Air Lease Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Air Lease (AL)

Air Lease (NYSE:AL)

Q1 2013 Earnings Call

May 09, 2013 4:30 pm ET

Executives

Ryan McKenna - Assistant Vice President of Strategic Planning & Investor Relations

Steven F. Udvar-Hazy - Founder, Chairman and Chief Executive Officer

John L. Plueger - President, Chief Operating Officer and Director

Gregory B. Willis - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Michael Linenberg - Deutsche Bank AG, Research Division

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Arren Cyganovich - Evercore Partners Inc., Research Division

Isaac Husseini - Barclays Capital, Research Division

John D. Godyn - Morgan Stanley, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Helane R. Becker - Cowen Securities LLC, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2013 Air Lease Corp. Earnings Conference Call. My name is Karen, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Let's turn the call over to Mr. Ryan McKenna, Head of Strategic Planning and Investor Relations. Please proceed.

Ryan McKenna

Good afternoon, everyone, and welcome to Air Lease Corporation's First Quarter 2013 Earnings Call. This is Ryan McKenna, Assistant Vice President for Strategic Planning and Investor Relations. I'm joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Financial Officer.

Earlier today, we published our first quarter results for fiscal year 2013. A copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, May 9, 2013, and the webcast will be available for replay on our website. [Operator Instructions]

Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense and stock-based compensation expense. These statements and any projections as to the company's future performance represent management's estimates of future results and speak only as of today, May 9, 2013.

These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of the risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events.

In addition, certain financial measures we will use during this call, such as adjusted EBITDA and adjusted net income, are non-GAAP measures and have been adjusted to exclude charges relating to amortization of discounts and debt issuance costs and stock-based compensation expense, among other charges. A description of our reasons for utilizing these non-GAAP measures, as well as our definition of them and their reconciliation to corresponding GAAP measures, can be found in the earnings release we issued today. This release can be found in both the Investors section and the Press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted.

I would now like to turn the call over to our Chairman and Chief Executive Officer, Steve Hazy.

Steven F. Udvar-Hazy

Thanks, Ryan. Good afternoon, and thank you for joining us today. I'm pleased to report that Air Lease Corporation increased its fully diluted earnings per share by 46% in the first quarter of 2013 compared with the first quarter of 2012. Similarly, compared with last year's first quarter, our revenues increased 45%. Pretax income increased 48% and our industry-leading pretax operating profit margin increased from 31% to 32%. These metrics demonstrate the continued execution of our robust growth plan.

Recognizing our strong growth and credit metrics, earlier today, Kroll Bond Rating Agency initiated a corporate credit rating of A- for Air Lease Corporation. Kroll took a fresh look at the aircraft leasing industry, evaluated our business strategy and credit profile and arrived at a very positive outcome for us. I would advise you to read their report as it is publicly available. We view this as a meaningful step in the maturation of the company that will allow us to further broaden our access to capital and continue to diversify our investor base.

As our favorable financial and operating results have continued, ALC's Board of Directors has authorized the company's second quarterly cash dividend of $0.025 per share in our outstanding common stock, which will be payable on July 8, 2013. Additionally, we have authorized the American Stock Transfer company to implement a dividend reinvestment plan for ALC stock. We anticipate our dividend program to continue in quarters to come.

We remain confident in the ongoing demand for new aircraft and the long-term predictable growth provided by our business model. The global growth in passenger airline traffic continues. For example, on May 1, the International Air Transport Association reported that global revenue passenger kilometers, RPKs, grew 4.2% for the first quarter of 2013 compared with the first quarter of 2012, with the month of March 2013, growing 5.9% in RPKs over March of 2012.

Capital markets have been strong, allowing airlines to successfully access fresh capital or refinance existing debt at rates that are materially inside historic levels. Over time, this should help the airline industry's balance sheets to improve. Furthermore, airlines have generally remained relentless as they further rationalize their capacity and cost structures, rebuild their fleets with the most efficient and technologically advanced aircraft. The flexibility and fleet growth provided by the operating lease remains a key element in an airline's ability to cope with an ever-changing landscape.

In 3 short years, Air Lease Corporation has built the largest order book for Western build jets in the leasing industry, currently stretching out to the year 2023 to meet the growing needs of our airline customers. As ALC and its management team are committed long-term players and believers in the industry, we continue to look forward working closely with the airframe and engine manufacturers to provide the best future products to our customers.

Most recently, ALC has been evaluating the Boeing 787-10X, the Boeing 777-9X and Embraer's next-generation G2E jet family as a follow-on to our recent commitment to the A350-900 and the A350-1000 programs from Airbus. We have also built what I believe is the best and the most capable management team in the aircraft leasing sector.

Let me now turn this over to John Plueger, our President and Chief Operating Officer and member of our Board of Directors, who will expand on ALC's operating results and strategic positioning.

John L. Plueger

Thanks, Steve. We're very happy with our strong operating results for the first quarter of 2013. During the quarter, we delivered 5 aircraft from our new order pipeline and acquired 2 incremental aircraft in opportunistic transactions, finishing the quarter with 162 aircraft across a diverse and balanced operator base, with 71 airlines spread over 41 countries.

As expected, the deliveries and acquisitions occurred during the back half of the quarter. Our average fleet age remained very low at 3.5 years, with a healthy average of 7.1 years remaining on our leases. Our lease margins have remained consistent and stable.

