Air Lease Corp (AL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2013 Air Lease Corporation conference call. My name is Julia and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-answer session towards the end of the conference. (Operator instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Ryan McKenna, Head of Strategic Planning and Investor Relations. Please proceed, sir.

Good afternoon, everyone, and welcome to Air Lease Corporation's second-quarter 2013 earnings call. This is Ryan McKenna, Assistant Vice President, Strategic Planning and Investor Relations. I am joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Financial Officer.

Earlier today, we published our second-quarter results for fiscal year 2013. A copy of our earnings release is available on the Investor section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, August 8, 2013. 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, 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 8, 2013. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of the risk factors that may affect our results.

Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we will use during this call such as adjusted EBITDA and adjusted net income are non-GAAP measures and have been adjusted to exclude charges relating to amortization of discounts and debt issuance cost 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 the reconciliation to corresponding GAAP measures can be found in the earnings release we issued today. This release can be found in both investors and the press section of our website at www.AirLeaseCorp.com. Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chairman and Chief Executive Officer, Steve Hazy.

Thank you, Ryan. Good afternoon and thank you for joining us today. I am pleased to report that Air Lease increased its fully-diluted EPS to $0.41 in the second quarter of 2013 compared with $0.28 in the second quarter of 2012, which represents an increase of 46%. For the first six months of 2013, ALC increased its fully-diluted EPS to $0.79 from $0.54 in the first half of 2012. This also represents a strong 46% increase. Similarly, our top-line revenues for the second quarter of 2013 were $208 million versus $158 million in 2012, a 31% increase.

For the first six months of 2013, ALC increased its revenues to $400 million from $291 million in the first half of 2012, representing a 38% increase. Our industry-leading pre-tax margin remained steady at just below 32% at 31.9%, and was achieved through our core leasing operations. I would like to commend excellent work of our entire management team and our staff who have continued the execution of our robust growth plan and delivered these leading record results.

Globally, passenger traffic continues to grow ahead of our expectations and we continue to see steady demand for our aircraft. IATA, the International Air Transport Association, recently reported that passenger traffic for the first half of 2013 increased 4.8% versus the same period in 2012 with load factors at a healthy 79%. The robust traffic growth is exceeding the growth rate in global GDP and the substantial replacement cycle is further driving demand for our aircraft.

We see an increase in product differentiation globally between legacy carriers, who are focusing on premium traffic passengers for medium- and long-haul international flying versus the low-fare, low-cost carriers targeting price-driven domestic and regional passenger traffic. ALC is well positioned to serve these diverse airline customers in the marketplace.

ALC's current aircraft fleet and future orders have proven to fit the needs of our changing marketplace. Our twin-aisle wide-body business focused on the Boeing 777-300 ER's and upcoming 787's as well as our Airbus A330's and A350's have been highly demanded by well-established blue-chip airlines around the world. This has helped expand ALC's customer base with top-quality credits and with assets that will hold their values well into the future.

Our single-aisle business, focusing on a Boeing 737-800NG, the 737 MAX as well as the Airbus A320 and A320neo's and the A321 family has appealed to the broader space of airlines. Customers are regularly approaching our marketing team with high levels of leasing demand for these jets, which is one of the reasons we have been able to place them with such long lead times.

The airplanes that we have already placed and the aircraft that we have on order are perfectly matched to the customer requirements in the global marketplace. The smaller aircraft in our fleet, including our ATR 72-600 and Embraer 190 aircraft, have found profitable homes in smaller high-yield marketplace opportunities that have high growth potential into larger aircraft.

The value of the timing and compelling economics of those purchasing decisions will help protect ALC from the value degradation that others have faced.

Currently, we find ourselves in a relatively stable interest rate environment that ALC forecasts will slowly rise in the coming years. I would like to remind everyone that while there is generally a lag period historically, there has been a general correlation between interest rates and lease rates. We have had a mechanism in place since the inception of our Company to minimize value degradation to our fleet from rising interest rates and cost escalations from the manufacturers. Our forward lease contracts contain interest rate adjustment factors that account for a rise in rates between the time of contract signing with an airline customer and the actual date of delivery of the aircraft.

Additionally, our contracts include provisions that require an adjustment in the lease rate to account for any manufacturer cost escalation. Therefore, our business is well positioned to handle these market forces. We continue to work with Boeing on the development and final product definition of the 787-10 and we anticipate that this model will become one of the most efficient worldwide twin-aisle fleet aircraft. We are working with our friends at Boeing to conclude the final contract on the 787-10's.

