing airplanes again, but it is almost exclusively focused on the European market. In the last month, we have begun to sign leases and letters of intent. What was clear when we last spoke in early May was that while COVID-19 affected every region of the world, it did not necessarily do so in the same way or at the same time.
At that stage, it was really only in China where COVID cases were falling and where we could see the early stages of an air traffic recovery. Today, other parts of Asia and Europe are coming out the other side and are flying again. A key factor in the recovery is the level of government support that has reached over $130 billion so far across 74 different countries around the world. Again, it is clear that governments around the world recognize the critical importance of maintaining a functioning airline industry. This support has been achieved through a combination of loans, subsidies, and guarantees. This has allowed many airlines enough breathing room to get through the worst of the traffic declines and provide the stronger footing for their recovery.
What we have also seen is a significant acceleration of retirements from airlines around the world who are right-sizing their fleets for the future. Many airlines were reluctant to do this in prior years as the opportunity cost of filling passengers was too high. The crisis today affords them the opportunity to do so. We have seen 950 aircraft retirements announced so far this year, equivalent to 4.5% of the world's fleet but over 5% of global seats, all of which go towards helping the supply-demand imbalance to reach equilibrium at a faster pace. Importantly, the vast majority of these retirements are focused on aircraft such as 767s, 747s, A340s, and 757s, which collectively represent less than 1% of the AerCap fleet. As mentioned previously, no other entity owns a greater percentage of new technology aircraft than AerCap.
In addition to this, there will be a very significant reduction in the number of new aircraft entering the market as a result of the production cuts announced by the OEMs. Today, Boeing and Airbus have announced production cuts of approximately 33%. We expect that they will announce further production cuts in the coming months. The combination of retirements and production cuts will contribute to the industry reaching equilibrium. Very importantly, though, for AerCap, market equilibrium is not 2019 traffic when airlines were making record profits. For us, equilibrium is achieved when traffic can enable airlines to cover their cash operating costs. Of course, we want to see airlines return to 2019 profit levels, but for AerCap, that will occur after they can cover cash operating expenses and pay their lease rents.
Switching back to AerCap specifically, what measures have we taken over the past number of months to offset the impact of the crisis? Our first priority in the midst of this crisis was to ensure that we maintained high levels of liquidity as the likely magnitude and length of the impact was unknown at that point. In an environment like this, it is as important to manage spending as funding. Early on, we negotiated with our three OEM partners, Airbus, Boeing, and Embraer, for the rescheduling of aircraft purchases into time frames more suitable for ourselves, our airline customers, and the OEMs' new production framework. Working in concert with the OEMs and our airline customers, AerCap has rescheduled the delivery of over 100 aircraft that were originally expected to deliver in 2020, 2021, and 2022.
The rescheduling of these deliveries has reduced our cash CapEx in 2020 and 2021 by a total of $5.3 billion. We also recently canceled orders for 15 Boeing 737 MAX aircraft, which had passed their contractual delivery dates. We have also been very busy supporting the business by managing the liability side of the balance sheet with additional sources of cash and liquidity. AerCap was the first aircraft lessor to access the unsecured bond market since the crisis when we raised $2.5 billion of unsecured funding in June. We attracted over $15 billion of orders across the two deals, and pricing has improved significantly since then, showing the confidence the market has in AerCap. This, along with our numerous other funding sources and initiatives, meant our average cost of debt issued since the beginning of April was only 4.2%.
Lastly, the team has been working hard to ensure that we continue to collect cash every day from our customers. It is important to note that we continue to collect cash from the majority of our customers every day. At the end of June, our deferral balance was $430 million, which is equivalent to roughly 9% of our annual revenues. Against this amount, we have over $1 billion of security. The level of requests for deferrals has slowed down as traffic has begun to recover. Obviously, there are some customers who have filed for bankruptcy in the last number of months, which should be no surprise to anyone given the level of disruption in the industry. That does not automatically mean we will have the aircraft returned, and in many cases, we expect the aircraft to stay in place after the airlines emerge from bankruptcy.
In other cases, we will take aircraft back, but I expect this to be manageable for a platform of AerCap size. Against all this, given the very strong levels of liquidity we have, the record high sources to uses, and low leverage levels, there will come a point where we will be able to take advantage of the opportunities available to us. We have not completed a competitive sale lease back since 2013, but it is clear that the terms of those transactions are improving, and we remain open to doing business in that channel should the right opportunity present itself. AerCap has always found a way to add value in a crisis in various ways, like opportunistic M&A or large-scale sale lease back, but only when the timing is right. As we look at the opportunity set at the moment, we remain patient but ready.