While the first quarter was a relatively light quarter for deliveries from our pipeline, we strategically tapped the bond markets for attractively priced long-term capital in February. Despite the temporary negative carry of interest expense, we were able to grow our net income by 49% year-over-year due to our core leasing operations without gains on sale from aircraft assets in our portfolio. We have 13 deliveries scheduled for the second quarter, and the pipeline should deliver more evenly throughout the second quarter and remainder of the year.

As we stated on prior earnings calls, our forward lease placements to date are skewed towards Asian carriers, as we sought to balance the geographic concentrations of our fleet. As of the end of the first quarter, Asia Pacific has now reached 39% of our fleet net book value, overtaking Europe now at 36% as our largest regional concentration by net book value. Additionally, no single customer now exceeds 10% of our fleet as measured by net book value. These trends should continue as our pipeline of aircraft continues to deliver over the next 18 months.

Moving forward from here and beyond the Asia Pacific region, we do see new business opportunities in the Middle East, Africa and Latin America. Overall, we see this as a prudent asset allocation strategy, reflective of a healthy reasonable balance for the aircraft in our portfolio.

If you've been following our progress, you know that during the first quarter, we closed purchase agreements with Boeing, Airbus and ATR to add incremental narrowbody and widebody aircraft to our pipeline. With those added orders in place, our marketing team has moved quickly, focusing on the new 777-300ER placements delivering from 2014 through 2016.

I'm pleased to report that we have already signed firm lease contracts for 6 of those 777-300ERs aircraft with Blue Chip customers, including Korean Air, Air New Zealand, KLM and Ethiopian Airlines. Additionally, we have previously advised that this year, ALC takes its last new A320ceo current engine option aircraft. I'm now happy to advise that ALC has now placed all of its last A321ceo aircraft delivering through 2015. So as of now, ALC has no more new Airbus single-aisle CEO aircraft to place. We move on to placements of our A320 and 321neo aircraft beginning 2016.

In regards to the overall aircraft order backlog, we continue to work with the manufacturers to accelerate certain delivery positions to meet lease demand. Our 2013 deliveries remain unchanged. But we've now added 2 more deliveries in 2014 for a total of 36 aircraft that year, and one incremental aircraft delivery for 2015 for a total of 32 aircraft that year. Keep in mind that as we place additional orders and accelerate deliveries, our forward lease placement percentage may reduce in comparison to previously announced placement percentages until we conclude firm lease placement of those recently order or accelerated aircraft.

So as of the end of the first quarter, we are now 100% placed for 2013, 92% placed for 2014 and 53% placed for 2015. This is right in line with our strategy of having our aircraft placed 18 to 24 months ahead of delivery.

On an overall portfolio basis, our lessees continue to perform well and we have no significant credit or arrears concerns.

With that, let me now turn the financial review over to Greg Willis, who will walk you through the financial results in more detail.

Gregory B. Willis

Thanks, John. During the first quarter, our rental revenue grew to $190 million, up 44% from $132 million achieved during Q1 of 2012. This translated to a fully diluted EPS of $0.38 per share, an increase of 46% over Q1 2012 EPS of $0.28 per share. As compared to the fourth quarter, we maintained a 32% pretax operating margin despite having much fewer nonrecurring gains on brokered asset sales.

Overhaul has accounted for only 4% of revenue during the quarter. And since the start of the year, ALC has closed 3 substantial financing transactions. This week, we finalized a 4-year unsecured revolving bank credit facility with 26 financial institutions for $1.7 billion with no LIBOR floor maturing in May of 2017. This new facility amends and updates our existing bank facility by increasing the size from $1.1 billion to $1.7 billion, extending the availability period from 3 to 4 years and reducing the pricing from LIBOR plus 175 and an undrawn fee of 37.5 basis points to LIBOR plus 145 with a 30 basis point facility fee.

In March, ALC issued its first bond guaranteed by the Export-Import Bank of the United States for $77 million for 2 737-800s on lease to Korean Air. This was a 12-year fixed-rate financing priced at 1.6%.

While we predominantly fund the company with unsecured capital, we intend to utilize Ex-Im financing in a very modest way going forward, as it helps diversify our funding sources with long-term attractively priced capital, which is important for our risk adverse funding strategy.

In February, we successfully printed a $400 million senior unsecured bond priced at 4.75% maturing in 2020. As you can see, combined with our 12-year Ex-Im transaction, we continue to lengthen the maturity profile of our debt portfolio as we opportunistically tap the market for capital. Our A- corporate credit rating is an additional positive development for our financing strategy going forward.

We concluded the first quarter with an overall composite cost of funds of 4.05% of being 62% unsecured. The new bank revolver, I described earlier, will be incorporated into next quarter's results and will continue to increase the unsecured debt ratio of our debt portfolio.

In addition to attractive pricing, this unsecured capital structure provides our management team with operational flexibility that translates into a competitive advantage for ALC in the marketplace.

As we have stated before, a key aspect of our funding strategy is that we look to opportunistically tap markets to maintain a high level of liquidity, while minimizing interest expense. This provides us with a financial strength to optimize the funding of our order book and to capitalize on aircraft opportunities that are presented to us.

