Ladies and gentlemen, welcome to BOC Aviation Limited's 2023 interim results conference call. I will now hand the session to Mr. Timothy Ross to begin today's presentation. Mr. Ross, please begin.
Thank you, Diana, and welcome everybody to BOC Aviation's earnings call to discuss our interim results for the six months ending the 30th of June, 2023. With me today are our Deputy Managing Director and Chief Financial Officer, Steven Townend, and our Chief Operating Officer, Tom Chandler. Please note that some of the information you'll hear during our discussion today may consist of forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. You should not place undue reliance on any forward-looking statements, and you should review our results announcements for full details. Please also note that all currency references in today's call are in U.S. dollars.
A copy of our earnings announcement is available both via the Hong Kong Stock Exchange and in the investor section of our website at bocaviation.com, and a conference call presentation is also available in the investor section of our website. This call is being recorded and will be available for replay from our website within the next 24 hours, as is a transcript of today's discussion. I'll now turn over the call to Steven Townend for his comments.
Thanks, Tim, good evening to everyone on the line. Thank you for joining us for our 2023 half year results earnings call, where a recovery in demand for leased aircraft underpinned a strong H1 performance. Our CEO, Robert Martin, is currently enjoying a well-earned vacation after celebrating his 25 years as CEO and won't be joining us today. We are delighted to report a net profit after tax of $262 million for the H1 of 2023, equivalent to earnings per share of $0.38. This compared with core net profit after tax of $206 million in H1 2022, and a reported net loss after tax of $313 million, reflecting the Russia-related write-downs. Net assets per share at period end were $7.72.
Our board has declared an interim dividend of $0.1131 per share, payable to shareholders of record on 29th of September, an increase of 27% on the interim dividend paid for 2022, and is consistent with our practice of distributing 30% of net profit after tax for the H1 . The company's policy remains to make a total annual dividend payment of up to 35% of full year net profit after tax. Adjusted for non-recurring lease termination income, our total revenues and other income rose 9% to more than $1.1 billion for the H1 , which we ended with total assets of $22.9 billion as our fleet returned to growth.
Our collection rate remained over 100%, reflecting the continued recovery of airline customer payments from previous years. This lifted our operating cash flow net of interest expense to a H1 record of $721 million. We finished the half year with cash and undrawn committed liquidity of over $5.7 billion. Looking at the industry more generally, the health of our airline customers has continued to improve, driven by growth in their passenger businesses and rising ticket prices. The International Air Transport Association recorded 47% growth in passenger traffic for the first six months of 2023 compared with the prior year.
On the back of better than anticipated traffic volumes, IATA doubled its net profit estimates in June for its member airlines to $9.8 billion for the year from the $4.7 billion anticipated at the end of 2022. It upgraded earnings expectations for all regions, with the biggest increases evident in Europe and the Middle East. Some of the macro influences that have been earnings headwinds for the airline sector in previous periods appear to have eased in the H1 of 2023. The average price for Singapore Jet Kerosene fell 21% to just under $100 per barrel in the H1 of 2023 compared to the previous year, helped further by a drop in the U.S. Dollar Index of 10% from its Q3 2022 high.
Interest rates, however, remain elevated and have increased the cost burden for both our airline customers and ourselves, although the rate of change appears to be easing and is being offset at the revenue line. For our airline customers, this has been driven by higher airfares, and for us, ourselves, it has been passed through in higher lease rates for recent deliveries. Airline profitability is improving around the world. In the United States, Delta Air Lines generated the highest revenue and profit of any quarter in its history in June, and United Airlines also reported a record profit. Across the Atlantic, Ryanair produced earnings at an all-time high and almost four times greater than last year's June quarter. While here in Asia, Cathay Pacific generated a H1 2023 profit of HKD 4.3 billion, its first semi-annual profit in over three years.
Higher rates of inflation have influenced airfares and airline results. For lessors, they have fed through into the value of aircraft, which for the most part have regained long-term trend values. Airbus and Boeing produced a combined 582 aircraft in H1 2023, 14% more than the same time last year, while passenger traffic grew at more than three times that rate. This has coincided with the level of parked aircraft returning to traditional normalized levels to put upward pressure not just on aircraft values, but also on lease rates.
