AL Q2 2024: Delivery delays risk $600M shortfall amid robust demand
- Persistent Aircraft Demand: Management emphasized that despite some reports of overcapacity from airlines, the overriding theme remains a critical shortage of new aircraft and robust demand for replacements, which supports strong lease rates and long‐term growth.
- Stable Profit Margins & Improved Lease Yields: Guidance remains intact for normalized profit margins, with improvements expected in 2025 driven by higher initial lease yields, increased lease extension activity, and a favorable interest rate environment.
- Opportunistic Fleet Optimization: The strategy to optimize the fleet—through opportunistic sales, leaseback transactions, and strategic aircraft acquisitions—positions the company to enhance gains on sale margins and improve overall returns.
- OEM delays and potential Boeing strike risk: Concerns over significant delivery shortfalls (e.g., a $600 million shortfall due to delays and risks of a potential Boeing strike) could adversely impact revenue, with Q3 deliveries uncertain.
- Lower-than-expected gain on aircraft sales: Gains were at the lower end of the historical range (around 8%) due to timing and product mix, suggesting potential pressure on profitability.
- Depressed lease extension revenue impacting margins: The lower end-of-lease revenue observed this quarter, driven by fewer expirations and timing shifts, raises concerns over sustaining healthy profit margins going forward.
-
Margin Outlook
Q: Do margins return to guidance this year?
A: Management expects margins to normalize despite a slightly lower quarter due to reduced end-of-lease revenue, driven by timing issues. They anticipate improved lease yields and benefits from falling interest rates to support margin recovery in 2025. -
Funding Environment
Q: Are funding spreads favorable and mix adequate?
A: With liquidity at $8.2 billion, management is opportunistic in tapping attractive fixed rate markets while managing its revolver, emphasizing a strategic mix between floating and fixed-rate financing. -
Delivery Outlook
Q: How confident are you about Q3 deliveries?
A: Management is targeting roughly $2 billion in aircraft deliveries for Q3, though caution remains due to contingencies like a potential Boeing strike and recent shortfalls. -
Industry Capacity
Q: How do shortages coexist with airline overcapacity?
A: Despite airlines increasing capacity as traffic remains strong, management stresses that delivery supply challenges persist, ensuring continued robust demand for leasing amid industry cyclicality. -
Geographic & Sales Mix
Q: What’s your China exposure and sales channel mix?
A: Exposure in China is reported as under 5%, with most aircraft sales occurring to other lessors rather than airlines, reflecting a diversified sales strategy. -
Gains on Sales
Q: Why were sale gains at 8% this quarter?
A: The lower gains were attributed to the timing of specific sales closings and the mix of aircraft products, even though overall package returns remain healthy.
Research analysts covering AIR LEASE.