While we do not have a large number of deliveries in the first quarter of 2013, we believe it was the best decision from a corporate finance perspective to secure long-term unsecured financing at such low rates. Our approach to managing our balance sheet can be described as conservative. We continue to execute our plan to modestly increase our debt-to-equity ratio but not to exceed 2.5:1, and our overall SG&A will continue to decrease as a percentage of revenue.

This concludes my review of the financial performance of the company, and I will now turn it back to Ryan.

Ryan McKenna

Thanks, Greg. That concludes management's remarks. [Operator Instructions] Now I'd like to hand the call over to the operator. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Mike Linenberg of Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

I guess, I have 2 questions here. Steve, when you talked about the -- or maybe it was John who highlighted the geographic concentration, highlighting Asia being larger than Europe and also talking about opportunities in Latin America, Africa and the Middle East. It was notable that you left out North America. And yet the North American market, there's a sizable replacement cycle there. What's preventing you from looking at North America more closely? Or is it just now is not the time, maybe you're 2 to 3 years premature? Your thoughts on that?

Steven F. Udvar-Hazy

Mike, that's a good question, and I sort of anticipated it. We are in pretty active discussions with all of the major U.S. carriers, including Delta, United, Southwest, American, US Airways. And we're trying to get a good handle on their fleet planning strategy, how they will allocate their aircraft acquisitions between outright purchases, using double ETCs, using operating leases, and that dialogue is gaining some momentum. We did not say in our release that we will not do additional business in North America. But on a historical basis, as you know, the leasing yields to North American airlines, particularly U.S. domestics, has not been of the levels that we experienced in the international marketplace. But we will look at opportunities in the U.S. going forward. It's kind of hard to predict what percentage they will play in the overall business. As of March 31, U.S. and Canada represented about 6.9%, so less than 10% of our book value of our fleet. That number could potentially go up if we do a couple of transactions in the U.S. on multiple airplanes. But it's kind of difficult to predict the outcome of those discussions and negotiations.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, great. And then my second question, and this is maybe more of a sort of conceptual strategic-type question. I watched over the last few weeks, it seemed like every week, a week wouldn't go by without a press release coming out of Air Lease and involving a 777-300ER. And there are a lot of those airplanes on order and there are a lot of airlines that maybe historically didn't use operating leases to the extent that they're now using them today, like a SingAir or even a Cathay. Given the size of that airplane and the number of these widebodies out there and of course, they're viewed as very good assets, it seems like there's not a lot of players in the space. I mean, there's a technical know-how. There's also a huge amount of financing commitment to get these -- to place these airplanes or to do deals. I mean, is there -- you've been in this space a long time, I mean, do you feel like that maybe there's a barrier to entry there, where only a few people can play with this high-quality asset and so therefore, you have a lot of runway and a lot of opportunities with these larger airplanes? And it's just not the 777-300ERs but maybe the A350-1000, that will be something that falls into the bucket.

John L. Plueger

Mike, it's John. The effect of the answer to your comment is yes. I guess, you could -- I don't know if you would call it barrier to entry, but certainly it requires a pretty in-depth knowledge of the aircraft, how it's configured, how inspected and the -- and how the aircraft actually then are returned at the end of the lease. It's easy to place a first-run aircraft, but it is actually, you test your mettle as a lessor, if you hold the asset less -- that long. As to what you're going to do with it afterwards, what is involved with the BFE [ph] , the interior, et cetera. But let's just take one further step back. We ordered these 10 incremental 777-300ERs as a direct response to demand. We're very comfortable with the aircraft and we visit most of the major carriers globally and we've been very, very successful with our placements. And in fact, there are less players in the 777-300ER space in our business. So we do enjoy a strong position in the 300ER as against most of our lessor peers. And I believe that, that's going to transfer over to the A350-1000. We get great -- we get good yields on our 777-300ERs. We have good pricing from The Boeing Company, and all of those factors are what led us to order more, and we've been very happy with the results of our placement so far.

Steven F. Udvar-Hazy

One other comment, Mike, and this might be useful to all of you on the line. Many of our 777-300ER placements are effectively replacement of older 747-400s. So by way of example, our lease placements at Air New Zealand, British Airways, KLM and several others are effectively replacing older 747-400s as they're no longer as economical as they were 10 or 15 years ago. So please don't look at this as just net growth in capacity. A lot of these transactions that we've done are primarily replacing older aircraft that are no longer as economically competitive as they were when they were at the prime of their career.

Operator

Next question comes from the line of Jamie Baker of JPMorgan.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

First question on aircraft, the consensus amongst your competitors seems to be that larger single-aisle aircraft are showing more strength than smaller single aisles. But the twins are still more preferred given the noise around the MAX/neo changeover. Would it be fair to characterize your view as similar to that?

John L. Plueger

Look, we -- Jamie, it's John. Yes, I mean, we are -- our forward views are more in line with the larger single-aisle aircraft, the A321s, the 737-9MAX, et cetera. We feel the industry is up-gauging. Clearly, if you look at the last year, 1.5 years and you look how the order book, for example, in Airbus for the A321 has been filling out nicely. The demand for the A321 is actually very strong. The demand for the A320 has been weak, which is why lease rates have been a little bit light, et cetera. We think that, that excess supply that's caused that weakness is actually now working itself to the marketplace. But generally speaking, we are bullish on the larger single-aisle aircraft as compared to the 737-8 current size or the A320 aircraft.

