Aircastle Limited (AYR) CEO Mike Inglese on Q4 2020 Results - Earnings Call Transcript

Apr. 21, 2021 1:25 PM ETAircastle Limited (AYR)
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Aircastle Limited (NYSE:AYR)

Q4 2020 Earnings Conference Call

April 21, 2021, 09:00 AM ET

Company Participants

Mike Inglese - CEO

Aaron Dahlke - CFO

Roy Chandran - Chief Strategy Officer

Frank Constantinople - SVP, IR

Conference Call Participants

Mark Streeter - JPMorgan

Doug Runte - Deutsche Bank

Robert Smalley - UBS

Operator

Good day, and welcome to the Aircastle 4Q Earnings Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Frank Constantinople, Head of Investor Relations. Please go ahead.

Frank Constantinople

Thank you, operator. Good morning everyone and welcome to Aircastle Limited’s fourth quarter and full year 2020 financial update call.

With me today are Mike Inglese, Chief Executive Officer; and Aaron Dahlke, Chief Financial Officer. Also on the line are other members of the management team who will be available during Q&A.

We'll begin the presentation shortly, but I'd like to remind everyone that this call is being recorded and a replay will be available through our Web site at www.aircastle.com, along with the press release and our PowerPoint presentation.

I'd like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements, and certain facts that could cause actual results to differ materially from Aircastle Limited's expectations are detailed in our SEC filings, which can also be found on our Web site. I'll direct you to Aircastle Limited's press release for the full forward-looking statement legend.

And with that, I'll now turn the call over to Mike.

Mike Inglese

Thanks, Frank. Good morning, everyone, and thanks for joining us today. Let me begin by again reminding everyone of the recent changes to our fiscal year and the going forward cycle for our financial reporting. As previously explained, in late September, we announced the change to Aircastle’s financial reporting period to better align with the financial reporting cycle of our shareholders, Marubeni and Mizuho Leasing.

At that time, we announced that our fiscal year end officially shifted from December 31 to the last day of February. Our fiscal quarters and on the last day of May, August and November and on this call we’ll cover our new fourth quarter and full year results for the three and 12 months ended February 28, 2021.

As you know, 2020 was a very challenging year for the aviation industry, including Aircastle, and the recent February statistics released by IATA in early April pointed to continued weakness in airline traffic. According to IATA, passenger traffic remained weak in February. Industry-wide RPKs were down almost 75% below pre-crisis levels compared to January's level, which was down 72%.

International markets remain pressured due to travel restrictions and border closures and the global domestic travel has been decelerating primarily due to new COVID-19 variants. While the near term remains challenging as the macro environment continues to improve, we have conviction that the long-term fundamentals supporting air travel remain intact, and Aircastle’s in-demand affordable fleet of aircraft will remain desirable to sensibly manage survivors of the pandemic.

While there have been new travel restrictions in certain domestic markets due to virus variants, we continue to believe that domestic market demand and low cost carriers will lead the recovery as the vaccine rollout accelerates. We're beginning to observe signs of improvement on the domestic side.

As of April 19, the TSA checkpoint travel numbers show traveler throughput in excess of 1 million for 39 consecutive days. While travel throughout was down 45% versus Q4 2019, it was up more than 14-fold versus the same date in 2020, which was dramatically impacted by the pandemic. Things are moving in the right direction. New lockdowns in Europe and strict travel restrictions across Asia Pacific continue to be headwinds. China, which is an early leader in the recovery, saw domestic traffic declined 50% in February.

On the international side, passenger traffic demand severely depressed with RPKs down close to 90%. Accordingly, we expect that the wide-body market will remain weak due to the evaporation of demand and the excess supply that will take time for the market to absorb.

Norwegian’s long haul exit and questionable commitments for the A330 from a number of airlines highlights the current wide-body imbalance, because their reliance on currently muted long haul traffic, recovery for carriers based in the Middle East in particular has been sluggish.

