Aircastle - Q2 2025

Transcript

Operator (participant)

Good day, and welcome to the Aircastle Limited Q2 2024 Financial Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to James Connelly, Senior Vice President of Corporate Communications. Please go ahead, Mr. Connolly.

James Connelly (SVP of Corporate Communications)

Thank you. Good morning, everyone, and welcome to Aircastle Limited's Q2 2024 financial update call. With me today are Mike Inglese, Chief Executive Officer, and Roy Chandran, Chief Financial Officer. Other members of the management team are also on the line, and they will be available during Q&A. We will begin the presentation shortly, but I would like to remind everyone that this call is being recorded, and a replay will be available through our website at www.aircastle.com. There, you can also find the press release and PowerPoint presentation that accompany this call. I would like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements.

Certain facts that could cause actual results to differ materially from Aircastle Limited's expectations are detailed in our SEC filings, which can also be found on our website. I would direct you to Aircastle Limited's press release for the full forward-looking statement legend. With that, I will now turn the call over to Mike Inglese.

Michael Inglese (CEO)

Thanks, Jim. Good morning, everyone, and thank you for joining us today. This morning, I'm pleased to share that Aircastle finished the Q2 with net income of $29 million, generated from a combination of significant gains on sales, as well as improved lease, rental, and finance lease revenues. Our fleet utilization was over 99% for the quarter, and our results reflect the strong tailwinds which aircraft leasing is currently experiencing. Recent data released by IATA reported that passenger air travel demand is at an all-time high, and load factors are at or near operational maximums. For the most part, airlines are performing well. IATA projects that net profits for airlines in 2024 will be generally consistent with the profit levels seen in 2023.

Although fuel prices have eased slightly, they're still a bit volatile given the situation in the Middle East, while increased labor, maintenance, and FX costs are still challenges which airlines must manage through. Successful airlines continue to take advantage of strong consumer demand. Despite concerns about recessions or inflation, people prioritize air travel for their families and businesses. This positive news on demand is against a backdrop of continuing shortage of new narrow-body aircraft. Growth for both airlines and aircraft lessors is challenged because of the limited inventory of new aircraft. Boeing and Airbus production forecasts show minimal improvements in the near term. Over the past few months, Boeing has scaled back their forecast for 737 MAX deliveries, now further challenged by the strike, which began on September 13th.

Separately, Pratt & Whitney's GTF powdered metal issue, which we previously remarked upon, has brought about the groundings of over six hundred aircraft. As a result of these unscheduled maintenance groundings and OEM narrow-body delivery delays, airline demand for current technology remains strong for aircraft lessors. Per Cirium Ascend, lease rates for ten-year-old 737 NGs and A320ceos began to exceed 2019 levels during our first fiscal quarter and continue to do so during our second fiscal quarter this year. For Aircastle's Q2, these strong lease rates were reflected in our 8% improvement to lease rental and finance lease revenues as compared to the Q2 of 2023. We're also experiencing strong demand for extensions and sales. On a year-to-date basis, we're seeing nearly three times the number of extensions we saw year-to-date in fiscal 2023.

During the Q2, we sold ten aircraft for net gains of $35 million. Among these sales were three wide-body aircraft. At the end of the Q2, our fleet is comprised of 91% passenger narrow-body aircraft by count. We have significantly de-risked our portfolio over time as we invest exclusively in the most liquid, in-demand narrow-body aircraft. The new technology portion of our portfolio was a 37% of net book value at the end of the Q2, which is above the global narrow-body fleet average. On acquisitions, we acquired four narrow-body aircraft during the quarter for $120 million.

Looking ahead to the second half of our fiscal year, with over $3 billion in liquidity and a low net debt-to-equity ratio of 1.9 times, we're poised to ramp up our acquisition activity in the second half of fiscal 2024, with a focus on expanding the book value of our new tech narrow-body aircraft. We appreciate the relationships we've built with a growing number of trading partners, who value how we close transactions professionally, efficiently, and without financing contingencies. As Aircastle celebrates our twentieth anniversary in aircraft leasing this year, we reflect on our journey from a private to public company, our eventual merger with Marubeni Corporation and Mizuho Leasing in 2020. Throughout the journey, with its achievements and challenges, Aircastle's culture and mission have been consistent.

As aircraft investors, we have a unique position as an investment grade-rated lessor with a strong track record and well-respected platform in the secondary market. As asset managers, we have a global team of outstanding aviation professionals who are well known for their expertise in re-leasing and transitioning aircraft. As Aircastle looks ahead from this milestone, we will continue to provide creative aircraft solutions for our customers while growing our fleet, using our proven disciplined approach with the crucial support of our shareholders. Before I conclude, I want to say thank you to our global team of Aircastle employees. These twenty years of success have been the direct result of your contributions, innovations, and sacrifices. On behalf of our shareholders and senior management team, I want to extend my heartfelt thanks and appreciation.

