SUMISHO AIR LEASE CORP Q4 FY2023 earnings call

• Record quarterly and full-year revenues achieved. - Strong fleet expansion with 22 new aircraft purchased in Q4. - Benefited from $67 million net from insurance settlement on seized aircraft in Russia. - Cargo and air freight markets rebounded, with air freight trend expected to continue. - Lease rates catching up with interest rates, with strong demand for fuel-efficient aircraft. - Delivered 22 new aircraft in Q4, including narrow-body and wide-body types. - A220 gaining traction globally due to attractive economics and fuel efficiency. - MRO capacity tight, with efforts to lay off expenses on next airline rather than using ALC's resources.

In the fourth quarter, Air Lease Corporation generated record quarterly revenues of $717 million, up approximately 19% from the same quarter last year. Full-year revenue was $2.7 billion, a record. During the fourth quarter, the company purchased 22 new aircraft, adding ~$1.2 billion in flight equipment, and sold 8 aircraft for ~$440 million. The fleet utilization rate was very strong at 99.9% for the full year 2023. The aircraft sales pipeline totals $1.5 billion, inclusive of roughly $600 million of aircraft classified as held for sale and $900 million subject to letters of intent.

• Forecasts 2024 new aircraft investments in a range of $4.5 billion to $5 billion. - Anticipates approximately $1.5 billion in aircraft sales for 2024. - Expects around $1 billion of Airbus deliveries in the first quarter of 2024. - Believes supply of new commercial aircraft remains highly constrained, supporting fleet growth and lease rates.

• Aircraft and engine delivery delays and manufacturing defects. - Legal uncertainties related to ongoing insurance claims and litigation in Russia. - Supply chain constraints impacting aircraft production rates. - FAA's limit on Boeing's MAX production rate affecting delivery volumes and fleet growth plans.

Q: Thanks for the time. Totally understand that quarter-to-quarter, we should expect that gain on sale to bounce around, of course, but had a solid gain this quarter, up from last quarter. With everything that's going on with the MAX and GTF, should we expect supply to remain tight or maybe even get tighter as we move to this year? And should that translate to potentially keeping that gain on sale higher than the historical average. Just any color there on both the supply and demand side and thoughts on the gain that Air Lease could enjoy in that environment would be super helpful.

A: John Plueger said the supply will remain constrained. Steven Hazy added that for every airplane they have for sale, there are multiple buyers, leading to a high level of liquidity in the secondhand market for aircraft and Air Lease will enjoy significant gains when disposing of assets.

Q: I was just hoping to get some more color on the returned aircraft and the end of lease revenue. I'm not sure if you can share this, but obviously, which airline and what type of aircraft would be helpful. And then just how should we think about the turnaround of getting those aircraft back out the door as you just spoke to, I'm sure there's plenty of interest and taking those aircraft off your hands. But what's MRO capacity like? Is that still pretty tight just in terms of the time line to get reconfiguration work done to get the back out of the quarter.

A: Steven Hazy explained that there are two types of leases. Many leases have monthly overhaul maintenance reserves, and some leases have compensation at the end of the lease. MRO capacity is very tight, and they try to lay off expenses on the next airline rather than using ALC's resources.

Q: If you look at what you initially wrote off, not what the insurance claim was, but what you wrote off, where are we in terms of aggregate recovery inclusive of the $67 million disclosed in the fourth quarter? I mean if you were to express recovery as a percentage of book, we're hearing around $0.65, $0.70 on the dollar elsewhere. Just wondering if the Air Lease metric is consistent with that.

A: Gregory Willis said to date, they recovered about 10% to 12% of the $800 million charge taken last year and couldn't comment much on market claims.

Q: In the past, you used to break out China separately in your press release. It looks like this time around you combined it with Asia. Could you discover what the exposure to China was in the fourth quarter? And if you're continuing to reduce the exposure to the country?

A: Gregory Willis said they consolidated because exposure to China has gone down significantly below 10%.

Q: In the 10-K, you called out 22 returned aircraft this year. Any color you can give on how many of those have actually transitioned versus how many aircraft that are waiting the transition?

A: Gregory Willis said the utilization percentage is 99.9% and almost all airplanes are subject to lease, with a seamless operation for regular returns.

Q: How long do you think it's going to take until the MAX gets back to some sort of regular rate of cadence, meaning and I guess this was asked in a sense before, I mean, how long do you think the supply and demand imbalance is going to be in the narrow-body market, right? I mean, it could be years, years, right? Are we thinking about this wrong?

A: John Plueger said the supply/demand imbalance will go on for years, and Boeing is delivering MAXs today, but the FAA's limit on production rate affects when the restriction might be lifted. Steven Hazy added that lease rates for new MAX 8s and new A320neos are almost neck and neck.

Q: Just a couple of quick ones, if I can. And you mentioned this a little bit in the prepared remarks before, but how long do you think it's going to take until the MAX gets back to some sort of regular rate of cadence, meaning and I guess this was asked in a sense before, I mean, how long do you think the supply and demand imbalance is going to be in the narrow-body market, right? I mean, it could be years, years, right? Are we thinking about this wrong?

A: John Plueger said the supply/demand imbalance will go on for years, and Boeing is delivering MAXs today, but the FAA's limit on production rate affects when the restriction might be lifted. Steven Hazy added that lease rates for new MAX 8s and new A320neos are almost neck and neck.

Q: Most of mine have been answered, but I was really curious about your aircraft procurement. I mean, not just for you guys but for the industry broadly, would you say, for instance, that lessors could start leaning more on obtaining planes through a little more through sale leaseback activity versus what's previously been the case. Or is that not so relevant for you guys because you already have such strong order books from the OEMs? Just was wondering what you see as the opportunity for the space as you procure aircraft.

A: John Plueger said their business model is primarily order book-driven, not large in sale-leaseback. Steven Hazy added that their strategy results in lower acquisition cost from OEMs than sale-leaseback.

Q: Thanks very much for taking the question from the fixed income side of the balance sheet. A question on the order book. There's an interesting split in the market among large thoughtful lessors as to whether you should line up at the tent at the air show to place orders or whether it's okay to place orders extending over the horizon past 2030. I'm wondering where you come down on that given that your order book commitment ends towards 2028, 2029.

A: Steven Hazy said they don't believe in joining order frenzy, think pockets of opportunity exist, and are in good shape over next 4.5 years. John Plueger added most 777-300 ERs will be extended