Looking forward, AerCap has been through numerous challenges before, and whilst this crisis is more global and uniform, our platform continues to perform well on cash collection and seeking out opportunity. I firmly believe we have the right mix of assets, people, and strategy to ensure that AerCap remains the market leader for years to come. With that, I will hand the call over to Pete for a detailed review of our financial performance.
Pete Juhas (CFO)
Thanks, Gus. Good morning, everyone. I'll start on slide seven. AerCap produced a solid financial performance in the second quarter with net income of $246 million and earnings per share of $1.92. For the first half of the year, our net income was $523 million, and our EPS was $4.06. The decrease compared to the second quarter of 2019 was primarily driven by lower lease rents as well as by a lower gain on sale of assets. On slide eight, our total revenues for the second quarter were $1,197 million, a decrease from $1,281 million last year. Our basic lease rents were lower due to lease restructurings, aircraft transitions, and the impact of airline bankruptcies during the quarter. Our maintenance rents were $224 million in the quarter and were higher due to lease terminations.
In the second quarter, we sold nine of our owned aircraft for a total of $188 million. The average age of the aircraft we sold was 14 years, and our net gain on sales for the quarter was $10 million for a gain on sales margin of around 6%. Finally, our other income was roughly the same as last year. Turning to slide nine, our SG&A expense was $53 million in the second quarter, a decrease from $65 million last year, primarily due to lower compensation-related expenses. Our maintenance rights expense was slightly lower than last year, and our other leasing expenses were $66 million compared to $49 million last year. The increase was primarily due to an increase in our provision for expected credit losses as part of the new CECL accounting convention.
We had asset impairment charges of $73 million in the quarter, which primarily related to lease terminations. Our maintenance revenue was also higher than normal this quarter as a result of lease terminations. Turning to slide 10, we continue to maintain a very strong liquidity position. We're currently holding a record level of liquidity with $12 billion in total sources of liquidity as of June 30. Against that amount, we had $5 billion of debt maturing over the next 12 months and expected CapEx of $500,000,000 for total uses of $5.5 billion. We currently have a record level of liquidity equal to 2.2 times our cash needs over the next 12 months and excess cash coverage of around $6.4 billion. As Gus mentioned, our CapEx requirements for both 2020 and 2021 have come down significantly this year by over $5 billion.
During the second quarter, we took delivery of only two new aircraft, and we only have $500 million of cash CapEx remaining over the next 12 months. Our strong liquidity position is the direct result of actions we've taken since the COVID-19 pandemic. Since the beginning of April, we've raised $3 billion of new funding, both unsecured and secured. As Gus mentioned, the average cost of this debt we've issued is around 4.2%, which is similar to our overall average cost of debt of 4.1%. While we've seen significant compression in our unsecured bond spreads over the last few months, they're still wide of where we think they should be for a company with the liquidity and balance sheet that we have. Our leverage ratio is 2.5 to 1, the lowest level since 2014, and our secured debt to total assets ratio remains in the low 20s.
Going forward, we'll continue to maintain a very strong liquidity position. We believe that's the prudent thing to do in the current environment. Therefore, we're planning to continue to run at a higher liquidity level of at least 1.5 times sources to uses coverage until things normalize. In the near term, we will likely run in excess of that level. We believe this will be viewed positively by the rating agencies. Now more than ever, we see the importance of having strong global access to funding. So far this year, we've executed approximately $10 billion of liquidity initiatives that includes $5 billion of CapEx and $5 billion of funding. Since June 30, we've undertaken $2.5 billion of liability management actions, including the $1.5 billion tender offer that we completed earlier this month, as well as the earlier retirement of $1 billion of debt maturing later this year.
In addition, we currently have over $2 billion worth of additional funding plans that are currently well advanced, and that we expect to close over the next few months on attractive terms. We will continue to be proactive in our funding to make sure we maintain a significant amount of liquidity headroom and excess cash coverage. We have $27 billion of unencumbered flight equipment assets, which can be used for additional financing in the future. This, of course, continues to be a very challenging time for the aviation industry, but with our strong balance sheet, record liquidity position, and unmatched operating platform, we remain well positioned and prepared to weather this storm. With that, operator, you can open up the call for Q&A.