Steven F. Udvar-Hazy

Yes. As we look at capacity constraints at a lot of airports in Europe, Asia and North America, we look at gate constraints, we look at ATC limitations, we look at frequency saturation in a lot of the city pairs. We're noticing a movement toward the larger average size per departure of these single-aisle aircraft. And so the 737-800, A321 and then the 737-8 and 9MAX and A321neo, we believe will be beneficiaries of that trend.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And the question that Mark Streeter and I have asked you in the past, is there any evidence that the higher export credit costs are starting to force some increase in sale-leaseback activity? Or perhaps more second-gen leasing in some of the smaller airlines increasingly look to the lessors?

John L. Plueger

Yes. I think, Jamie, the answer is yes. Not in a large or a rush or a huge way. But I would just say that over the past 6 to 8 months, we have been responding towards needs and inquiries both on sale-leaseback basis but also from a placement of our own order book basis, where the airline has told us that they have looked at the alternative sides of financing, including Ex-Im or ECA, anything that's been covered by the 2010 Aircraft Sector Understanding or ASU. And we can correlate a number of inquiries and discussions to those comments that have been made by airlines that are saying we are now looking at the operating lease as an equal or better methodology for getting our aircraft just based upon some slightly higher financing costs.

Steven F. Udvar-Hazy

And we've also had situations, Jamie, where a large airline may have options on some additional, either Airbus or Boeing aircraft. And instead of exercising those options, they've opted to go with us on an operating lease using our aircraft because they find that it's a little more efficient, they have fewer progress payments to make to Boeing or Airbus, and these upfront costs in terms of total dollars have gone up significantly in terms of the guarantee fees.

Jamie N. Baker - JP Morgan Chase & Co, Research Division

And if I could just squeeze a third, do you think the Kroll rating helps you gain any more traction with the more traditional agencies?

John L. Plueger

Look, it's hard to say, Jamie. I think it will just help us with our overall financing needs going forward. I think in the insurance marketplace, it's very, very helpful, because we believe that this will equate and eventually lead to Air Lease being an NAIC 1, if our understanding that methodology. So yes, I think it will be helpful on our overall financing. As to whether it's influential in our discussions with other rating agencies, I really have no idea.

Operator

Next question comes from the line of Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore Partners Inc., Research Division

You talked about discussions with domestic airlines with their large orders, are you in discussions at all with the international airlines that have very large orders that will be coming online over the next few years to step into any of those orders?

Steven F. Udvar-Hazy

So most of our discussions with both the U.S. domestic airlines and international carriers that have their own direct orders involve placement of our aircraft, aircraft that ALC has ordered from Boeing, Airbus. We're not really focused in a meaningful way on the sale-leaseback market. What we have seen is that the lease rate yields on the sale-leasebacks are not even close to what we are able to achieve on our direct acquisitions from the manufacturers. So we're not really emphasizing the sale-leaseback model. But we will look at situations where we might mix in a limited number of sale-leasebacks to complement direct placements of our own aircraft in sort of a packaged deal to a particular customer. But we're not really a large participant in the sale-leaseback auction process.

Arren Cyganovich - Evercore Partners Inc., Research Division

Makes sense. You have a large order book. So...

Steven F. Udvar-Hazy

Yes, we have a large order book. We buy wholesale and we're funding at very attractive rates. And we're not really a market leader in the sale-leaseback sector. There's a number of other very good players that are really good at that, and they've achieved success, and we'll let them fight it out.

Arren Cyganovich - Evercore Partners Inc., Research Division

And then lastly, the Ex-Im financing that you did in the quarter, was this part of the grandfathered aircraft that doesn't face the higher ASU? And do you anticipate doing additional Ex-Im financing going forward?

Gregory B. Willis

Yes, these 2 aircraft were grandfathered under the old ASU and we're going to strategically look at additional new aircraft mainly because of this Kroll rating also may in theory help our upfront Ex-Im fee as well.

Steven F. Udvar-Hazy

Yes, we believe that with an NAIC 1 rating and the Kroll A- rating being investment-grade category, it will effectively reduce our upfront guarantee fee, which we can then amortize over the 12-year financing period. So that could get us closer on some of these transactions where it's kind of a close call between just using our own unsecured sources versus a 12-year term loan.

Gregory B. Willis

But overall, we look to have about 10% of our debt going forward being secured over the long run.

Operator

Next question comes from the line of Isaac Husseini from Barclays.

Isaac Husseini - Barclays Capital, Research Division

Question on the growth opportunities. Can you help us maybe understand or size the incremental growth opportunities above and beyond the order book? So you said in the past that you wanted to focus on younger aircraft. And you said in the past and even to the prior question that the sale-leaseback market isn't ideally one that you'd want be very active in. So when we think about even more growth -- I mean, is that going to be coming from adding to the order book incremental orders? Or is it maybe stepping in to take over some of the slots from airlines that perhaps do not need the orders that they placed a few years ago?

