Air Lease's (AL) CEO John Plueger on Q2 2016 Results - Earnings Call Transcript

| About: Air Lease (AL)

Air Lease Corp (NYSE:AL)

Q2 2016 Results Earnings Conference Call

August 04, 2016, 04:30 PM ET

Executives

Ryan McKenna - IR

Steve Hazy - Executive Chairman

John Plueger - CEO and President

Greg Willis - EVP and CFO

Analysts

Moshe Orenbuch - Credit Suisse

Helane Baker - Cowen

Rajeev Lalwani - Morgan Stanley

Mark Streeter - JPMorgan

Arren Cyganovich - D.A. Davidson

Vincent Caintic - Macquarie

Michael Linenberg - Deutsche Bank

Kristine Liwag - BoA Merrill Lynch

Christopher Nolan - FBR

Jason Arnold - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen and welcome to the Second Quarter 2016 Air Lease Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Mr. Ryan McKenna, Head of Strategic Planning.

Ryan McKenna

Good afternoon, everyone and welcome to Air Lease Corporation's second quarter 2016 earnings call. This is Ryan McKenna, and I'm joined this afternoon by Steve Hazy, our Executive Chairman; John Plueger, our Chief Executive Officer and President; and Greg Willis, our Executive Vice President and Chief Financial Officer.

Earlier today, we published our second quarter 2016 results. 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, August 4, 2016 and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session.

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, and 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 the future results and speak only as of today, August 4, 2016. 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 the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted margin are non-GAAP measures. A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q we issued today. This release can be found in both the Investors and 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 Executive Chairman, Steve Hazy.

Steve Hazy

Thanks Ryan. And good afternoon to all of you and thanks for joining us today. As you can see from our earnings press release, ALC has continued to perform extremely well. There have been significant developments since our last call with you including the Brexit vote in the United Kingdom, increased terrorism, and profit warnings by some major airlines.

In spite of all the headline news that has a negative tone, passenger traffic growth increased by more than 6% year-over-year through June. In July, IATA published a traffic growth of 5.2%. However our best-in-class fleet balanced order book tailored to meet long term global passenger demand and strong forward placement percentages have generated leading results.

Our strategies of targeting aircraft orders for fleet replacement, rather than just for growth, extending leases early resulting in low rate of lease expires over the next five years and maintaining a conservative debt to equity ratio of 2.5 to 1, as well as striving to improve our investment grade ratings which is now a positive outlook for S&P have all served us very well for many years and are serving us well now.

This excellent strategic positioning allows us to look forward not only with continued optimism and confidence, but with a total focus on capturing opportunities. Let me remind you there are businesses linked at long term demand for air travel and the resulting replacement and growth of aircraft fleets. These macro developments have not altered a long term views on the industry.

Our highly experienced management team at ALC has navigated through many, many diverse industry conditions over the past three decades. There have been many instances over the past decades where we have witnessed supply and demand imbalances and adjustments across all aircraft types.

For example, during ALC's history, we have seen midlife AC20s come under pressure and recover. We have seen 737 700s and A319s come under pricing pressure and then recover. We've also seen new build A320s and 737 800s come under limited pressure with the introduction of the NEO and MAX yet have shown considerable resilience and steady demand. And at the same time four engine a very large wide-body aircraft have fallen out of favor with new and efficient twin wide-body aircraft gaining favor with most profitable twin-aisle operators.

We take advantage of these market dislocations with a steady hand and a positioned ALC from day one to be able to profit successfully in all market conditions. We did make a number of significant lease placement announcements at the Farnborough Airshow and recently including the placement of four new A350-1000 aircraft at Virgin Atlantic is a key element in their long-term wide-body strategy to replace their older Boeing 747 400 fleet. This is an example where we have worked closely with the airline for years to help them with their fleet planning decisions and this placement is another example of the ALC difference.

Beyond Virgin Atlantic our wide-body lease placements continue to be robust. Look forward to our future press releases on these topics. We've also made some positive changes at ALC since our last earnings call with you. On June 17 this year, we announced our executive leadership succession effective July 1 of 2016 with our Board of Directors naming my long term colleague John Pluegeras our Chief Executive Officer and President as well as elevation of the corporate title of our CFO, Greg Willis to Executive Vice President and CFO and myself assuming the position of Executive Chairman.

Our press release issued at that time describes these changes in detail and for the reasons for them I won't spend too much time reviewing that. Suffice it to say that these moves were accomplished as part of ALC's organized and well thought out long-term succession planning which exists across our company in all departments and all levels. These changes allow ALC to operate at maximum efficiency, optimization and preparedness going forward. It is also in line with our Board of Director's views on best practices for corporate governance and operational excellence at a public company.

John and I will continue to working together very closely in all key areas of our business and our long-term partnership will continue as it has for the past 30 years. John is extremely well-suited for the CEO role and he’s committed to building the shareholder value of ALC. I’ve worked with John and trained him for 30 years and it’s time to kick the training wheels off. John will focus a bit more on overall strategy in all areas. At the same time I will continue my full-time involvement in the business working very closely with our airline customer leadership, the OEMs and our financiers.

In our Executive Officer roles we both report to our Board of Directors and are continuing to chair of the Board working closely with Robert Milton, our lead Independent Director as well as our other distinguished board members. I’m also devoted to mentoring, teaching and guiding our talented executives and staff to help them perform to the best of their capabilities and contribute to the growth of Air Lease.

And with that, I’d like to turn the call over to new Chief Executive Officer and President, John Plueger.

John Plueger

Thanks, Steve. Let me begin by thanking Steve for his leadership and vision that he has shown in building a world-class leasing platform in six short years and for everything that he’s done for me personally. We move forward together doing what we love doing. Our entire management team firmly committed and focused on building shareholder value.

