Air Lease Corp (AL) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Air Lease Corporation earnings conference call. My name is Chanel, and I will be the operator for today. At this time, all participants are in listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Ryan McKenna, Director of Strategic Planning and Investor Relations. Please proceed.

Thank you very much. Good afternoon, everyone, and welcome to Air Lease Corporation's second-quarter 2011 earnings call. This is Ryan McKenna, Director of Strategic Planning and Investor Relations. I'm joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer and Jim Clarke, our Chief Financial Officer.

Earlier today we published our second quarter results for fiscal year 2011. A copy of our earnings release is available on the Investors section on our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, August 11, 2011 with an audio replay that will be available 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 answers to your questions, are forward looking statements within the meaning of the Private Securities Litigation Reform Act including, without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense and stock-based compensation expense. These statements and any projections as to the Company's future performance represent management's estimates of future results and speak only as of today, August 11, 2011. 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 be using during this call such as the adjusted EBITDA and adjusted net income are non-GAAP measures and have been adjusted to exclude charges relating to discounts on certain convertible notes and stock-based compensation expense, among other charges. A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and their reconciliation to corresponding GAAP measures can be found in the earnings release we issued today. This release can be found on the Investors section our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted. With that out of the way, I'd like to turn the call over to our chairman and chief executive, Steve Hazy.

Thanks, Ryan. Good afternoon, and thank you for joining us today. I am pleased to report that for the 3 months ended June 30, 2011 Air Lease Corporation recorded pretax income of $10.9 million and net income of $7 million resulting in an $0.08 per share earnings on a diluted basis. Adjusted EBITDA was $62.8 million, and our adjusted net income totaled $19.5 million for the second quarter of 2011. Our cash flow from operations for the quarter was $48.5 million. This is our fifth full quarter in business and now our second consecutive quarter of increasing profitability. As we continue our growth trajectory, our Q2 results reflect the 121% increase in pretax earnings compared with Q1 2011. When comparing to the first 6 months of this year to the prior-year, we move from a pretax loss in our startup phase in 2010 to a pretax profit of $15.8 million in 2011. Recent macroeconomic concerns in the aftermath of the S&P downgrade of the US loan credit rating have resulted in a significant amount of market turmoil. But market turmoil is nothing new to aircraft leasing, nor to ILFC's management team.

The aircraft leasing sector as a whole has historically demonstrated resilience during such market conditions. Specifically, prior to starting ALC, our management team generated consistent and steady financial performance in the aircraft leasing business even as a broader airline industry had been challenged. We profitably managed through numerous industry cycles and worldwide developments such as the Gulf War in the early 1990s, the so-called Asian financial crisis in the late 1990s, September 11, 2001 and its aftermath, which provided the single largest financial shock to date to the global air transportation system, the global recession that began in 2007 resulting in the collapse of Lehman Brothers, AIG and the financial market turmoil in the fall of 2008. Our management team has navigated through rough waters many, many times and based on our experience, we believe turbulent times provide additional opportunities for us to make the case for aircraft leasing even more compelling to the world's airlines.

Air Lease is well capitalized with a very strong balance sheet and is positioned to profit in this marketplace. During times like this, it is important to focus on the fundamentals. So, let me review 2 most basic fundamentals that we see going forward. First, aircraft demand is outstripping aircraft supply. Second, we appear to have entered a period where we believe global economic factors will drive airlines toward leasing solutions in greater numbers. Air travel is now the world's form of mass transportation, and not just for passengers. The majority of the world's air freight is transported in the bellies of commercial passenger airliners. We do not see any of these fundamentals changing in a meaningful way. In fact, due to the ever increasing world population, growing middle classes in China India, Brazil and most of the developing world, we believe that commercial air transport will continue to grow over the long term, even if there is a year or 2 of slightly decreased traffic volumes in certain markets or economic pullbacks in certain regions.

The industry is experiencing an unprecedented demand for new fuel-efficient aircraft. The order books of Boeing and Airbus are effectively sold out the next 3 years. In fact, they are oversold in certain months for single-aisle aircraft and therefore, significantly constraining supply. Both Airbus and Boeing have responded by increasing production levels, but they are still unable to provide the aircraft requirements by the marketplace. In an environment where airlines are unable to go directly to the manufacturers for new planes, they turn their focus to the leasing community. In ALC's opinion, the current availability of new aircraft from all lessors is still insufficient to satisfy demand over the next 5 years. Even if economic conditions drive airlines to cancel or defer as much as 5% of their firm orders during this time period and those cancellations and deferments add to total new aircraft availability, ALC believes that the total demand still outstrips total supply.

