Aircastle Limited - Earnings Call - Q2 2026

Executive Summary

• Q2 2026 delivered $227.510M total revenue and $57.233M net income, aided by $56M insurance settlements and tempered by $31.153M impairment tied to customer bankruptcies; lease rental revenue rose 17% YoY.
• Liquidity remained robust at ~$2.5B; debt issuance of $650M at 5.000% and investment‑grade upgrades by S&P (BBB) and Moody’s (Baa2) strengthen funding flexibility.
• Fleet mix continued transitioning to new technology narrow‑body aircraft (50% of NBV), with 100% of the fleet on lease and utilization at ~99.7%.
• No numeric guidance provided; catalysts were ratings upgrades, insurance recoveries, and continued portfolio youthening; estimate comparison unavailable on S&P Global for AYR.

What Went Well and What Went Wrong

• What Went Well

  • Lease rental revenue +17% YoY; management emphasized “favorable lease rates” and scaling on new tech aircraft: “Half of our fleet NBV is now composed of new technology narrow‑body aircraft”.
  • Insurance settlements of $56M booked in other income boosted earnings: “we recognized an additional $56,000,000… from Russia related insurance settlements”.
  • Credit profile improvement and efficient financing: $650M notes at 5.000% and ratings upgrades to BBB/Baa2 support capital access and growth.

• What Went Wrong

  • Impairment expense spiked to $31.153M, primarily due to customers’ Chapter 11 filings, which lifted operating costs 26% YoY in Q2.
  • Maintenance revenue declined YoY (Q2 $9.708M vs $19.378M prior year), consistent with fewer transitions; management reiterates maintenance is not a profit center.
  • Spirit exposure adds repositioning risk: five aircraft rejected; possible engine shop visits could delay redeployment; likely placements include non‑US markets.

Transcript

Operator (participant)

Good day, and welcome to the Aircastle Limited Second Quarter 2025 Financial Update Conference 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. Connelly.

James Connelly (SVP of Corporate Communications)

Thank you. Good morning, everyone, and welcome to Aircastle Limited Second Quarter 2025 Financial Update call. With me today are Michael 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 will 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 Michael.

Michael Inglese (CEO and Member of the Board)

Thanks, James. Good morning, everyone, and thank you for joining us today. I'm pleased to report that Aircastle finished the second quarter of our fiscal 2025 with net income of $57 million on total revenues of $228 million. We acquired 11 aircraft for a little over $500 million in the second quarter, and I'm pleased to share that halfway through our fiscal year we've successfully completed almost $1 billion in aircraft acquisitions. On behalf of our leadership team and our shareholders, I want to express gratitude and appreciation for our global team's focus and execution across these transactions. With these efforts, our platform is serving 75 lessees in 46 countries, with 278 owned and managed aircraft. 92% of our fleet is narrow-body passenger aircraft, representing the market's most liquid in-demand assets.

During the quarter, we delivered an A321neo to each of Frontier and IndiGo, three 737 MAX 8s to WestJet, and a 737 MAX 9 to United. As a result of our extensive investment in new-technology aircraft over the past seven years, as of August 31, 2025, approximately 50% of our fleet is new-technology based on aircraft net book value. This is an important milestone in the continuing transformation of our fleet. Given the continued shortage relative to demand for OEM narrow-body output, growing the new tech portion of our fleet highlights Aircastle's effectiveness as a trading partner, our strong airline relationships, and the dedication and effectiveness of our global team. Roy will go over our financial results in more detail, but first, I'd like to share my thoughts on the broader aviation market and where Aircastle fits within it.

Overall, there is strong demand for air travel, and airlines generally continue to be profitable. Airlines are benefiting from stable fuel prices while finding ways to absorb rising costs of materials and labor. Aviation traffic numbers, as reported by IATA, continue to show growth. Year-on-year, global RPKs rose 4.6%, with international growth outpacing domestic. For August 2025, IATA reported industry-wide passenger load factor reached a historic high at 86%. International traffic in Asia-Pacific showed the strongest year-on-year growth, followed by Latin America and the Middle East. Domestic traffic growth varies among regions, with the exception of the U.S., where we've seen eight consecutive months of declines in year-on-year growth. Conditions continue to be generally favorable for lessors, and we expect that to continue as narrow-body production shortages are likely to extend for several more years.

Airbus's monthly aircraft production continues to fall short versus targets. However, the company is making significant investments in their production facilities in the EU, UK, China, and North America. This week, Bloomberg reported that Boeing is planning to raise their monthly 737 MAX production from 38 to 42, subject to FAA approval. Increasing production output takes time, however, and while delays endure, midlife aircraft values remain high. Ishka recently reported that retirements of narrow-body aircraft in 2025 are trending roughly half of what they were in 2024. Demand for lease extensions continues to be high. For the first half of our fiscal year, we only had two aircraft transitions as compared to 14 lease extensions. We continue to trade aircraft in a manner that is mindful of these trends.

