Aircastle - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 headline results: revenue $193.6M, net income $18.1M, Adjusted EBITDA $182.4M; utilization remained >99%. Sequentially lower vs Q2 (driven by smaller gains on sale and lower maintenance revenue) and down y/y given unusually high maintenance revenue in the prior-year period.
• Trading and fleet actions remained active: acquired 8 aircraft for $259M (69% new-technology by purchase price) and sold 8 aircraft (avg. age 17 years) for $145M generating $20M in gains; owned fleet NBV $7.1B with 213 unencumbered aircraft (NBV $6.1B).
• Balance sheet/liquidity positioned for offense: $2.8B total liquidity as of Jan 1, 2025; adjusted net debt-to-equity 1.8x; total debt $4.5B (85% unsecured), weighted avg. interest 5.3%.
• Management emphasized discipline in capital deployment with leverage below target pending attractive risk-adjusted opportunities; noted OEM supply constraints, strong airline demand, and macro/geopolitical risks as key market drivers.

What Went Well and What Went Wrong

• What Went Well

  • High fleet utilization (>99%) amid tight aircraft supply; continued strength in lease extensions and placements supporting stable core lease rental revenue ($158.4M vs $156.8M y/y).
  • Productive trading: $20.5M gains on sale; acquisitions tilted to new-tech (69%) positioning mix for durability; CEO: “demand for aircraft remains strong and the constrained supply…is expected to continue for the remainder of this decade”.
  • Robust liquidity and improving credit trajectory: $2.8B liquidity; Moody’s outlook to Positive; CFO reiterated confidence in ratings upgrades on stronger metrics and model.

• What Went Wrong

  • Sequential and y/y revenue decline: total revenue $193.6M vs $216.7M in Q2 and $238.7M y/y; lower maintenance revenue ($14.5M vs $19.4M in Q2 and $58.7M y/y) was a headwind.
  • Higher impairments vs Q2 ($8.4M vs $5.8M), and lower trading gains vs Q2 ($20.5M vs $35.4M) pressured net income ($18.1M vs $28.7M in Q2) and Adjusted EBITDA ($182.4M vs $199.3M).
  • Management acknowledged the pace of lease rate/value increases has “slowed,” and discussed interest-rate volatility and macro/geopolitical uncertainties as near-term considerations.

Transcript

Operator (participant)

Good day, and welcome to the Aircastle Limited third quarter 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. Connelly.

James Connelly (SVP of Corporate Communications)

Thank you. Good morning, everyone, and welcome to Aircastle Limited's third quarter 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 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 Mike.

Mike Inglese (CEO)

Thanks, Jim. Good morning, everyone, and thank you for joining us today. I'm pleased to share that Aircastle finished the third quarter with net income of $18 million, bolstered by significant gains on sales, as well as improved lease rental and financed lease revenues. Our fleet utilization continues to be up over 99%, and year-to-date cash flows are up 19% versus prior year. Our aircraft trading volumes increased in the third quarter as well. We acquired eight aircraft for $259 million, 69% of which was new technology aircraft based on purchase price. We sold eight aircraft with an average age of 17 years, which brought in $145 million in proceeds and $20 million in gains.

As we've recently shared, we're also ramping up our acquisitions in the fourth quarter, having delivered the first two of six MAX 9s to United and four of the five A321neos we're expecting to deliver to IndiGo. The new tech portion of our overall portfolio rose to 40% at the end of the third quarter, and with these additional acquisitions, we expect this share of our fleet to continue to grow over time. Last week, I had the privilege of participating in many aviation conference events in Dublin. I was grateful for the opportunity to connect with industry peers and many of our valued customers. This morning, I'd like to share some of the impressions and perspectives that I took away from these conversations. Afterwards, Roy will then take us through the financial highlights in more detail, and then we'll have a brief Q&A.

From our perspective, we see four main themes dominating the aviation market right now: the positive outlook for air travel in 2025 and beyond, the profitability of airlines, the shortage of aircraft and engines, and uncertainties posed by geopolitical risks. Last month, at their Global Media Day, IATA shared their outlook for 2025. In their consumer demand forecast for air travel, IATA believes that the strong uptick in demand we saw in 2024 will extend into 2025 and beyond, however, at a slower pace. IATA estimates that year-on-year growth in total passenger numbers for 2024, once finalized, will be 10.7%, with Asia-Pacific showing the largest regional increase of 15.6%. Looking ahead to 2025, IATA's global growth rate is forecast to continue, but at a slower rate of 6.2%. It's also important to remember that 2024 was the year in which demand broke through the pre-pandemic levels.

The slightly slower rate forecasted for 2025 is likely to reflect a more steady organic traffic growth going forward. Airline connectivity, the measurement of the number of unique city-to-city routes, was at an all-time high in 2024 at just over 22,000. This is up approximately 5% from 2023 and is forecasted to grow another 3% in 2025. Over the next two decades, the number of global passengers is projected to increase at an average annual rate of 3.8%, leading to the net addition of over 4.1 billion passenger journeys, which means by 2043, passenger journeys are expected to reach almost 8 billion. These forecasts both support an outlook for near-term stability for aviation as well as the long-term viability of narrow-body aircraft as investments. Turning to airline financial health, IATA's outlook also forecasts a slight improvement in airline profitability.

