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Text: Earlier today, we published our results for the second quarter of 2021.
This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense items.
These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today, August 5, 2021.
In addition, certain financial measures we may be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on equity are non-GAAP measures.
This release can be found in both the Investors and Press section of our website at www.
Unauthorized recording of this conference call is not permitted.
Since our last call with you, the recovery of air travel has varied significantly by geography based on the status of the pandemic in each location, vaccine availability and travel restrictions.
In other countries including many in Asia, there remain headwinds to recovery with lower vaccination rates and more aversion to opening borders.
Overall, given the Delta variant surge, we intend for you to hear from us today as always our balanced view on the state of the industry.
Our optimism is rooted by the rebound in air travel we've all seen and the conversations we have with our airline customers, who are adjusting to and planning for ongoing revival of passenger traffic.
At the same time, given COVID-19 complexities and uncertainties, which vary by country, we are realistic that we do have airline customers continuing to struggle with the most prolonged downturn in our industry's history, and that has continued to impact our results.
For the second quarter of 2021, we're reporting $492 million in total revenues and diluted earnings per share of $0.75 a share, down 6% and 41%, respectively, compared to the prior year's second quarter, which, for the most part, was a pre-pandemic quarter.
Our results this quarter were primarily impacted by approximately $87 million of rental revenues we did not recognize in the quarter due to cash versus accrual basis revenue recognition and lease restructurings.
I'll discuss this more momentarily.
While we took delivery of about $1 billion in new aircraft in the second quarter, that was $200 million less than we originally anticipated, and 50% of these deliveries took place in the month of June, providing a minimal contribution to the full quarter, but providing long-term rental contribution thereafter.
We're pleased that our collection rate improved in the second quarter to 87% as compared to 84% in the first quarter and our lease utilization rate was strong at 99.7%.
Importantly, our net deferrals balance continues to decline to $115 million today -- as of today from $131 million as of early May when we last spoke, with now more than half of the deferrals granted to date having been repaid.
The decline in our deferrals balance contributed to the increase in our operating cash flow, which is up nearly 30% for the first six months of 2021 versus 2020.
Now as I highlighted earlier, revenues were impacted by $87 million from cash basis accounting and lease restructuring agreements.
$42 million of this quarter came from lessees on a cash basis where the lease receivables exceed the security package, and collection was not reasonably assured.
It's important to note that approximately 2/3 of the $42 million is attributable to one customer, Vietnam Airlines, where we have 12 young A321neos and four 787-10s on lease with one of those Neos being owned by one of our management vehicles.
While we did receive a subsequent payment from Vietnam in July, we expect reduced level of rental payments to continue during 2021 as we work through these matters with the airline.
We believe the country of Vietnam and the airline have a bright future despite the significant impacts that pandemic has had on them to date, and that is in the best long-term interest of ALC for us to continue working with the airline toward payment and resolution.
The remaining $45 million of the $87 million was related to lease restructurings.
As I said in my initial comments, the recovery and health of our airline customers vary significantly by country and region.
And as such, we expect that we may need to continue working with our airline customers on accommodation requests, including restructurings.
However, as I told you last quarter, the frequency of these requests is declining meaningfully.
We're very pleased to report that in the second quarter, we successfully sold our unsecured claim in the Aeromexico bankruptcy.
Now Greg will elaborate further on this in his remarks.
But consistent with the original expectations we shared with you months ago, our 737 and 787s remain at Aeromexico as these young aircraft combine the backbone of the airline fleet.
In fact, we have three more 737-9s yet to go in future delivery to Aeromexico.
As in this case, with others and many in our customer profile, our relationship with the airline and modern aircraft that they have on lease from ALC remains a key differentiator.
Our lease placements remained strong with 90% -- 93% excuse me, of our order book placed on long-term leases for aircraft delivering through 2022 and 80% through 2023.
And our order positions continue to position us very well for the future.