Let me remind you that the ALC Management team and Board collectively own a significant percentage of this company. Further in assuming the CEO position, I am happy to be taking a significantly greater percentage of my compensation in ALC stock. As such I'm pleased to report that in the second quarter of 2016, Air Lease recorded total revenues of $350 million versus $305 million in 2015, an increase of 14.9%.

We also achieved record adjusted net income before income taxes of $152 million in Q2 versus $130 million in 2015, which represent a 16.7% growth year-over-year. This resulted in record adjusted diluted EPS before income taxes of $1.39 share versus the $1.19 which is an increase of 16.8%.

These consistent and record financial returns represent another quarter of growth and market-leading results that reflect the strength of our aircraft leasing platform. So our portfolio results remain consistent. We remain optimistic in the face of global challenging headwinds such as Brexit and the increased frequency of terrorism events.

Now Steve outlined earlier many of the aspects of how we structure a business model to profit in all industry conditions. We continue to drive down our financing cost with a positive forward outlook from S&P and I would point out that the debt markets have remained relatively calm in the face of global uncertainty.

We are also driving your aircraft cost down as we work together closely with the OEMs on successful aircraft placement campaign globally. Looking forward, we believe the capacity discipline will be maintained on the part of both the OEMs and the airlines but we are watching this very closely on both the rate ramps for the narrow body jets and the current production rates for wide bodies. We continue to see airlines taking a very measured and thoughtful long-term view of their business instead of prematurely reacting to every up and down in the market.

We have yet to see at Air Lease any meaningful impact on our European portfolio or forward placements as a result of the Brexit referendum both in the UK or terrorism events in Europe. Our European lessees are performing. We do believe however that it is still too early to draw any conclusions or speculations about what the future holds in that regard. But with our young fleet and our global placement capability, we are prepared to handle challenges should they arise. And first and foremost we view all market conditions with an eye towards opportunity that is our management team culture.

For ALC the Farnborough Airshow was all about the continued smooth execution of our business. The demand for our new aircraft continues and as such we've proactively placed aircraft farther forward than we have in recent history. We are now 91% placed through 2018 and 80% placed for 2019

Furthermore, we have minimally expertise over the next three years and of those very few are wide-body aircraft. For example ALC only has one unplaced use wide-body lease expiring in 2017 and none in 2018.Again there has been no overall change in our current operating portfolio metrics and the cost of financing continues to come down.

Therefore our return profile continues to be strong and has not shifted meaningfully. And in fact our operating margins have increased compared to 12 to 24 months ago. For the second quarter we took delivery of 13 aircraft from our order book and acquired three incremental units. The transition process to Nordic Aviation Capital for the ATR and Embraer fleets has progressed and we’ve transferred nine aircraft during the quarter. The market for used aircraft remains robust and we continue to see demand for our aircraft. With the agreed sales to NAC we have far exceeded our sales projections from the beginning of the year.

Like for Capital One is now over halfway to the target of filling up the $2 billion fund. The pace of concluded transactions has been slightly slower for the first half of 2016 in a highly competitive environment. But we're mining potential transactions for the second half of the year and maintaining a disciplined and careful approach to asset acquisitions pursuant to the objectives of that fund.

As you look forward to the third quarter, we will acquire six aircraft totaling approximately $500 million in capital commitments. Five of these deliveries are from our order book and one is an incremental unit that has been acquired from an airline.

All these aircrafts are reflected in our commitment table. Owning to the strong performance of our company since inception and the confidence in our future and continued growth, ALC's Board of Directors declared a quarterly cash dividend to shareholders of $0.05 per share. We delivered excellent results while building a best-in-class fleet on long-term leases with globally diversified customers and a flexible forward order book that gives us a competitive advantage.

An important aspect of the management level changes we’ve made effective July1 is elevating our CFO Greg Willis to Executive Vice President. Greg’s promotion is well deserved as his accomplishments and reputation have grown both externally and internally as he runs our finance and accounting organization.

So let me now turn this call over to Greg who will walk you through our financial results that we believe further differentiates ACL. Greg?

Greg Willis

Thank you, John and Steve. I really appreciate all the support that you’ve provided.

Turning to the numbers, we generated record revenues of $350 million representing a 14.% increase from the prior year. This growth in revenues is primarily driven by the purchase of 16 aircraft representing approximately $900 million in capital expenditures. Our portfolio lease yield has remained constant along with a core fleet metrics which include our 3.7 year weighted average age and our average lease term remaining of seven years. Along with our watch list remains at historically low levels, these long-term contracts for our fleet provide a significant amount of visibility into our expected future earnings and cash flows of our business.

Aircraft sales, trading and other income have continued to represent a consistent yet modest component of our total revenues aggregating just 6%. During the quarter we sold 10 aircraft, five ATRs, four E-Jets and one aircraft to Blackbird Capital I. The remaining aircraft transfers relating to the E-Jets and ATR sales to NAC should continue over the coming three quarter at a similar pace to what we executed this quarter. As you know, we constantly modify our order book to optimize quantities and delivery positions to meet our customer needs.

In connection with this activity we reevaluated all of our forward delivery position assumptions included in our CapEx disclosures and made the determination that we’ve been overly conservative in forward delivery specification and escalation assumptions which includes assumptions for inflation.

Over the past several years this has resulted in higher CapEx projections than the price of delivered aircraft. As of June 30, our commitments have decreased to $29.2 billion from $30.5 billion in the first quarter. This decrease includes the $700 million effect of the revision of these forward assumptions.

On the financing side of the business we were very active in the second quarter. We continue to remain focused on our core product metrics which include a conservative debt-to-equity target of 2.5:1, over 90% unsecured financing and a balanced debt maturity schedule with a high quality asset base with long-term highly visible attractive cash flows.

We increased the capacity of our unsecured revolving credit facility by $350 million to $3.13 billion and extended the final maturity to 2020 at a rate of LIBOR plus 125 basis points which will adjust down [ph] to a 25 basis points with a ratings upgrade.