John L. Plueger

So the incremental growth that we mostly refer to, we've already partially outlined in our comments. One is the acceleration forward of our order book to meet demand. We are still, even today, talking with manufacturers of what slots can we get earlier and we've now outlined in my remarks a couple additional slots in '14 and another one in '15, et cetera, et cetera. We also advised that this quarter, we purchased from other lessors 2 incremental opportunistic aircraft on lease to very good carriers, and that remains a source, although a modest source of continuing growth. We are always on the lookout for well-priced assets. And across the aircraft lessors, we've now bought an aircraft in our first year, primarily for most of the other lessors. The other lessors, like we do, look at their fleets and look at the balance and concentration limits with customers, sometimes they want a lighten those concentration limits, sometimes they have a concentration exposure too much in a certain aircraft type. So we also look at those opportunities.

And then finally, while we don't -- we are not a major player in the sale-leaseback market, we would consider, as Steve mentioned, that some sale-leaseback transaction based on -- more linear based, but only tied and primarily tied with a placement of new aircraft from our own order book. We are also -- I would say, the final category is when manufacturers, be it Boeing, Airbus, Embraer or ATR, approach us, which they have done routinely over the past couple of years and we have taken advantage of this. They approach us with a whitetail on the line because they know that we can -- whitetail, meaning an aircraft that has fallen out of placement, customer went away, whatever the circumstances are. Their plane is being built, and now does not have a home. We've taken advantage of that so far to date, and we will continue to do so. And the manufacturers do, on a case-by-case basis, bring us those opportunities, which we have acted upon and we'll continue to do so.

Steven F. Udvar-Hazy

The main point is that we now have a strong balance sheet. We have liquidity reserves that we can, in fact, take advantage of situations where the company can acquire incremental aircraft. So we do have that financial capacity. And we built into our long-term model the ability to acquire additional aircraft on a regular basis, and we'll continue to do so.

Isaac Husseini - Barclays Capital, Research Division

Okay. That's helpful. And maybe as a follow-up, you've been talking in the past about the amount of demand for aircraft in Asia. Now with 39%, give or take, of your book in Asia, do you guys have any internal limits, concentration limits on any geography? Or could that number go up further?

Steven F. Udvar-Hazy

Well, I think we publicly stated at many of our investor conferences and in our public pronouncements that we could see the Asia Pacific, and when we talk about Asia Pacific, that does include, for example, Australia/New Zealand and the South Pacific, not just Asia, and that could wind up and stabilize in the low 40 percentile of the total portfolio. So 39% is certainly the best that we've achieved so far in terms of the Asia marketplace. But that could rise a little bit more and then probably stabilize going forward.

John L. Plueger

And, frankly, we're more focused on single country exposure than we are on regional exposure. And so the comment I made in my -- in the text of the call was that we are now at a point at the end of this quarter where no single country represents 10% even of our net book value. And that's an important -- more of an important metric for us. So we do look on a more -- we're most -- more focused on country exposure per se than we are in regional exposure.

Operator

Next question comes from the line of John Godyn of Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

I just want to follow up on some of the comments about the U.S. and opportunities that might be there. There's a sense that if anything, I guess, U.S. airline credit profiles are getting even better than they were in the past, which I know you're aware of, and seems like that would make leasing to them even less attractive than it had been in the past. I was just hoping you can elaborate further on sort of what might be changing on the margin that could create opportunities for leasing above your hurdle rates if that opportunity hadn't been attractive before?

Steven F. Udvar-Hazy

To just give you an example, let's say, one of these U.S. airlines is trying to rationalize their fleet, they're trying to reduce the number of fleet types to become more cost efficient, and they require additional aircraft of a certain type, a new generation aircraft above and beyond what they've ordered themselves. So on those situations, the driving force might be the need for the aircraft that ALC will have available at some point in the future to complement and supplement what the airline has ordered themselves. And in that case, the lease rate will be an important factor but may not be the most important factor. Secondly, we have potentially 2 large U.S. carriers combining in the near future, and they have a pretty diversified fleet of both Airbus and Boeing, both single aisle and widebody types. There could be opportunities there once that consolidation process is underway. For us to perhaps take aircraft away from that combined entity, put them outside the U.S. with other customers of ours and input new aircraft into that airline to sort of optimize their own fleet composition. So we're going to be working very creatively, but I think one of the guiding lights that we always have is that we have to achieve a return -- financial returns that are close to our overall portfolio performance, and we don't want to undermine our financial results with low lease rates. So the end result has to be an economically efficient transaction and one that's a win-win for both the airline and for Air Lease.

John D. Godyn - Morgan Stanley, Research Division

Great. That's actually very helpful examples and a good segue into this -- into another question. You've sometimes described yourselves as a sort of more than a lessor, kind of a partner with the airlines, sometimes a fleet planner of sorts. To date, it seems that the value add you provide in that way gets baked into the quality of the leases you signed. But I'm curious if there are any other ways to leverage sort of existing platform relationships and brand that you have to accelerate earnings growth even more. I guess, we've seen other lessors manage lease portfolios for others that they don't own but perhaps there are even more creative ways to kind of create value that I'm not even thinking of.

John L. Plueger

Well, I think we try and use our relationships, in fact, our fleet planning skills and capabilities as a core element of our whole lease business, and that means looking at rationalization of fleets. It means maybe helping an airline taking out used aircraft where we may or may not be a principal. It may mean that we get paid a fee or an assignment that takes the means that we distribute some of these aircraft for the airlines. We continue to develop these processes and these ideas, but I think airlines have come to expect that when they deal with Air Lease, part of the bang of the buck they get is the benefit of what we believe our opinions will be, how they should evolve their fleet. So I think the answer is if what your question is leading to is, "Can we get paid by the airlines for doing this?" Look, we are open to it. I think we are open to the concept of being compensated if we take a lead role in the disposition of a fleet or a subtype of aircraft or an airline. I think that's a fair thing to do. And we are looking for those opportunities. Let me just also make one -- I may have made a comment earlier talking about our concentration of regional and country aircraft. I may have said no single country exceeds 10% of our fleet as measured by net book value, it's actually no single customer. So I've just been handed a note to correct what I said there. So we can go onto the next one.