I want to remind all of you that ALC has $27.1 billion in rental commitments on our current fleet and forward order book placements.
We're having robust discussions with our airline customers on new aircraft placements.
Specifically, we've seen increased interest in our new single-aisle aircraft, including the A321neo, and now placements of our A220s.
In addition, we're seeing additional demand for the MAX, and in fact, have reinstituted previously canceled MAX aircraft for a few of our customers.
Importantly, lease rates for new single aisles are showing improvements.
Many of you probably read, in fact, about the European Green Deal Legislative Package known as "Fit for 55", which aims to cut 2030 net greenhouse gas emissions by 55% compared to 1990 levels.
An important proposal within this package is the integration of advanced sustainable aviation fuels, which can reduce emissions by up to 80% as compared to traditional jet fuel.
Our young modern aircraft are equipped to handle sustainable aviation fuels.
And when combined with the benefits already achieved by operating new aircraft, including lower maintenance costs, lower fuel burn, lower NOx emissions, smaller noise footprint.
These elements only further aid an airline's business case to operate a young, modern aircraft like those in our fleet and order book.
Looking ahead, although we have OEM contractual commitments to take delivery of 52 aircraft in the second half of 2021, you're all aware of Boeing's delivery pause on the 787.
As the commitment table in our 10-Q shows, we were scheduled to take delivery of 10 787s through the end of the year.
It is unclear at this juncture how many 787s we will take for the remainder of this year.
But our best estimate today is approximately three of these aircraft.
Furthermore, we have recently been notified by Airbus of some slippage in our A321neo deliveries attributable to COVID or supply chain issues.
Given these OEM delays, we currently expect to take delivery of approximately 36 aircraft out of the 52 contracted aircraft stream, and that translates to approximately $1 billion of deliveries to occur in the third quarter and $1.6 billion to occur in the fourth quarter of 2021.
Given these OEM delivery delays, we will significantly scale back our aircraft sales for the remainder of this year, and possibly into early 2022.
And for our growth and to help fill this shortfall in aircraft investments, we see the current environment continuing to favor buying attractive assets versus selling them.
I want to end my comments as I begin by saying that we are encouraged by the resurgence in air travel occurring throughout many parts of the world, and believe the aviation industry is well set for ongoing recovery.
We will continue to work through any customer challenges, which are to be expected, given that the Delta variant may temporarily dampen or prolong the recovery and many countries are still battling through this pandemic.
However, we strongly maintain our long-term view that international air traffic will follow the lead we've seen from domestic travel recovery and that over time, global air travel will recover back to levels witnessed pre-pandemic driven by the need and desire of people to travel around the world.
Reflecting this continued confidence, our Board of Directors has declared another dividend of $0.16 per share for the second quarter of 2021.
We're all encouraged by what we've witnessed over the last several months, which indicates that the traveling public is eager to get back in the air once they feel safe and they're allowed to do so with minimum limitations.
As we look around the world, there seems to be very much a 2-tier recovery occurring.
The first is in the developed versus emerging markets, with countries and regions with the highest incomes getting vaccinated as much as 30 times faster than those with the lowest income brackets.
As the vaccination rates across the globe increase, we should see a steady reopening of air travel.
IATA has cited research for medical organizations around the world, which has shown that vaccinated travelers pose less risk to local populations, and data shows that pre-flight testing can help reduce risks associated with unvaccinated travelers.
In a study also conducted by IATA, 85% of the respondents agreed in some regard that they will not travel if there's a chance of quarantine at their destination.
Yet at the same time, 86% said we're willing to undergo COVID-19 test as part of the overall travel process.
So to the extent governments can further move past broad border closures and quarantines and allow vaccinated travelers or those with a negative test, this could significantly benefit the further rebound in air travel.
We are hopeful that increased vaccination rates in key markets will ultimately drive reopening in other locations even if the vaccination rates in those areas are lower than in the most developed countries.
