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Edited Transcript of AER earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 AerCap Holdings NV Earnings Call

DUBLIN Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of AerCap Holdings NV earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aengus Kelly

AerCap Holdings N.V. - CEO & Executive Director

* Joseph McGinley

AerCap Holdings N.V. - Head of IR

* Peter L. Juhas

AerCap Holdings N.V. - CFO

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Conference Call Participants

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* Catherine Maureen O'Brien

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Ettore Carlo Bianchi

Cantor Fitzgerald, L.P. - MD

* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* James Ulan

Crédit Suisse AG, Research Division - Research Analyst

* Jamie Nathaniel Baker

JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst

* Jonathan Morales

Morgan Stanley, Research Division - Research Associate

* Kevin William Crissey

Citigroup Inc, Research Division - Director and Senior Analyst

* Koosh Rohit Patel

Deutsche Bank AG, Research Division - Research Associate

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Ross Harvey

Davy, Research Division - Transport, Distribution and Logistics Analyst

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Susan Marie Donofrio

Macquarie Research - Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the AerCap Second Quarter 2019 Financial Results Call. Today's conference is being recorded, and a transcript will be available following the call on the company's website. At this time, I would like to turn the conference over to Joseph McGinley, Head of Investor Relations at AerCap. Please go ahead, sir.

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Joseph McGinley, AerCap Holdings N.V. - Head of IR [2]

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Thank you, operator, and hello, everyone. Welcome to our second quarter 2019 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Pete Juhas.

Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation, other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call.

Further information concerning issues that could materially affect performance can be found in AerCap's earnings release dated July 30, 2019. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay.

We will shortly run through our earnings presentation, and we'll allow time at the end for Q&A. (Operator Instructions)

I will now turn the call over to Aengus Kelly.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [3]

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Thank you, Joe. Good morning, everyone, and thank you for joining us for our second quarter 2019 earnings call. I'm extremely pleased to report to you, our shareholders, an all-time record quarter, with earnings per share of $2.42. This outstanding result is a product of our unrivaled platform capabilities and our disciplined approach to capital allocation. Our focus on acquiring only the most in demand, new technology aircraft types rather than end-of-line current technology aircraft and selling large numbers of older aircraft at a considerable premium has produced an excellent portfolio. This strategy has also enabled us to repurchase over 40% of our outstanding shares at a discount to book value, while reducing our leverage and maintaining the highest liquidity levels in our industry.

In the last 12 months, we have taken delivery of 77 aircraft, and increased our average leased assets by $2.7 billion. Today, our portfolio is 53% new technology aircraft. This is the highest percentage of any major aircraft lessor in the world. And just as importantly, for the last 8 years, AerCap has avoided ordering any end-of-line current technology aircraft. This barbell approach means we only acquire certain variants of new technology aircraft, such as A320neos and 787-9s, not end-of-line current technology aircraft.

As in our view, this is the best way to maximize long-term returns for our shareholders. This is actually a contrarian view. As many investors and some rating agencies look purely at the average age of a fleet, rather than the components behind it to measure fleet quality. We believe that this approach does not fully capture the risks and the rewards of an aircraft leasing business. Today, AerCap has an order book of 331 of the most in-demand variants of new technology aircraft that will deliver between now and 2023. We are well placed out into the future, including 90% placed in all of our new deliveries through the end of 2021. Relative to our balance sheet size of $43 billion, our remaining forward order cash commitments of $16.3 billion over the next 5 years are very manageable, particularly when this is tied to our industry-leading liquidity position.

This quarter is another example of the consistency of the earnings power of AerCap, which is driven primarily by the capabilities of the platform. The average lease expiry date of our fleet today is the end of 2026. This is almost 7.5 years from now, and it's despite having an older average age of our fleet than several of our competitors.

Like our industry-leading EPS of $2.42, this is a tangible example of the superior capabilities of the AerCap platform. The longevity of our contracted revenue gives a significant visibility into our future cash flows and profits. The consistency and reliability of our performance is one of the key hallmarks of AerCap's business model.

AerCap also has the world's leading platform for the sale of used aircraft. For the last 5 years, we have accounted for a significant portion of all the sales of midlife and older aircraft in the global markets. In an opaque market, that volume of activity gives us tremendous information on advantages and knowledge about aircraft values, which we use to make intelligent decisions that create value for our shareholders. There continues to be very strong demand from buyers for older and midlife assets.

In the second quarter, we continued to sell assets into a strong secondary market, with sales of 22 owned aircraft in Q2 for just over $500 million. We have sold 81 owned midlife and older aircraft in the last 12 months. These sales have reduced our exposure to certain aircraft types, airline credits and recycled capital into more accretive opportunities.