As to global economic forces that drive airlines further toward a leasing solution, I can provide three fundamental observations. First, negative economic pressures have historically led airline managements to make conservative decisions about additional leverage and to their balance sheets. Quite simply, we believe that the economic stress caused to airlines will cause them to turn to us to meet their aircraft requirements, transferring the financial requirements of aircraft ownership and the risk of ownership to the lessors. And in this dimension, ALC is available and is able to provide fleet solutions for our airline clients in the short-term, medium-term, as well as long-term. Secondly, the new sector understanding for aircraft, ASU, was put in place in late 2010 by the US European/Brazilian/Canadian governments for guarantees underlying export financing for commercial aircraft which will result in substantially increased funding costs, thereby eliminating the cost advantages previously provided by ECA-backed financing. In fact, the fees on those financings and the guarantee fees associated with them have gone up significantly.

Third, the current weakness of the US dollar makes leasing relatively less expensive for foreign airlines. And I want to point out that 90% of ALC's business resides outside of the United States. It should also be noted that a prolonged relief in oil prices from north of $100 per barrel to about $80 a barrel should provide a financial benefit or offset the potential declining airline yields or reduction in traffic growth that may derive from a period of economic slowdown. We remain thankful for the support that our existing and new investors have shown Air Lease Corporation in our first full year of operations. Now John Plueger, our President and Chief Operating Officer and member of our board will discuss ALC's strategic positioning and what we see in our current operations. John?

Thanks, Steve. Look, as Steve has pointed out, looking forward, we see demand for new aircraft exceeding supply. In fact, this was a key premise in the launch of Air Lease Corporation. Accordingly, as of June 30, 2011, ALC has a balanced future order book of 234 new aircraft delivering over the 10-year period from 2011 through 2020 which will provide the backbone and core of our growth. Based on our nearly quarter of a century average management team experience in this industry, we've ordered what we consider to be the best, most fuel-efficient, most widely distributed aircraft available from Boeing, Airbus and Embraer and ATR.

Now, I mentioned the word balanced when referring to our order book. By that, I mean not only balancing single aisle with twin aisle, balancing Airbus with Boeing, balancing engine manufacturers, balancing the rise of regional jets and turboprops with Embraer and ATR respectively, but also balanced in terms of overall quantity, capital risk and hedging against potential negative economic headwinds. Specifically, as a general policy, we only order about half the amount of aircraft that we think we can place and finance. This allows us to keep half of our capital powder dry for incremental opportunistic orders or asset acquisitions and conversely, keeps our forward capital commitments manageable in the event that unforeseen worldwide events lead to prolonged periods of weak aircraft demand. As another fleet balancing example, ALC's orders for the new engine option A320 and 321 were measured, pending clarity from Boeing as to its competitive response. That is, a new aircraft or a re-engined 737. About 3 weeks ago, we got Boeing's answer; a re-engined 737 projected for delivery towards the end of this decade. We are analyzing and commenting to Boeing on the performance and economics of this aircraft as those parameters unfold and will plan that segment of our future fleet acquisitions according to our findings and determinations.

ALC's strategy also focuses on global diversification of our airline placements to maximize risk adjusted returns. ALC routinely analyzes concentration and type risk before entering into placement discussions as an integral part of our risk management. We are not seeing any hints of increased credit or collection issues among our customer base, nor have we seen deterioration in lease rates. To the contrary, we are seeing overall lease rates across our chosen aircraft types strengthening, consistent with the supply versus demand outlook we've outlined. Finally, we believe that ALC's current debt-to-equity ratio of less than 1 to 1 at June 30, 2011, combined with our liquidity factors, including cash, available and under-owned secured and unsecured facility credit lines and unencumbered aircraft provide sufficient balance sheet strength to take advantage of opportunities and at the same time, minimize our downside risk to credit markets and negative economic pressures.