I'll now pass the call over to Roy, who will go through our Q2 results in more detail.

Roy Chandran (CFO)

Thanks, Mike. For the Q2, we had net income of $29 million on total revenues of $217 million. Our 8% improvement in combined rental and finance lease revenues as compared to the Q2 of 2023 reflects an improved lease rate environment and strong fleet utilization of over 99%. Our Q2 Adjusted EBITDA was $199 million. We sold 10 aircraft and other flight equipment in the Q2. Sale proceeds of $304 million, with gains on sale of $35 million, are a reflection of the strong demand for narrow-body aircraft, which Mike detailed. Of these 10 aircraft we sold, three were wide bodies with an average age of 12 years, and seven were narrow bodies with an average age of 16 years.

Our $7.1 billion valued fleet is now 85% unencumbered, which is an all-time high for Aircastle. In the Q2, we paid off approximately $200 million of secured financing and issued $500 million of 5.75% unsecured senior notes with a seven-year maturity. This new issuance is the highest oversubscription we've seen, and the tightening spreads observed among the sold bonds show that debt investors continue to see a long-term value in investment-grade issuances. The strong demand for current tech narrow bodies, which Mike discussed, was reflected in the 22 lease extensions we completed during the Q2. At the end of the Q2, total debt was $4.5 billion, of which 86% was unsecured.

The weighted average interest rate on our debt at the end of the Q2 was 5.1%, down slightly from the Q1 of this year. Our conservative balance sheet has always been one of our strengths, and our next significant debt repayment isn't until August of 2025. We finished the Q1 with net debt-to-equity of 1.9 times. In the second half of this year, we expect to utilize our leverage capacity and grow our fleet, focusing on new technology acquisitions. As of October 1st, we have total liquidity of $3.1 billion, composed of $2.1 billion of undrawn facilities, unrestricted cash of $500 million, and $500 million in projected 12 month adjusted operating cash flows and contracted sales.

Finally, we continue to believe our performance and structure merit further positive assessment from the rating agencies and investors alike. Aircastle maintains a conservative capital structure and has significant liquidity. We have de-risked our portfolio and continue to improve profitability. Moving forward, our plan is to efficiently leverage on our expanded equity and continue on our improved cash flow and profitability trajectory and grow our in-demand narrow body fleet. Above all, improving on our IG ratings remain a strategic objective, which we are confident of achieving, as evidenced by the support demonstrated by our shareholders, Marubeni Corporation and Mizuho Leasing. And with that, operator, we are happy to open the call up to questions.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from the line of Doug Runte from Deutsche Bank. Please go ahead.

Douglas Runte (Managing Director)

Yes, thanks very much. A couple of macro questions, if I could. Thanks very much for the presentation with the robust data and the color that you shared. I'm wondering if you can talk a little bit about, I guess, some potential contradictions that we're seeing between macro data, which looks extremely strong, and anecdotal data that we're starting to see from certain airlines and certain regions, that, in fact, we may have too much capacity. So whether it's the LCCs in the U.S., some of the LCCs and even the larger carriers in Europe, I guess I'm wondering if you can reconcile a little bit or explain this disconnect?

Are these anecdotes that we're hearing suddenly going to turn into data, the data is going to turn into a trend, and we look back and say, "Were we missing something here?

Michael Inglese (CEO)

So, yeah, Doug, look, we're seeing on an individual airline basis and regionally, some readjusting of capacity as airlines respond to the many variables that affect their business. But I, you know, it's, I think, more airline by airline specific, and it kind of reflects differently for each of them and for each of the people like us who have a different portfolio composition, as they're looking at some conflicting data, I think, too, as you pointed out. So I look, I don't think it's unusual. There's no trend line that goes at some slope forever in some direction. And there are many things going on in the world that are affecting different parts of the world in a different fashion.

Douglas Runte (Managing Director)

Thanks. That's very helpful, and thank you for sharing a lot of data that you're providing on lease extensions. I'm wondering if you can talk a little bit about, I guess, lease quality. We see some of the data from Cirium that you do as well, and obviously, you're in the game, not just relying on appraisers, but in addition to increased lease rates, are you able to garner, I guess, better lease quality, people becoming maintenance payers rather than EOLs? The ability to get extensions, not just for the twelve months that a Boeing customer might want, waiting for their MAX, but something longer that would make you happier, so can you talk a little bit about lease quality, not just some of the lease dollar metrics that we see through the appraisers?