As we look at our capital deployment options between aircraft purchases, delevering, M&A and capital returns to shareholders, it is clear that the discount to book value that currently exists provides us with the greatest opportunity to create value for our shareholders. Given this, we announced a further $200 million repurchase authorization in June, so we have the ability to continue to take advantage of this opportunity throughout the year.

On the topic of the MAX, Boeing continues to work with the civil aviation authorities to ensure the aircraft's return to service, and they now assume they will obtain regulatory approval in the fourth quarter of this year. To date, we have taken delivery of 5 MAX aircraft. We had originally expected to receive 17 this year. The number that we actually receive will ultimately depend on the timing of the fix and when Boeing can deliver the aircraft to our airline customers.

Turning to the demand side. IATA reported an increase in RPK growth of 4.5% in May, which is above the 3.1% posted in March. But below the 20-year average of 5.5%. That growth in May was broad-based, but led by Latin America at 6.5%. Load factors, however, reached a new record for May at 81.5%, which we believe underpins the demand for aircraft. As we said before, the best indicator for AerCap of whether or not there is support for growth at these levels is what is actually happening with our aircraft placement activity every day in the markets, and we continue to see solid demand.

In closing, our record results this quarter demonstrate, once again, the competitive advantages and consistency of AerCap's business. We will continue to run the business to optimize shareholder value and generate sustainable and consistent returns for our shareholders.

With that, I will hand the call over to Pete.

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Peter L. Juhas, AerCap Holdings N.V. - CFO [4]

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Thanks, Gus. Good morning, everyone. AerCap produced a very strong performance in the second quarter. We had record earnings per share of $2.42, a 42% increase from last year. Our book value per share is now $67.08, an increase of 13% over the last 12 months. We've continued to grow by taking delivery of new technology aircraft, and our average lease assets increased by $2.7 billion year-over-year. We completed 82 aircraft transactions in the second quarter, including 17 for wide-bodies. This included purchases of 11 new technology aircraft during the quarter and sales of 22 of our older and midlife aircraft. Our utilization rate remained very high at 99.4% for the quarter. Our average remaining lease term is now 7.4 years, one of the longest of any major lessor. We continue to carry very strong levels of liquidity, and we're now 2x covered for all of our cash needs over the next 12 months. And we continued with our share repurchases and announced a new $200 million program in June.

In the second quarter, we repurchased 3.5 million shares for $169 million. And so far this year, we have repurchased 7.2 million shares for a total of $337 million, which is an average discount to book of 29%. So all together, it was a very strong quarter that reflects our consistent operating performance, the power of the AerCap platform and our disciplined approach to managing our assets and allocating our capital.

Our net income increased by 30% compared to the second quarter of 2018, and our EPS increased by 42% year-over-year to a record $2.42 for the quarter. This increase is the direct result of our capital allocation strategy in 3 key respects.

First, our net income increased as we grew our average lease assets by $2.7 billion, as we've taken delivery of 77 new tech aircraft over the past 12 months.

Second, we sold 22 aircraft in the second quarter for $502 million, and we've sold 81 aircraft over the past 12 months for approximately $1.5 billion. These are older and midlife aircraft from our portfolio that we're selling as part of our strategy to transition our fleet away from these aircraft types and towards a new technology fleet. This strategy has consistently produced gains on sale, including $78 million worth of gains in the second quarter. But more importantly, it's given us proceeds and capital that we can redeploy into other more attractive opportunities.

Third, as we've discussed before, we continue to believe that AerCap's stock is a compelling investment opportunity. By selling older aircraft at a gain and reinvesting the proceeds in a better portfolio at a significant discount to book, we can create significant value for our shareholders over the long term. And this quarter, you can see the impact of that redeployment of capital. While our net income went up by 30% year-over-year, our EPS was up by 42% due to the repurchase of almost 15 million shares since April of last year. And that's basically 10% of our total outstanding shares that we bought back over the past year.

Now we could have held on to those planes or done economically unattractive sale leasebacks instead, but ultimately, we're focused on getting the best economic result for our shareholders. So that's where you can see our capital allocation strategy at work in this quarter's results.

On Slide 6, our total revenues for the quarter were up by 7% year-over-year, driven primarily by the increase in our average lease assets in the second quarter. Our basic lease rents increased to $1.077 billion. Maintenance revenues were about flat year-over-year, and other income was higher in the second quarter of 2019, primarily due to higher interest income.