Aircastle’s fleet is primarily narrow-body focused and we know that these aircraft will fare considerably better versus wide-bodies over the medium to longer term. While we're confident that the recovery will occur, the timing is difficult to predict. The airline's lost revenue boost in the previous peak season, and while vaccine rollout suggests there's a light at the end of the tunnel, trends that would clearly support a near-term recovery continue to lack visibility.

The latest wave of the virus is now passing through certain geographies resulting in more border closures and limitations amongst [ph] individuals are able to do. The question now facing airlines, will we miss the upcoming peak season? The answer to that question is still ambiguous.

There's no globally harmonized plan to open borders and how to reopen is a sovereign decision made by each country, which would be guided by infection rates at home and where travelers might be arriving from. Travel bubbles that were designed to boost travel have not worked well so far. They have been delayed or only partially implemented and the patchwork of rules have frequently changed.

IATA recently reported that the COVID-19 pandemic has decimated over a decade of gains in air connectivity globally, the number of airport fares in March 2021 was only 50% of the connections that existed pre-pandemic in March of 2019, and the perpetual lack of air connectivity will hamper the global economic recovery.

So if the recovery takes longer, what does that mean? From an aircraft lessors perspective, liquidity management and delayed capital spend will remain critical to surviving airlines and this benefits investment grade lessors with strong liquidity, capital markets access, like Aircastle.

Our investment grade credit ratings were recently affirmed by Fitch, S&P and Moody's and we have a seasoned management team with experience through various aviation cycles, and we continue to be well positioned to thrive when the crisis is behind us. While 2020 was a difficult year, we accomplished quite a bit since the beginning.

We took the company private in March and are now owned by two long-term minded global institutions, Marubeni and Mizuho Leasing. Beginning with the onset of the COVID crisis, we moved quickly to access and harvest record levels of liquidity. And in August, we raised $650 million at 5.25% for five-year notes. And in February, we raised an additional 750 million seven-year debt at a record low coupon of 2.85.

A portion of the proceeds were used to retire 500 million of 5.125% debt maturing in 2021. The coupon differential results in an annual cash interest expense reduction of about $11.5 million dollars. Both accommodative central bank policy and favorable capital markets environment have benefited the investment grade rated lessors and finance companies and airlines in general.

From an operating perspective, our leasing platform was very active during fiscal 2020. A few days ago, we delivered the first of our 15 Embraer 195 E2 aircraft to KLM Cityhopper. A second E2 is scheduled to be delivered in May. And we have two additional aircraft to deliver to KLM later this year, with the balance of the placement expected between 2022 and 2024.

We're proud to be playing a significant role in KLM’s fleet renewal, facilitating a shift to more sustainable operations and helping KLM meet their goal of reducing their carbon footprint by at least 50% by 2030. Of the 25 E2 jets we have on order, 18 of these aircraft have been placed, including the 15 with KLM.

For the 12 months ended February, we acquired a total of five aircraft and sold 12. During the year we completed a total of approximately 200 lease transactions. And in recent conversations with our customers, we're observing that deferral and cash collection activity appears to be stabilizing.

In addition, recently the New York Court managing the LATAM bankruptcy proceeding approved LATAM’s position to keep and extend our leases on our 10 A320s with the airline. Our core strategy will center around continuing to maintain a broad base of liquidity and to avoid outside contractual obligations. Tactically, we'll look to deploy capital with an emphasis on incorporating newer technology aircraft into the portfolio operated by airlines operating in markets with strong domestic and regional footprint.

From a fleet management perspective, we'll continue to focus on expanding our in-demand fleet of narrow-body aircraft across the broad customer base that is geographically diversified. We’ll further strengthen our balance sheet and earnings profile. And along with our owners, we're committed to maintaining an investment grade credit rating going forward.

With that, let me now turn the call over to Aaron to spend a few minutes on our financial results.

Aaron Dahlke

Thanks, Mike. For the year, we acquired five narrow-bodies for 154 million and sold 12 aircraft for net proceeds of 180 million. Our gain on sale of flight equipment was 9 million for the quarter and 34 million for the year. The average age of the aircraft we sold was 13.4 years.