The aircraft we sold this quarter had a weighted average age of 18 years, while our acquisitions had an average age of three years. New-technology aircraft are starting to trade in that midlife space. In fact, in the second quarter, two of our 737 MAX acquisitions were seven years old. In addition to these trading highlights, we recognize an additional $56 million in the second quarter from Russia-related insurance settlements. I want to acknowledge the steadfast work of our legal team and advisors who have been managing this long and complicated process. Finally, I'm pleased to share that our improved profitability and positive fleet evolution are now being recognized by our rating agencies.

In August, we received a rating upgrade from S&P to BBB Flat, and just last week, Moody's announced that they've upgraded Aircastle to Baa2 based on our "consistent profitability and resilient business model anchored on strong liquidity." After advocating for these upgrades, we're grateful for this acknowledgment. Poised with $2.5 billion in available liquidity, we look forward to continuing our positive momentum into the second half of our year and have a strong pipeline of acquisitions and sales to support profitable growth in the years to come. Now I'll turn it over to Roy.

Roy Chandran (CFO)

Thanks, Michael. For the second quarter, we generated net income of $57 million on total revenues of $228 million. Lease rental revenues of $190 million represented a 17% increase as compared to the second quarter of 2024. As Michael mentioned, we purchased 11 aircraft, adding $503 million to the book value of flight equipment. We also sold four aircraft during the second quarter, bringing net sales proceeds of $73 million or $24 million of gains. During the quarter, the average age of aircraft acquired was three years versus 18 years for aircraft disposed. Our entire fleet was on lease at quarter-end, with an average age of 8.6 years. The 26% increase seen in operating cost in the second quarter was primarily the result of impairments related to customers announcing their filing of Chapter 11 bankruptcy protection.

During the quarter, we also recognized $56 million in other income from insurance settlements related to Russia-based aircraft, all of which have now been collected. Turning now to financing and our capital-raising activities. This quarter, we recycled debt, issuing $650 million unsecured senior notes at 5%. This new issuance was executed at a 117 basis points spread to Treasuries. We also repaid $650 million of senior notes due that had been issued at 5.25%. Next major debt maturity is not until June of 2026. 99% of our $8.5 billion fleet is now unencumbered, while 98% of our debt is unsecured. The weighted average interest rate on our debt at the end of the second quarter was 5.1%, down slightly from the first quarter of this year. Adjusted net debt to equity at the end of the second quarter was 2.2 times.

As of October 1st, we had total liquidity of $2.5 billion, comprised of $1.8 billion of undrawn facilities, unrestricted cash of $200 million, and $500 million in projected 12-month adjusted operating cash flows and contracted sales. Lastly, I'd like to highlight the rating upgrades Michael mentioned from S&P and Moody's, will further bolster our investment-grade rating. We're glad that our business model has been validated through these upgrades, as the agencies recognize our continued growth trajectory and improving financial performance. As Michael highlighted, macro conditions are positive for aircraft leasing, and we continue to differentiate ourselves in the midlife space while leaning into a high proportion of new-technology aircraft acquisitions. Our optimism for the future is rooted in improved ratings, ample liquidity, a proven track record, and unfailing shareholder support. And with that, Operator, we're happy to open the call up to questions.

Operator (participant)

Thank you, sir. If you would like to ask a question, please signal by pressing Star 1 on your telephone keypad, and if you're using a speakerphone, please make sure your mute function is turned on to allow your signal to reach our equipment. Again, press Star 1 to ask a question, and we'll pause just a brief moment to allow everyone an opportunity to signal for questions. Again, please press Star 1, and your first question will be from Mark Streeter at J.P. Morgan. Please go ahead.

Mark Streeter (MD)

Okay, gentlemen, good morning. And Michael and Roy, congrats on the journey from high yield to now mid and high BBB across the board. Great recognition of your team. Job well done. So just want to acknowledge that. Don't have to ask you about ratings on this call. That's the good news. Okay, so Michael, I do want to ask you about M&A, though. Obviously, we're going to go through the first sort of earnings season here with a lot of commentary, I think, on the recent M&A transactions and what might be coming. And clearly, in Prague this week at the ISTAT conference, I saw a lot of panel overviews, summaries, talking about the need for further consolidation. So maybe you can just sort of address what's on everyone's mind, which is sort of Aircastle's position in a consolidating industry.

Roy Chandran (CFO)

So look, we feel good about where we are, our size, and our scale, but you can't ignore the things that are happening around you in your industry. So we will continue to look at opportunities that we think make sense for us, but these are few and far between, and finding a way to win in a competitive bid process can be challenging. So we're conscious of it. We're interested in it to the extent it makes sense. But in the meantime, we have a plan that we've laid out with our shareholders, and we're going to continue to march forward and execute on that plan and continue to try to drive our profitability and our ROE higher as we move forward the rest of the decade.