The second recovery tier is domestic versus international travel with domestic travel improving more quickly and international travel growth is lagging.
Domestic travel has certainly been afforded the opportunity of late to capture demand that international travel has not as many travel restrictions remain in place.
And we have seen proof of that in the latest travel data for the last two or three months.
Per IATA's latest release for June 2021, traffic industrywide domestic RPKs were down only 22% as compared to June of 2019.
Whereas international, they were down 81% versus June of 2019.
If we look at even more information from EUROCONTROL, the same trend exists.
For example, in the United States, one of the most recently reported week, U.S. domestic passenger airline departures were down only 18% as compared to 2019 levels, whereas international was down 37%.
Similarly, in China, domestic traffic recorded an increase of 7% above January 2020 levels, whereas international flights were suppressed at nearly 70% below January 2020 levels.
In Europe, domestic demand is driving traffic volumes within countries, including Spain, France and several others.
Obviously, we're eager to see how the progress, as the summer comes to an end, will develop.
And we would be naive to think that recovery will not continue to go on waves depending on the evolution of COVID variants and government policies impacting reopenings.
However, these data points reinforce our views that there is significant pent-up demand for air travel seen via domestic travel recovery.
For the year 2019, global scheduled airline passengers were over four billion, one-way trips.
And IATA forecasts that by the end of '23, we should be -- or could be at 105% of 2019 levels.
We believe that the rebound in passenger traffic will ultimately be driven by continued vaccine rollout and the continuous removal of travel barriers and that we could see this forecast ultimately surpass perhaps even more quickly.
Our airline customers are witnessing the same trends as we are.
And as a result, we are having productive discussions with them on new lease placements, and our deliveries are ongoing.
In the second quarter, we delivered new single-aisle 737 and A320, A321neo aircraft in Europe, Middle East and Latin America, and new wide-body aircraft to China, Europe and the United States.
We also continue to lease used aircraft.
These are the aircraft we agreed to purchase from Alaska Airlines when we placed the new MAX aircraft contract with Alaska in late 2020.
We leased them back to Alaska, and the young A320s will become a meaningful component of Allegion's fleet in 2022 and 2023.
Airlines are continuing to choose to operate younger aircraft like those in ALC fleet, and delivering from our order book.
In fact, as of the end of June, industry information indicates that 88%, I repeat, 88% of the aircraft under the age of five years were back in service.
And 78% of aircraft in the age range of five to 15 years old were in service, whereas only 63% of aircraft over the age of 15 were back in service.
As John mentioned earlier, with sustainability initiatives front and center, we believe operation of modern, fuel-efficient aircraft will continue to be the trend on a global scale.
You are seeing this with announcements from airlines throughout the world.
United Airlines recently placed an order for over 270 Boeing MAX and Airbus A321neo aircraft, which will replace older aircraft in their fleet and lead to significant improvement in fuel efficiencies, reduction in carbon emissions as they strive to reduce greenhouse gas emissions, 100% by 2050.
You have also seen similar announcements on the tackling of sustainability initiatives by the utilization and purchase of new aircraft from airlines, including Korean Airlines, which committed to reducing greenhouse gas by introducing new generation aircraft like the 787-10.
Korean has a number of 787-10 aircraft delivery from ALC over the next several years.
Alaska Airlines also recently placed a direct order for a substantial number of new 737 aircraft to achieve better fuel efficiency, and the airline is also leasing 13 new 737-9 MAX aircraft from ALC with deliveries beginning in the fourth quarter of this year.
While the pandemic to some degree, temporarily overshadowed the industry's commitment to advancing sustainability initiatives, it is still very much in the forefront in the minds of our airline customers making our young fleet and order book of modern technology aircraft even more critically needed than ever before.
I believe, over time, our industry will continue to evolve to tackle the critical changes we need in terms of fleet modernization, infrastructure investment, etc, to better our environmental footprint, lower aircraft operating costs and increase overall operating efficiency.