As it stands today we’ve banking group to include a globally diversified base of 50 financial institutions. We completed a successful senior notes offering of $600 million at 3.375%, maturing in 2021 and just this week we saved 200 basis points refinancing in unrated private placement which will save us another $2 million annually. We anticipate future savings as we continue to refinance our remaining legacy unrated bonds and layer on incremental financing where the price is meaningfully inside our historical transactions.

We ended the quarter with a composite cost of funds of 3.3% which has continued to decrease. As we indicated last quarter the fixed rate portion of our debt will continue to fluctuate due to the timing of our capital market activities. However, there is no change to our long-term target of 80% fixed rate debt.

Additionally our SG&A ratio to revenue for the first six months of the year have declined and over time we expect it to continue to decline as a percentage of revenues. All of these positive trends have resulted in us recording $1.39 in adjusted diluted earnings per share before income taxes representing an increase of 16.8% over the prior year and an adjusted margin of 43.7%. This contributed a further expansion of our adjusted returns on equity to 18.74% on a trailing 12-month basis.

This concludes my review of the financial results and financing activities of the company and I’ll now turn it back to Ryan.

Ryan McKenna

Thanks Greg. That concludes management's remarks. For the question and answer session each participant will be allowed one question and one follow-up.

Now I’d like to hand the call back to the operator. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open.

Moshe Orenbuch

Great. Last quarter we had talked a little bit about the planes that had come into, that you had acquired outside of the order book. Is there anything you can tell us about the ones that you did in Q2 and will be doing in Q3?

Steve Hazy

Yes, we acquired three brand new A321 high gross weight [CO] [ph] aircraft from a larger airline in Latin America that felt that they had perhaps too many aircraft in their pipeline with Airbus and we have placed all of these three aircraft in Western Europe on long-term leases.

One aircraft delivered before the end of the second quarter and we have one aircraft this third quarter and the third aircraft is going to be in the fourth quarter for delivery.

Moshe Orenbuch

Great. And just as a quick follow-up. Maybe if you could just kind of give us your sense I mean you talked a little bit in your opening remarks Steve about fluctuations and such but maybe if you could just talk a little bit about the wide body market one of you competitors this morning made some comments about seeing some pressure there.

Steve Hazy

I think you have to separate the wide body market into really two segment, the very oldest like 747s and the 11s the older 767s, obviously has suffered in terms of the marketability and operating costs but what we’re seeing is demand for the new airplanes particularly the A330 Neo the A350 family, 787 family and even the 777 300 ER continues to be strong.

We have placed all of our 777s the remainder of 2016 and early '17. We’re seeing very strong demand for the 787-9 and 787-10 and also for the A350 family, as well as the A330 Neo. So we’re seeing some segmentation in the market but the portfolio that we have and the aircraft we have on order we’re seeing very robust activity, strong demand and good lease rates.

Moshe Orenbuch

Thanks very much.

Greg Willis

The older 777-200s Moshe, 200 ERs and the older 777-300s and the used aircraft marketplace there has been some softness there but to Steve's point we really don’t have any of those in our portfolio.

Moshe Orenbuch

Got it. Thanks so much.

Operator

Your next question comes from the line of Helane Baker with Cowen. Your line is now open.

Helane Baker

Hi guys, thank you. Oh my God, I was trying to figure out the mute button for a second there. That was pretty wild. So just on the aircraft placements that you are doing for the replacement programs, what are you seeing in terms of the rents like I should go out to 2019, 2018 are they holding up relative to your expectations and what you think the stock there would be when you place those aircraft orders?

Steve Hazy

Yes. Look, we anticipated over time all kinds of market conditions but the bottom line answer to the questions, here is exactly what we’re seeing. The demand remains strong but we’re seeing a bit of a wider variation sort of customer by customer placement by placement on the lease rate.

So strong demand consistent but more variation on the lease rate and definitely more competition so I think it’s fair to say there is a little more variability on the bottom side of that spectrum, it has trended a little bit lower but in our own placements again on a overall portfolio average we’ve achieved about what we’re looking to achieve.

So bottom line is demand is there, it’s being supplied – that demand is being serviced by probably a greater supply, a little bit more variability in the overall lease rate structure that’s across the board, a little bit more downward pressure on the bottom end.

Greg Willis

Also I’d like to add that all these future placements that have long lead times in other words aircrafts delivering in the ’18, ’19, '20, '21, we have built in interest rate protection into those lease rate structures, so to the extent there's an increase in base rates whether it's LIBOR treasury rates, we can adjust those leads rates just prior to delivery and enjoy the benefits for the remaining life of those lease transactions.

Helane Baker

Okay. And then I just…

Steve Hazy

I also commented on our results that we do continue to drive our aircraft cost down as well. Each of these campaigns are competitively fought between the OEMs and we do enjoy additional benefits over and above our contractual entitlements as we place these aircraft. So generally speaking we're driving our aircraft cost down as well.

Helane Baker

Okay. And then just maybe it's just an accounting question for Greg. On the aircraft that you're holding out for sale that are being delivered over the next one year, do you have to account for those aircraft separately in revenue or are those just part of rental equal rental revenue until after they're sold.

Greg Willis

Right. So there's a footnote in our queue that talks about our policy for aircraft that are held for sale. We've included them as a component of our flight equipment line or balance sheet. Revenues are that those aircraft generate continue to flow through rental revenue yes, depreciation is unstopped.

Helane Baker

Great.

Steve Hazy

The rent continued till the actual closing date of the sale to the buyer.

Helane Baker

Okay, perfect. Thanks guys. I really appreciate the time.

Operator

Your next question comes from the line of Rajeev Lalwani with Morgan Stanley. Your line is now open.

Rajeev Lalwani

Hi gentleman. Hi, thanks for the time. Two quick questions, I guess first for you John with the assumption of a CEO role. What are some of your priorities and goals going forward particularly from an investor perspective?