Before I hand this over to our President, John Plueger, I would like to make a few additional observations. In the airline industry, there is a strong and uniform consensus that Air Lease Corporation benefits from a superior management team with deep experience; that ALC is a leading aircraft leasing franchise with predictable revenue generation and the highest sustained profit margins; and, thirdly, our strong core relationships with the airlines, the aerospace manufacturers and the commercial banking community that serves this sector are unrivaled. We also enjoy the highest market capitalization of any of the public lessors despite being the youngest one.

So now, I would like to turn this over to John Plueger, our President and COO, who will further discuss our performance and strategic positioning.

Thanks, Steve. Our aircraft lease placements are tracking to plan with no significant change in overall portfolio lease rate factor. During the second quarter, we saw demand from Europe, the Middle East and parts of Asia. We successfully delivered 10 aircraft from our order book and acquired two incremental planes, increasing our fleet to 174 aircraft.

We have now expanded our lease portfolio to 78 customers across 44 countries. No single airline customer represents more than 10% of annual revenues. Our average fleet age remained very low at 3.5 years with a healthy average of 7.1 years remaining on our leases.

A cornerstone of our fleet strategy is to order the best balance of the most highly sought after and most fuel-efficient aircraft from the 70-plus seat turboprops to twin-aisle wide-body's with 400 seats and above. This balancing concept prevents us from becoming overly exposed to any single aircraft type that might be impacted by market conditions such as the A320 in recent years.

Further, the surety of delivery slots many years into the future allows us to allocate aircraft to a diversified customer base rather than becoming overly concentrated with single customers in large sale/leaseback RFPs.

Let me be clear about one point of potential confusion on Wall Street. All aircraft and the prices paid for them contain predelivery payments. They are simply part of the embedded cost of any aircraft. We are able to minimize their impact by placing large orders and negotiating down the cost rather than paying for those PDPs and the resulting capitalized interest expense paid by the airline in the final price of a sale-leaseback. This strategy has served our Company very well and it has generated a consistent core earnings stream in past quarters with a pretax profit margin north of 30%.

Let me just add a few comments on the product side. Beginning with Airbus, all of our current generation new A320 and A321 aircraft and all of our new A320 aircraft were placed some time ago. We are starting to respond to requests for our A321neo and A320neo aircraft with deliveries to us commencing in 2016. Additionally, we are receiving the first inquiries for our A350 aircraft which commenced delivery in 2018.

It is premature at this juncture to make any comment as to lease rate factors, but we believe that the assumptions and forecast we used when making the purchases of those aircraft remain reasonable and sound.

As to Boeing, we're working on remaining lease placements in 2015 through 2017 of our 777-300ER's and Boeing 737-800's. We continue to add high-quality names such as British Airways, Etihad and Korean and other premier airline names to our customer base through our 777 program with lease economics in line with our expectations. We find overall stable lease rates with our Boeing 737-800 lease placements. As a reminder, we have already placed the first eight of our Boeing 787-9 aircraft to begin delivering in 2017.

All of the Embraer aircraft we had on firm order have now been placed and delivered. All of our ATR aircraft have been placed and those that have been delivered are performing well.

On an overall portfolio basis, our lessees continue to perform well and we have no significant credit or arrearage concerns. Importantly, we have no leases expiring this year and no more than 5% of the aircraft in our fleet is up for renewal in each year through 2017. We firmly believe in locking in extensions early and our lease portfolio clearly reflects our marketing team's ability to execute this strategy.

As we look forward to our remaining deliveries for the year, we now have clarity that the third quarter will be a relatively light quarter for our capital commitments and that our delivery stream is weighed heavily towards the fourth quarter. Our business is predicated on long-term aircraft leasing operations and this shift and quarter-ization of deliveries has no impact on our long-term strategies.

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

Thanks, John. During the second quarter, our rental revenue grew to $208 million, up 31% from $158 million achieved during Q2 of 2012. This translated to fully-diluted EPS of $0.41, an increase of 46% over Q2 2012 diluted EPS of $0.28.

We continue to achieve pre-tax operating margins north of 30%, predominantly achieved through our core leasing operations. I would like to highlight that our overall revenues accounted for only 40% of our revenue during the quarter.

During the second quarter, we amended and extended our 2010 warehouse facility, reducing the interest rate to LIBOR plus 2.25% from LIBOR plus 2.50% on drawn balances and reducing the interest rate 250 bips from 75 bips on undrawn balances. We extended the availability period from June 2015 to -- to June 2015 from June 2013 with subsequent four-year term-out option.