Mark Streeter (MD)

Is there anything specific, Michael, to where Aircastle sits right now in terms of its age focus, asset focus? Obviously, you've been getting younger and so forth, but you're still not the youngest fleet out there. You're not the biggest order book player and so forth. So is there any sort of nuance of your strategy that makes it more or less important that you get bigger? Because that's what I think so much of the focus is on: scale and the benefits of scale. Do those scale benefits impact Aircastle as much as they might impact others that are merging?

Michael Inglese (CEO and Member of the Board)

Look, I can see benefits from additional scale, and is there an opportunity someday to merge, perhaps, with someone who has an order book? Yeah, scale will continue to give us, I think, good access to the capital markets, more liquidity in our sort of debt stack if we get bigger. There's opportunities, I think, on leveraging platform size to manage more assets in the context of combinations, and expanding customer relationships and expanding interaction with the OEM, I think, are all the benefits of scale that could accrue as people consolidate in the industry.

Mark Streeter (MD)

Okay, great. And then just one more topic I want to bring up, which is Spirit, obviously, 100 rejected airplanes. Just sort of, I know you're not involved in a material way, but maybe you can sort of talk to the implications of that on the industry in terms of do you expect those aircraft at your peers that where they've seen material rejections at Spirit, do you expect those aircraft to leave the U.S.? Do you expect that to have any near-term sort of impact on Aircastle's strategy or how you feel placements are being impacted or rollover or anything like that in light of what's going on at Spirit?

Michael Inglese (CEO and Member of the Board)

So look, I think the obvious thing to think about is there may be a bunch of planes that are going to need new homes. Not entirely clear yet. Obviously, Spirit's going to shrink their fleet. How many of the rejected aircraft wind up back there versus go in search of new homes remains to be seen. And clearly, the GTF issue will play into how long will it take for assets that come out of there to go through the shop if engines need shop visits, and when will they, in fact, be back out in the market available to fly? So there's a variety of factors. I think it's pretty clear Spirit needs to shrink, and they've indicated that. And it's likely there will be more A320 family aircraft looking for homes around the world, not necessarily in the U.S., as a result of what's happening there.

Mark Streeter (MD)

Do you expect it looks like they're rejecting over 100 airplanes, right? So that's what they filed with the courts. So let's just assume that that's what it ends up. Do you expect those 100 airplanes to leave the U.S. market, or do you think there are potentially U.S. homes for some of those planes?

Michael Inglese (CEO and Member of the Board)

Look, I think it's logical to think some of them stay here, but I can't kind of give you the breakdown of where 100 planes are going, but I think a fair number of them will find homes outside the U.S.

Mark Streeter (MD)

Okay, great. Thanks, Michael. Appreciate it.

Operator (participant)

Thank you. As a reminder, it is Star 1 to ask a question. Next, we will hear from Douglas Runte at Deutsche Bank. Please go ahead, Douglas.

Douglas Runte (Managing Director)

Yes, thanks very much. Maybe just following up on Mark's filibuster on Spirit Airlines. I guess I want to be clear, the five aircraft that you have there were all, in fact, rejected. That's correct?

Roy Chandran (CFO)

Yes, that's correct.

Douglas Runte (Managing Director)

I guess Spirit has also disclosed in its initial declaration that it's not a maintenance payer. I'm assuming that's going to be the case with your five aircraft as well?

Roy Chandran (CFO)

That's a reasonable conclusion.

Douglas Runte (Managing Director)

I guess it's good to know that Mr. Fred Cromer hasn't perjured himself in his declaration. And then I guess just a final follow-up. There's clearly demand for these types of aircraft, but I guess are there going to be issues that you can discuss in greater fashion with the GTF, transfers of Pratt obligations? And I guess, have you had discussions with Spirit, and is that why your aircraft were rejected, or as I think you alluded to, is it the shot across the bow to get your attention?

Roy Chandran (CFO)

Look, I can't talk about we continue to have discussions with Spirit about what may or may not make sense in the context of the planes that were rejected. Some may stay. None may stay. That remains to be seen, and to the extent they don't stay, they'll need to find new homes, and some of them will need shop visits before they find new homes, and can't really give you a lot more color than that at this point.

Douglas Runte (Managing Director)

No, I appreciate that. And then the two bankruptcies that you mentioned with the expense, was Spirit one of them?

Roy Chandran (CFO)

Yes.

Douglas Runte (Managing Director)

Okay. That was very helpful. Thanks very much, Michael. Much appreciated.

Roy Chandran (CFO)

Thanks, Douglas.

Operator (participant)

It appears that there are no additional questions at this time. I would like to turn the conference back to James Connelly for any additional remarks.

James Connelly (SVP of Corporate Communications)

We just want to thank everyone for joining the call today. And if you have any questions, please follow up with us.

Operator (participant)

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines and join the rest of your day.