We sounded our optimism in respect of the Indian market on our last call, and this has materialized in Air India and IndiGo, having placed the two largest aircraft orders in airline history, totaling almost 1,000 aircraft. While rebounding more slowly than originally anticipated, growth in China's outbound passenger flows should sustain the Asia Pacific market's impetus over the balance of this year and into 2024. The number of domestic flights now exceed 2019 levels, while international and regional flight numbers were at 53% of those as at end of July, up from less than 10% at the beginning of the year. We expect this renewed activity to be reflected in Chinese airlines aircraft orders and their demand for leased aircraft, especially following the expansion of permissible countries to which Chinese can travel from 60 to 138, announced last week.
Just turning to our Board of Management, we welcomed our new Chairman, Mr. Liu Jin, in April, as he took over from Mr. Chen Huaiyu. In July, Tom Chandler was appointed Chief Operating Officer, replacing David Walton, who retired at the end of H1 2023, and whom we thank for his many years of service. I'll now hand the call over to Tom to speak to our operations and business development, and then I will return for a more detailed review of our P&L and balance sheet.
Thank you, Steven. Our operational report for H1 2023 is as follows: We delivered 16 aircraft to seven different airline customers, of which one was purchased by the customer at delivery, giving us 15 net new aircraft deliveries for the half and taking us past the 400 owned aircraft milestone. We also signed lease commitments for 45 aircraft during the period. As at 30th June, our total fleet stood at 652 aircraft, comprising 404 owned, 35 managed, and an order book of 213. These 213 aircraft represent a record high committed CapEx of $11 billion. This strong pipeline underpins our future growth and comprises the most popular new technology aircraft types, predominantly Airbus A320neo family and Boeing 737-8.
These committed deliveries give us an excellent baseload of CapEx each year and a valuable positions given the supply issues that the industry faces and the high demand environment described earlier by Steven. Our new deliveries in the H1 of the year were primarily narrow body aircraft, although we also added another four Boeing 787 deliveries to our balance sheet. All of our new deliveries were fuel efficient, latest technology aircraft and included our maiden delivery of five A220 family aircraft, as well as three 737-8 and four A320neo aircraft. We continue to see the impact of manufacturer delivery delays, with 12 aircraft, which were scheduled for delivery in the H1 of 2023, being delayed into the H2 . Of the deliveries that did occur in the H1 , a significant number occurred in June, delaying our revenue.
We believe that supply chain and labor issues will continue to impact our OEM partners at least the remainder of this year, and may take another one or two. Have stabilized, then the net effect will abate. To offset the effect of delays, we've made considerable progress in sourcing replacement CapEx and have increased committed deliveries for 2023 to 41, from the 24 reported in March. Adding new positions to our 2023 and 2024 delivery skylines has been a key focus, and in H1 2023, we transacted for seven A320neo aircraft, scheduled for delivery in H2 2023, 6 737-8, four of which will deliver this year with a further two next year, and two A321neo and five A220-300 scheduled for delivery this year.
While we continue to deliver new and used aircraft around the globe, in H1 2023, our new aircraft deliveries were concentrated in the Americas. This reflects the demand and earnings growth that this region is enjoying. With deliveries to American Airlines, JetBlue, Lynx, and Viva Aerobus, and looking ahead, with the exception of five recently sourced A320neos, all of our 2023 order book deliveries are placed with airline customers, with around 70% of 2024 deliveries also placed. During the half, we transitioned eight used aircraft to airline customers, with only two own single-aisle aircraft off lease at the end of the period, one of which is already committed for lease. This compares with 17 aircraft at the same point last year and reflects the robust demand that currently exists for the young aircraft of which our fleet comprises.
The weighted average age of our owned portfolio was 4.7 years at the end of June, remaining one of the youngest in the aircraft operating leasing industry. We also continue to have one of the industry's longest weighted average remaining lease terms for our owned portfolio at eight years. 71% of our fleet is latest technology, as is 100% of our order book. The average appraised value of our fleet was $20.3 billion, representing a 5% premium to the fleet's net book value of $19.3 billion. We sold three aircraft from the owned fleet during the H1 2023. Have letters of intent already signed for 11 aircraft sales in the H2 , suggesting a full-year sales pattern similar to that of 2022. Moving on to ESG.
