Peter Juhas: Sure, thanks Hillary. I’ll take the share repurchase question. So far this year, we have bought back around $170 million worth of stock and we have a little over $100 million left in our existing authorization, and you saw we have announced a new authorization for $500 million, so we’d expect to deploy all of that this year. Beyond that, we have assumed some additional share repurchases in the projections, and those are based on the earnings, the CapEx, and sales assumptions that we have laid out here; but if we do better on earnings, then we’ll have more excess capital that we can deploy. If CapEx gets delayed, we’ll have more excess capital, and likewise if we can sell more assets or produce gains on those sales, that will also lead to more excess capital, and of course that’s all before any mention of additional insurance proceeds, which we would hope to recover but can’t count on.
It’s really a function of all those things, how much we’d ultimately do. Gus, do you want to touch on–?
Aengus Kelly: Sure, and on extensions, look – as Pete said, the market’s extremely strong. There is hardly any aircraft that we have with customers that they don’t want to extend. They have to pay the going rate, of course, but I think particularly on wide bodies, nearly everything extends in the last quarter, and on the narrows it’s very strong as well.
Hillary Cacanando: Got it, thank you very much.
Operator: We’ll go next to Jamie Baker with JP Morgan.
Jamie Baker: Good afternoon. Pete, a follow-up to the net spread question that we already took during Q&A. You guided to stable trends next year, you talked about the drivers for net spreads coming down sequentially in the fourth quarter, but Mark and I are still curious what impact lease extensions and asset sales might be having on this particular metric, and maybe the answer is they’re not really contributing, but are those factors that we should also factor in, in addition to what you articulated in response to the first question?
Peter Juhas: Sure, so Jamie, you’re right – both of those can affect it as well. I mean, fundamentally if we’re selling older assets that may have higher yields, we are–you know, you lose that revenue, right, so that can affect the net spread. But obviously as we laid out, we’re redeploying that capital, so we think that makes sense. On the extensions front, that can have an impact on it because essentially if you are extending more aircraft and particularly if you’re extending aircraft that are further advanced than your normally would, as we’ve been doing, then that affects you because you have to straight-line those rents over the existing lease and the new lease, and so that can have an impact on net spread, all else equal. I think those are contributing factors too, but fundamentally we do expect to see it. I think it will stay flat based on what we see for the next year.
Aengus Kelly: Okay, but I would really focus, Jamie, on the fact that–the real focus is there. If we managed to net spread, I would not have sold any older aircraft, and so what we look at is what’s the metric we want to focus on – value creation, earnings per share, and the right risk profile of our fleet, so therefore I’m selling older aircraft at massive gains, I’m redeploying them into the buybacks at a massive gains. You saw from my example on the trades we did last year, we turned book equity of one times into 2.25 times, so if I was worried about net spread, I wouldn’t have done something like that. We are here to make money for the shareholders, and that’s the way we drive it. In the meantime if you sell those assets, the residual business is actually better than it as before with a lower risk profile.
Jamie Baker: That’s great, Gus. No pushback from us on this, I’m just trying to articulate things for some investors. Just a quick follow-up on Russia, can you remind us in aggregate what your average recovery has been as a percentage of the book that you initially wrote off? It looks to be around, I don’t know, $0.65, $0.70 on the dollar, at least for the aircraft that had been settled. Is our math accurate on that?
Peter Juhas: Yes, that’s about right – 70% is right, Jamie, but remember that we still retain the insurance claims for the full amount on our own policy, so it’s not as though that money is necessarily lost.
Jamie Baker: Got it, got it. Okay, Pete and Gus, thank you very much. Appreciate it.
Peter Juhas: Sure.
Operator: We’ll go next to Terry Ma with Barclays. Caller, your line is open.
Terry Ma: Hey, good morning. I wanted to see if you can provide an update on your cargo conversion program – I think you guys called out some one-time costs last year, so I was hoping you could maybe quantify the revenue opportunity and how much of that is actually factored into the ’24 guide.
Aengus Kelly: Well as it relates to the cargo program development, we have several 777s that are currently in conversion. We expect, and in our guidance we expect the 777s to start rolling out of the conversion program in the first half of this year and into the second half and from thereon, so yes, our guidance does not include any revenue from those 777s in the first part of this year.
Terry Ma: Got it, and then on your sales guide of $2 billion, what’s the mix of assets we should assume in terms of aircraft, engines and helicopters, and how should we think about the gain on sale contribution from each of those?
Aengus Kelly: Well as it goes to the mix of assets, generally speaking it will be similar to what we’ve done in the past, with a focus generally on older assets. As it pertains to the gain on sale, we don’t give guidance to gain on sale; however, you can look at our historical performance and you can see that we have generated very significant gains there, but there are zero gains in our forecast.
Terry Ma: Right, got it. Thank you.