During the fourth quarter, collections represented 80% of lease rental and direct finance lease revenue. And we saw collections increase in March to more than equal lease rental and direct finance lease revenues.

For the fourth quarter, we reported a net loss of 96 million while total revenues rose sequentially from 181 million in the third quarter to 198 million in the fourth quarter, a nice improvement, we incurred non-cash impairment charges net of maintenance revenue of 75 million.

The net charges were primarily driven by 91 million write down of three younger A330s, which was offset by 16 million of maintenance revenue. The balance of maintenance and impairment charges is breakeven and relates primarily to our typical lease and transactional impairments, including four narrow-bodies and one older A330.

For the full year, the net loss was 333 million. Over this period, impairment charges totaled 426 million, while full year maintenance revenues plus realized gains totaled 206 million. Total revenues increased 9.2% versus the third quarter 2020, but due to the COVID pandemic, revenues were down 9.6% versus the full year ended December 31, 2019.

Turning to our capital structure, at year end our total debt was 5.2 billion of which 4.4 billion or 85% was unsecured. In January, we priced 750 million of seven-year unsecured bonds at a record low coupon of 2.85%. As stated earlier, we used a portion of the proceeds to retire 500 million of 1.25 coupon maturing debt in 2021.

As our funding costs have declined, the weighted average rate on our debt declined to 4.12 at the end of February '21 versus 4.57 at the end of 2019, and our average maturity increased to 3.7 years versus 3.4 years at the end of 2019.

Our liquidity position remains robust. As of April 1, we had a total liquidity of 2.3 billion. That's included 1.25 billion of undrawn revolving credit, unrestricted cash of 609 million, contracted assets sales of 123 million and projected 12-month operating cash flows of 340 million. In addition, we have 151 million of undrawn letters of credits from our lessees. We ended the fourth quarter with 108 million of deferrals with 26 lessees, which is down by 11 lessees since the third quarter due to lessees’ deferral with payments.

In closing, while the aviation environment remains challenging, we have been actively managing through the issues the airline industry has been dealing with by having a strong balance with minimum contractual commitments. We see the macro environment improving and strongly believe the long-term fundamentals of air traffic are intact.

Aircastle’s fleet of in-demand aircraft is affordable and desirable to airlines who are positioned to survive the crisis. We expect domestic market demand will lead to recovery, and that narrow-body aircraft will fare considerably better than the white-bodies over the medium to long term. This will benefit Aircastle’s predominantly narrow-body fleet.

We also believe that liquidity management and delayed capital spend will remain critical for the airlines in the years ahead. Aircastle’s conservative balance sheet, broad capital market access, strong liquidity position and investment grade metrics and credit ratings position us well to assist our clients. With our seasoned management team and our long-term focus on investment grade rated owners, we are highly optimistic about the future.

Last but not least, our management team would like to express our gratitude and appreciation to the employees of Aircastle. 2020 was an unusual and difficult year. We can't say enough about the respect we have for the dedication and professionalism of our people.

And with that operator, we're happy to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll take our first question from Mark Streeter with JPMorgan.

Mark Streeter

Good morning, gentlemen. So as usual, I'm confused on the collection front. So you're reporting 80% collection. But if I look at the press release here, right, 12% of your lease revenue is in some sort of restructuring proceeding and then the deferrals represent sort of 17% of lease revenue. So I guess can we just back up, and you know the way I like to look at this and investors like to look at this which is sort of the unaffected pre-pandemic run rate, how should we -- because the numbers, the 80%, the 12%, the 17%, it doesn't seem to foot. So I'm just wondering if you can help us sort of get our arms around what the sort of real collection rate is or adjusted collection rate, or maybe just provide some color behind your 80% and how it interacts with this 12% and 17%.

Mike Inglese

Aaron, do you want to take that?