Michael Inglese (CEO)

Yes. So I think, look, on the topic of maintenance reserve payers and return comp trends, I'm not seeing a big swing on that phenomenon, in terms of lease terms out in the marketplace. Obviously, people who are maintenance payers are always trying to go to a different place, but that's a much more individual airline-by-airline negotiation between lessors and customers, as to what risk profile each of us are willing to take. As it relates to other terms and trying to find extension periods that make sense for both parties, that's always a negotiation and is oftentimes driven by the maintenance condition and the natural maintenance cycle around aircraft.

And of course, there are gonna be customers who want to do it for a short term, since it suits them, but sometimes that doesn't work for the lessor. And given the state of the market, and the state of play amongst the OEMs and the supply chain issues, et cetera, you know, lessors still have more leverage today than certainly they did two or three years ago.

Douglas Runte (Managing Director)

And then maybe I'll conclude by throwing a little bit more red meat on some of the comments you made about ratings. I guess, for Moody's in particular, the basic question might be: What are they waiting for? What are they looking for? What do you need to do that evidently they don't quite see yet? And longer term, maybe for Roy, what's the sweet spot on ratings? Is it a mid triple B? Is the industry gravitating maybe to a higher norm as the sweet spot? On the horizon, where do you think you need to be?

Roy Chandran (CFO)

So, Doug, on ratings, I mean, obviously, we continue to have discussions with all agencies. S&P has put us on positive outlook, so-

Douglas Runte (Managing Director)

Right

Roy Chandran (CFO)

with, hopefully with time, you know, we'll get the right result there. We have also engaged with Moody's in particular. I think their methodology has a bias towards new. So if you think, you look at one of their metrics when they look at, you know, implied residual risk in the fleet, the metric, I think, looks at, you know, net investment in leases minus the NPV of future contractual cash, right?

Douglas Runte (Managing Director)

Right.

Roy Chandran (CFO)

And so by definition, because we have an older fleet, and we play in the secondary market, our contractual cash flows are gonna be shorter, right? And so I think that bias,

Douglas Runte (Managing Director)

Right

Roy Chandran (CFO)

hurts us. The flip side is, I don't think they necessarily penalize lessors who buy newer aircraft and trade them on a secondary basis because the contractual cash flows are much longer in that instance. So I think there's a natural bias in their methodology that we've, you know, it's gonna be, in the short term, hard to overcome. We've made the case. I think we continue to try and, you know, show them data that even with the older segment of our fleet, we continue to generate gains, and in any time where we've taken any sort of impairments, you know, they are really sort of transactional impairments, right? So if you look at the P&L geography, you take an impairment, but you're also recognizing maintenance income on a net basis, you know-

Douglas Runte (Managing Director)

Right

Roy Chandran (CFO)

P&L file. So that nuance, I think we continue to highlight, and hopefully it bleeds into their analysis. But having said that, I think the methodology is, you know, in some ways cast in stone, and it's gonna need a different approach.

Douglas Runte (Managing Director)

Sure.

Roy Chandran (CFO)

But I think they have, to their credit, they have, you know, sort of, taken another look at our fleet and realized that, you know, we've migrated the fleet dramatically from being, you know, much more focused on at least a higher proportion of our fleet in cargo and widebodies to predominantly narrow-bodies. So yeah, it's a journey. I think we, you know, we had a long journey getting to IG, but, you know, I'm quite confident that we'll eventually get there with all the agencies.

Douglas Runte (Managing Director)

just slide six-

Roy Chandran (CFO)

To your second-

Douglas Runte (Managing Director)

I'm sorry.

Roy Chandran (CFO)

To your second question on what the sweet spot is, I think the sweet spot is, you know, whatever makes sense from an operational point of view, right? You know, given our business and the nature of our, you know, the way we play, a single A may not make sense, right? Because it may require us to be operating at, you know, significantly lower leverage. Because generally, the agencies use leverage as a proxy for risk, and so if you think you're older, you need to be at a lower leverage.

Douglas Runte (Managing Director)

Sure.

Roy Chandran (CFO)

So from where we stand, you know, mid triple B probably seems okay. End of the day, I think what's more important as opposed to the ultimate ratings is, you know, on a relative basis, right? Where do we sit relative to our peers, and is there too much of a premium that the market is charging us for us, relative to our business, and our peers?

Douglas Runte (Managing Director)

Well, your slide six is very powerful, so perhaps they can look at it, extrapolate, and realize that old is not necessarily bad, and in fact, in this environment, probably pretty good. So thank you for sharing all the color.

Roy Chandran (CFO)

Thanks, Doug.

Michael Inglese (CEO)

Thanks, Doug.