John Plueger

Sure, my first priority and goal is to continue on exactly as how we've been doing focusing with a vengeance on our core business. That's always remained the marching order here it remains a going forward. Having said that, I have been asking our departments and our team, let's think a little bit more strategically, let's see if there is something within our core competency that we are not seeing or with that we're not missing, maybe something that we take advantage of.

I mean look we talk to airlines 24/7 and we're talking to the OEMs - we have a lot of knowledge, I think we have a lot of good Intel. And I'd like to think and Steve and I chat about this earlier, I like to think, I want to rescrub it and not just take everything for granted. And I want to see if there is a way that we can maybe expand our profitability and our business opportunities remaining within our core.

I don't know what those things are right now. But I would just say on strategic side we're looking in any and all opportunities and it's a good time for all of us of the company and inflection point to take a look at again what we're doing. I mean we have so much information, we have so much intelligence, we have so much data. I want to make sure there's nothing just obvious the system visible to us, because we've been doing the same way for many, many years.

So bottom line focus on our core it is they are absolute strength. Our results indicate that that is not going to change, but can we enhance that little bit strategically from within our core competency.

Rajeev Lalwani

Thanks. And then just on the placement of aircraft. You guys later in another year or so going out to 2019, I mean is that something that's going to continue meaning are you going to be more aggressive as you move forward maybe look for placements out 2020 or so. Just to take some of that risk of the table?

John Plueger

Well we don't see it as risk, as we've always said we under order to begin with. In other words we don't order every aircraft that we think we can place. So the results that we've been able to achieve in placing aircraft in 2018, 2019, 2020, 2021 are really as a result of airlines coming to us and saying we have fleet planning going up to that time frame and we need to replace some of our aging aircraft and we're simply responding to our client requirements.

But also placing aircraft on a longer lead time does take some of the risk volatility that may have occur in future or lease rates, because we're able to lock in profitable lease rates. Multi years ahead of their deliveries and then we get to enjoy those lease rates for 12 to 14 years after the aircraft are delivered.

Rajeev Lalwani

Great. Thank you, gentlemen and congrats on the new roles.

Operator

Your next question comes from the line of Mark Streeter with JPMorgan. Your line is now open.

Mark Streeter

Good afternoon, everyone. And John and Greg congrats on the promotions, well-deserved. First question export credit the fallout from export credit with Airbus and Boeing both shut down are you seeing opportunities to step in, you obviously have the great relationships with both manufacturers, as more time passes, are there more opportunities for you to step in to those situations where that funding isn’t available?

John Plueger

Yes. That’s a good point. I’m glad you raised, Mark. Yes, we are actually seeing a bit more inquiries coming in related to that. Don't forget that generally speaking since this industry the leasing industry was formed, generally speaking during times of greater uncertainty that is an actual opportune time and history demonstrates the people do turn aircraft leasing as opposed to using their own balance sheet. And so that coupled with the export credit lack of moving forward. So in fact we are having several discussions with a couple of airlines along those fronts. So, yes.

Greg Willis

Exactly a good point by, John. We are seeing actual transactions that we've now completed where historically those airlines have relied heavily on export credit financing. I can point to a recent event on 787s with an airline that normally would have utilized export credits. We just did another transaction in Asia with the National Carrier that is previously utilized export credit financing on 737 MAXs.

We've also just completed another deal in Eastern Europe on new generation single aisle aircraft, another airline that has historically used excellent financing. So we are to some extent getting the benefit of that because the certainty in what we can provide and this uncertainty when Congress and the European agencies will come back to full operational status.

Mark Streeter

Great, thank you. And then Steve I’ll throw this one out to you but John obviously you can jump in too. You were quoted in the press since the last call regarding the C Series and that you were willing to take o Air Lease is willing to take a leadership role but Bombardier wouldn’t meet you on price.

So what sort of the postmortem now that we have the order from Delta, and the progress that they’ve made with Air Canada in the order book there, is there still an opportunity for you to take a leadership role in that aircraft or has that ship sailed?

Steve Hazy

Well look we have a very large commitment to the A320 21 NEO family. We have a significant commitment the largest commitment of any lessor for the Boeing 737 MAX family. But we owe it to our shareholders and to our customers to continue to evaluate all aircraft types whether it’s the C Series or the E2 or even aircraft manufactured in Japan and China and elsewhere.

So it’s a continuous process. All I can say is up through today we have not seen a compelling business case presented by the other manufacturers aside from Boeing and Airbus that would take this to a higher level. But we continue to have dialogue with all of the OEMs both engines and air frame manufacturers.

John Plueger

Yes, look you've seen us just sell our E-Jet fleet, you’ve seen us sell our ATR fleet. So suffice it to say that we would need a pretty compelling business case that would give us a pretty high degree of confidence that whatever we do if we did anything whether it's with the C Series or anybody else call MAX C919 I mean you can fit in there.

But we’re talking about the C Series here that business case would have to be pretty compelling and pretty strong that we could do if not equal to what our current portfolio makes it but exceed and do better going forward.

And so we're not at that point yet, but we always continue to listen to offers and we have had chats with the Bombardier very recently. We will continue those dialogues and if it ever comes to the point where we think the risk reward tips in that favor, we wouldn't hesitate to make a move on a new aircraft type.

Steve Hazy

Listen Mark we’ll watch the operational integrity and reliability of the airplane. We’re going to monitor how Swiss is doing. We’re going to monitor AirBall take as they introduce the C300 series later this year. So we’re going to keep a very close eye on the program and compare the performance of those airplanes to our core Airbus and Boeing narrow-body aircraft.

Mark Streeter

Perfect. Thanks very much, gentlemen.

Operator

Your next question comes from the line of Arren Cyganovich with D.A. Davidson. Your line is now open.