Steven F. Udvar-Hazy

Yes, I was just going to say that we're also expanding our asset management aircraft management business for third parties, and we increased our service revenue in that in 2012. That will continue to grow in 2013 as we help third parties manage those aircraft assets, many of which are leased to airlines we already do business with. So the incremental cost to us is minimal and just generates additional revenue for the company.

Operator

The next question, it comes from the line of Jason Arnold of RBC Capital Markets.

Jason Arnold - RBC Capital Markets, LLC, Research Division

I guess if we see S&P and Moody's jump in here with a favorable rating like Kroll, which seems like at the 3-year of operating history mark, we might see here sometime near term. But I was just curious how you would envision your funding mix kind of changing up if you're to have access to kind of cheap longer-term corporate debt?

Steven F. Udvar-Hazy

Well, the -- I don't need to tell you that the bond market has been very, very favorable to issuers. And what we're seeing is that an investment-grade issuer has a larger scope to do various maturity levels. There's a broader and a deeper availability of investors for an investment-grade company. So we would try very hard to bring down the incremental cost to our financing going forward and take advantage of the recognition that the rating agencies will be giving us in the future. And one of our big goals is to bring down the average cost of our financing, lengthen our average maturity so they are more in line with the average lease remaining on our leases and thereby, drive profitability to a higher level. And then that kind of feeds itself because the more profitable we are, the more respect we'll have from the rating agencies and hopefully continue to drive down the cost margins on our funding. So we're actively pursuing that, and it's a high priority for us to optimize our funding and to minimize the cost of financing in the future.

Jason Arnold - RBC Capital Markets, LLC, Research Division

Great. Now would you, I guess, kind of continue then also in the same vein to target that kind of 70% fixed and 30% floating rate kind of approach on the funding cost side?

John L. Plueger

Yes, that's ultimately our goal, Jason. And I would add to Steve's comment that one of our long-term views in towards capital raising is this is now very much a global market, and we do look to expand even more so than we've currently done, being able to raise money in global capital markets, including in Asia and elsewhere. And in Asia would be Singapore, Hong Kong, et cetera, et cetera, which now, of course, represents the largest -- Asia Pacific being the largest region now for our company. It's a natural source for capital raising there as well. So it's really important for a U.S. foreign -- any foreign company, be the U.S. or other, in the long-term view to have an investment-grade rating for continued capital access. Now having said that, we've enjoyed a really nice ramp-up in the -- from Asia Pacific banks in our banking group. But I think we have no current concrete plans. But just kind of a big picture, that investment grade rating will also help us globally outside the United States with capital raising in the debt markets.

Steven F. Udvar-Hazy

What's interesting also in this new $1.7 billion revolving unsecured bank facility, we brought in a number of large European banks, notwithstanding the headlines that we see every day about Europe. And we also, brought in a number of Asian banks into that facility. So we are in a sense, globally diversifying our banking friends and banking partners, and I think the rating agencies will have to, obviously, consider that in their evaluations.

Operator

Your next question comes from the line of Scott Valentin of FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just a quick modeling question on the accelerated

deliveries, the 2 in '14 and the 1 in '15, do you know which quarters they'll hit and what aircraft types they are?

Steven F. Udvar-Hazy

The one in '14, there's one I think in the second quarter, one in the fourth quarter, but it's not going to be meaningful in terms of being able to define the actual day of delivery because we're working with Boeing, Airbus and ATR right now to move some other slots around, hopefully bring stuff forward. So I think even we would have a tough time modeling the specific revenue impact of those early deliveries. It's an ongoing process and as we add both incremental opportunistic purchases and succeed in moving some of these slots forward, they will all have a positive influence on the revenue generation of the company in '14 and '15.

John L. Plueger

Scott, also let me add that as an operating matter, especially for 2014, aircraft have lead times for specification orders that are buyer furnished equipment, et cetera, et cetera. So part of the art in this is being able to align, not only getting incremental positions but being able to have those positions in such a way that we can build them on an on-time, on-schedule basis for the customers that we have in mind. So part of the balance that we do in the back and forth with all the manufacturers is by what date do we need to have the spec identified. And sometimes that causes things to move a month or 2, et cetera, et cetera. So there is some practical matters as well. It's not just as simple as, oh, we got a new airplane in January '14, great. We've got to be able to build that airplane to our customer's specification and there are some lead times involved with that.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And just kind of a follow up there. So it sounds like you have your forward delivery scheduled that's -- you guys have that in the queue, and we can get the number, so you expect to see additional aircraft on top of that, I guess, is what your saying?