We concluded the second quarter with a highly-attractive overall composite cost of funds of 3.74%, which is 31 basis points below Q1. The successful upsizing of our unsecured corporate revolver to $1.7 billion gave us a great deal of additional liquidity, some of which we put to use during the quarter.

Our debt portfolio has now grown to nearly 69% unsecured. As you can see, we continue to shift away from secured financing in favor of the unsecured model and are driving our cost of funds lower with each transaction.

Further, our A-minus corporate credit rating provides us with additional funding flexibility and financial strength. We continue to execute upon our plan to modestly increase our debt-to-equity ratio, but not to exceed 2.5 to 1. We have successfully constructed a debt portfolio with no sizable maturities in the next three years and our approach to managing our balance sheet will remain conservative by maintaining a large liquidity cushion. As John mentioned in his remarks, our aircraft deliveries are weighted heavily to the fourth quarter and will result in a timing shift of revenue from Q3 to Q4. However, expect our annual SG&A to continue to decrease as a percentage of revenue.

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

That concludes management remarks. For the question and answer session, each participant will be allowed one question and one follow-up. Now I would like to hand the call over to the operator. Operator?

(Operator instructions) Michael Linenberg, Deutsche Bank.

I guess a couple questions here. Steve, you made a pretty big bet here on the 787-10. What did you see that got you onboard with that aircraft? What are maybe -- that differentiates it from what is out in the market or maybe what manufacturers may be planning? If you can talk about that, that would be great.

Sure, I'm happy to do so; thanks, Mike. First of all, we looked at the route networks of the major intercontinental carriers and came to the conclusion that the 787-10 can operate effectively in about 95% of the routes that are currently served by aircraft such as A340's, 777-200's, 777-300's, 747-400's and so on. So it can serve a very, very significant portion of all wide-body operations, all the way out to 7000 nautical miles, which equals a little over 8000 statute miles.

Secondly, the aircraft is actually a minimum change upgrade from the -9, and the primary change results in two additional revenue generators. One, the 18-foot stretch of the airplane results in about six additional rows of seats, so in the nine-abreast configuration, that's 54 seats. In an eight-abreast configuration, that's 48 seats. So the airplane picks up roughly between 45 and 54 additional seats versus the -9.

In addition, in the under-floor compartment, the 787-10 picks up two additional large pallet positions or a pallet position plus 4 LD-3 containers. So both the passenger revenue capability of the airplane and the under-floor cargo capacity airplane increase significantly over the 787-9 with minimal changes to the aircraft.

The result is that the unit economics of the airplane in terms of seat kilometer cost and the additional cargo capability of the airplane puts it in a very unique and advantageous position amongst all of the wide-body aircraft. We essentially have an airplane now that has almost the capacity of a 777-300ER, but with substantially lower trip cost and DOC costs on either a seat kilometer or a seat mile basis. So it's really a quite easy equation which results in a superior airplane in terms of economics for the airlines.

That's a great run-through. I appreciate that.

I hope that's helpful to all of you.

That's very helpful. Jumping to a second question here, and maybe this is Greg or John, just looking at your financing cost, getting the composite cost down below 4%, I think 3.74%, assessing on how the market has moved of late, there has been a lot of volatility. What are your thoughts on the view that maybe we saw the bottom; we saw the bottom this last quarter, and as we look out over the next couple of quarters, it seems, if anything, rates are going higher? What are you seeing in the marketplace, Greg?

The way I see it, the majority of our floating-rate debt is on the short term. I don't think anybody's forecasting a rapid rise in short-term rates. I would like to remind you that our financing strategy targets 70% of our debt being fixed and 30% of it being floating. As we continue to go on, we're going to go out and issue longer-dated fixed-rate pieces of paper as you see us access the market in that mechanism.

I think that you'll see us do smaller deals to maintain the -- to avoid blips in the marketplace and to access windows along the way. And on the revenue side, I will let John and Steve comment on this, but we are protected on our forward lease placements through our lease escalators.

I think the summary, Mike, is that we continue to enjoy very good access both to the debt capital markets and the banking group. I think we now have the largest banking group of any publicly-traded lessor with well north of 40 banks overall. So sourcing capital at attractive rates I think remains a compelling part of our story. But I think, as Greg was pointing to, let me remind something that Steve commented on his remarks, and that's we have interest rate protection clauses in the vast majority of all of our forward deliveries. So whatever the interest rate was at the date of contract execution, if it is higher, whatever that benchmark might be, as of the date of delivery, which is when we fund most of those purchases, that is reflected in a revised upward tick in our lease rate.