Operator: We’ll go next to Catherine O’Brien with Goldman Sachs.
Catherine O’Brien: Hi, good morning gentlemen. Thanks for the time. Not to keep harping on lease yield, but even if the OEMs were to start to hit production targets faster than the market was expecting, haven’t we not even really seen the impact to your lease yield from the strong lease rate environment that kicked off with how tight supply and demand was and maybe a difficult second half ’22, all the way through next year accelerating? How many years out are we from your delivery slots–or how many years out are your delivery slots booked at this point, and when do you start taking delivery of aircraft, the majority being signed second half ’22 and later?
Aengus Kelly: You could think about two to three years out, Catherine – you’re right in that aircraft that were signed in 2021 would have delivered in 2023, aircraft that are signed even into the first half of 2021 would have been 2023, 2024, you get to 2022 placements, back half of 2022 will be back half of ’24, Q4 ’24 into ’25, ’26, etc., so you’re correct in saying that there is a lag in that regard. But again, I’d make the same comment about lease yields on a portfolio basis that I do about the net spread – as we sell the older asset, we of course reduce our lease yield because they are higher yielding at the last two years of a lease than they were at the front two years of the lease. But where you pick it all up is on the EPS, and that’s the key thing to look at.
Catherine O’Brien: I totally agree, makes sense. Just wanted to make sure I wasn’t thinking about that inflection incorrectly, just in terms of when we’re going to actually start to see–
Aengus Kelly: I think if you can keep the lease yield flat, improve the quality of your portfolio, and drive up EPS, you’re achieving a far better risk-adjusted return on a higher quality business, and that’s what AerCap has been doing for 10 years.
Catherine O’Brien: Right, totally makes sense. Then can you just speak to how lease rates have trended since we last spoke? I realize it’s only been a couple of months, but given the incremental issues with the MAX and the GTS, is it fair to say supply has gotten even tighter and you’re already seeing that translate to lease rates? If yes, is that mostly on narrow bodies or are you seeing flow to wide bodies as well? Thanks.
Aengus Kelly: I wouldn’t say in 90 days, we’re seeing a dramatic move, to be fair, Catherine; but there has been a move upwards, there’s no doubt about it. For sure there has, and what’s very important, of course, is we’ve seen a bit of a fall in interest rates in that 90-day period but we have not seen a fall in lease rates, and that’s what you’re really interested again, is to say okay, what happened with the headline lease rate is interesting, but what happened underneath with the interest rate? So what we really like to see is falling rates and steady lease rates, or even slightly increasing lease rates, and I’d say the last 90 days, lease rates are probably similar but interest rates fell, so we didn’t have to pass on the fall in interest rates.
Catherine O’Brien: That’s great. Maybe if I can squeeze in one really quick third one for Pete on the guidance, in your third quarter 6-K, you had, I think $6.4 billion in purchase obligations. You’re guiding to 7.2 in CapEx for this year. Were you able to lock in incremental aircraft or is that just a function of–you know, I understand there’s so many moving pieces in the skyline, just trying to figure out what drove that delta. Thanks so much for the time.
Peter Juhas: Yes, some of that is engines, Catherine, engine purchases in 2024. I mean, there are a bunch of things that move around here, and I think as we look out at the 7.2, we do have some significant questions about that, so that’s our estimate today but it could clearly move around a lot, given the OEM issues.
Aengus Kelly: Yes, if I was a betting man, Catherine, I’d imagine that some of our CapEx is inevitably going to move to the right.
Catherine O’Brien: Great, thanks for all the time.
Peter Juhas: Sure.
Operator: We’ll go next to Chris Stathoulopoulos with Susquehanna International Group.
Chris Stathoulopoulos: Morning, thanks for taking my questions. Aengus, thank you for the walk-through on how you’re thinking about the supply-demand dynamic, I think three points you outlined. But on points two and three, you spoke to the stressed MRO network, backlog of shop visits – as we think about those two points and we think about resolution here and which of those might persist longer, would like to hear your view on how you see that moving into perhaps mid or end of the decade. Is it MRO perhaps resolving faster, or are these both pressure points that, for any number of reasons, you’d have those – would love to hear them, that we should expect to extend closer or into end of decade? Thank you.
Aengus Kelly: Sure. On the MRO, on air frame MRO I would expect that issue to get resolved sooner. It’s easier to conduct air frame MRO than it is to do engine MRO. To do engine MRO, you need to have a test cell, a very big workforce of highly trained engineers. It’s a little bit different. I think the air frame MRO will get solved first. The engine MRO, though, here’s the big issue – there’s a finite supply of parts to build and repair engines. Those parts, when a part is made or manufactured, it can go, number one, to production aircraft engines, i.e. an engine that’s going to go on the wing of an Airbus or a Boeing aircraft. Number two, instead of that, the part could do to spare engines. Now if the fleet was staying on wing longer than it currently is, you wouldn’t need as many parts to go to spare engines, but you do.