Steven F. Udvar-Hazy

Well, we took 2 additional aircraft, including one widebody aircraft, an A330 in the first quarter. We're picking up another airplane in the second quarter and we are in discussions for additional aircraft. We're being very selective on things that are outside the boundaries of our existing order base. But you can see there is a pattern to it. There are additional assets being acquired, if we think all of the dimension of the transaction makes sense for us. Financially, is it a strategic customer, is it a new customer, is it a kind of airplane that we feel is a good fit into our portfolio. So a lot of these boxes have to be checked for that airplane to make sense.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then just one last final question. There's been some concern about over-ordering by some of the Asian airlines. And just wondering, I want to get your thoughts if you think one, they are over-ordering; or two -- and two, if they are, what impact that may have on the kind of Asia Pacific airline profitability if there's too many aircraft there?

Steven F. Udvar-Hazy

The biggest over-ordering has been both in Asia and in Europe from low-cost carriers, like Lion Air in Jakarta, the AirAsia Group in Kuala Lumpur. Those players have really ordered very aggressively, and both into the 737MAX and the A320neo sectors. Whether those aircraft will be delivered on the current projected schedules and will they go to these designated airlines is yet to be seen. But we're having some difficulty understanding based on their current plans and networks whether they can, in fact, deploy all of these aircraft efficiently. But I believe that both Boeing and Airbus have built in a cushion into their own production plans and have overbooked more sales than they can actually build. So they built in this cushion to take into the eventual consideration that some of these aircraft may be delayed or canceled or deferred. And I think both manufacturers are playing it pretty safe right now.

John L. Plueger

I would just -- tagging on to our previous comment, frankly, we wish these airlines well and we want them to grow and be profitable and do well. But it is exactly these kinds of situations that can lead to incremental opportunities for Air Lease. If in fact, some of these carriers decide to defer or to cancel or to -- they're not -- for whatever reason, they're not going to take them, we stand ready. And in fact, I can tell you, I'm kind of hoping that these will actually present incremental growth opportunities for us because we can grab up those positions and deploy them very, very effectively globally.

Steven F. Udvar-Hazy

Yes, and every time an airline like an Orion Air or a Lion Air or a Norwegian or an AirAsia orders hundreds of planes, what really happens is a lot of delivery positions get tied up. And so in effect, positions that we have in 2015, '16, '17 become more valuable because there's a reduction in the total number of available positions. And therefore, a lessor like Air Lease can provide an airline what it needs because some of these low-cost operators have sort of tied up so many positions. So in sort of a perverse way, it's actually helping us right now.

Operator

Next question comes from the line of Moshe Orenbuch of Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Actually most of my questions have been asked and answered. I just -- maybe on a shorter-term basis than you've talked about, it sounds like you should have some pretty good performance on the interest expense line going into the second quarter and second half just because of the combination of the prefunding and what you did on the revolver. How aggressively will you use the revolver? And I mean, how should we think about that on a kind of a shorter-term basis? It sounds like it should be pretty good.

John L. Plueger

Look, we are a management team that runs a capital-intensive company who has an experience at our prior company of seeing what can happen when the financial markets close down. We don't anticipate that will happen, but we are older and wiser. And therefore, we will always err on the side of caution when it comes to having ample liquidity. I think we've achieved the right balance in that liquidity between having good low-cost funding for a good amount of time in the future, having plenty of liquidity available for these opportunistic transactions. And I would say that the unsecured revolver that Greg and his team have just now obtained for us or amended from our prior revolver just gives us that flexibility. As to how much we're going to use it, it will kind of depend upon what incremental opportunities that we find out there. We have plenty of capacity now. We manage our company prudently. We look at all aspects. And so we don't really give any guidance as to how much we're going to use revolver or not. But suffice to say that we are amply funded, and that just gives us a lot of capital to be able to find good opportunities as we go forward.

Steven F. Udvar-Hazy

And one of the other advantages of this new bank facility is that it allows us to optimize and pick and choose the timing of when we do go back to the bond markets because we do have the flexibility of utilizing the revolver and drawing down, paying back as we see fit. So in a sense, it actually is a good management tool in sort of optimizing the timing of any additional longer-term maturities. Secondly, we are watching the policies of the central banks in North America, Europe and Asia very closely for any signs of interest rates moving in the northerly direction. And so long as we're sitting in this low cost interest rate environment, a prudent usage of short-term funding based on short-term LIBOR rates is extremely efficient for us, particularly for things like progress payments and opportunistic purchases.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Great. Please, let us know if you see any of those signs.

Steven F. Udvar-Hazy

If we knew that, we wouldn't be in the aircraft fleet...

Operator

Next question comes from the line of Helane Becker of Cowen Securities.

Helane R. Becker - Cowen Securities LLC, Research Division

Just a couple of points of clarification. Steve, on the dividend, is it something that you're going to look at and visit every quarter or every year? Or how should we think about your dividend policy?

Steven F. Udvar-Hazy

Well, before we declared our first dividend, we and the board and our finance team spent a lot of time thinking about it. And I can tell you that we had an overwhelming strong support from a lot of our shareholders, particularly our institutional shareholders and a lot of our retail holders that have various funds and buckets available for investing in dividend paying companies. So we looked at that long and hard and made a decision that by having a small modest dividend that has the future possibly of growing over time, we open up new avenues of equity investors who cannot invest in non-dividend paying companies. And I think it's turned out to be the correct assumption. Now in terms of policy, the board looks at our financial performance very carefully every quarter. And so long as the company's doing well, we will continue to pursue being a dividend paying company. But each quarter, we and the Board of Directors make that determination, and we just declared our second dividend, which will be payable on July 8. And hopefully, our thinking is that this will be a quarterly event. And as the company prospers, obviously the board will take into account the merits of growing that dividend in the future. But we will take it on a quarter-to-quarter basis.