Arren Cyganovich

Thanks. I was wondering if you could talk a little bit about what you're seeing from customers are seeing a little bit weaker unit revenues from some folks I know you don't have much exposure in North America. But just overall what you're seeing from your customers and how you feel about…

A – John Plueger

Being thoughtful making long-term fleet planning views. And so we don't see a lot of knee-jerk reaction. So as to profitability as you know that kind of ebbs-and-flows but still today even with some of the proper warnings we've seen on a global basis the industry remains healthier than ever.

Now I also talked about capacity discipline and I think that actually kind of ties into it here. It's a very good thing when we see for example both Boeing and Airbus making lowering production rates of airplanes they’re not selling, in this case primarily the four engine aircraft. There were some questions about being raised about whether Boeing is going to go from 12 to 14 a month on the 787.

These are exactly the kinds of things that you want to see that this one creeping in. By the same time airlines themselves need exercise that discipline and we're actually looking for opportunity we don’t really found them. But what we would expect to see is that if there's a little bit more risk aversion that's creeping in as a result of a little softening our profitability we're actually hoping to look and step in if some of these airlines wanted to further orders or pushing back or cancel. We’ve been actually offered a couple of airlines that they could take our leader positions if we took their earlier position.

So the bottom line we haven't really seen any reaction at all from our customers to their commitments to us whether it's currently or on forward orders. No real concerns about their financial performance but we think that that might happen going forward. And if so we you know one advantage we have is our young fleet is using the last aircraft types that an aircraft wants to exit. But pursuant to what I said earlier we really do view any and all opportunities I mean we are a global fleet equalizer and that's where we prosper and that’s where we make money.

So the short answer is no, nothing from our airlines to-date about profitability concerns with respect to us. They’re out there but we do want to see this continued discipline on the part of the OEMs and if it means that ultimately they don't go up to the fully expected production rates on single aisle that's even better. If it means that if few airlines needed to differ and cancel a few more that's good too. That’s all about capacity discipline which drives ultimately their profits.

Steve Hazy

It’s interesting that in our total backlog of future deliveries where we’ve already contracted leases with airlines all over the world. For the record we haven't had one airline that has come to us to delay delivery. On the other hand some airlines have gone to the manufacturers to reschedule some of their deliveries. But at Air Lease we've not had any airlines that have asked for deferrals.

Arren Cyganovich

That’s helpful, thank you. And then in terms of the adjustment to your forward order book Greg could you talk a little bit I'm sorry I missed a little bit of what you're saying as to what caused the reduction of the values of your future commitments? And then I guess related to that does – I think you said interest rates is part of that, is the expected lease rates that would be, kind of booked on that the purchase of those aircraft come down so the profitability should roughly stay the same I guess over time or maybe I’m over thinking that?

Greg Willis

I think you might be over thinking it. There’s unfortunately very limited information I can give you based upon the provisions of our purchase agreements with the OEMs. But the heart of the reduction in our CapEx was due to escalation assumptions on the aircraft that we've ordered.

And I guess in terms of lease rates we also do have protection on our lease rates for writing escalations but that's separate analysis and this is solely based upon our – solely looking at our forward purchase commitments

Arren Cyganovich

Okay. Thank you.

Operator

Your next question comes from the line of Vincent Caintic with Macquarie. Your line is now open.

Vincent Caintic

Hi great. Thanks very much guys. Good afternoon. Just about, three concerns about maybe over supply and over capacity. Could give us a kind of a history lesson of the opportunities that you’ve seen in the past in how you’ve taken advantage of those opportunities when there might have been some of this volatility.

Greg Willis

Well, just very recently we had a large U.S. airline that approached one of the two large manufacturers to delay some of their direct orders because they determined that their own CapEx was a little out of line with their realistic projections. The OEM immediately picked up the telephone and contacted us to see if we would be willing to accelerate some of our positions and tumble forward because we had an opportunity in Europe with a major flag carrier that wanted earlier position that what we had available and within a matter of days we struck a deal to take these aircraft earlier than what we anticipated and the original airline that ordered these airplanes in the U.S. was satisfied that they could defer some of their deliveries and we in turn placed these aircraft at an airline in Europe and heretofore did not have this aircraft type.

So we introduced a new type of airplane at this particular airline which was a target customer for both large OEMs. Let me give you a second example Vincent that we just actually talked about in the remarks and that is we took three single aisle aircraft from a Latin American carrier under excellent pricing terms, they were brand new and we placed those airplanes with carriers in Europe.

And so that’s an example of new aircraft and so we got a great deal on those airplanes, very aggressively priced. We got a good lease rate so we’re going to get a good return. But also it goes beyond there, it goes, it extends even to the used aircraft environment. I mean throughout history for 30 years that’s one of the things we do well as we take advantage of ups and downs.

So I do not rule out by any means buying well priced used aircraft should they become available from the airlines or other leasing companies for that matter. And so we’ve done that many, many times in the past and this exactly the kind of opportunity that we’re looking at when there are sort sea shifts going on in supply and demand in different aircraft types.

Steve also mentioned in his earlier comments, a couple of years ago there was softness in the smaller narrow body 319, 737-700 but then airlines like Southwest started buying them all up, United started enquiring old used A319 and that boosted the values there. So during that time a few years ago we picked up one or two very well priced aircraft and we put them on lease. So it basically is taking advantage of those market opportunities. It means getting a good deal, finding aggressive pricing, and we’re looking for those.

Steve Hazy

And as Greg mentioned earlier we now have a revolving credit facility of well in excess of $3 billion of available liquidity that gives us a lot of fire power to take advantage of opportunities.

Vincent Caintic

Great, that’s very helpful color guys. So that’s the opportunity on the asset side and I actually want to touch on the other side of things. In this continued low interest rate environment it seems like there is a lot of continued investor demand for these stable assets and so I was wondering you gave a bit of an update on Blackbird I but what’s the demand there for more of that to fill and then maybe other Blackbird Is.