Then third, engines have to go into the shop to get repaired, so the shops, the MRO shops also need that part, so there are three sources of demand for every engine part being produced today. The manufacturers of those parts way back up the supply chain, who do the castings, are not going to increase that significantly anytime this decade, as far as I understand, so I think we will see the engine issues persist through the decade, and bear in mind that AerCap is the largest marginal supplier of spare engines to the world, which gives us of course an enviable position when it comes to engine leasing. But as it pertains to aircraft leasing, it gives us a unique advantage over all of our competitors because they cannot offer the vital products that we can in conjunction with our aircraft.
Chris Stathoulopoulos: Okay, thank you. As a follow-up, as we think about the secondary market here for 2024, I think you said in response to an earlier question, there’s been a slight fall in interest rates. It sounds like lease rates are steady to up, but we have had news here around the MAX and kind of growing concerns around quality control issues with certain aircraft and types, as well as some carriers recently signaling a potential change in the composition of their order book, so given all that, could you put perhaps a finer point or details of what you’re seeing in the secondary market? Any sort of color you have around aircraft types or residual values that have perhaps meaningfully shifted, or not, since you last updated a few months back? Thanks.
Aengus Kelly: Sure, well it’s worth again just splitting the family up, so we all know that Airbus is outselling Boeing – it has been for some time, but it’s not enough just to say the 320 family outsells the Boeing family. Airbus wins in one particular aircraft – it’s the A321 product. It does not win as much on the A320 product. The 320 product is the 180-seater, the 321 product is the 220, 230, 240 seater even in some instances. The MAX 8 is the 180 competitor from Boeing – that airplane is an excellent aircraft, and many operators will say it’s as good, if not better than the competing Airbus A320 aircraft. Where Boeing falls down, though, is that the MAX 10 has not yet been certified and it’s not as capable an airplane even when it is.
It’s unlikely to be as capable as the A321 currently is, so from our perspective, we are very bullish on the MAX 8 – in fact, we bought a few of them around Christmas, that just popped up. We think that is an excellent aircraft, but because of the 321 superiority over the larger Boeing product and the fact that it’s so early to the market versus the Boeing product, we are going to see a significant majority of the market heading towards the Airbus product line for the long term.
Chris Stathoulopoulos: Okay, thank you.
Operator: We’ll go next to Ron Epstein with Bank of America.
Ron Epstein: Good morning guys. Maybe following up on that last comment, Gus, when you look at Airbus’ narrow body backlog, of the approximately 11,000 airplanes, 70% of them are A321 – I mean, it’s an overwhelming majority of their backlog, and for lack of a better word, it really kind of crushes the Boeing offering. I mean, isn’t your sense that Boeing kind of has to do something or they’re really going to just lose out on that larger segment? It does seem like carriers, and tell me if I’m reading this wrong, are trying to migrate the narrow body product to larger shelves?
Aengus Kelly: Yes, by and large, there’s been up-gauging around for sure in the market, and that’s where–you know, when the 737 800 and the 320 were the heart of the market [indiscernible]180 seater, Boeing had a majority of the market. That’s clearly changed now, as you rightly point out – the 321 is the dominant airplane, but the MAX 8 still has a very significant user base and is in good demand, actually. But just the target market for the MAX 8 just is not as big, as you rightly point out there, Ron, as the 321, because many customers are up-gauging. But we still see very strong demand for MAX 8 and there’s very limited supply of them.
Ron Epstein: Got it, got it. Then what’s your sense on the 220? Is there much demand there, particularly the 300, and if they were to do a 500, which I guess there’s speculation they may or may not, will there be demand for that?
Aengus Kelly: Listen – I think the manufacturer should focus on making what they have. I honestly think any of the OEMs to contemplate a new platform with new engines, given the troubles they have had with the 380s, the Rolls Royce engines, the 787 grounding 19 months after entering into service, the MAX issues, the delays that were year-after-year for Airbus’ 320 program, I think they should focus on their customers now and delivering on the promises they have made, and delivering them on spec, on time.
Ron Epstein: Then maybe one last follow-up to that, how are you planning your own delivery horizon with your customers on the MAX 8, given–or the MAX just in general, given all the uncertainty with the FAA inspections and everything that’s going on?
Aengus Kelly: We just work with them, you know, and we work closely with Boeing. The customers want the aircraft as soon as they can deliver them, and we try and get them with Boeing the most accurate delivery dates we can. At the moment, that’s not possible, but hopefully we’ll have clarity as to what the delivery profile will be for ’24 and ’25 by the time we talk again.
Ron Epstein: Got it, all right. Thank you.
Operator: We’ll go next to Stephen Trent with Citi.
Stephen Trent: Good morning everybody, can you hear me okay?
Aengus Kelly: Yes.