Turning to Slide 7. Our net interest margin was $755 million for the second quarter, and the increase over last year was due to growth in our basic lease rents, driven by the higher average lease assets. Our average cost of debt for the second quarter was 3.95% before debt issuance costs and fees of about 34 basis points. Including those costs, it was around 4.3% for the second quarter, with the increase from 2018, driven primarily by the roll-off of fair value of debt related to purchase accounting. Our net spread less depreciation was 3.4% for the second quarter, up from 3.2% last year. That was primarily driven by our lower depreciation rate as we reduced the age of our fleet as well as to lower maintenance rights expense as our maintenance rights asset continues to roll off. The average age of our fleet decreased from 6.6 years to 6.2 years at the end of June. We achieved this through a combination of purchases of all new technology aircraft and sales of older current tech aircraft. The average age of our new tech aircraft, which represent 53% of our fleet today is only 2 years, while the average age of our current tech fleet is around 11 years, and we believe this barbell approach is the correct way to manage our portfolio.

As I mentioned before, our average remaining lease term has increased to 7.4 years, one of the longest in the industry, and this gives us strong visibility into our future lease revenues and cash flows.

So effectively, in the second quarter of 2019, we're generating higher returns on a better-positioned portfolio with a lower average age, a higher proportion of new tech assets and a longer average remaining lease term.

Turning to Slide 8. Our net gain on sales was $78 million for the second quarter. During the quarter, we sold 22 of our owned aircraft with an average age of 16 years. That resulted in sales of $502 million for the quarter. Our unlevered gain on sale margin was higher than usual at 18% for the quarter. We've continued to see strong demand from buyers for our midlife and older aircraft. We said in April that we expected to sell about $1.5 billion of aircraft for the full year. Given our sales to date at this point, I think we'll be closer to $2 billion of sales for the full year.

Turning to aircraft purchases. In the second quarter, we took delivery of 11 aircraft for CapEx of around $900 million. That was lower than we had expected because of the MAX delays. As you can see from our supplemental materials, we're now assuming that we'll take delivery of only 3 MAXs this year. Ultimately, of course, the number will depend on when the MAX receives certification and when Boeing recommences deliveries, but that's our best estimate at the moment. So for the full year 2019, we now expect our CapEx to be around $4.5 billion.

Slide 8 -- Slide 9, our SG&A expenses were around $65 million for the quarter, a decrease of 24% from $85 million last year. That $65 million equates to about 5% of our revenues, which shows the efficiency of our platform. The decrease from last year is mainly due to lower compensation-related expenses. As in previous quarters, all the asset impairments in the second quarter related to lease terminations and aircraft sales. The maintenance revenue recognized on the impaired aircraft more than offset the amount of the impairment. Our maintenance rights expense was $16 million for the second quarter, down from $35 million in 2018, and this was primarily driven by the lower maintenance rights asset balance, which has come down substantially since 2014 and is now under $1 billion. But the maintenance rights expense was particularly low in the second quarter based on the timing of maintenance events.

Our other leasing expenses were around $49 million for the second quarter, a decrease from about $68 million last year, and this decrease was due to lower expenses related to lease terminations compared to the prior year period.

Slide 10. We continue to maintain a very strong liquidity position. As of June 30, we had available liquidity of $8.6 billion. That includes our cash, our revolvers, our other undrawn facilities and our contracted sales. Together with our operating cash flows, that gives us total cash sources of $11.8 billion, which is 2x our cash needs over the next 12 months, and that amounts to excess cash coverage of around $6 billion. This is our highest coverage ratio ever and shows our commitment to maintaining a high level of liquidity at all times.

Now this quarter, the number is somewhat elevated because we have very little debt maturing over the next 12 months. But as you can see from the chart, we've exceeded our target level every single quarter.

Finally, on Slide 12, our book value per share -- our book value at the end of June was just over $9 billion, and our book value per share was $67.08 compared to $59.25 last June. That's a 13% increase over the past 12 months. And over the past 5 years, we've grown our book value per share at a CAGR of around 15%. Through our operating performance and capital allocation strategy, we can continue to generate strong growth in book value per share year-after-year.

So to wrap up then, we had a record second quarter, our utilization rate was high. Our fleet continues to grow with the addition of new tech aircraft. We're placed far out into the future, and we continue to sell used aircraft at attractive prices. We ended the quarter with a record level of liquidity. And through our capital allocation strategy, we continue to generate strong double-digit growth in our book value per share. As we look out now at the full year 2019, we currently expect to have core EPS, that is, EPS excluding gains on sale of between $6.60 and $6.80 for the full year.