So I think the bottom line is, I have no way of knowing whether we have hit the low or whether that is yet to come, etc. But I see this Company continuing to have good access to capital with competitive bids from a variety of sources and can certainly pretty feel confident in saying that we will continue to enjoy some of the lowest cost of capital of any of our publicly-traded peers, if not the lowest cost of capital. I see no change in that going forward. And if all of us end up paying slightly higher interest rates because the overall financial markets move up, so be it. So will the airlines. So I continue to see us preserving what I perceive to be as our continued advantage in the marketplace or.

The overall success of our business is based on the quality of assets and not necessarily the interest rate environment, because we are protected on the asset side.

Greg or John, just quick on the interest rate protection clauses, just based on what you have seen over the years, are those fairly unique in the industry, or are they more standard, or maybe it's hard to call?

I think that the concept of indexing your lease rate to an interest rate is not uncommon. We have been doing it, though, from day one in our Company. And I think it's something that the airlines understand. Everybody understands you pay for paper money. The advantage we continue to employ is that at delivery, our lease rates become fixed and, therefore, they are budgeted and known quantities that the airlines can easily work with for the duration of the lease, in addition to providing a lot of flexibility on lease extension and other things that we can do.

So I think that this management team has introduced that concept of putting in an interest rate benchmarked many, many years ago and we continue to use this from day one here going forward. And if there is -- it's just simply a question of what index do you use, do you put any boundaries around it, that sort of thing.

Mike, I also want to emphasize that ALC is focused on new aircraft, new technology aircraft. So, frequently, our lease placements involve lead times and deliveries quite far off from the time we sign the contracts. So we have aircraft that we signed leases for in 2015, 2016, 2017, 2018. So it's important for us to build in that protection because, obviously, the interest rate environment will be different three, four, five years from now.

So we have always taken the position, let's be conservative and let's build in those protections so that whatever the interest rate environment is at the time of the delivery of the actual aircraft, our lease rates will reflect that environment at that time. So I hope that explains our philosophy on the subject.

John Godyn, Morgan Stanley.

Steve, that was just a phenomenal amount of detail on your thought process around the 787-10. I was hoping that you could expand on some of your views on wide-body's going forward. What I was hoping you could speak to is just how you assess the opportunities around A350's and perhaps, long-term, the 777-X.

I'm happy to do that. If we look at the composition of wide-boy fleets when we started the Company in 2010, there was a large number of A300-600R's, A340-300's, A340-600's, even some A340-500's, a lot of 777-200's, very large quantities of 747-400's -- in the passenger space, I'm talking about -- and then obviously the 777-300ER. What we have looked at in the aging process of these fleets, including the 747-400's, MD-11's, A340's, the older low-growth-rate A330's, and some of the oldest 777-200ER's, and we looked at what is the requirement to replace those aircraft as we looked at between, say, 2015 to 2022. And that's where we see the A350-900, the A350-1000, the various members -- the larger members of the 787 family, the 9 and the 10 and then, ultimately, the 777-X -- they will all play a very significant role in replacing these aircraft that were built in the early 1990s and the mid-1990s that will be turning 25 years of age.

And so the key participants in this replacement market will be the 777-300ER. In fact, many of our placements are replacing 747-400's.

Just to give you an example, at Air New Zealand, British Airways, Korean Air, KLM, we have done recent placements of new 777-300ER's for deliveries next year and 2015 -- every one of those is replacing 747's. And then, beyond that, we look at these highly efficient larger versions of these twin-aisle aircraft, the A350's and 787's, as well as the 777 and its new derivatives. They will continue to play a leading role in replacing the older, aging wide-body aircraft. Even with minimal traffic growth, there is going to be a pretty strong demand, and there is a strong demand that we are seeing, to replace these aging wide-body aircraft.

John, let me just add to Steve's comment, what is an overall philosophy that we have taken here from day one. And that is, Steve used the word replacement four times. In our own ordering of aircraft and in these very models that has just elaborated on that are replacing, in our own lease placements we focus and concentrate our efforts to where our aircraft are replacing prior-generation aircraft, not just growing. There's a lot of discussion in the industry about how much is growth, how much is replacement. But for our own lease placement purposes, we concentrate where there is a replacement component, less on growth. Certainly we have added aircraft in airlines across the world that have been growth aircraft. But the vast majority of our placements, be they single-aisle or twin-aisle, are devoted situations where we are replacing older technology aircraft. We just feel that that's a better bet, a more sure bet overall strategically for our particular aircraft. And so far, we have been very successful in employing that philosophy and will continue to do so.