Aaron Dahlke

Sure, happy to. Hi, Mark. The way to think about it is that we have been conservative on our revenue recognition, so the cash will trail to that revenue recognition. And so for the fourth quarter, it came in at 80%. We are seeing that uptick in March. And as we forecasted in our earnings release, we're talking about for the next 12 months, we're looking at operating cash flows coming in right around 340. So that is more obviously than where it ended for the last 12 months, end of February.

Mark Streeter

Okay. So what is that -- so that next 12 months at 340 for operating cash, how does that compare to the last 12 months then?

Aaron Dahlke

Yes. So that's going to be for the last 12 months when you look at the 10-K that we filed today came in at roughly 175. And then when you adjust for the merger class, it was 207. So we're projecting that almost double our cash flow from ops in the next 12 months.

Mark Streeter

Okay, that's a very helpful number. Great. I appreciate that. And I know you just recently spoke to some of the rating agencies, right, and S&P specifically. I just want to ask you about -- so what Betsy did, right, is she actually downgraded your standalone, right, but then gave you one notch of trying to uplift, so you stayed at the same spot at BBB-. And what I'm wondering is, what will it take to get her and S&P back to standalone BBB-, and assuming you still get the one notch uplift, that's sort of your path to mid BBB at S&P. So I'm wondering if that's a goal is to get that standalone rating up another notch? And what you have to do to get there?

Mike Inglese

Roy, do you want to touch on that?

Roy Chandran

Yes, sure. Hi. Good morning, Mark. I don't think sort of the formula is any different from what it has been today. And typically, I think if you look at the criteria and our peers, it's a function of sort of aircraft age to some extent, proportion of new technology, longer lease profile. So I think all those attributes, as you kind of add them up together, will get us kind of closer to sort of what the peer group is. And obviously, this is not something that we have consistently agreed with, with the agencies, but the agencies do have a certain template, and I think we need to tick those boxes. It's not a question of liquidity or obviously management team on lease, but I think the agencies are still looking for a newer, lower weighted aggregate portfolio and longer lease terms and transition into new technology. So I think once we kind of start making those moves, we have a higher probability of getting back to kind of a BBB- flat rate, then obviously by definition back to BBB flat with the model being uplift.

Mark Streeter

So it sounds like a plan. Thanks, Roy. Go ahead, sorry.

Mike Inglese

I was just going to say, so obviously it's going to take some time to transition the portfolio, and then to see what's happening to the extent of industry recovery as we move through the next couple of years.

Mark Streeter

That’s great. Thanks, Mike and Aaron and Roy. I appreciate it.

Mike Inglese

Thanks, Mark.

Operator

[Operator Instructions]. And we’ll take our next question from Doug Runte with Deutsche Bank.

Doug Runte

Good morning and thanks for taking the questions. I'm wondering with the deferrals that you've granted, to what extent have you been successful getting a quid pro quo on perhaps getting extensions on the backend? We've seen many aircraft, ABS transactions actually, see extensions on average lease terms presumably in conjunction with the federal grants. I'm wondering to what extent you've extended cash flow contractually?

Mike Inglese

It's a mixed bag, Doug. And typically, I would say over the course through the last year, when you're granting a short-term deferral, it typically hasn't been with a quid pro quo per se of extension. It's typically been more with a reasonably short payback period with some interest rate associated with it.

Doug Runte

Okay.

Mike Inglese

In the context of other credits, when you're looking at longer term deferrals, then it definitely has involved some extension component to it. But it's really an airline by airline dynamic and it mostly relates to what's happening with a specific airline and what are the realistic prospects and what's happening in their market and with their fleet and their flying.

Doug Runte

Okay, that's helpful. Thank you. I'm also wondering as a result of either court supervised restructurings or your own consensual negotiations, what percentage of your fleet is now on either short-term or long-term power-by-the-hour agreements.