Having exceeded our stock exchange ESG KPIs for the three years ended 2022, we've set ourselves new targets for 2025. When compared with 2019, we aim to reduce our CO2 emissions per average headcount by 20%, cut our paper usage per average headcount by 65%, and reduce electricity consumed per headcount by 55%. We are implementing strategies to achieve these. During the H1 of 2023, we lifted the number of community-focused events for which our colleagues volunteered, completing nine as compared to six events in the H1 of 2022. In Singapore, we worked again with regular partners, Food from the Heart and Waterways Watch, as well as the Red Cross. We donated used monitors to TOUCH Community Services. Elsewhere, we worked with the homeless and the hungry in London and New York, respectively, and collected litter in Tianjin.
We also continued to deliver on our previously announced governance and diversity commitments. That concludes the overview of our operation business performance for the H1 of 2023, and with that, I'll now turn back to Steven for a deeper review of our financial performance and outlook.
Thank you, Tom. As I mentioned earlier, we reported net profit after tax of $262 million for the H1 of 2023, equivalent to earnings of $0.38 per share and our best H1 performance since 2020. Total revenue was $1.1 billion and continues to be well diversified. This represents an increase of 9% when adjusted for the $223 million in non-recurring income arising from termination of leases that we recognized in H1 last year. Lease rental income rose 7% to $940 million as we grew the fleet and as our lease rate factor improved. Our gains on aircraft sales of $14 million were in line with H1 2022, with sales timings expected to be concentrated into the H2 of the year, as Tom mentioned.
Other income rose to $46 million, primarily due to the release of unutilized maintenance reserves collected in prior years and tax rebates. Interest and fee income was down $12 million to $40 million in H1 2023 because of lower contributions from predelivery payment financing. From a cost perspective, our two largest expenses continue to account for 90% of the total. Depreciation, which remains our largest expense, was flat at $393 million compared to H1 2022, reflecting the pace of aircraft deliveries that occurred towards the end of the H1 . Finance expenses, our second-largest item, rose by 30% to $297 million.
This was mainly due to a higher cost of debt of 3.9% per annum in the H1 of 2023, compared with 2.9% for the same period last year. Lease rate factor increased to 9.8% from 8.9%, reflecting the effects of improved lease pricing and interest rate adjustment mechanisms in our leases. Net lease yield rose to 7% from 6.8% in the H1 of 2022. This was slower than the improvement in lease rate factor, primarily explained by the higher cost of funds recorded during the period. Impairment of aircraft declined to $3 million compared to last year's $47 million, excluding the effects of the Russia-related write-downs that featured in 2022's H1 results.
Impairment losses on financial assets of $3 million compared favorably with $6 million in the H1 of 2022. Looking at the balance sheet, we ended the half with total assets of $22.9 billion, funded by debt of $15.8 billion. Total equity increased to $5.4 billion, compared with $5.2 billion at the end of 2022. This was mainly attributable to profit for the period and partially offset by the payment of dividends amounting to $123 million. Our debt level increased to $15.8 billion compared to end 2022 as we funded our fleet growth, with gross debt to equity stable at 3x as compared with 2.9 in December last year.
Rating agencies S&P and Fitch both reaffirmed our A- credit rating and stable outlook during the H1 of 2023. We raised $1.7 billion in new financing, comprising $1 billion from the debt capital markets, with a further $660 million drawn from banks. Cash flow generated from our financing and operating activities allowed us to fund our CapEx and repay $1 billion in maturing bonds and loans. We have $1.4 billion in debt obligations scheduled for repayment in the H2 of 2023, which, together with our anticipated CapEx, can be funded from our cash flow and our committed liquidity of $5.7 billion.
Finally, excluding the effects of the write-down of aircraft in Russia, our effective tax rate was up slightly at 11.4% in the H1 of 2023, compared with the H1 of 2022's 9.9%. To close, our operating environment is the strongest that it has been for almost four years as we move on from the effects of a pandemic and Russia-related write-downs. We are grateful for the support of our board, our staff, and our other stakeholders throughout this period. Passenger traffic growth remains robust, underpinning everything from airline cash flows to aircraft values. This positive backdrop is once more allowing our team to focus on growing the balance sheet and regaining the momentum that has always characterized our industry and our company.