And with that, now we'll turn it over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jamie Baker of JPMorgan.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [2]

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Starting off with a MAX-related question. Now that Boeing has established its reimbursement pool, how should we think about compensation and how it courses through the earnings model. I realize remuneration hasn't been negotiated yet. I'm just wondering about the mechanics of how you expect to be reimbursed and how we should model for that? Any thoughts?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [3]

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Jamie, it's too early to discuss that. There are various ways that Boeing have to provide compensation. But at this early stage, it's too early to discuss that.

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Jamie Nathaniel Baker, JP Morgan Chase & Co, Research Division - U.S. Airline and Aircraft Leasing Equity Analyst [4]

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Okay, fair enough. Second, on the aircraft sales over the last 12 months. Could you add any color as to how pricing in the recent 6-month period compared to the first 6 months of that period on a like-for-like basis, particularly on the narrow-body side, just looking for how pricing might have evolved over the last 12 months.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [5]

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Sure. I'm very happy to, Jamie. 12 months ago, the market was extremely strong. No question about it. Then as we came into the very end of this year in December with the -- or the very end of 2018, with the markets at -- all financial markets under pressure, coming into the Dublin Airfinance conference in January, we were concerned, would there be as many buyers of airplanes? There were. But I think it's fair to say that at that time, people were more cautious and patient. But certainly over the last 4 months, we've seen a full return to where we were in terms of prices, 12 months ago. So really, I think, any temporary aberration was driven by that December sell-off. But I can firmly say it recovered very quickly as evidenced by our results.

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Operator [6]

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Our next question comes from Ross Harvey of Davy.

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Ross Harvey, Davy, Research Division - Transport, Distribution and Logistics Analyst [7]

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Two for me, with just one clarification. Firstly, can you provide any guidance on the expected gain on sale margin in H2? It was a particularly strong figure in Q2 relative to what we should expect for the second half. And secondly, one maybe for Pete. The quarter-end cash at hand level, just under $1 billion. Does this sort of indicate what you'd establish as a new norm or should it revert back up in the coming quarters? And just on the clarification side, just to doublecheck the core EPS that you outlined for 2019 was $6.60 to $6.80, excluding gains on sale. Is that correct?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [8]

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Yes, Ross, thank you. So I'll take them. First with the last question, yes, core EPS, excluding gains on sale for the year, $6.60 to $6.80, so to confirm that, which is an increase, obviously, from our previous guidance of $6 to $6.20 for the full year.

Second, in terms of gains on sale, we don't project those margins. Although if you look historically, they've generally been between 5% and 10% on an unlevered basis. So obviously, this quarter was higher at 18%, it was significantly higher. And that's really just due to the mix of what was sold. That will bounce around in any particular quarter, and we've shown that before. Last quarter, we had a chart there that showed that. So you can see that move around. But I think, in general, 5% to 10% is a reasonable estimate. But again, it will move around quarter-to-quarter.

And sorry, what was your -- did you have a third question?

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Ross Harvey, Davy, Research Division - Transport, Distribution and Logistics Analyst [9]

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Yes, it was just in relation to the cash at hand. Yes.

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Peter L. Juhas, AerCap Holdings N.V. - CFO [10]

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Yes. So the cash in hand, around $800 million. I mean we had been running that at around $1 billion. And we decided that we can probably bring that down a little bit, so we ended the quarter at $800 million. Again, you can see that, in particular, we have a fair amount of CapEx coming up over the next several quarters, but pretty low debt maturities. I think this is a reasonable level for us to run it at, so I think we could keep it at $800 million. And then you see on the liquidity side, generally speaking, we're at 2x coverage over the next 12 months, which is a very high level.

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Operator [11]

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(Operator Instructions) Our next question comes from Kristine Liwag of Bank of America.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [12]

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For the 95 737 MAX you have on order, how much in predelivery payments have you made? And with the aircraft still grounded, what are your obligations for predelivery payments for the rest of '19 for the 3 aircraft you have said you may receive for the full year? And then also for 2020?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [13]

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Kristine, we don't break out the PDPs by individual aircraft type, that's competitively sensitive information as we have a number of different types on order. We are -- in terms of our contract, of course, whatever obligations we have in our contract, we will comply. But then whatever rights under our contract we have, we will enforce.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [14]

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For -- maybe switching gears. For the 7 -- for Embraer E190, E195-E2s, has the Boeing and Embraer deal on this aircraft changed the demand? And also, what percent of your 35 E2 aircraft through 2021 is already placed?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [15]