Mike Inglese

If you look at the people in court or similar situations, clearly LATAM has been in Chapter 11 since last May, and they represent 13 of our aircraft and something around 5.5% of net book value. Beyond that, it's a handful of onesie-twosies. We've been in and out with Aeromexico. We had one aircraft. We've got some smaller airlines in Europe with single aircraft exposure, some of whom have actually come back out. And then we have a couple aircraft in Avianca. So it's -- off the top of my head, I don't have the crisp answer of aircraft and net book value, but it's been the same people we've been talking about since the middle of last year.

Doug Runte

Okay, that's helpful as well. And then perhaps lastly, you mentioned that you saw collections, I think you used the word stabilizing. I'm wondering if you can provide some granularity by region, maybe Europe versus Asia versus the Americas, and what are particular areas of concern?

Mike Inglese

It's hard to generalize by region quite frankly. But if there was a generalization, I would say Southeast Asia is still struggling pretty significantly, whether it's Thailand, Malaysia, Indonesia. In Singapore, there's not the level of activity that anybody was hoping to see when we got to this point, as we were looking forward as recently as six or four months ago. We've certainly had work -- we're working our way through some of the Latin American issues clearly in terms of LATAM, what Azul did with all of its lessors in the context of deferrals, Avianca in Colombia; Aeromexico in Mexico. But on the other hand, in each of those regions, we have other customers who have continued to pay or who've had smaller deferrals and continue to honor those arrangements. So not a broad generalization, but I would say regionally, clearly, Southeast Asia is a place where things are progressing a lot slower than everyone would like.

Doug Runte

Interesting. Thank you very much for the additional details. That's it for me. Thank you.

Mike Inglese

Thanks, Doug.

Operator

[Operator Instructions]. We’ll take our next question from Robert Smalley with UBS.

Robert Smalley

Hi, and thanks very much for taking my questions. Just a couple, first on LATAM. AerCap I guess tried to auction some obligations they had with the company. How does that impact your relationship and your standing there and your valuation? So that's my first question. Second, again, on the competitive environment, we have a big merger in this space. How does that affect you competitively? Number one. And then number two, they've got a lot of financing to do in the latter part of the year. How does that impact your financing plans and could you layout what you're doing for [indiscernible] between now and the end of the year? Thanks.

Mike Inglese

So in terms of LATAM, and I think you made reference and it was a little muddle, but I think you made reference to AerCap, is rumored to be looking to do something with their unsecured claims in the marketplace.

Robert Smalley

That's right.

Mike Inglese

Yes. Look, I can't comment on those rumors. We're certainly looking at the situation on an overall basis in the context of our continuing relationship as a lessor and what our claims will be worth, I'm not in a position to kind of talk about what our strategy is or tactically how we're thinking about it. So I can't really give you a lot of color there. With respect to AerCap and GECAS [ph], clearly you're taking two people, each of which was 3x or 4x or 5x bigger than us and putting them together. And clearly, they had a lot of financing to do in the second half of this year. I'm assuming they'll be getting started with that sometime over the course of the summer, or even maybe before summer gets here. So we don't see today significant amount of our own financing needs in the course of the next six to nine months. But we obviously have taken notice of what they're doing. They will clearly be out in the market in a variety of forms. And that may or may not have some implications for pricing an appetite amongst investors as we move through the second half of the year. From a competitive standpoint, we have been sort of trading counterparties with both of those entities over the years, in terms of purchasing aircraft from both GECAS and AerCap. I don't think that will change on a go-forward basis. As a practical matter, it feels like they'll probably be doing very little trading in the current year heading into their merger. But I would expect after the merger that they'll be pretty active as a seller as AerCap was after it acquired ILFC.

Robert Smalley

That's very helpful. Thanks. And again, thank you for doing the call. Greatly appreciate it.

Mike Inglese

Thank you.

Operator

It appears there are no further questions at this time.

Mike Inglese

Okay. Thanks, everybody. Appreciate you taking the time to join us. If anybody has any follow-up questions or would like to reach out to Frank Constantinople, please do so. Look forward to talking to you soon and appreciate your support.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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