Operator (participant)
Thank you. If you would like to ask a question, please signal by pressing Star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's Star one to ask a question. We will now take our first question from Jamie Baker from JPMorgan. Please go ahead.
Jamie Baker (Analyst)
Hey, good afternoon, gentlemen. Mark and I have a question on operating cash flow year-end, pre-COVID, obviously. The 12-month figure in your deck was $3.1 billion. It declined to $2.7 billion last quarter, and it's $2.3 billion today. That's a 26% decline. How should we interpret that? Is that sort of the best estimate now going forward for what percentage of rents you expect to collect? Should I come at it differently? Was this influenced by CapEx revisions, maybe some other inputs? If those inputs now are baked, are we at the trough, and should any further changes be driven solely by deferrals? We just need some guidance here on how best to interpret this metric and the recent decline.
Pete Juhas (CFO)
Sure, Jamie. The main impacts of it, as you alluded to, it's really what we're seeing is mostly due to the deferrals. I think as we go forward, it's the deferrals, and then as we look at our estimates, the $2.3 billion estimate for the next 12 months, we've baked in our deferrals into that. We've also reflected the lower CapEx. You've seen CapEx has come down a fair amount, right, from our previous estimates. That's reflected in there too. What you're seeing, and if I compare it to last quarter, for example, I'd say some of that effect is due to, as we look at what's going on on the deferral side, we're seeing somewhat longer repayment periods for some of those deferrals.
As you push those out, right, you're getting back to regular rents from those lessees, but you're not seeing as much of the repayment of that deferral amount during that 12-month period.
Jamie Baker (Analyst)
Okay. That's helpful. Second question, are requests to convert existing leases to a power-by-the-hour structure significant right now? Would that be captured in deferred revenue going forward to the extent that conversions are temporary? Just trying to get a feel for how material this phenomenon might be. It feels like we're taking more investor questions on the topic with every passing week. Thank you.
Aengus Kelly (CEO)
No, Jamie. There are cases, of course, where you have certain power-by-the-hour arrangements, but the vast majority of the fleet is most definitely not on that arrangement. We do have airlines in bankruptcy, of course, and they're not paying anything at the moment. We would hope that that probably troughed in the second quarter. In relation to the power-by-the-hour question, that certainly does not apply to the vast majority of the fleet.
Jamie Baker (Analyst)
That's great. Thank you, gentlemen. Take care.
Pete Juhas (CFO)
Sure.
Operator (participant)
We will now move to our next question from Moshe Orenbuch from Credit Suisse. Please go ahead.
Moshe Orenbuch (Analyst)
Great. Thanks. Peter, I was hoping you could kind of just help us understand a little bit, kind of building on the previous question. When you've got lease revenue recorded, the different alternatives, I guess, an airline in bankruptcy, how does that—is there any difference between that recording and a regular kind of lease contract? Then given that you've now started to take some, I guess, a little bit of write-downs, could you talk a little bit also about the level of receivables that you're carrying and perhaps any other kind of differences that this has kind of made within the financials? Thanks.
Pete Juhas (CFO)
Sure, Moshe. I guess I'll start on the bankruptcy question. What happens when an airline goes into bankruptcy? Obviously, we've still got a lease with them, but they're not paying on that. We assess those. We look at them and say, "Okay, are those rents probable of collection?" If they're in bankruptcy, if they've just gone into bankruptcy, then you'd say no. We wouldn't recognize any revenue associated with any of those customers while they're in bankruptcy until they are emerging and you've got a plan. If you've got an agreement to lease those plans with them going forward, you might start. For now, you wouldn't. For any of those airlines that have gone into bankruptcy recently, we're not recognizing any revenues for those. Maybe as I look at—you mentioned the write-downs, I think, was your next question?
Moshe Orenbuch (Analyst)
Yes.
Pete Juhas (CFO)
Yeah. During the quarter, we had $73 million of impairments on about eight aircraft. Every quarter, we do an impairment analysis, of course. We look at our fleet and see if we have impairment triggers for any of our aircraft. When we have a trigger, we perform a test to see if the aircraft's impaired. This quarter, these impairments were triggered by lease terminations during the quarter. They're offset by around $50 million of maintenance revenue that we recognized on those aircraft. Of course, beyond those kind of airline-specific or aircraft-specific credit triggers, we also look at the overall environment to determine whether there are other trends or factors that we ought to be considering. One of the things that we look at there is early retirement announcements by airlines.