Now, utilizing these strategies, Air Lease Corporation added 16 aircraft during the second quarter of 2011 and ended with 65 aircraft in our fleet with a weighted average of -- age of 3.6 years spread across a diverse and balanced customer base of 43 airlines in 26 countries with 37% of our fleet based in Europe, 34% based in Asia, 24% based in North, Central and South America and 5% in the Middle East and Africa. Looking forward to the end of 2011, we have firmly contracted transactions that will add another 33 aircraft such that as of today, we have lined up 98 aircraft towards our goal of achieving a fleet of 100 aircraft by the end of 2011. We evaluate opportunities on an ongoing basis to acquire attractive aircraft from other leasing companies, our airline customers and the airframe manufacturers. As of today, our forward lease placements are tracking our expectations. We are 100% placed for 2011, 93.5% placed for 2012, 56% placed for 2013 and 23% placed for 2014. With respect to the recent economic turmoil, the credit markets have remained liquid and have had little impact on ALC's borrowing costs thus far. Based on outcome of the Fed Open Market Committee meeting on Tuesday we expected those rates to remain attractive over the next 2 years. As market conditions evolve, we will continual to evaluate additional sources and forms of financing. And on that note, I'll turn this over to Jim Clarke, our Chief Financial Officer. Jim?

Thank you, John. As Steve mentioned, this quarter marks ALC's second consecutive quarter of increasing profitability. During the second quarter, our fleet generated $74 million in rental revenue which includes overhaul revenue of $2.6 million compared to rental revenue of $1.2 million, which included overhaul revenue of $0.2 million in the second quarter of 2010. As a reminder, ALC adds aircraft during the quarter, so the full impact on rental revenue for aircraft acquired during the quarter will be reflected in subsequent periods. Interest expense and depreciation increased year-over-year proportionally to our fleet growth and higher debt balances. We during the second quarter of 2010. SG&A expense represents a disproportionately high percentage of revenues during our initial years of operation. As we continue to add aircraft, we expect SG&A to continue decreasing as a percentage of our growing revenue.

Turning to our financings, as of June 30, 2011, ALC had built a diverse lending group consisting of 16 banks, providing unsecured and secured facilities. Our overall composite costs of funds was 3.29% in the second quarter. This rate does not include the effects of up front fees, undrawn fees or issuance cost amortization. During the second quarter of 2011, the Company issued $120 million in senior unsecured notes in a private placement to institutional investors. These notes have the 5-year term and a coupon of 5%. As of quarter end, we had 12 unsecured revolving bilateral bank facilities totaling $313 million.

Additionally ALC entered into to secured term facilities with recourse to the Company aggregating $82.8 million. In connection with these facilities, the Company pledged $129 million in aircraft collateral. ALC drew $104.9 million under our warehouse facility in incrementally pledged aircraft lateral totaling $163 million in the quarter. As of June 30, 2011 ALC had borrowed $703.9 million under the facility and had pledged 28 aircraft as collateral with the net book value of $1.2 billion. As John indicated, we continue to expand our banking group and sources of financing. Since June 30, ALC has added new bank facilities to $110.9 million, and we are pursuing additional opportunities in the banking sector as well as private and public debt capital markets as conditions warrant. I will now turn it back to Ryan.

Thank you, that concludes management's remarks. Now I'd like to hand the call over to the operator for questions. Operator?

Thank you. (Operator Instructions). Gregory Lewis of Credit Suisse

Yes, thank you, and good afternoon. John, you mentioned a little bit about the -- Boeing's decision to re-engineer the 737. In thinking about that, could you provide a little bit of color on that? And what does that change Air Lease's willingness to maybe start to look at aircraft that are maybe a few years old in terms of doing purchase only [spat] transactions? Go ahead, John.

Go ahead, Steve. I think, Greg, the focus and the primary business model of this Company concentrates on new aircraft purchased from the manufacturers. You have to remember when we started this Company, we did purchase sale lease back transactions as a historic kit, and we do remain open to purchasing additional incremental aircraft in that marketplace in the near-term future. But clearly, we are now shifting to a model where we are focusing our primary growth on new aircraft acquisitions. And as to the 737 reengineering, all we can say is that we continue to evaluate the information that we have with Boeing and are very involved with Boeing. And we continue to comment to Boeing on how we see that aircraft evolving and on the economics of that aircraft. So, I think it's -- until the -- until that aircraft is fully and specifically defined and as a matter of fact, until the Boeing Company gets board approval to launch that aircraft, I think it's a bit premature to draw a lot of conclusions or forward projections as to what we may or may not do. I think we just simply need to be confident and understand what that final product is before reaching any broad conclusions. Steve, do you have anything to add?