We remain well-positioned to capitalize on growth opportunities, given our strong liquidity and valuable pipeline of committed deliveries, to which we are continuing to add through selective purchase and leaseback. We're confident that the progress that we've recorded so far in 2023 will continue to translate into returns for our stakeholders and are excited about our prospects for the future. This concludes our review of the industry, our company's financials, and our outlook, and I'll pass the call back to Tim.
Thanks, Steve. This wraps up management's formal commentary. We now have time for Q&A, and out of fairness to others, request that each participant restrict themselves to one question and a follow-up, unless time permits for additional queries. I'll hand the call back now to the operator for the Q&A session.
Thank you, Mr. Ross. We will now begin the question-and-answer session. In the interest of time, participants are limited to one question each. If you have any follow-up questions, please join the queue again. In between questions, please expect a brief silence as we open the phone line for you to ask your question. Participants with questions to pose, please press star one one on your telephone keypad, and you will be placed in a queue. To cancel the queue, please press star one one again. Once again, star one one on your telephone keypad now. Our first question is from Miss Hillary Cacanando, Deutsche Bank. Please go ahead.
Oh, hi. Thank you so much for taking my question. I, I just, I have kind of like a higher level question. I know there's generally a lag between the increase in interest rates and, and lease rates, and, you know, there's been a little bit of a headwind for the industry because of the elevated interest rate environment. How do you see that playing out next year? I, I think the consensus is that, you know, the interest rates will, you know, start going down, will be, you know, going down next year. If we do see lower interest rate environment next year, do you see the, that, you know, headwind turning into a tailwind starting next year?
How should we think about the, the whole interest rate environment and the lag between that and the, and the lease rate going forward?
Hi, Hillary. Steve. Yeah, thanks for the question. I think the way that we think about this is that, as you say, there's typically a lag, but the lag does apply both on the way up, as well as on the way down. You have to remember there's two sides to really our revenue generation. One is where we are providing financing, so where we are funding an airline's deliveries. That does tend to track interest rates fairly closely, although with a lag, because what we are competing against there is just other forms of financing, which will move with interest rates.
The other side of our business is where we have our own order book and where we have aircraft delivering from that, which is affected by interest rates, but it's also affected by supply and demand for aircraft. I think what we are starting to see now, as traffic growth has come back strongly, is increased demand for aircraft, and that demand increasing faster than the manufacturers can increase supply. What we should start to see, as we move through into next year and beyond, will be that those aircraft that we're placing now for delivery in those future years, should be at better lease rate factors than we have been able to achieve in recent years.
If at the same time you then do get interest rates falling as well, then correct, you know, you will get a tailwind if provided all that stacks up.
Great. Thank you. That's, that's really helpful. And I just have one more follow-up question. You sold three aircraft the H1 versus five last year. Could you just remind us what, remind us what your sales strategy is, and how does that, like, you know, like, how old the aircraft are generally that you're targeting, how does that kind of differ from, you know, some of your other competitors in terms of the strategy?
Okay. Yeah. So really, I think, you know, we, we use our aircraft sales strategy as the means by which we manage our portfolio, and so as to achieve a number of different things. The, the bulk of what we sell will be, have an average age higher than the average age of the fleet. It will have a shorter lease term remaining than the average lease term remaining of the fleet, because that is what is enabling us to keep that young fleet, keep the longer average lease term remaining, and to turn over the equity from those aircraft back into the young planes and keep the overall fleet metrics that we want.
The only other reason sometimes that we would sell planes, is, you know, if, for example, we contract to do a particularly large transaction with an individual airline, and in the same way that a bank might syndicate part of a deal, we might use the aircraft sales strategy as a way to reduce our, our risk to a, a specific situation. Usually it falls into one of those. The, the way to think about it is really that's how we manage the portfolio on an ongoing basis.
Got it. Got it. Thank you so much. This was really helpful.
Thanks, Hillary.
Thank you. Our next question is from Mr. Parash Jain, HSBC. Please go ahead.