To date, as Gus mentioned, we've seen announcements for early retirements of around 950 aircraft in total. Most of those have been 747s, 757s, A340s, those types of aircraft that collectively make up less than 1% of our fleet. We haven't seen an impact there. What we have observed, though, is that there have been some announcements of early retirements of 777s and A330s. Together, those make up around 10% of our fleet. As we go forward, I think that's an area where we'll have to monitor developments to see if there is any impact on those aircraft types.
Moshe Orenbuch (Analyst)
The line on your balance sheet trade receivables did go up about $100 million in the quarter?
Pete Juhas (CFO)
Mm-hmm.
Moshe Orenbuch (Analyst)
How does that look?
Pete Juhas (CFO)
Yeah. Trade receivables was $200 million at the end of June. What we would expect on some of those, I'd say probably $120 million or so of that, we would expect that to go into deferrals. Essentially, there are deferrals being discussed with customers where they just were not completed before the end of June. I would expect that movement to go in there. If you think about our deferrals balance at the end of June, it was $430 million. I would expect that $120 million to go in there.
Moshe Orenbuch (Analyst)
Got it. Maybe just a somewhat big-picture question. Gus, you talked about sale lease-backs, and you're seeing some of your competitors kind of doing that to a greater degree. Is it a question of the level of returns on those agreements now, or is it a level of seeing some kind of liquidity level for AerCap? What is the—what's going to be the factor that gets you to start doing that if that's something that's of interest?
Aengus Kelly (CEO)
It's a combination of the return level and the risk in terms of the airplane and the assets. Now, at the moment, there isn't a huge amount of supply on the sale lease-back side because a lot of airplanes are just not being delivered. I do think that will change as we go into 2021, as the OEMs start to redeliver aircraft. At that point in time, it'll be clear that the airline's balance sheets have been stretched. The airlines will have a significant amount of debt on their balance sheets or a significant amount of state aid. The objective of the airline will be to reduce that state aid as fast as possible. It certainly won't be to be buying airplanes. I do expect that there'll be a structural turn in the market in the demand for sale lease-backs.
I do think that on the far side of this, there will be less lessors that are in the market, and that will have the liquidity to take advantage of it also.
Moshe Orenbuch (Analyst)
Thanks very much.
Operator (participant)
We will now move to our next question from Catherine O'Brien from Goldman Sachs. Please go ahead.
Catherine O'Brien (VP and Equity Analyst)
Hello, everyone. Thanks so much for the time. Maybe just one more on the lease deferrals. Maybe that number ticks back up a little bit if that $120 million gets moved into the balance, but down from last quarter, at least as of the end of June. What's driving that? Is that lessors going from being under deferred payment plans to lease terminations, or is that customers maybe who started resuming regular payments? Any color there?
Pete Juhas (CFO)
Sure, Katie. I would say if you look at the end of March, the balance on the balance sheet then of deferrals was around $140 million. What we said during the call was that we expected it to—that we had done by the time of the call, it was around $300 million or so, and that we expected it would go up to $600 million. As I look at it today, right, I would look at it and say we had completed—we had notes receivable of $140 million as of March 31. That went up to $430 million as of June 30.
If I look at where is that balance going to go to over time, where do we expect it to go to based on what we've talked to customers about and what we foresee, I expect that that balance on the balance sheet should grow to around $700 million-$800 million over the next couple of quarters. That is where I would expect it to go. You have to look at the security behind that as well that we referenced of $1 billion. In addition, it has to be seen in context of the revenue of the business as well. It is still less than 20% of the business, 20-23% of the revenue.
Catherine O'Brien (VP and Equity Analyst)
Right. Okay. Understood. I'd love to understand a little bit more how you guys are thinking through adjusting your order book. Right now, of course, there are also lessees canceling some of these orders in some cases, particularly the MAX. In general, how do you determine what the right balance is between managing liquidity today and stress lessees today and long-term growth after the recovery? One quick housekeeping one, just the $14 million unrealized gain, what was that? Was that Norwegian? Thanks so much.
Pete Juhas (CFO)
Yeah. Just on that last one, that was Norwegian. We're accounting for the Norwegian stake on a mark-to-market basis. Every quarter, we will just mark it based on the value at the end of the quarter. On the CapEx, it is something you have to be very cognizant of managing the future as well as the current liquidity needs. What you have seen is that we acted very quickly in March and April to significantly reduce the CapEx. Now there is a very low amount left for the year of $900 million and a low amount next year relative to where it was of $2.2 billion. We have reduced CapEx by $5.3 billion in total. What you want to make sure, of course, is that you believe you have attractive pricing on your CapEx. We do know.