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Well, we -- as of almost 12 months ago, we had placed 47 out of the 50 we have on order. So we're, to all intents and purpose, done on that; and we were done some time ago. And which, again, shows you the difference between the capabilities of AerCap and anyone else who's ordered that airplane or most airplanes for that matter. Since the tie-up with Boeing, of course, there has been more interest in the aircraft. One of the issues that subscale OEMs struggle with is a global logistics chain to support an airplane around the globe on a 24-hour basis. And that is where Bombardier and Embraer are at a distinct competitive disadvantage to the giants of Airbus and Boeing, who have that. And so now that Embraer has that or it is coming once the deal closes, we can already see the level of interest in the aircraft picking up considerably.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [16]

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And since you've already placed the majority of the existing orders you have, what else do you have to see to get you to place more orders for the E2? And then also tied to that, right, you already mentioned with the tie-up with Bombardier on the CSeries -- well, it's now called the A220, would that airplane's success with its partnership with Airbus, does that make that asset more attractive to you as well?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [17]

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I think, look, it's just demonstrably true that any airplane that becomes part of the Airbus and Boeing stable just becomes more attractive automatically than it was before. In terms of the E2, we placed an awful lot of them. I think we want to see now how the merger goes with -- between Boeing and Embraer. I think they have a tremendous opportunity to go on the offense with this airplane, provided the integration of the 2 companies is successfully -- is successfully done and done quickly for that matter.

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Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [18]

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And the A220, Gus?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [19]

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And the A220s, I mean, we continue to look at them. On the Airbus side, it's fair to say that the A320neo family airplane has been a tremendous success. We placed all our neos out until 2022, and we've placed more than anyone else in the world. And so that airplane has done very well, and we'll -- we will continue to look at the A220 as well to see how it's commonality evolves with the rest of the highly successful 320 family.

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Operator [20]

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(Operator Instructions) Our next question comes from Catherine O'Brien of Goldman Sachs.

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Catherine Maureen O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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So maybe just a question on the update to your core EPS guidance, pretty impressive given that CapEx has had to come in a bit because of delivery delays. Could you just maybe walk us through what on the cost side of the house has improved versus your prior expectations? Or maybe it's just the lease rentals you're getting on that lower CapEx base? Any puts and takes would be helpful.

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Peter L. Juhas, AerCap Holdings N.V. - CFO [22]

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Sure. So I'd say the main drivers, Catherine, we are seeing some more revenue on the maintenance side. So the maintenance contribution has been higher than what we expected it to be, so that's one driver. Some of the costs have been lower than we expected. So SG&A, as I mentioned, was $65 million. That's a little lower than we had expected it to be. On the leasing expense side, those have been a little lower than we had expected. So there are a number of items that contribute to that estimate. But I'd say those are the main ones.

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Catherine Maureen O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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Great. And then maybe, Gus, a number of your peers have noted that while there haven't been any notable exits, the pace of growth at some of the new entrant lessors out of Asia has slowed over the past year. I guess, first, are you seeing that? And then second, of the more global base of new entrants focused on the sale-leaseback market, have you seen any of those players place orders or material orders with the OEMs? Or they're primarily sticking to the sale-leaseback market still?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [24]

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Well, I think, actually, I understand that China Minsheng has sold most, if not all, of its portfolio. So they'd be the first to turn tail. ICBC also was reported to have sold a significant portion of its portfolio. So look, I wouldn't say that there are many of the new entrants that have significantly reduced their interest in the sector, but I do think some of the new entrants that came over the last 4 or 5 years are beginning to become more rational and more thoughtful in how they deploy their capital. And I think we do see signs of that in the sale-leaseback market. It's still 2013 since AerCap executed its last sale-leaseback transaction. It hasn't stopped us growing faster than anyone in the industry has ever grown before though. So there's plenty of opportunities in this business if you're patient and disciplined. But then by the same token, when the opportunity is right, you do have to be aggressive. But I would say, overall, that there's still an extremely strong bid in the sale-leaseback market for new airplanes. But probably some of the participants are a bit more thoughtful than they may have been in prior years.

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Catherine Maureen O'Brien, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Okay, that's great. And then have you seen any of those sale-leaseback players branch out into placing orders with OEMs?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [26]

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Not many really. I mean, it's a very small group of people who have an order book of more than 10 or 15 wide-bodies and 30 or 40 narrow-bodies, you're into a very small number of operators. So maybe you might see a few of them place some -- a few small narrow-body orders. But I don't see anything dramatic changing there at the top table.

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Operator [27]

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Our next question comes from Rajeev Lalwani of Morgan Stanley.