Greg Willis

Well I think look as to Blackbird our first mandate is to successfully conclude that program. I mentioned that the pace was a little slower in the first half of the year, why, because we’re disciplined, we’re doing exactly what we’re just telling you that we’re trying to do. We’re trying to find a good deal environment but to your point there is a lot of grab for assets and so there is strong market of people that want to go out and do sale lease backs and other things and that’s all within the Blackbird environment.

So the Blackbird Capital II is always on the books but I keep saying internally here let’s not get the cart before the horse. Let’s do as well as we can do and make Blackbird Capital I successful that will attract further investors.

We do look at other aspects of the marketplace. We continue to watch the asset back security market et cetera. That might be eventually an avenue of exit for some of us for a certain class of our assets but that remains to be seen but your point is well taken. There is an investment appetite and demand and we want to take advantage of that when we can but on a measured and disciplined pace.

John Plueger

We’d like to see more of that inventory demand coming by our equity because, the company is doing well but we don’t feel that the market is valuing the long term stability and the earnings growth of Air Lease.

Greg Willis

There certainly is huge healthy demand for capital though on that, on the equity side of the private deals so that market remains with very significant demand where it’s all about finding the asset as John said.

Vincent Caintic

Thanks very much. I appreciate that.

Operator

Your next question comes from the line of Michael Linenberg with Deutsche Bank. Your line is now open.

Michael Linenberg

I haven't gone through all the release, I wasn’t sure if you had called out the gains or whether or not you took a gain on the 10 aircraft that you sold during the quarter I guess it’s the ATRs [indiscernible].

Greg Willis

Yes, in the MD&A of the Q we stated the gains that we recorded on 10 aircraft sold were $16.7 million.

Steve Hazy

Little over $17 million.

Michael Linenberg

That's great. And then second question and this had to do recently with the deferral by American on the A350s I think that sent up some red flags, as people are questioning the durability of demand of wide body aircraft and I am just, American in the end indicated they didn’t have to pay a penalty and my sense is that those airplanes are going to get picked up by somebody else who wants those delivery positions one hand but on the other how is Airbus at this point keeping up with some of these airplanes.

I know that a lot of the airlines have been a bit frustrated by delays and I am just curious if some of this maybe Airbus and the suppler base just getting back on track and so this is kind of a long question to, where are we with the supply chain and actually getting these airplanes to customers on time. I mean is this a bit of a safety valve to maybe help Airbus get back on track any …

Steve Hazy

They are on the right track, they are on the right track.

John Plueger

I think that it is a safety valve that’s needed safety valve.

Steve Hazy

Michael we do remain concerned about certain elements of supply chain. It is very tough to achieve some of these ramp up rates and along with that therefore if you have a concern on supply chain and the ramp up rate we also have concern about quality.

We want to make sure that the airplanes that we’re getting are of good quality and it’s something we watch very, very closely but this A350 I think provides tremendous relief to Airbus and it actually – let me harp on one point. When we see these deferrals I think it’s a natural reaction that Oh my gosh, the world is changing, airlines don’t need airplane anymore.

This is exactly the kind of discipline and capacity that we want to see broadly throughout the globe is a earlier adjustment rather than a later adjustment of forward views and in this case it wouldn’t surprise me at all. Your question on whether there wasn’t any penalty to American was the fact that Airbus needed a relief. And that’s actually also a good thing because you need to really watch that ramp up rate and it’s real stress on suppliers and so we saw that and I saw that and Steve and I took a look at that said well, that is a pressure relief valve and frankly Airbus needs it.

Greg Willis

And also remember these aircraft were ordered by U.S. Airways as part of their ultimate A330 replacements and American as you know has a large fleet of 777-200 ERs, 777-300 ERs, 787-8, 787-9s so adding another wide body type kind of early in the process has turned out to be challenging. So I think it’s a win-win for both of those companies.

Michael Linenberg

Great, thanks.

Greg Willis

And it’s good for the industry because it fewer wide bodies coming into the game which is I think good in this environment.

Michael Linenberg

Great, thanks for the color guys.

Operator

Your next question comes from the line of Kristine Liwag with BoA Merrill Lynch. Your line is now open.

Kristine Liwag

Hi, guys good afternoon. John and Steve for the aircraft with delivery in 2019 can you discuss how lease rate factors for those contracts that you signed this year compared to the deals that you signed for the year of delivery from last year and genesis of this question is really to quantify how the business environment has changed or stayed the same in the past year.

John Plueger

My answer will be the same as I gave earlier Kristine. Comparing this year to last year it’s overall about the same but we’ve seen more variability. The range is widening a little bit and there has been on an overall basis a little bit of reduction on the low end of the market range in the lease rate factors but by the same token on our deals we have some that are also at the upper end of that range.

So I would just say there is more variability as I mentioned earlier but we’ve seen a little bit more pressure on the bottom end. But also I want to mention to you that a lot of our lease placements to an airline involve multiple aircraft delivering over multiple years. So let’s say we do a deal we just announced a recent deal with Cayman Airways for example on 737 MAXes. The first airplane delivers in 2018, we have aircraft in ’19 and then we have the fourth airplane 2020, the lease rates are all the same even thought the aircraft are delivered in different years.

So on a multi aircraft transaction we’re not discounting the aircraft that are delivering the later years. Does that make sense?

Kristine Liwag

Sure so I guess - average it’s kind of flat.

Greg Willis

So the answer again just to point out to an earlier comment this is one of the reasons why we have in fact advanced and we have a higher rate of forward placements than we have in the past. I think again as indicated we’re 91% for 2018, we’re 80% for 2019 that’s higher than what we normally are going out three to four years and so life I about balance.

And so we’ve balanced our forward placements. We’ve gone a little bit more aggressive as a hedge toward prospective future lease rates softening a little bit but having said that our overall portfolio on an average basis very little change year-to-year but we have seen a little bit compression on the bottom side.

Steve Hazy

But we’re also projecting Kristine a lower portfolio cost of borrowing and as Greg mentioned in his remarks we are now on a consistent basis replacing debt that we issued back when we were non-investment grade back in 2010, 2011 and early 2012 and we’re replacing that debt at lower absolute costs to ALC than the interest rates that prevailed on those securities. So to that extent we’re going to benefit from a lower cost of financing.