It's very important to remember, and sometimes it's hard to see it. Travel will come back. That's demonstrably clear from what we've seen in other markets around the world. Once the government lifts restrictions and the consumer believes it's safe to travel, they will travel, and they will travel quicker than you think. That's what we've seen in Europe. That's what we've seen in China. The U.S., as I said, the market has stalled. The structural growth in this industry has not changed over the long term. You have to keep that in mind as you negotiate with the OEMs and with your customers. You're striking a balance between maintaining what you believe is an attractive order book, particularly on the 737 MAX.
I do believe the 737 MAX will be an aircraft of choice and an aircraft in demand as we come to the other side of this in 2023, 2024. As I've mentioned before, we deliberately positioned our overall strategy in our portfolio that if there was a trend to move into new technology quickly, AerCap would be best positioned for that because we stayed away from buying any end-of-line current/old technology assets. We haven't bought any of those or ordered them since 2011. Our exposure to that trend is less than many others of people moving rapidly out of current tech into new tech. I do think that it's a very delicate balance, and it's something I think we've managed pretty well, and we'll see the benefit of that in the years to come.
Catherine O'Brien (VP and Equity Analyst)
Understood. Thank you very much for the time.
Pete Juhas (CFO)
Sure.
Operator (participant)
We will now move to our next question from Mark Jeffries from Barclays. Please go ahead.
Mark Jeffries (Analyst)
Yeah. Thank you. Gus, you alluded to the fact that your equilibrium is determined more by airlines reaching their cash operating costs. Can you talk about how close we are to that and how much more, if any, capacity needs to come out of the global fleet?
Aengus Kelly (CEO)
I mean, look, we're a good bit away from that. I mean, on a global basis, that's a fact. Now, I think that we'll need to get back to probably around 60%, maybe close to 70% because airlines will have done two things. The cash costs won't be the same as they were in 2019. That's come down structurally as well. You don't need quite as much revenue to cover where they'll be; they'll be more efficient. I do think that we'll probably get closer to cash operating costs being covered if we can get to around 70-odd percent, depending on yields, of course, of where the airline's revenue base was in 2019. We're just not there at the moment. There's a long way to go before we get to that. I can assure you I don't see that happening this side of anytime soon.
On the airplane side of things as well, we've seen a lot of the fleet grounded. As Pete mentioned, I mentioned there really are about 21,000 large commercial airplanes in the world. We've seen 950 retirements. Most of those, though, are large airplanes. The amount of seats that come in, seats is what matters. It's not the number of shells; it's seats. Seats are what you want out. Every time a very big airplane comes out, of course, that is a positive. We've seen over 5% of the global ASMs come out. I do think we'll see more. Also, I talked about production cuts from the manufacturers. We saw another production cut today from Boeing. That's in addition to the 33% I said in my opening comments.
I think we'll see more production cuts both from Boeing and Airbus as well to help us to get to that equilibrium. The reason is not out of any philanthropic nature from Boeing and Airbus. It's a reality. If they don't cut the production and they put in too many airplanes into the system, the airlines they are forcing the airplanes into will either file for bankruptcy or their competitors will file for bankruptcy, and Boeing and Airbus will lose their order books. A much more sensible way to do it is restructure us with the customers, excuse me, on a consensual basis and maintain the order book for some dates in the future. I think those discussions are still ongoing. I would be hopeful that tomorrow, when Airbus, I think, release their results, we'll see another production cut there like we did from Boeing today.
Catherine O'Brien (VP and Equity Analyst)
Okay. That's helpful. Sorry if I missed this, but did you talk about what your exposure to AerMexico is?
Aengus Kelly (CEO)
No. We have several 787s to AerMexico. We had one 737-800, an old airplane, that was taken back.
Catherine O'Brien (VP and Equity Analyst)
Okay. Got it. Thank you.
Operator (participant)
We will now take our next question from Helene Becker from Cohen. Please go ahead.
Helene Becker (Analyst)
Hi, everybody. Thank you very much, Operator. I just have a couple of questions. One is on the pre-delivery deposits. Will those come down since you've deferred so many aircraft and canceled so many aircraft? Can you recapture some of that money?
Aengus Kelly (CEO)
The answer to that, to both of those, is yes on both canceling.