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Jonathan Morales, Morgan Stanley, Research Division - Research Associate [28]

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It's actually Jonathan on for Rajeev. I wanted your thoughts on the pending wide-body replacement cycle. Boeing's obviously been out talking about how that's something they see maybe early next decade. I just wanted your thoughts on whether that's something you're beginning to see as you start to place aircraft out into 2020s? And how are you positioned for it?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [29]

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Well, I think that goes back to how we set up the portfolio and the consistent strategy we've had for many years, in that we do believe that for the next decade or the best part of it, the 330 and the 777 will be the backbone of long-haul travel. Having said that, as we get to the end of the 2020s, you're going to see those aircraft replaced by the 787 and by the A350, predominantly. And that is something in our position we see. And that's why we were very keen to stress that looking at the average age of a portfolio does not capture the risks and rewards within a portfolio. So based on what I said, you'd much prefer to own a 12-year-old 777 than a 3-year old one. The 12-year old one, you'll have no economic exposure to when the residual value -- when the economic cycle or the replacement cycle, as you say, starts to really kick in at the end of this coming decade. Whereas, if you have one that has 10 or 12 years left to consume, you're in a very different position. And so we would agree that there is a replacement cycle out there. But you need to be positioning yourself for it many, many years in advance, and I don't believe anyone has done the work that AerCap has done to position its portfolio with that barbell approach that we just spoke about.

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Jonathan Morales, Morgan Stanley, Research Division - Research Associate [30]

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And if I could, just one more. Obviously, you guys talked about a higher or elevated sales this year. Is that going to impact your fleet age targets for the year? I know I think you guys talked about expecting that to be in the low 6s this year. Does that change at all? Or does it get pushed out?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [31]

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No, no, it's a -- as of June 30, we were at 6.2 years. And so I think we'll continue to be just over 6 years in the low 6s at the end of the year as well, which is pretty consistent with what we have said before.

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Operator [32]

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Our next question comes from Scott Valentin of Compass Point Research.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [33]

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Peter, you mentioned earlier the contributors to the higher core EPS guidance. I'm just wondering if there's any upside to net interest margin. Rates have kind of maybe -- the trajectory of rates have changed a little bit, at least, mid and long-term rates have come down. Just wondering if there's maybe upside to the 8% margin you guys have talked about.

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Peter L. Juhas, AerCap Holdings N.V. - CFO [34]

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The 8% spread. Yes, so I still expect the spread to be 8% this year. I mean, what we've seen on the debt side and the interest rate side. So you saw our cost of debt this quarter was 4.3%, including all of those fees and costs, which is about 35 basis points. I think, for the full year, it will probably be around 4.2%. But given what we've seen in the market, where we've seen rates going down, and pulling back, right? We've seen a compression of spreads. Today, our funding costs are well below 4%. So if we were to do a 10-year today for instance, we could do that -- a 10-year unsecured bond, we could do that under 4%. We could do a 5-year at just over 3%. So if we see this environment continue, we would see that cost of debt come down, and we would see a benefit to spread.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [35]

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And then just a housekeeping question. On the buyback capacity, how much is still authorized of the $200 million that was announced in June?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [36]

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About $190 million still authorized.

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Operator [37]

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Our next question comes from Helane Becker of Cowen.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [38]

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I think, Peter, you might have said this, what would CapEx have been, had you gotten your full complement of aircraft this year versus what you forecast it will be now?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [39]

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Helane, thanks. So we had originally expected it to be just under $6 billion for the year. And now we're expecting about $4.5 billion.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [40]

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Okay. And then the other question I had was with respect to LIBOR. I noticed you still use LIBOR plus for some of your debt, and it's going away in another 1.5 years or so. And I'm just kind of wondering, are there provisions to replace LIBOR with another benchmark?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [41]

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Well, there are a couple of different benchmarks that are being considered, including SOFR. So I think that we will see a transitioning to that over time.

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Operator [42]

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Our next question comes from James Ulan of Credit Suisse.

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James Ulan, Crédit Suisse AG, Research Division - Research Analyst [43]

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So we've chatted with a handful of fleet managers who are saying that they're expecting neo and MAX lease rates to go up, and we haven't really chatted with enough to form a big sample size. But I was wondering if you could share some feedback that you're getting from your customers about how the MAX is impacting lease rates on, I guess, the neo and also current generation narrow-bodies.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [44]

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It's -- I mean, the MAX has just been grounded for a relatively short period of time. So the impact that it is having is difficult to say also because there's no clarity around when the slots that you had will actually deliver. So you're not in a position to actually really offer them to customers at the moment. So with that lack of clarity, it's not easy to offer aircraft into the market at the moment. As I said earlier on, really since its launch, the neo has been fairly strong and has maintained its strength in the market. Over the course of the last 3, 4 years, we've moved over 200 of them. So we still see solid demand for the airplane. The fact is you're placed out already many years in advance. So there isn't necessarily an impact on a neo placement in any near term because of any issues with the MAX. And as I said, then unused airplanes, we saw a very strong market last year. And there was more -- any fall-off in that was -- happened in December, well before the MAX grounding; and that was due to really the sell-off in the financial markets, which then, obviously, we saw a strong bounce-back in those values more recently.