I want to expand on the details, underlying our financial results for the second quarter.
And I would like to remind everyone that for comparative purposes, the second quarter of last year was not fully impacted by the pandemic.
Over the past year, despite the pandemic, we have made over $3 billion in aircraft investments, which has benefited our revenue line.
However, as John mentioned, revenues in the quarter were negatively impacted by $87 million from lease restructuring agreements and cash basis accounting, of which $42 million came from lessees on a cash basis.
This compares to $49 million in the first quarter and $21 million in the fourth quarter of last year.
Hopefully, we'll have a favorable resolution with Vietnam and other cash basis lessees by the end of the year.
But until then, we expect that our cash basis numbers will remain under pressure.
In total, our cash basis lessees represented 10.9% of the net book value of our fleet as of June 30, which compares to 15.3% in the first quarter of '21 with improvements stemming from the resolution we reached with Aeromexico.
I think it's important to expand upon John's commentary on the sale of our Aeromexico bankruptcy claim.
The sale represents a full recovery of our past due receivables.
So while our earnings were negatively impacted in prior periods, we were able to recoup these losses through the sale.
It is important to note that not all situations will end in this result, but we are pleased with this outcome.
Additionally, I want to highlight our rationale behind keeping customers on cash accounting instead of rushing to enter into restructuring agreements, while the earnings impact in a given quarter would be reduced if simply -- if we simply accepted a lower restructured lease rate and return to accrual accounting.
But that would typically come at the cost of lower economic returns over the life of the new agreement.
We prefer to negotiate rather than to settle, which we believe gives us a better chance at a higher financial outcome in the restructuring process, but this typically takes more time.
So while cash accounting has been a meaningful drag on results.
We are, in effect, taking short-term pain for the long-term gain and preserving economic returns and maximizing shareholder value.
As John mentioned, rental revenues were negatively impacted by $45 million in the second quarter, much of which was attributable to restructuring that took place in prior quarters.
Finally, as of today, our total deferrals net of repayments are $115 million, which is a 12% decline from $131 million we reported on our last call.
Repayment activity has continued with the total repayments aggregating $127 million or 52% of the gross deferrals granted.
These receipts are reflected in our operating cash flow, which has increased significantly and reflects the continued recovery of our airline customers.
Looking at aircraft sales, trading and other activity, you will recall that we noted -- that we were not going to sell any aircraft in the second quarter.
This compares to $18.5 million in gains recognized from the sale of four aircraft and repurchase of $185 million in short-term debt maturities below par in the second quarter of 2020.
Interest expense increased year-over-year, primarily due to the rise in our average debt balances driven primarily by the growth of our fleet, partially offset by the decline in the composite cost of funds.
Our composite rate decreased to 2.9% from 3.2% in the second quarter of 2020.
Depreciation continues to track the growth of our fleet, while SG&A remained largely flattish compared to last year.
Overall, I think it's important to note that despite the continued challenges, we are generating positive margins and returns on equity, which should improve as our customers come off cash accounting as the world continues to recover from the pandemic.
Finally, I want to touch on financing, which continues to provide us a significant competitive advantage over our peers.
We are dedicated to maintaining a investment-grade balance sheet, utilizing unsecured debt as a primary source of financing, and have over $24 billion in unencumbered assets at quarter end.
We ended the period with a debt-to-equity ratio of 2.5 times on a GAAP basis.
We raised $1.8 billion in debt capital during the second quarter, beginning with a $1.2 billion senior unsecured issuance at 1.875%, which represents a record low for our company for a 5-year issuance.
Additionally, we raised another $600 million of floating rate senior unsecured notes at LIBOR plus 35 basis points, which represents another record low for ALC.
We anticipate maintaining elevated levels of liquidity until the broader aviation market recovers.
This concludes management's remarks.

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air lease q2 earnings per share $0.75.
q2 earnings per share $0.75.

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