I just wanted to add that the program is still in the design definition phase. There is a lot of work yet to be done by CFM and GE on the engine. And it's really premature, as John indicated, to draw any conclusions as to the competitive economic profile of that aircraft versus the AC 20 family. Secondly, based on the best information we have, the possible re-engining of the 737 will track much later than the Airbus programs. So, in terms of timeline, any impact it may have in the future is going to be at a later date. I hope that answers your question on the re-engine 737 concept.

Okay, great, and then -- yes, thank you very much. And then in thinking about fewer NOLs, it looks like some of that US airlines are going to be -- there are potentials there, we will see how that plays out. Given that backdrop and -- historically, you have tried to source more aircraft overseas in emerging areas. Just given the opportunities that it looks like are going to be available over the next few years in the US, do you anticipate getting a little bit more aggressive in sort of placing aircraft in the US?

We obviously maintain a close dialog with the senior managements of all the large US carriers, legacy carriers. We are ready have two 737-800s with Continental United. We have two 737 700s with Southwest. We've had on and off discussions with senior management at American, Delta, Alaska and US Airways, and we will keep our eyes and ears open. But as you say, our traditional market focus has been the international marketplace. But we do allocate about 10% of our total assets and resources to the domestic US market, and so that will play a role in our future. It's difficult to predict how these airlines will perform over the next several years, but we certainly keep our options open vis-a-vis the US carriers. But do not expect that to be a significant part of our revenue base.

Okay, great. And then just one final question. Clearly, there's a lot of economic uncertainty out there in when we'll see how the next six to 12 months play out. But could you talk about -- I guess in previous sort of downturns in the global economy, what that meant for your Company and in thinking about just how strong the balance sheet is. Could that actually provide some pretty attractive opportunities?

Absolutely. Generally, what we've seen on a global basis is that airlines tend to ground their least efficient aircraft, and they deactivate markets where they don't perform well in terms of traffic and revenue generation and profitability. And so because of the mix of the fleet that we have with the airlines, it is less likely that our aircraft will be affected. And what we've seen in the past is that the oldest, highest maintenance cost, highest fuel consumption aircraft are the ones that are most vulnerable to reduced utilization or even grounding. And as you say, we do see opportunities because if an airline needs cash, we could potentially acquire assets at distressed prices. We look at the downturn as a window of opportunity, not as a sign of distress for ALC. And that's based on historical performance.

I would just add to Steve's comments that actually, if you look at our history as a management team, volatility is something that we actually profitably exploit. And one of the advantages of having such a large airline at work and a fleet not only with future orders coming, but with relationships with all the airlines is we can address any short, medium and long-terms concerns that they have. Sometimes an airline may come to us and they say, hey, we might want to up gauge this size of aircraft or down gauge. And if we have that aircraft on lease, we actually say, fine. You give that one back to us. We have great placement capability. We'll give you a bigger one. We can give you is all or one. We solve their problems. And I think that's the key element here in volatile times. We solve airline problems. And we often said that if this was a boring, steady state, 3% to 4% a year industry where people kept airplanes for 25 and 30 years, there'd really be no need for leasing. But in fact, it is a very volatility that we exploit and is the very tool that I think the airlines committee looks to us to help them solve any concerns they may have, whether it's over capacity, under capacity, switching type, switching markets, consideration of mergers and acquisition, alliances et cetera. This is the very thing that we thrive on.

Just to illustrate that example, a few weeks ago one of our customers in Europe decided that they had a surplus of two very, very young single aisle aircraft because they were realigning their network. And within a matter of days, we came to an agreement to purchase those two aircraft and within 24 hours, we actually found a customer in the Americas on a very attractive lease solution. What we did is we helped one airline reduce their capacity and another airline in the different part of the world increase their capacity as the demand dictated. So, I think that flexibility, that creativity, that mobility and the relationships that we have established with airlines all over the world is a tremendous asset on our balance sheet that you can't really quantify.

Okay, perfect. Thank you for the time.

Thank you. Next question?

Jason Arnold, RBC Capital Markets.

Just curious if you could talk about which global regions you're finding the most opportunity in at present? And then perhaps comment on the competition between yourselves and lessors and other sources of aircraft financing out there right now.