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James Ulan, Crédit Suisse AG, Research Division - Research Analyst [45]

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What about for lease rates of the current generation technology?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [46]

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Again, look, you've got to look at -- we're at a 99.6% utilization. So it's not that we have a bunch of airplanes on the deck, that we can just put up in the air because of the shortage of MAXs. So we don't immediately generate a gain from that per se.

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Operator [47]

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Our next question comes from Reno Bianchi of Cantor Fitzgerald.

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Ettore Carlo Bianchi, Cantor Fitzgerald, L.P. - MD [48]

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I had a question related to HNA affiliate exposure. My understanding is that you had 3 narrow-body and 15 wide-body. I just want to -- if you can give me a little bit of color. So what is happening there? How late they are with the payment?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [49]

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Sure. Well, you can see our receivables position at the end of the quarter, in totality, was at $60 million, which is below the averages. We do -- we are working with members of the HNA group, be it the different airlines. We do believe that the airlines themselves are viable businesses. And the issue they struggle with, of course, is to some extent, what happened at the parent level, where liquidity had been taken from the airlines. It was encouraging to see the first steps in the closure of the Hong Kong Express sale to Cathay Pacific occur. There's also been another -- other airline AOCs in China. I believe there's also some interest in those. In China, an airline AOC is a very difficult thing to get, unlike in Europe or the U.S. where anyone can set up shop tomorrow. And there, there's only been a handful of them granted in the last several years. So it's quite a valuable asset to have. So there is value in those HNA airlines, and we are working with them, and have worked with them, to be fair, over the course of the last year. But as I said, you can look at our overall receivable position to see where we stand.

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Ettore Carlo Bianchi, Cantor Fitzgerald, L.P. - MD [50]

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Okay. My second question, I want to try to dig a little bit deeper on a gain that you booked in the quarter, the $78 million on the sales of 22 aircraft, it comes down to $3.6 million per aircraft. And when I look at the recent history, the only quarter that you exceed that number was fourth quarter 2018, when you booked about $4.3 million per aircraft. But that particular quarter, you sold aircraft that on average were 12 years old versus 16 this quarter. So the bottom line, it seems like the $3.6 million per aircraft is quite in excess of the average $1.5 million to $2 million. And I think you booked for most of the last 3 or 4 years. I am wondering, was there any particular to the composition of the 22 aircraft than you sold this quarter? Is that more a reflection of the market coming back? What made for that seemingly very high gain per aircraft?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [51]

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So you're right, Reno, it was definitely above the average that we've -- average gain that we've sold out over time. They were older aircraft here, but not that different, really, when you look at it over the past couple of years, what the average has been. It's been in around that 14 to 16-year-old average age. I do think, in some cases, on some of these older aircraft, we're able to extract a lot of value for them. You know that we have a conservative depreciation policy as well, right, for our older aircraft, and that's part of it. But I think the -- so I think that it's -- we're looking at this relative to our book value.

And I think what you can see from this is that it's -- we are able to realize -- more than realize the book value in our older assets. In fact, typically, you see this 18% gain. That's a big margin. And as I mentioned before, that's on an unlevered basis. That shows you how solid that book value is. And so while I wouldn't take that necessarily as an indicator to say that next quarter, across the board, across the industry, you're going to see higher values for your aircraft. I wouldn't say that. But I would say that this is what gives us confidence that our book value is fully real. It's fully realizable and more.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [52]

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And Reno. I mean, as Pete said, it does bounce around. It averages around 8% on a gross basis, which on a levered basis, which is what we are, of course, that's closer to 1.3x our book equity. And I think you can look back over the last 12, 13 years since we've been a public company. And every single year, we've generated a gain on sale selling assets.

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Ettore Carlo Bianchi, Cantor Fitzgerald, L.P. - MD [53]

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And my final question, if I may. At the end of last quarter, you had 398 aircraft that were pledged to different credit facility. How many aircraft were pledged at the end of the second quarter?

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Peter L. Juhas, AerCap Holdings N.V. - CFO [54]

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It's 359 encumbered aircraft at the end of the second quarter.

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Ettore Carlo Bianchi, Cantor Fitzgerald, L.P. - MD [55]

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How many? I'm sorry.

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Peter L. Juhas, AerCap Holdings N.V. - CFO [56]

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359.

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Operator [57]

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Our next question comes from Kevin Crissey of Citi.