So, if you look at the universe of A340's, for example, ranging all the way from the A340-200, which is the smallest size, the size of an A340-200, A340-300's, A340-600's and 500's, we believe that essentially all of those aircraft will be replaced over the next 10 years. And the A350 family will probably be the primary replacement vehicle for those planes, but on certain campaigns and some airlines, the Boeing product will also be a significant player.

So I hope that explains our strong views on the twin wide-body aircraft in the years to come.

That's very, very helpful, thank you. As we continue to get closer and closer to ultimately seeing A320neo's in the marketplace, if you could just update your thoughts on what kind of impact you expect residual values of older vintage A320's when that finally starts to happen, that would be very helpful. Thank you.

Well, a lot of people on Wall Street generalize about A320s, but you have to dig a little deeper below the skin, so to speak. The A320 originally went to service right around the turn of 1990. And the initial A320's were powered by the CFM56 engine, an earlier version of the engine, which is called the 5A version, which went out of production in the latter part of the 1990s. Also, the IAE engine, the International Aero Engine, V2500 A1 engine, was the power plant in the initial versions of the A320.

So I would say the first 600, 700 A320's we have to put into a different category than the more recently-built A320's. Those initial versions that fall into that category I just described have experienced and will experience degradation of value. But keep in mind that by 2015, a lot of those aircraft will be reaching 25 years of age and somewhere in the vicinity of 80,000 to 90,000 flight hours. So there's a natural attrition of those older aircraft.

We have seen in the last six months that the younger A320's, and even more particularly the A321, have actually enjoyed a resurgence in lease rates and demand, and we are seeing pretty good, consistent demand across the board from all regions -- Latin America, China, Asia, South America, former USSR republics, and even in the US.

So I think the A320, because of its huge market penetration, and the whole family will continue to enjoy a very successful future. Obviously, the A319 is still under some pressure as we see airlines up-gauging towards the larger end of the family. And the same thing is true on Boeing. The 800 is doing very well, we are seeing a little more activity on 900 ER's, and certainly the 600's and 700's are not enjoying the type of success that they had maybe 10 years ago.

Thanks a lot, that's very helpful.

Isaac Husseini, Barclays.

A question for Steve or maybe even John -- when we look at your fleet, there are a handful of planes that you bought when you first started the Company that are probably approaching or past the seven-year mark. I know that you have sold AC20 in 4Q and you have indicated that you would probably consider selling more planes as they approach the 7, 8 year mark. But we have not seen any sales in this year, I think. Is there any reason behind that? Is there something that you are seeing in the pricing market that is holding you from selling some assets? Or just any thoughts on that would be helpful.

No. We are pretty clear that as we continue to grow the Company in age, again, we're a Company focused on growth earnings, that we have begun and will continue to sell aircraft from our marketplace. Those that you cite that we have bought in the 2010, early 2011 airframe, some of those are candidates. Typically, there is a lot of buying and selling activity in this industry in the fourth quarter. Many lessors rebalance their portfolios at the time. So we actually do have several ongoing projects that could result in some aircraft sales. But at the end of day, we are aggressive buyers, but we are also aggressive sellers and we want to make sure that we realize good profitability on every aircraft sold, and we think we will.

So I would say that we internally in our own planning are pretty much right on track with evaluating sales candidates and talking about sale of a few aircraft. I think we have been very clear from day one -- in 2013, overall, don't expect us to sell 10% of our fleet. These are all -- what is great about our airplanes and I think the reason that we're going to get a good price is if we if we sell them with a lease attached, which is our plan, these are very good earning assets.

And so the biggest question we face internally is what is the best time to sell. If we can enjoy a very good yield for another two years on these airplanes, is it better for us to sell them now or two years from now? So that's more the question. It's more a question of balance and ultimately what is going to lead to the best bottom-line result for that particular asset, whether we sell it now or a year or two from now. But suffice to say that we have ongoing programs and, in fact, we receive continuing interest from parties who want to buy some of the aircraft out of our fleet. So from our perspective, I think it's pretty well as we anticipated and planned.

Okay, perfect, I appreciate that color. And then maybe a question for Greg. Just wondering if you can provide some insights or some color on how you guys think about the 730 mix of fixed versus floating. How you get to that target and what is the thought process behind it?