Sure, if you just look at our earnings release, Jason, you'll actually see -- and by my remarks you'll see that our greatest increase from the last quarter was actually in our percentage of business in Asia. So, I think we went from last quarter of somewhere just south of, a hair under 30% to somewhere around under 34% just in three months. So, I think broadly that continues to remain the focus for growth for ALC as we have commented and stated over the past year. Those results are exactly tracking with our expectations. We have also, if you look at our website, we have been very successful in our Embraer and ATR placements in South America, for example, in Brazil. But I think if I had to just put of fine point on it Asia still remains, I think the larger focus. And in fact, most of our -- all of our recent placements on the wide-body side have been Asian-focused. We just announced, by the way, in Europe a significant placement as well of our single aisle aircraft. And so I think the simple answer is Asia, we don't see that changing. We see that continuing to strengthen.

I think Latin America is still showing double-digit growth rates in what we consider the stronger countries like Brazil and Colombia, Panama. And certain regions of Europe are still doing quite well. Eastern Europe, we've done a number of transactions. We recently close to deal in Czech Republic, we have some aircraft going to Bulgaria. We've done three AC20s in Russia. I think with our diverse marketing penetration, it's still looking quite strong from all areas except a few countries in Europe, obviously on the watch list. And the US, as I mentioned earlier, is less than 10% of our total activity. We really haven't seen any impact of the turmoil over the last weeks on our direct business.

Okay, great. And then on the competition between yourselves and others, it seems like with what's going on in bank land that as you mentioned earlier, that you've got a real advantage. I was just curious if you could offer any additional color on competition you are seeing there?

There's been a lot of publicity in the last year about the startup lessors, and there's significant distinctions between the various players. Jackson Squared and Avalon, which are the two other large startups, and by large, I mean capital-wise, have focused primarily on the sale/leaseback market. And generally, what that involves is an airline has already placed an order, and they step into that position at delivery. We have done very little, and in fact, have no plans to do any of that in the future. As John indicated earlier in his introduction, our focus is new aircraft from the manufacturers. We have acquired packages of portfolios from various financial institutions and lessors. That was primarily to prime the pump and get the initial fleet up to where it is today. But the bulk of our future capital allocation is going to new aircraft that we have negotiated on terms that we feel are attractive for our long-term shareholder value.

In terms of other competitors, obviously GCAS continues to be a major player. [ILFE] has very few new aircraft deliveries in the next few years, so we haven't seen really any competition with our old friends over there. But we don't see the competitive environment any different than in the past. There is 6 or 8 players and right now, demand is in excess of supply, so there's room for everybody. But as we grow in strength, I think our market presence will continue to strengthen, and we will be taking market share way from the other players.

Mark Streeter, JPMorgan.

Steve, you have been spiritedly vocal in the press and so forth about a preference for Boeing not to re-engine, but to introduce new technology, narrow body. And I'm sort of wondering, and I know you're working with them and so forth but are you disappointed they didn't go down that route?

Personally I'm disappointed. But I fully recognize and understand the reasons why Boeing is going down this path. You have to remember that they two very large programs, the 787 and the 747 A Intercontinental which have been expensive, ambitious projects, and neither aircraft has been certificated yet. Neither aircraft is in revenue service. They've both been in tremendous negative cash flow for the Company, and I really feel until those aircraft are out flying it would have been very difficult for Boeing to make a $10 billion or $12 billion commitment to develop a new aircraft.

Now, we continue to work with Boeing very closely on defining a new generation of aircraft which will eventually replace the 737 and the 757. But I think at this juncture, with the implication of the existing programs and the inability to find where this new airplane will be built and how it would be built and some of the other labor issues Boeing is faced with right now, I think they took sort of a Band-Aid solution. But there's still questions about how competitive that 737 re-engined airplane will be vis-a-vis the A320neo because as you all know, the 737 has aerodynamic and geometric limitations on the fan diameter of an engine.

So, we're still working and talking to Boeing on a frequent basis to understand how this design will evolve on the 737 re-engining, and all cards are still on the table. I don't think there's been any definitive final definitions on the configuration, but certainly they have their work cut out because the airplane is closer to the ground, it's an older generation airplane. The original design dates back to 1967. So, I think Boeing has many, many challenges to overcome to make it an effective airplane.

And any downstream impact of perhaps -- I think the assumption is they are going to re-engine the aircraft, now they're to get board approval and so forth. And there's been some speculation about Boeing pulling forward a 777 redo. And I'm just wondering, if you look at the downstream effect of Boeing having now shown their cards in terms of what their narrow body strategy is, what that means in terms of how you are looking at the different aircraft programs in the marketplace.