Greg Willis

And lower aircraft prices.

Steve Hazy

And of course as John mentioned earlier each campaign we address the cost of the aircraft very aggressively to make sure that we get the absolute best pricing considering we’re one of the largest volume buyers of both Airbus and Boeing.

Kristine Liwag

Great and maybe a minor follow-up, there was a slight downtick in your regional concentration in the Middle East and Africa for your portfolio, I think it was about 9.5% in December, 9% in March and about 8.6% this quarter. Should we think about this as a proactive change in your strategy to divest from the region or is this a very minor change.

Steve Hazy

It’s just timing of deliveries Kristine.

Greg Willis

We have deliveries going into Africa and the Middle East in fact in the fourth quarter and beyond so these are just minor timing percentage differences.

Q - Kristine Liwag

Great. Thank you very much.

Operator

Your next question comes from the line of Jamie Baker with JPMorgan. Your line is now open.

Unidentified Analyst

Hi, good afternoon guys, this actually Nish [ph] on for Jamie. I want to touch really briefly, I want to discuss this to some extent but on John’s comments earlier about OEM and airline capacity. On the OEM side you've obviously witnessed pretty significant number of product cuts along various wide body segments and you guys expressed some degree of solitude with this and that it’s a rebalance the market. Do we think that we’re still in early innings in this or has this largely played out for this cycle?

Steve Hazy

Well I would be no surprise that we may see a further rate reduction for example on the 777, as you know going out over the next year and year-and-a-half. So that would really be of no surprise. It would probably of no surprise if in fact Boeing also decided not to boost the rate on the 787 to 14 that they left it at 12. I think the big question is about single-aisle rates and today there is still a -- the backlog remains strong both manufacturers remain over quoted in a number of months.

We've actually seen those charts from each manufacturer by customers etcetera, etcetera. And many of those over quotes are real. And so it's a bit of a dilemma because they do actually need some cancellations and deferrals just like when you show up at an airline counter and there's too many seats sold that needs to happen. But when we get out to '18 and '19 know we're watching carefully I'm not 100% convinced I don’t think Steve is – I don’t think we’re 100% convinced that we're going to get to 62 a month with Airbus or that we're going to get to 57 a month with Boeing on the single-aisle.

We’re just a little skeptical about and what we're saying here is we believe we still believe that if in fact the overall marketplace does not support those rates then in fact both OEMs will simply not institute the last and final production rate increases as they've announced today.

A – John Plueger

Yes, I can tell you that last week we met with Airbus top management, this week we met with the Boeing top management and I think they're very conscious of making sure that their production rates are in complete harmony with demand and that the contracts they have will actually perform at the time of deliveries. So I think there’s a greater level of looking at this than say a year ago. I think there’s a greater consciousness that there needs to be this equilibrium.

Unidentified Analyst

Yes, I would agree that.

A – John Plueger

So we think people are going to be more conservative in their projections going forward than maybe 18 months or 24 months ago.

A – Steve Hazy

Let's look at the second quarter announcements also both Airbus and Boeing both companies took large write-offs in very – for various different reasons. And I think at the end of the day this shows as well that look both of these companies are more focused than they've ever been on realism, realism in production rates, realism in their operating performance, these write-offs were something that was needed. It became obvious and they did it.

A – John Plueger

And they are public company.

A – Steve Hazy

Look what happened to Boeing’s stock when they had this write-off it went up quite a bit. I mean it run up by 3% as I recall. So I mean here's the whole point, the whole street I think knows that we need to see this kind of continued discipline in all aspects and all measures .And we believe that it will be there.

A – John Plueger

And as Mike Linenberg said earlier there are choking points in the supply chain because the weakest link in the supply chain can really have a negative effect on the ultimate deliverability of these aircraft on time. So for you guys as analysts look at the supply chain very carefully because that's where these stress points are already.

Unidentified Analyst

Yes, I would agree. Final question someone unrelated, can you just remind us of your exposure to Turkey and any kind of risk points there?

A – Steve Hazy

We have the smallest exposure to Turkey of any of the major lessors. Currently I believe we have two aircraft there two 737 800s but it's with an airline that has also Western European the sister company and we can easily redeploy those aircraft in the Benelux as part of Europe. So we have no aircraft that the government owned THY, Türk Hava Yolları, THY.

John Plueger

Yes, Steve is talking about airline called [Core Engine] [ph] we have nothing with Turkish Airlines.

Unidentified Analyst

Okay.

A – Steve Hazy

And we don’t have any aircraft with the Charter operators that have been focused on their Russia to Turkey business because as Russian citizens can go to Turkey without a normal Visa they cannot do that going to Western Europe.

So Russia has been historically strong market but since the shooting down of our Russian military aircraft by the Turks and the recent situation at Istanbul Airport and on the unsuccessful coup we’re seeing softness in Turkey. But Air Lease has the least exposure in Turkey of any of the major lessors.

Unidentified Analyst

Okay, that’s very helpful context. Thank you so much for the time, guys. I appreciate it.

Operator

Your next question comes from the line of Christopher Nolan with FBR. Your line is now open.

Christopher Nolan

Hi, thanks for taking my question. On the comments on the lease rate pressure the low end, is this competitors buying market share or is that just competition from older jets because of cheaper jet fuel prices?

A – John Plueger

I don’t know, I don’t know I mean I can't speak for other lessors. I mean I think everybody's very actively competing on the new aircraft side as well. How much is compared -- I don't really think the older jet side of it is that much of a point. I mean one real strength that we have tried to incorporate since day one, Steve mentioned in his opening comments and that is our new aircraft placements are specifically targeted primarily towards aircraft replacements and not growth.