Airline profits for 2024 are projected to net a cumulative $31.5 billion, with a lean-ish 3.3% margin. IATA's forecast for 2025 expects cumulative profits of $36.6 billion, with a slightly higher 3.6% margin. These estimates assume stable global GDP and easing oil prices in 2025, offset by anticipated demands for higher airline salaries, labor shortages, and continuing supply chain challenges. Turning now to the availability of new aircraft, the consensus in Dublin was that the OEM capacity constraints experienced in 2024 will persist into 2025 and beyond. Boeing's production challenges have been well documented, and Airbus has recently announced that its 75-unit monthly production target has been moved out to 2027. The average age of the global commercial airline fleet at the end of 2024 was 14.8 years. This is an all-time high and proof that demand for new replacement aircraft is not being met.

Aircraft retirements are being pushed off, and lessors are receiving significant lease extension requests at favorable lease rates. Thinking ahead to the future evolution of narrow-body types, because Boeing and Airbus must prioritize restoration of their existing production lines, both are likely pushing off the development of whatever narrow-body will replace the MAX and NEO well into the next decade. The topic of geopolitical risks and their potential for disruption factored into nearly every discussion last week. The three topics I discussed so far, continued strong demand for air travel, airline profitability, and the market shortage of flight equipment, these are not new topics. We've been discussing them for several consecutive quarters now. Geopolitical risks and disruptions, however, are a more challenging topic for everyone and their scant data available to make predictions. For generations now, multilateral trade alliances and cooperation between governments have enabled global aviation to prosper.

Although the changes brought on by globalism have posed tremendous disruptions to many elements of the world economy over the past decades, air travel is an industry that has thrived, and today, billions of people now have access to affordable air travel who did not have such access generations ago. Global shifts in policymaking in 2025 could disrupt energy markets, trade agreements, and supply chains. Downstream impacts from such changes could adversely affect the current profitability of airlines and the choices of their customers. There's no crystal ball that can tell us what will happen, but disruptions have been experienced in the past, and aviation investors who are bolstered by a strong team, shareholder support, and disciplined approach have proven themselves successful at managing through these disruptions.

Just as it's been throughout our 20-year history, we believe Aircastle's experienced team of aviation professionals, now with the outstanding shareholder support we received from Marubeni Corporation and Mizuho Leasing, positions us to make the most of aviation's tailwinds and nimbly manage through any challenges the future may hold. I'll now pass the call over to Roy, who will go through our third quarter results in more detail.

Roy Chandran (CFO)

Thanks, Mike. For the third quarter, we earned net income of $18 million on total revenues of $194 million. Rental and financed lease revenue continues to improve as cash flow from operations is up 19% versus year-to-date of 2023. And as Mike had mentioned earlier, our fleet utilization finished at over 99%. Our third quarter Adjusted EBITDA was $182 million. We purchased eight aircraft and sold eight aircraft in the third quarter, adding net book value of $259 million and bringing in sales proceeds of $145 million, with $20 million in gains. The eight aircraft we sold had an average age of 17 years. Net book value of our fleet is at $7.1 billion, of which 85% remains unencumbered. As at the end of the third quarter, total debt was $4.5 billion, of which 85% was unsecured.

The weighted average interest rate on our debt at the end of the third quarter was 5.3%. We finished the third quarter with net debt to equity of 1.8 times. As of January 1st, we had total liquidity of $2.8 billion, composed of $2.1 billion of undrawn facilities, unrestricted cash of $200 million, and $500 million in projected 12-month adjusted operating cash flows and contracted sales. In relation to our ratings trajectory, we remain confident that our strong credit metrics, coupled with our proven business model, will prove sufficient to drive towards ratings upgrades from both S&P and Moody's, following on from our positive outlook designation. We continue to benefit from the outstanding support of our shareholders, Marubeni Corporation, and Mizuho Leasing. Finally, the fourth quarter's new tech acquisitions we might mention earlier have us optimistically moving forward to grow our cash flow and expand our profitability.

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're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. And again, it's star one to ask a question. And we'll take our first question from Mark Streeter at JPMorgan. Please go ahead.

Mark Streeter (Analyst)

Great. Thanks. And good morning, Mike and Roy and team. Mike, great to see you in Dublin. Look forward to seeing you at our conference on March 12th in New York. First question, 1.8 times leverage, that's suboptimal. It's below your target. What are the constraints right now in terms of your deployment of capital and rightsizing, leverage, and obviously increasing cash flow and returns and so forth as you deploy that excess capital that you have right now? What's holding you back from that rising to your target level more quickly?

