Air Lease Corporation reported revenues of $663 million and diluted earnings per share of $0.87 in Q1 2024.
The company added 14 new aircraft valued at approximately $900 million to its balance sheet and sold 5 aircraft for about $240 million in sales proceeds.
The fleet’s weighted average age remains at 4.7 years with a weighted average lease term of 7 years. Utilization rate stood at 100%.
Passenger traffic volume increased by approximately 14% year-over-year, driving strong demand for fuel-efficient commercial aircraft.
ALC’s order book is fully placed through 2025, with 63% of the entire order book placed.
Market Dynamics and Outlook
The supply chain constraints for new commercial aircraft are expected to persist, affecting Boeing and Airbus production.
Full-year 2024 delivery projections are estimated to be around $4.5 billion to $5.5 billion, with expectations set at the midpoint of this range due to ongoing delays.
Sales pipeline for aircraft remains robust at approximately $1.4 billion, with expected sales of around $500 million in Q2 2024.
Financial Health and Strategy
Rental revenues comprised $614 million of the total Q1 revenues, with an additional $49 million from aircraft sales, trading, and other activities.
Interest expense increased by $30 million year-over-year due to a rise in composite cost of funds.
Air Lease completed several capital markets transactions totaling approximately $1.4 billion in Q1 2024.
The company’s liquidity position remains strong, with $6.5 billion available at the end of Q1 2024.
Fleet and Expansion
ALC’s future growth is underpinned by a $21 billion order book scheduled for delivery through early 2029.
The company delivered 14 new aircraft in Q1, including 13 narrow-body and 1 wide-body aircraft, despite delivery challenges from manufacturers.
Air Lease emphasizes a long-term business model, focusing on owning new aircraft only over the first third of their economic lives.
Challenges and Risks
Supply chain issues and production challenges at Boeing and Airbus are impacting aircraft delivery timelines and quantities.
The current interest rate environment and the inversion of the yield curve are contributing to increased financing costs.
Industry Outlook
The commercial aircraft market is experiencing a significant supply-demand imbalance, favoring leasing companies like Air Lease due to strong lease rates and aircraft values.
IATA traffic figures indicate solid expansion in international and domestic travel, with Asia Pacific leading the growth.
Question and Answer
Order Book and Growth Opportunities
Question
Has the company considered increasing the size of its order book?
Answer
Air Lease Corporation has a substantial order book of over $21 billion, comprising more than 300 aircraft deliveries through the first quarter of 2029, which positions the company well for future growth.
The company placed strategic orders during the pandemic, securing favorable pricing, terms, and delivery dates that are not currently available due to the industry’s recovery and the order frenzy.
Air Lease anticipates potential opportunities to add incremental aircraft in the coming years as airlines and lessors may need to modify or alter their delivery and order backlogs.
Comac Aircraft Orders in China
Question
Were you surprised by the recent Comac aircraft orders from Chinese airlines?
Answer
The orders from Chinese airlines for Comac aircraft were not surprising and were actually a logical expectation, given the Chinese government’s support for domestically-built aircraft.
Inclusion in Stock Indices
Question
Are there any other stock indices that Air Lease is looking to be included in, and what is the process for inclusion?
Answer
While the company is open to being included in additional stock indices, there is not much it can do beyond expressing interest.
Being a U.S.-domiciled public company provides advantages for inclusion in several S&P indices, but there are currently no imminent additions beyond the S&P 600, in which Air Lease is already included.
Impact of Interest Rate Increases on Profit Margins
Question
Can you discuss the expected impact of interest rate increases on profit margins and whether the lag between lease rate increases and interest rate increases is expected to narrow this year?
Answer
The company anticipates its profit margins to remain at around the current level, with potential changes depending on interest rate policy, the timing of aircraft deliveries, and the execution of the sales pipeline.
While the exact timing and impact of interest rate increases are uncertain, Air Lease expects to benefit from long-term macroeconomic trends.
Share Buybacks
Question
When will the company consider share buybacks, considering its current leverage ratio of 2.7x and the priority of paying down debt?
Answer
Air Lease will explore all options, including share buybacks, once it reaches its target leverage ratio and has excess capital.
Capital allocation decisions, including share buybacks, are subject to thorough discussions at the highest company levels.
Lease Rate Trends and Net Spread Contraction
Question
How do the lease rates for the most recent leases signed compare to those signed two years ago, and is there a power-by-the-hour or increased sales nuance contributing to the net spread contraction?
Answer
The most recent leases for new-generation Airbus aircraft have lease rates approximately 14% to 15% higher than those signed for identical aircraft in late 2022.
While there was a slight net spread contraction from the first quarter of last year, there was actually a 10 basis point increase from the fourth quarter of 2020.
The timing of aircraft sales, asset deliveries, and the appreciation of aircraft values over time all contribute to variations in lease rate margins.
The company encourages looking at the broader trends and outlook rather than focusing on quarter-to-quarter fluctuations.
Insurance Proceeds for Aircraft Trapped in Eastern Europe
Question
Can you provide an update on the potential insurance proceeds for the aircraft trapped in Eastern Europe?
Answer
Air Lease is actively pursuing two avenues to recover insurance proceeds for the aircraft trapped in Eastern Europe.
The company is working to solidify arrangements with designated Russian insurance companies that have been approved by the Russian government and OFAC, as well as pursuing legal action against carriers to recover claims under the additional layer of insurance procured by Air Lease.
Ongoing negotiations and court cases are expected to progress in the coming months, with the potential for reporting progress in the recovery of insurance proceeds.
Geographic Exposure and Long-term Growth Markets
Question
Is the sequential increase in net exposure to North America and decrease in other markets, such as Asia, a short-term nuance, or does it reflect a shift in long-term growth focus?
Answer
The changes in geographic exposure are part of the company’s natural evolution and long-term strategy, rather than a reflection of a shift in focus.
Air Lease has gradually moderated its exposure to China over the past few years, and while China remains a significant market, the company has been actively placing leases in other regions, particularly Europe and Asian markets like Southeast Asia, Malaysia, Thailand, and Vietnam.
The increase in European lease placements and the diversification of Asian market exposure are consistent with the company’s ongoing strategy.
Potential for a Third Aircraft Manufacturer
Question
Given the supply chain challenges and aircraft delivery delays, is there room for a third aircraft manufacturer to enter the market?
Answer
While Air Lease is open to evaluating new aircraft manufacturers, any new entrant would face similar supply chain challenges and regulatory scrutiny as existing manufacturers.
The certification and delivery of new aircraft would take several years, even without current production challenges, and would likely extend beyond 2030.
Additionally, the development of new technology engines, which are essential for breakthrough improvements in aircraft economics and operating efficiency, is expected to take a similar timeline, further delaying the introduction of new aircraft.
A350 Freighter Program and Demand
Question
What has been the reaction to the A350 freighter, given Air Lease’s involvement in its launch?
Answer
There has been strong demand for the A350 freighter, with several orders already placed by major airlines, including Cathay Pacific, Air France, KLM, and Starlux Airlines.
Airbus’s decision to enlarge the cargo door on the A350 freighter has led to concerns about program delays due to the certification process for the new configuration.