Helane R. Becker - Cowen Securities LLC, Research Division

Okay, great. And then my other question is could you ever or could you break out where India is in your business and how you're thinking about that market given all the issues that have gone on there in the past year?

Steven F. Udvar-Hazy

Yes, I mean, we have -- this management team has a tremendous amount of experience in India, not just in our current company but in our prior company. And we have dealt with Air India. We dealt with startups, we dealt with low-cost carriers. We dealt with airlines that got merged into both Jet, and like Air Deccan that was bought by Kingfisher. We dealt with Sahara that was bought by Jet Airways. We've watched that market very carefully, and it is very unfortunate that a country of that size does not have a predictable way of dealing with airline insolvencies and airlines that do not perform their obligations. And I think it's a clear demonstration that you could have an international treaty like a Cape Town, but each country will then customize its own responses to how they deal with it. So I would say right now, the Indian airlines as a whole have not been profitable. I think IndiGo and maybe to a lesser extent, SpiceJet, were the only 2 that had sort of credible operating margins. The industry grew too fast once the country was liberalized because there used to be a duopoly between Air India and Indian Airlines. And once the country was opened up to private airlines, First Jet [ph] and others, there was a massive increase in capacity. Yields went down and virtually every airline lost money. We now see the jungle sort of stabilizing a little bit, and we will look at cautiously opportunities in India. But I would have to say right now it's not a real priority for us because we have so many other countries and airlines that demand and need airplane from us. So India right now is on the watch list. We want to see what happens with government policies, both at the federal and local level and how they deal with repossessions and we just want to see a more robust recognition of ownership rights in India by aircraft owners and lessors. And once that is more clear, I think we'll take another look at India. But for the time being, there's a lot of other countries where we feel more comfortable. That's not to say that in the future, we don't consider India an interesting place to do business. We do have 2 customers there that are performing well, SpiceJet, IndiGo, and we know the market. We have some members of our management team that are intimately familiar with India and they've done a lot of deals there. So we're going to watch that market very carefully. We'll see how other lessors perform, whether the airlines can regain profitability or decent margins. And we'll see how the regulatory climate becomes more lessor friendly. And when all the stars are aligned, certainly, we'll look at going back into that market. But right now, it's not sort of at the top of our list. I hope you understand our position on that.

Helane R. Becker - Cowen Securities LLC, Research Division

I think you made it quite clear.

Operator

Your next question comes from the line of Glenn Engel of Merrill Lynch.

Glenn D. Engel - BofA Merrill Lynch, Research Division

A couple of questions. One, the aircraft you're purchasing, how do the prices today compare to the prices you did a couple of years ago? Are we just seeing inflation type increases?

Steven F. Udvar-Hazy

You're asking kind of a very touchy question. I mean, obviously we hope we build in some good protections for the company in terms of inflationary indexes with the manufacturers. So no, we're not seeing a significant difference between what we paid for an airplane in 2011 versus 2013. And we're trying to keep that inflationary momentum to an absolute minimum.

Glenn D. Engel - BofA Merrill Lynch, Research Division

That's clear. Second question is you've seen even Air Canada and American access the asset ABS market. Is that a market that could be attractive to you? And what would it take?

Steven F. Udvar-Hazy

We look at the ABS market not as a direct function of our day-to-day operating philosophy or funding of our company. But it could be equal in the future for disposal of a pool of asset into a structure, into a secured structure. But at the moment, we don't believe that's the most optimal financing for us because as an operating lessor, we want to have mobile aircraft that we can deploy in different jurisdictions, different countries, different airlines and the ABS secured structure has some limitations and handcuffs that we don't believe are really ideal for an operating lessor. So it could ultimately work for us as a disposition vehicle of assets but it's not going to be a primary source of financing. I mean, do you want to add something to that?

John L. Plueger

Right. Spot on. That's exactly right.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And final question, can you give any thoughts on your interest in 787s? And what would it take to start buying more of those?

John L. Plueger

Glenn, it's John. We already have 12 787-9s on order, and they don't deliver until -- the first don't deliver until 2017. We have already placed the first 8 of those 12. Steve indicated in his remarks that we are looking at the Boeing 787-10X, a new product. And I can only say we have nothing specific today. But as we grow our fleet, I think you can see us adding to the 787 platform in a meaningful way.

Steven F. Udvar-Hazy

We've spent an awful lot of management time working with Boeing for many years on sort of making sure that the model lineup of the 787 will be a very, very efficient workhorse for the airlines. So our main focus is, obviously, on the second and third generation 787s.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And your view is the issues they've had are things that don't really dent your enthusiasm for the plane in the long run?

Steven F. Udvar-Hazy

Correct. Well, we took high school physics and we started electricity. So that's as much as we know about it.

Operator

I'd now like to turn the call over to Ryan McKenna for closing remarks.

Ryan McKenna

Well, thank you all for joining us. That concludes our call for today, and we look forward to speaking with you all next quarter.

Operator

Thank you for joining in today. That concludes the presentation. You may now disconnect. Have a good day.

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