Hi, thank you. Hi, Steve. If I may just carry on from the previous, previous question. Can you help us understand at current interest rate environment, assuming probably the interest rates will remain elevated for all the way through 2024, based on your upcoming refinancing, what will be the best way to think about your effective, effective interest rate going into H2 of this year and, more importantly, for 2022?
Sorry, Prash, could you, could you repeat the, the, the H2 of the question? I, I, I got the, I got the context of the H1 , but didn't hear the specific question in the H2 .
What I'm understanding is that your effective interest rate is at about 3.9%, based on your, your upcoming maturity of previous, previous bonds. How should we think about if the interest rate environment remains to this state all the way through 2022?
The, so I think it, it's, obviously, it depends on the weight of what happens to the pattern of, of interest rates and, and how that, yeah, evolves as, as we move forward. Clearly, the, the pace of change slows down as, as we move forward because increasing amounts of funding are, are already at new levels. The, I, I think the, you know, the way to, to think about this is, for us, new CapEx is good because in almost all cases, that is accretive in terms of lease rate factor. So even though we're funding it at higher rates, to the extent we need to go out and raise fresh funding today, it should enable, over time, expansion of that net lease yield.
What's actually, and it's slightly counterintuitive, is, is not so good for us, is not to grow in this environment, because then you're just over time ending up with a higher cost of funding on the same portfolio. So as long as we're, we're maintaining that, that growth, then I think, you know, we should be always staying ahead of it.
No, I mean, that's helpful. Just, Steve, if I may, I also take the liberty to ask a follow-up question. Going into the H2 , can you talk about is the purchase and leaseback market is getting increasingly difficult, just in case if the scheduled deliveries are pushed forward?
Yeah, sure. You know, if I, if I look, you know, but what we've already been able to achieve in the H1 , you know, since we spoke to everybody earlier in the year, we've already been able to increase the, the number of deliveries that we have. You know, when we spoken to you before and when we spoke at our Investor Day, you know, we spoke about having a target CapEx each year of, you know, at least $4 billion. I think, you know, if we look at the progress that we are making, we're making good progress towards that. The, we're still seeing, you know, in today's market, that we continue to, to pick up new transactions, and we continue to see that moving forward.
I think also, as we move into this higher interest rate environment, it becomes increasingly challenging for those competitors that aren't investment grade. You see the gap between the way the investment grade guys are able to fund themselves versus the rest getting bigger. I, I do see us being able to, to continue to, to make up that shortfall to the extent it occurs.
Lovely. Thank you so much, and have a lovely day. Bye.
Thanks, Prash.
Thank you, Prash. The question and answer session is still open. If you would like to ask a question, please press star one one on your telephone keypad now. If you would like to ask a question, please press star one one on your telephone keypad now. Our next question is from Amy Chen, Citi. Please go ahead, Amy.
Hi. Hi, this is Amy Chen from Citi Research. As we've communicated before, maybe the delays in aircraft deliveries has pressured on our net lease yield, because we can't reprice our asset as fast as our liabilities are being repriced. How long do you see the supply chain issue to persist in the H2 of this year and also going forward in the next two years? Thank you.
Okay. That's... Maybe, maybe I'll let Tom take that one, Amy, and, because he's much more closer to the discussions that we have with the manufacturers.
Yeah. Thanks, Steve.
Sure. Thank you.
Yes, Amy, we do see the supply chain issues continuing, as I mentioned, at least for the remainder of this year and another one-two years. Obviously, the manufacturers are motivated to work very hard to address this, which they continue to do, and our discussions with them indicate that they are taking, you know, all the measures that you would expect them to take. As I mentioned, the position where it stops having a net impact on the deliveries is where the delays stop getting worse, and then they stabilize, and then they try to recover back to the original timings. We do think that the net impact will reduce before you start seeing the reporting that the manufacturers are back delivering to the original schedule.
Thank you, Tom. That's very helpful.
Thank you, Amy.
Okay.
The Q&A session is still open. If you would like to ask a question, please press star one one on your telephone keypad now.
We've got questions. We're very happy to end the call now. I'd like to thank everyone for their participation today. Please do not hesitate to contact myself or Kelly at our email address, which for me, is timothy.ross@bocaviation.com, should you have any follow-ups. We look forward to speaking you, to you in the weeks ahead. Thank you very much.
Thank you, Mr. Ross. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Thank you.