So not all of the replacements but that is what the great majority or that’s where we target and that’s where we focus. What other leasing companies do, I don't know, we have said that we are in an increasingly competitive environment. And so that would tend to believe that as that competition does increase it will be logical to assume that we’re seeing a little bit lower bids here and there by some other competitors to sort of and that's why comment and said that the lower end of the range sometimes can be lower, especially for the top-tier credits.

A – Steve Hazy

I think sale leaseback market has also been very competitive and that’s not a market that we're participant in. And we're seeing a little greater disparity between lease rates on sale leaseback versus operating leases that we have with a lessor controls the asset and we have the early delivery positions. And we can tailor the lease terms to the airlines requirements. So there’s a little bit of that.

We’re seeing more competition on the sale leasebacks from leasing companies that do not have their own significant order books that they can control. So they’re almost forced to go to airlines and say, okay, we’ll buy your plane and lease it back to you and an offer very economical rates to the airlines. But that's not our business.

Christopher Nolan

So is it fair to say that through 2017 you expect that your lower operating -- your cost -- operating cost to decrease fasten your revenues because of declining that cost and so forth?

A – Greg Willis

Yes, that's one of the reasons, we’ve mentioned before in past weeks we expect to benefit significantly from reduced interest costs as a function of refinancing some of those initial high-yield bonds. For example in April we have 1.1 billion in senior notes maturing they’re unrated at the 5 and 5/8 and we think that we can refinance those notes at a rate meaningfully lower than the coupons that on those notes. We also think that we’re going to benefit from increased operating leverage as well.

A – John Plueger

I don't think you should -- one part of the question though Chris to be specific reduction of revenues I don't think that's accurate. Revenues will continue to increase as we continue to grow. So I wouldn't characterize it that way.

Christopher Nolan

Yes, absolutely.

A – Greg Willis

Yes, our revenues are growing right about 20%a year.

Christopher Nolan

Yes, I know I misspoke. I mean improved operating leverage. So, sorry about that. So, okay, thanks and Greg congrats on the promotion.

Operator

Your next question comes from the line of Jason Arnold with RBC Capital Markets. Your line is now open.

Jason Arnold

Hi, guys. Good afternoon. I was just wondering if you could comment on the 3Q deliveries and sales if there's any kind of frontend or backend loading to any of that just from a kind of housekeeping perspective?

A – Greg Willis

Hi, JasonI think John mentioned in his remarks that there's roughly 500 million in CapEx plan for Q3 and the sales we feel they're going to be a spread evenly over the next three quarters.

Jason Arnold

Okay. And then deliveries too kind of spread evenly over 3Q?

A – Greg Willis

For the sales, the sales will come in ratably over the next three quarters of what we've already contracted. And then the aircraft deliveries there the CapEx the 500 million we think it’s going to be ratable over the quarter.

Jason Arnold

Okay. Thanks. And then…

A – Steve Hazy

It’s about three or the next three quarters.

A – Greg Willis

…it's probably going to backend loaded.

Jason Arnold

Okay.

A – Steve Hazy

Yes, the sales are going to be a little more backend loaded so it would not be a midpoint, probably a little…

Jason Arnold

I got it. And then the CapEx is also a little bit more backend loaded as well for the 500 million?

A – Steve Hazy

August is usually a very light month for us in terms of taking deliveries because it’s the peak of the summer and airlines don't like to take deliveries in August. So we try to shy away from new deliveries as much as we can in August. Just as a long term.

John Plueger

September is heavier than July and August, Jason.

Jason Arnold

Perfect, that makes sense. Thank you. And then just one quick follow-up, I guess on the yield at Farnborough and perhaps your meetings with Boeing any thoughts on 757 replacement any updates there?

John Plueger

Yes, well as Steve mentioned we've just met with Boeing recently and look there, looking really hard at the middle of the market aircraft, but I gave an interview to Dominic Gates of Seattle Times during the former road show and the comment that I made out of that is kind of reflective of kind of how we feel. Tell me the price of the airplane I'll tell you what the man's going to be.

Steve Hazy

I told the same to the Wall Street Journal.

John Plueger

It's really to be born about it, but there's no doubt in Boeing’s capability build a great airplane. They can sell a lot of units et cetera, et cetera it addresses a gap in their product line. But more and more today true than any other time what's it going to cost and frankly that's going to determine market.

Greg Willis

I think, I think Boeing recognizes, Jason that the A321 Neo had significantly outsold the 737-9 Max particularly from international carriers. And now there's an airplane that Air Bus builds a single haul they can do a transatlantic operation. They can fly seven, seven and a half hours nonstop.

And I think Boeing wants to respond to that, and I think that the strategy that we think is being formulated the two pronged one, is there are further way to improve the 737-Max and then maybe five, six years later come out with a new middle the market airplane, but the cost of developing their airplane and what the world is going to look like in the mid-2020s those are tough questions that Boeing has to address.

And then as John indicated what is the cost of making that airplane, and where are you going to make it, what part of the United States or offshore would this airplane be actually built. The first part of that two step as Steve talked about is the so-called 10 Max and we've been very, very clear with Boeing that their original EIS I think it was fourth quarter of 21 was just was just too late.

I mean it's that's just too late. I think I believe they're looking at moving that up meaningfully but if you're going to do a one two punch you got to do a one to timely especially the one part…

Steve Hazy

Because by 2021 they'll be more than a 1000, more than 1000 A321 Neo’s in service. So once an airline makes a large commitment for the A321 Neo including the LR version it's going to be much more difficult to unseat those airplanes. So as John indicates a Boeing is going to do an improved -10 Max it has to happen sooner than 2021 and we have telescope that the Boeing and CFM.

Jason Arnold

Excellent, great perspective there. Thanks a lot guys.

Operator

And we've reached the end of the Q&A session. I would now like to turn the call back over to your host Mr. Ryan McKenna.

Ryan McKenna

Thank you for joining us today. We look forward to speaking with you next quarter in November.

Operator

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.

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