We are targeting that over the next two years. The way we are going to approach it is by doing longer fixed-rate issuances in the bond markets, both private placements and the public markets. And that's our balance. As we utilize the capacity under our bank revolver, we opportunistically approach the debt capital markets and look to term out that financing in a prudent manner. And that will also help push out the weighted average life of our debt. (Multiple speakers).

I think if I just add to your philosophy, how we got to 70/30, frankly that has been -- for Steve and I, that has been a very long-held tenet and sweet spot from having run this business, this kind of business for 30-plus years. Over that long amount of time through a great degree of cycles, both the aircraft cycle valuations in market rate, lease rates, but more importantly to your question, interest rates, through ups and downs in all market situations, it has turned out for us that on balance, we believe the 70% fixed, 30% floating gives us the maximum bang for the buck. It fixes the vast majority of our debt on the longer-term side, yet allows us to enjoy better margin and lower interest rate funds on a smaller portion of our debt, 30% of our debt.

So it is simply nothing more than lessons learned over many, many years and many interest rate environments and market environments.

Also I would like to add that all of the public bonds that we have placed and, also, all of the long-term private placements as well as our $200 million convertible debt issuance, all of those were at fixed rates. So we have not issued any long-term public bonds or long-term private placements that are floaters. Everything that we have done of significant term in the public markets and the private placement markets have been on a fixed-rate basis.

Okay, that's very helpful color, thank you so much.

Jason Arnold, RBC Capital Markets.

I have a two-part question, I guess just first wanted to get an update on any changes to regional demand for lease financing that you are seeing, any particular areas heating up or cooling off. Second, just wanted to see if you could update us on the demand for leases relative to other sources of aircraft financing, in particular with the EC8 changes there, any impact you are seeing.

When you are saying regional, are you talking that geographic regions?

Geographical regions, yes, Steve, thanks.

In my remarks, I commented that we had seen this quarter demand for Europe, Middle East and parts of Asia. That is this quarter where we have been placing aircraft and executing lease agreements. I would say this quarter, we haven't quite seen as much from China. Specifically, I said parts of Asia; that's Southeast Asia, primarily, other parts. That doesn't mean that we won't, and it doesn't mean that it's necessary cooling off. Don't forget, we had a huge placement about 18 months ago that we announced with the three largest single-aisle campaigns at Air China, China Southern, China Eastern; we placed 53 aircraft. So we not out looking to place 53 more aircraft, nor do we have them available to place, going forward.

So I would say the Middle East has really been a strengthening point. We continue to see demand in Europe. I think overall, Europe as a large equation seems to be doing as good or better these days. And just in the most, very recent past, we have been obtaining a lot more enquiries from South America.

So it continues to be a very broad brush global business. There's no real significant, compelling change in the sea winds really in any different jurisdiction. It's just that this quarter, based upon what we had to offer and what's out there in the market place, it was mainly Europe, Middle East and parts of Asia.

We have placed a large number of Boeing 737-800's in Latin America. Those aircraft will deliver in 2014 and 2015. So all regions are certainly active. There's ongoing campaigns literally everywhere. We are even seeing some activity in the US where we think we can bring some valuable assets into fleet planning equations of some of our large airlines in the US.

So across the board, I think there's good, healthy activity. Airline profitability is kind of okay. It could be better, but it is more positive than negative. And that is giving the airlines encouragement to continue this replacement cycle that we are benefiting from for the next 10 years.

Okay, great. And then just one quick follow-up on the decision-making process for the Pratt & Britney versus the Leap on your 30 firm neo's. Maybe just a little color there would be interesting.

Basically, we have on order currently 50 A320 family neo's. The majority of those are A321's with sharklets. Again, we did that with a lot of thought and analysis. There's a large 757 replacement market. That aircraft is out of production. So we are seeing a lot of demand for the A321 and, even more particularly, the A321neo with the added range and the improved performance and fuel burn on the airplane. So we are seeing good activity across the board in those aircraft types.

As far as the engine selection, we have had a very, very thorough technical analysis of these engines and we've talked to a lot of our airline customers. And based on that, we elected to have about 30 of our (inaudible) aircraft powered by the Pratt & Whitney new generation of geared fan engine. And we continue to be a solid, loyal customer of General Electric across the board on our 737-NG's, on the 737 MAX, on the 777, even some of our A330's and then, of course, a proportion of our neo activity. As John said, we try to balance our portfolio so that we appeal to the largest number of perspective airline customers.

We also have GE exclusively on our Embraer E-jets, and we have 32 of those.