Mike Inglese (CEO)

The simple answer, Mark, is discipline. So we recognize, having gotten an equity injection, that we're under a reasonable leverage target for our ratings targets eventually, but we're going about it in the same way that we've been doing it for many years, which is we're evaluating lots of opportunities that are in the market, whether they're bigger portfolios or smaller ones, and trying to find the right mix of assets that meet our risk-adjusted return requirements. And we're also in an environment where selling planes also makes lots of sense, and buying and selling means growth occurs at a slightly slower pace than it might otherwise take place. But we're going to keep doing it disciplined. Whether there's a bigger portfolio deal that happens this year for us, we have the capacity to chase it. Time will tell.

Mark Streeter (Analyst)

And how does the 10-year on the screen right now? It's 457. So certainly, we're in a higher-for-longer environment than I think what people were thinking back in September when the Fed started easing and the 10-year went the opposite direction. I mean, we're a little bit off the highs here, but how do you think that impacts your ability to deploy capital? What interest rates mean for some of the capital that is chasing aircraft from other jurisdictions and so forth? Any major changes there or any insights into this interest rate environment and how it impacts the outlook?

Mike Inglese (CEO)

Look, it's been more, we're currently at a level that we weren't thinking about six months ago, but we're better off than we were a month ago, so it's a little more volatile, not to the magnitude, I think, that's changing kind of the longer-term approach we or others in the industry have, but you have to, I think, be a little more conscious of it. You have to make sure you're thinking about how interest rate adjustments and purchase price adjustments work, and spreads are still reasonably tight, so it kind of is what it is, and you got to just be conscious of it and think about how you are deploying your capital and what your return requirements are given some increased volatility.

Mark Streeter (Analyst)

And then last thing for me, one of the items I was debating in Dublin with people, you probably had some of these conversations as well, was this concept of have lease rates and values, is the pace of increase slowing? Airlines are always talking their book and talking about pushing back on, obviously, what they want to pay and so forth. But this is something I was debating with appraisers and with other lessors. It's just that pace of increase in lease rates and values. Just any comments on that?

Mike Inglese (CEO)

Look, it feels like the pace of increase has slowed, whether it's topped out or that I'm not quite sure of yet, but I'd say it feels to us like the rate has, in fact, slowed.

Mark Streeter (Analyst)

But to be clear, isn't weakening just—you're not just able to push price as much as you would like, or maybe you thought you could?

Mike Inglese (CEO)

Look, it's always a negotiation, and then price is just one of the elements of what you're solving for when you're talking to somebody about a lease extension or, obviously, when you're making new investments or doing new sale lease-back transactions.

Mark Streeter (Analyst)

Okay. Great. I'll leave it at that. Thanks, Mike. Appreciate the time.

Mike Inglese (CEO)

Thank you.

Operator (participant)

As a reminder, it's star one to ask a question. Next, we will hear from Doug Runte at Deutsche Bank. Please go ahead, Doug.

Doug Runte (Analyst)

Yes. Thanks very much, and thanks for sharing the call from warm, sunny Dublin as we sit here in cold, not-so-sunny New York. A question on sales strategy. You mentioned how robust the market was for selling assets. You've recorded some significant gains on those sales relative to the revenue that you got from them. I'm wondering, why not more? Why not less? What determines what and how much you're going to sell? And I guess we all know we're in pretty robust time from supply demand, but at what point do you start positioning the portfolio to the manufacturers eventually catching up?

Mike Inglese (CEO)

So look, our sales approach has been pretty consistent over time. We look at what we have. We look at what's trading in the market. We bring a sizable number of assets to the market to typical counterparties on a pretty regular basis throughout the year. And we look to see what makes sense in the context of reshaping our own portfolio as assets age and as different assets and credits attract more interest in the marketplace. We continue to invest in new tech and prior tech, as I think prior tech is going to have a longer run than anyone was thinking five years ago.

But clearly, we're trying to follow the market, and eventually, the market and new tech will get back to some normalized level of production, and those new techs and the ability to find mid-aged new tech will also be a feature of what we'll be looking at as the decade and the second half of this decade comes out of.

Doug Runte (Analyst)

Maybe a follow-up on that, on the acquisition strategy. So adding United, very nice counterparty, presumably a long lease tenor with new max nines. I guess in terms of acquisition strategy, where do you want to be on the risk-return curve? United, great credit, good story, decent aircraft, but presumably lower returns. How do you balance that of returns versus credit quality going forward?

Mike Inglese (CEO)

Look, it's the same way we always had. I think we want to have a balanced portfolio. We won't be doing all top credits. We won't make enough money doing that. There's going to be a balance of credit, asset type, age in a way that we think all adds up to an appropriate risk-adjusted return for the complexion of the portfolio and for the new assets we're adding.

Doug Runte (Analyst)

Great. I'll keep it to two. Thanks. Thanks very much for that.

Mike Inglese (CEO)

Thanks, Doug.

Operator (participant)

Thank you. And it appears that there are no additional questions at this time. I will turn the conference back to James Connelly for any additional remarks.

James Connelly (SVP of Corporate Communications)

Just want to thank everyone for joining us today. Please reach out if you have any questions.

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.