Well, this is something, Mark, that we spent a tremendous amount of time with Boeing and Airbus and the engine manufacturers. We as been spending a lot of time with Boeing since the Paris air show. We have looked at different scenarios on an improved version of the 777. There is multiple variations. Some involve minor changes, some involve a completely new wing, some involve aerodynamic improvements, some would involve a brand-new engine which GE would have to develop as a follow on to the G90.

Let's just say there's a lot of options on the menu. Some of those options are extremely costly in terms of development costs and would involve significant redesign of the airplane. Others are more what I would call Band-Aid solutions to be competitive with that A350 1000. But everything is still on the table, and I don't think Boeing is going to come to any quick decisions on any of those programs because they involve tremendous amount of resources, both financial and engineering design resources. And I think first of all you have to come to grips with getting the 787 flying. I think that's really the number one goal right now at the Company. When I say company, I'm talking about Boeing, not ALC.

Great, thanks, Steve. Always appreciate your color around the aircraft programs. And then just a final question. There's been some activity on the portfolio front Fly having purchased their most recent portfolio, RBS portfolio is clearly out there in the marketplace. Just sort of wondering if you've had about using our dry powder on any of those portfolios in the marketplace?

Well, I'll let John comment, but everything that is available, including the kitchen sink of lessors, has been offered to us. There's been a parade of opportunities, but I'll let John comment on the quantitative and the qualitative aspects of that.

I think Mark, as you would expect, we just simply cannot -- we really don't comment on all of these different possibilities vis-a-vis ALC's intentions, simply to say that we are doing our jobs evaluating all opportunities across all fleets and aircraft types on an ongoing basis. Your point, those are out there, certainly they are. And we are doing our management jobs, evaluating the whole Company on a go forward basis. That's all we can really comment on at this point in time.

All right, great. And then just one last question. Has -- Boeing and Airbus, they took down a lot of back stop financing, their primary financing with that huge AMR order. Have you specifically been approached by them with some of the economics of what they promised AMR and how Air Lease might be able to participate in that deal?

Yes, both have approached us, but we have not seen any definitive economics. I think they've made general commitments to American to provide third party financing and leasing. But I don't think the details of that have been resolved in its totality, so we are not at this point ready to make any comments on that because we don't have all the facts.

Thanks, Mark, very much for the question. Operator, next?

Gary Liebowitz of Wells Fargo Securities.

Thank you, and good afternoon, gentlemen. Can you tell us how you're thinking about the engine decision on a A320neo, how the Pratt engine is stacking up against the CFN and when you could -- when we should expect you to make that choice?

Well, our first delivery on the A 320neo is not until the very early part of 2016. And so we still have about 4.5 years before delivery, and we would expect to make some engine decisions probably in the next 12 to 18 months. We are not in a hurry to do that. Obviously, both engines are still under development and testing, so we are monitoring that very closely, Gary. And as you know, we do have a lot of experience with A 320 engines, A 320 family engines over the last 25 years. So, we are working very closely with Airbus and the engine suppliers on monitoring the performance of these engines, their fuel consumption characteristics, their maintenance cost curves and so on. So, once we feel comfortable and we get good market feedback from our airline lessees, we will make those decisions in due course.

Okay, and not to beat a dead horse on this 737 re-engine, but I think the general -- the conventional wisdom is that Boeing is looking at perhaps a late 2016 or early 2017 service entry. Did you -- were you implying by your prepared comments that it could be a little bit later than that?

I just would just ask you Gary to look at every new program in the last 20 years from Boeing and Airbus and look at the promised delivery date and certification date and the actual. And you can do that research. I'm sure you have the data available whether it's the A 380 or any other airplane that has been designed and built in the last 20 years. We have not seen a single airplane that was on time.

Okay, okay, and you don't have any conversion options for your 2017 NG scheduled deliveries, correct?

I'm not at liberty to comment on the arrangements we have in our purchase agreements with Boeing. Those are covered on the confidentiality. But knowing how we operate you can make your own assumptions. We generally leave a lot of flexibility in all of our purchase agreements to switch between types and sub models. It's a general philosophy of the Company, but I really can't comment on the specifics on our Boeing agreement. Thank you very much for the question, Gary.

Can you just tell me when the 10-Q is coming out?

It should be published tomorrow.

Tomorrow, Gary. It's in the press.

Arren Cyganovich, Evercore.