Excellent, thanks a lot, appreciate it.

Arren Cyganovich, Evercore.

I was wondering if you could talk a little bit about your thought process around placements. You are 100% placed through 2014 and 66% placed through 2015. Those are pretty far lead times with respect to potential improvements in the global economy. Do you end up leaving any kind of economics off the table with those kind of lead times? How do you balance how far you go out on your forward leases?

Yes, just a quick comment. When you are ordering new aircraft, lead times to become much more important simply for one reason. Those aircraft have to be built to a specification. With the supply chain constraints that face both Boeing and Airbus, there's a certain minimum time in advance which you really do need to specify the aircraft because you've got to order seats, gallies, in-flight entertainment equipment, and those lead times have become a little bit longer.

So part of this is driven by simply the industrial requirement that says you really do need to specify how you are going to build these aircraft, and it's a little bit less time with the single-aisle, a little bit more time with the twin-aisles aircraft. Twin-aisles -- you kind of like to be there within 18 months or so or better.

So part of the answer is you don't have the luxury of waiting until nine months before delivery or eight months before delivery to negotiate a lease if you are going to customize that aircraft to the airline's specification. You can build a generic aircraft, but then that is going to force you to change that aircraft as soon as you deliver it, to whatever the air (inaudible) wants. That's going to entail a lot more cost.

To the overall question, do you leave any money on the table, I think our financial results would indicate the answer is, I think, probably no. But it is fair to say that we as a management team for the past more than 30 years of running this business find a lot of value and to be able to put the aircraft to bed with comfortable lead times that assure the procurement of all of the internal parts of the aircraft in a normal course of business fashion and to have visibility from a revenue perspective and from a customer exposure perspective on exactly where these things are going. Generally speaking, what we find is those that wait too long suffer too much risk. And there have been many sleepless nights by other leasing companies when they have been waiting way too long and have missed lead times on the quest for obtaining one more penny in yield, and usually that is not a successful strategy.

Just as a point, I think that the long lead times make a lot of sense and add to the visibility. So I was just curious in terms of your thoughts, and that's helpful.

But the other question I had was, back to the interest rates, in general when you have the rising interest rate environment, is it naturally a good thing for lease rates and your overall profitability, or is it more of a wash as your financing costs tend to rise along with those lease contracts?

There's pros and cons. One of the pros is that if the cost of new aircraft go up because of escalation or the cost of financing new aircraft goes up because of higher interest rates, it results in a more robust value on used aircraft, good used aircraft. And so, therefore, the residual values of existing fleets tend to be performing better. The lease rate market does follow interest rate trends because the largest single component, cost component of a lease, is the interest expense. And then, of course, you have the depreciation, which is a function of the aircraft acquisition cost.

So they do move in parallel, and if an airline has to acquire an airplane, they have two choices -- either finance it or lease it. If they finance it, they are dealing in the same interest rate market as the lessor who has to finance the aircraft, unless they just buy it for cash.

So we find that it's kind of neutral. The downside is, if we do a long-term lease for delivery three or four years downstream and we simply fix the rate and close our eyes and pray that everything will be fine, that is not a strategy that we pursue. As we described earlier, we build in adjustment factors, both for the aircraft escalation in cost as well as interest rate indexes that we agree with the airline ahead of time that will be then captured at the time of delivery. So we take a very conservative, maybe overly conservative approach on this, but we feel that's the best way to protect our shareholders' interests.

I will say from a historical perspective, if interest rates start going up a lot, what I think history would show is it does tend to drive airlines more towards the leasing equation. They don't want to lever their balance sheets as much and they are not quite certain of the future market. But, on the downside, you want to have healthy customers. To the extent that they have higher cost of financing, and that deteriorates their financial performance, that's not good either.

So I would just say strictly from a demand equation point of view, we have a very, very simple phrase. It's probably oversimplified, admittedly, but I will offer it to you anyway. We have talked about it in various road shows, etc. A simplified way to look at it is in the good times the airlines need our delivery positions and in the bad times they need our balance sheet. And that's actually more true than not true.

So from a demand perspective, higher interest rates, I think, tend to drive people more towards the leasing side, but it also compresses your customers' earnings.

Very helpful, thank you.

Scott Valentin, FBR Capital Markets.

You mentioned earlier the A-minus rating by Kroll. I know you have been talking to other rating agencies. Any time line potentially when maybe we will hear something from them?