Helene Becker (Analyst)
Okay. Thank you. My other question is you talk about having significant unencumbered assets. How are you getting to that number? Is that a third-party appraisal, or is that just your view of, I guess, list price of the aircraft that are unencumbered? How should we think about that number? I get that question a lot. How do you come up with that? I probably do not ever have a really great answer for it.
Pete Juhas (CFO)
Yeah. Helene, that's just if we look at our balance sheets, where we're carrying the aircraft and then subtracting the secured debt against those. As you can see, it's an enormous number, $27 billion. The reason we put that down there, frankly, is obviously we're not looking to do anything close to that in terms of secured financing. I just think it's noteworthy to include that because it is a very large number. I think in contrast, if you're looking at the airlines or others who are looking at, I mean, non-airplane assets to finance against, these are hard assets. I do think that gives us options as we think about financing in the future. As I said before, look, most of our financing is unsecured, and that will continue to be the case.
I think what you're seeing in the current environment is that it really does, you do see the benefit of having all of these different financing options. Certainly, as Gus mentioned before, our average cost of debt for the first half of the year, 4.2%. That's a pretty good number in this environment.
Helene, it's just the net book value, what we carry the assets at. It's very different sometimes if you think of what airlines say are unencumbered assets, which can be confusing where you're assessing slots, gates, and rights, etc., and routes, which is very different. Ours are just hard aircraft assets.
Helene Becker (Analyst)
Okay. If I can sneak one more in, as the Norwegian lockups expire, would you consider selling the shares, or will you be long-term holders?
Aengus Kelly (CEO)
I mean, look, we're just going to assess that situation over time, and we'll do what's in the best interest of AerCap and Norwegian for the long term.
Helene Becker (Analyst)
Okay. All right. That's very helpful. Thanks, guys. Have a nice day.
Pete Juhas (CFO)
Sure.
Operator (participant)
We will now take our next question from Ross Harvey from Davie. Please go ahead.
Ross Harvey (Analyst)
Hi. Good afternoon. Two questions for me. The first is just wondering if you can help us bridge the sequential change in lease rate from Q1Q2 when you look at the moving parts like restructurings, like say, Norwegian and the non-recognition of revenue from bankruptcies and maybe the straight lining of rents from extensions. Just how does it split out from one to the other? The second question, if I may, you mentioned that we should expect further changes on the delivery schedule based on the discussions that you're having. I'm wondering to what degree that might impact H2 of 2020 or 2021, or is it further down the line? Maybe related to this, would you allocate capital to used rather than new deal lease backs with some selected customers?
Pete Juhas (CFO)
Sure. I'll answer your first question, Ross. I mean, the main driver of the difference during the quarter was the aircraft that we've got on cash accounting, right, where we're not recognizing revenue. Those are aircraft in bankruptcy or others where we think they're weak at the moment. In total, that was about $76 million in the second quarter. Normally, we would be getting that amount. That was really the big driver in bringing down the revenues during the quarter. The other factors are you've got some aircraft where we've terminated the leases as a result of default. We've brought those aircraft back, and they're not earning revenue at the moment. It's a combination of those things, but cash accounting would be the biggest factor there. Gus, do you want to cover this question?
Yeah. In terms of the fair lease backs, I do not think we would do the used airplanes at this point. I think it would be more we would stick to if there is better value in the new technology assets. I think that is what we would stick with because I do believe that there will be a significant increase in supply and the demand for those fair lease backs as the OEMs start to deliver significant numbers of airplanes in 2021. I think you would be better off waiting for that when there is probably a supply-demand mismatch in our favor.
Ross Harvey (Analyst)
Great. Just in terms of the CapEx, by the way, would you expect much change for H2 2020 or 2021, or is it more further down the line that we might expect changes?
Aengus Kelly (CEO)
I think in second half, 2020, unlikely. I mean, it is now down at $900 million. And in the second half, in 2021, it's at $2.2 billion. I think the vast majority of the movements there have occurred. Could you see a few hundred million more move? Yeah, but not the scale of what has happened over the course of the last four months.
Ross Harvey (Analyst)
Okay. Great. Thank you very much.
Operator (participant)
As there are no further questions, I would like to hand the call back to Aengus Kelly for any additional or closing remarks.
Aengus Kelly (CEO)
Thank you very much, everybody. We look forward to speaking to you again in three months' time. I very much hope that at some point in that three months, we may get to see each other face to face. Thank you.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.