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Kevin William Crissey, Citigroup Inc, Research Division - Director and Senior Analyst [58]

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Just one question from me. Big picture, long, long term, can you talk about the opportunities and risks maybe from electric aircraft and/or other technology changes that might be out there that, on a long-term basis, may adjust the market.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [59]

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Well, Kevin, you may have seen that last Monday, Monday of last week, we delivered a brand-new 787-9 that conducted the longest-ever biofuel flight of 12.5 hours. So the challenge of biofuel of course is, can it made efficiently at scale? And the answer to date is no. That may be -- that is a substance that can be used today. And the question is around cost. Electric engines are not that advanced yet, or other types. I think you do have to look at the extraordinary investment that is required to develop an aircraft and an engine. And the risks associated with that development are extraordinary as well, as recent events have shown us. So I think it will be some time before we see the replacement of the current technology engines that we have by an alternative fuel source, given the huge risks involved in doing it. I think it could be quite some time.

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Operator [60]

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Our next question comes from Koosh Patel of Deutsche Bank.

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Koosh Rohit Patel, Deutsche Bank AG, Research Division - Research Associate [61]

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How do you think about the -- how do you think the introduction of the A321 XLR might impact the wide-body replacement cycle and more specifically, valuations and demand for some of the smaller variants of wide-body aircraft such as the A330-200 or 767s or even the 787-8. I know you have a number of 321neo on order as well. Would you consider converting some of these to the XLRs?

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [62]

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The XLR is a very interesting aircraft. It's a very powerful airplane. But what you have to remember is the heart of the A321 market is flying less than 3 hours. That's where the vast majority of the market is because the further an airline goes from home, the greater the risk it carries. Further you go from home, no one knows who you are. And how do you pick up freight and passengers on the far side? That's always the challenge whenever you fly long-haul. So I do think, I will definitely take some of that to the market -- aircraft, there's no doubt about it. I think, again, that you will see it, of course, over time, will it take up some of the routes that are currently flown by wide-body assets that aren't built for those routes. And could it be a better airplane in those routes? Sure, it could, yes. But it's not going to come into service and scale until 2025, 2026, before we see it in scale. It may be even later, to be quite frank. And that's a ways off. And the way we wanted to set up the AerCap portfolio is that, as you mentioned, our A330 fleet, et cetera, at that point in time, because we do believe that there is a replacement cycle coming and we've been getting ready for it for the last 5 years, because we could see it coming given our knowledge that we see and the information we have in the market, that we'll have limited to minimal exposure to that aircraft type in that time frame.

And if we see that the market is more than a niche market for the XLR, we'll certainly convert some of those airplanes that we have of A321s into that aircraft type. But at the moment, the heart of the A321 market is still in the, let's say, less than 4-hour missions, many are less than 3 hours. So an airline will ask itself, if all I'm going to do with that airplane is fly from New York to Miami, do I want to carry all that extra weight that could enable the airplane to fly from New York to San Diego? You're not going to get paid for carrying that extra weight around. So that's the question that airlines will be asking themselves, is it an aircraft that's applicable to more than a niche component of my fleet?

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Operator [63]

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(Operator Instructions) We will take our next question from Susan Donofrio of Macquarie Capital.

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Susan Marie Donofrio, Macquarie Research - Senior Analyst [64]

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Yes, just a question on your customer watch list, would you say it is better, the same or worse relative to a year ago? Feels better, but I just want to kind of circle around.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [65]

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I'd say, overall, it's similar. You're right, fuel is better. Brent, which really is the key index for the global markets, has been in the low 60s. That's a big driver. But overall as you know, look, we'll always have a few customers -- that's just the nature of the business -- that have their issues, and we work with them. But again, I would stress that, as you've seen over the course of the last 13 years as a public company, defaults haven't been a material driver of AerCap's performance over that period of time. So would I expect when the winter comes, 1 or 2 guys to make it? Sure. Is that something out of the ordinary? No, it's not. We don't see anything much different to where we were last year, in fairness. And this time last year, I think we were looking at the Air Berlin and Monarch situations.

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Operator [66]

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That concludes today's question-and-answer session. At this time, I would like to turn it back over to the host for any additional or closing remarks.

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Aengus Kelly, AerCap Holdings N.V. - CEO & Executive Director [67]

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Thank you. Thank you, everyone, for joining us today. Look, to sum up, we delivered another very strong quarter, our best ever, with $2.42 of EPS, we've increased the outlook for the full year, and we'll continue to run this business in a way that's focused on the future and generates the maximum value for our shareholders. We look forward to speaking to you again in 3 months' time.

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Operator [68]

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