No. We're not going to offer a time line, but I think it's safe to say that we have been offering them information and data. We have maintained and with our second-quarter results will engage in a dialogue with them. But I think we always fall short of projecting forward when we might have another rating agency opinion on us. But I think our dialogue is good, and I think I would only offer two things.

Number one, every quarter that we conclude successfully, which I think this is another quarter example of, is another quarter that we are older, and that removes further any question of the fact that we have only been in business just for three years. I think that has been an issue up till now. I think that issue is going away. And then it's just a matter of continued execution and good financial performance.

Okay, and just as a follow-up question, it seems like wide-body aircraft have become maybe more popular among the lessors. Is that a reflection more of values holding up a little better than some of the narrow-body's, or do you think that is more a reflection of airline demand?

I think it's more airline demand, but we don't really see a shift. We continue to have airlines exhibit a large appetite for single-aisle aircraft, both in the Boeing and Airbus camps. We are seeing a lot of campaigns on single-aisle aircraft across the whole geographic spectrum.

And then, as I mentioned earlier, if you were on the call, we do see a very large replacement market for Boeing 747, A340's, some of the older A330's, particularly the A330-300's that are older, lower gross weight, and even some of the oldest 777's.

So it's just a natural cycle, and production rates of the A330 family and the 777 family are currently at all-time highs at almost 20 aircraft a month, which is just strong. And then, of course, the 787, Boeing is working very hard to achieve 10 airplanes a month by the end of the year. So you are looking at over 300 aircraft just among those three types, which is clearly a reflection of airline demand. We don't really see any new wide-body wide-tails, and the financing environment continues to be there both with the export credit agencies. A lot of the European banks have come back strong into the aircraft financing sector. We see more Asian bank activity.

So financing is there and the demand for the airplanes is certainly there.

Jamie Baker and Mark Streeter, JPMorgan.

Actually, this is Jon Rau on behalf of Jamie and Mark Streeter. If you were an economist, what would you say about the state of the market for leases and aircraft that you lease, for example, price, terms and funding costs? Are they improving, neutral or deteriorating on an economic basis, including all consideration?

We can only speak to our performance. If you track our results, you'll see a high degree of consistency in lease rate ratios to our capital being employed. We really haven't seen a lot of deviation since Q2 of 2010 when we took delivery of our first aircraft on May 19 of 2010. We've seen a lot of consistency. As we mentioned earlier, there is some correlation between interest rates and the way they behave versus lease rates. But I think, if anything else, we have shown a high degree of stability in the lease economics, certainly with aircraft types that we have invested in.

Okay, thanks. As a follow-up, you guys have identified e-jets and turboprops as having some of the best lease rate factors. We were wondering if there's any change in that regard and whether we should start to expect those aircraft to playing a somewhat larger role in the order book going forward?

These aircraft have been very successful for us. We currently have 46 airplanes in that category, but they represent a very small fraction of our total asset base that's employed. They have been very useful in introducing us to airlines that are ultimately stepping up to the jet age, to larger aircraft. But we don't really see a change in our philosophy in terms of the percentage of capital we employ.

In fact, the primary aspect of our future order base is on the Airbus and Boeing products. As John said in his remarks, we've taken delivery of our last e-jet. We only have five or six ATR 72's still yet to deliver. So they will be a sound component of our portfolio, but certainly at this point in time, our CapEx is focused on the new generation Boeing and Airbus product and less on the smaller regional aircraft. We have done the regional thing. I think our timing was very well executed, and we established a strong footprint in that market. It has worked out very well for us, but the bulk of our expansion in the coming years is on the new Boeing and Airbus products. And our disclosures are quite clear on that.

Thank you.

Glenn Engel, Bank of America.

This is actually Dave Van Der Keyl, in for Glenn. Most of my questions have already been answered, but just one on your stock -- a couple of your publicly-traded lessor peers have tapped the equity markets in recent months to take advantage of some investment opportunities that they are seeing, so I'm just wondering what Air Lease's propensity is to do something similar.

We have no plans to access the equity markets. Our debt-to-equity ratio is just a tad over 2 to 1. We have the largest [stated] capital of any of the publicly-traded lessors, and so we have a very strong capital base. And we believe our common equity, coupled with our retained earnings that we generate every quarter is sufficient to take us through this growth cycle. So we have no plans at this time to issue any other new form of common stock, other than if employees or executives exercise stock options. But that would be a very minor contribution in terms of capital.

Thanks.

You have no questions at this time. I would now like to turn the call over to Ryan McKenna for closing remarks.

That concludes our call for today. Thank you for your participation and we look forward to speaking with you next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.