Thank you. We've been hearing from other smaller lessors about the pricing on new narrow bodies being relatively too high to generate strong enough returns. Can you talk a little bit about how you differ and where you expect to see your returns on new narrow bodies purchases? I think in the past, you've said high teens type of pre tax ROEs are possible, but competitors are saying that's a little bit too rosy. Can you comment a little bit on that?

We have really not seen any differentiation between what are projections were last year versus actual performance in terms of lease rates where we're seeing the trends pretty much along the lines of what we have anticipated. So, I don't know what other smaller lessors are giving your comments, but.

Arren, this is John Plueger. We just -- just a matter of comment, we don't give sort of forward guidance or that sort of thing. I think you can just generally assume that we bought aircraft at a one time that we're happy with and that we believe are going to give us the returns that we need to achieve. But you will not be seeing guidance from us on margins or lease rate factors of that sort of thing.

Okay, thanks. And then additionally, the -- in your comments you mentioned that you could potentially acquire some aircraft at distressed prices. Is that really all new aircraft that you are talking about there, not any kind of mid age older aircraft, just new stuff?

Our general focuses on new aircraft or used aircraft that are less than five years old. So, in terms of opportunistic acquisitions, we are always willing to look at what they called wide tails, and that's the aircraft that is built by Boeing or Airbus were there was an intended customer, but the customer doesn't show up for delivery. So, that's one type of a circumstance. Another one could be were an airline needs to generate cash and is willing to sell a young aircraft to generate cash at below market prices to do it quick transaction.

That's helpful, thank you.

Your final question comes from the line of Gary Chase of Barclays Capital.

Everybody, just wanted to ask a quick one on the quarter and then a broader one if I could. Could you maybe give us a sense for the asset acquisitions that came into effect during the quarter, were those skewed to the quarter, or should we think of them as something that developed simply through the period?

Gary, we really don't comment as to timing, et cetera. We did put a comment in our prepared remarks that just reminded people that they are added ratably throughout the quarter, and that's just always been true in our business. We just don't provide comments as to early, middle, late or that sort of thing. And as our fleet size grows, that becomes less and less relevant. Full impact in future quarters.

I'm sorry, what was that?

Full impact in future quarters, in other words. And in fact, as the lease grows, that timing effect just gets minimized.

Yes, for example, if let's say we bought an airplane on June 21, we only get nine days or one-tenth of the quarter of revenue. But in the next quarter, in the third quarter we would get full revenue recognition. So, one has to be careful in doing numerics on the quarter and dividing them, aircraft into rentals and things like that because depending on when the aircraft was purchased during the quarter, it could alter the mathematical result. So, I think what we're saying is just be careful when you analyze those numbers because aircraft are delivered at different points in a given calendar quarter.

Yes, right. I guess you talked around this issue in the prepared remarks about you weren't seeing any stress in the capital markets. I'm wondering if maybe, is that a statement that you think speaks to Air Lease, just given (technical difficulties) position in the powder that you do have, or is it more broad? And one of the reasons I'm asking is I'm trying to get a sense of whether or not you think the current environment might create kind of unique opportunities that (technical difficulties) spending some of that (technical difficulties) on or if you think the situation needs to develop quite a bit further before that kind of (technical difficulties) would be likely.

All I can say is we've had tremendous support from the commercial banking community in the US, in Europe, Asian banks. We have not seen any banks that have shied away from doing business with us. We have also during the quarter issued $120 million of five-year private placement to two large very sophisticated institutions. We continue to see a lot of interest from financiers in Air Lease, and I think that's a byproduct of several factors. One, as John pointed out, this management team has weathered and successfully navigated through many, many economic cycles over the last four decades. Number two, I think we have the best balance sheet in the business, we have the strongest capital structure. I think we have a very strong paid in capital equity base, and we have low leverage. And I think we have the relationships with both the suppliers and the ultimate users of aircraft, the airlines, on a global scale. And I think the lenders and the banking community and the institutional debt investors I think recognize those positive qualities. And so for that reason -- for those reasons, I think we have not seen a degradation in the availability of debt capital for the Company. Now, we are very mindful that certain banks are going to be more stressed than others, and there's obviously issues that we are following very closely in Europe. But so far, they have not directly impacted Air Lease.

Okay, thanks.

Thank you very much, everybody, for joining us today, and that concludes the Air Lease Corporation second quarter call. Thank you.

Ladies and gentlemen, that concludes the presentation. Thank you for your presentation. You may now disconnect. Have a great day.