Ladies and gentlemen, welcome to the investor call for BOC Aviation Limited first half 2021 results. I will now hand the session to Mr. Timothy Ross to begin today's presentation. Mr. Ross, please begin.
Thank you, Jessica, and welcome everybody to BOC Aviation's earnings call to discuss our interim results for the six months ending 30th of June 2021. With me today are our Managing Director and Chief Executive Officer, Robert Martin, our Deputy Managing Director and Chief Financial Officer, Steven Townend, and our Deputy Managing Director and Chief Operating Officer, David Walton. 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. 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 www.bocaviation.com. 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 are the transcripts of today's discussion. I'll now turn over the call to Robert Martin for his comments.
Thanks, Tim, and good evening to everyone on the call. Thank you for joining us for our 2021 half-year results earnings call. During this period, we surpassed $5 billion in cumulative earnings and celebrated our fifth year as a publicly listed company. We've reported a net profit after tax of $254 million for the first half of 2021, equivalent to earnings per share of $0.37. This was down 21% on the same period last year, although it represented an improvement of 36% on our second half 2020 net profit of $187 million. Net assets per share, meanwhile, rose by 5% from the end of 2020 to $7.19. Our pre-tax earnings, adjusted for non-cash impairment charges, rose 5% to $434 million compared to first half 2020, as we invested in our aircraft fleet with deliveries of 100% new technology aircraft.
Our total revenues and other income continued to rise, increasing 7% to more than $1.1 billion for the first half. We ended first half 2021 with total assets of $24 billion. Operating cash flow, net of interest expense, was $557 million for the period, just ahead of the same period last year. Amounts deferred under rent defer ral agreement where we supported our customers remain equivalent to 2% of our available liquidity. We finished the first half with cash and undrawn committed liquidity of $5.8 billion and remain well supported by capital markets and the banking market. In first half 2021, we raised $1.5 billion in bond issuance and drew down $630 million in term loans. We continued to utilize the $3.5 billion revolving credit facility provided by Bank of China during the period, with $250 million drawn net of repayments at the end of June.
Consistent with previous interim distributions, our board has declared an interim dividend of $0.1098 per share, payable to shareholders of record on October 13th. This represents a payout ratio for the half year of 30% of net profit after tax. The board's policy continues to be to pay a dividend to shareholders of up to 35% of full-year net profit after tax. Whilst the prospect of renewed outbreaks of COVID-19 remains a risk, the speed and efficacy with which vaccination programs have been rolled out in many of the world's largest economies have been supportive of domestic traffic growth. The clear correlation between high levels of vaccination and lower hospitalization rates should give governments the confidence to remove barriers to travel and to reopen their borders with other countries.
We've noted the confidence evident in the second quarter earnings calls among our suppliers and customers, and we share this confidence. Freight traffic continued to perform above pre-pandemic levels during the first half, and domestic passenger demand returned close to 2019 levels in a number of major markets such as China, the United States, and Russia. As European countries began to open their borders to vaccinated travelers, this should start the recovery in regional and transatlantic passenger traffic as well. As airlines increase their operating schedules and place new orders, airframe manufacturers are looking to raise production. Since the return to service of the Boeing MAX in December last year, over 150 MAX aircraft have been delivered and there have been over 500 orders placed so far this year, leaving a backlog of 3,300 MAX.
Boeing is producing 16 MAX per month at present and expects to lift this to 31 per month from early next year. Meanwhile, Airbus has announced increases in production from 40 to 43 A320neo family aircraft per month in July and anticipates lifting that to 45 per month from the fourth quarter of 2021. Airlines globally have become demonstrably more confident in the recovery. According to the International Air Transport Association's Airline Business Confidence Index for July, 89% of airline CFOs surveyed expect better passenger traffic over the next 12 months. Of the same sample of CFOs, 73% anticipate a rise in profitability, with the outlook for earnings improving on previous surveys the most since January 2007.
This recovery in earnings for passenger airlines is being led by U.S. carriers, where three of the big four have already reported profits for the second quarter 2021, and the fourth anticipates positive numbers soon. A number of North Asian airlines are close to or are reporting profitability as they successfully leverage their freight business. We expect more airlines to join them as vaccination levels rise. This will be good for airlines, for the aviation industry, and for our company. More liquidity is becoming available to support the aviation sector as its earnings outlook improves. Bond and equity markets are beginning to support non-investment grade issuers. The asset-backed securitization market for aircraft deals has also reopened, providing an important source of funding for non-investment grade borrowers as potential buyers of our aircraft. The pace of recovery, however, will be uneven in both trajectory and distribution.
Carriers serving economies where the effects of the pandemic are still pronounced continue to struggle, with those domiciled in Southeast Asia the most significantly affected. Low vaccination rates, limited government support, reliance on cross-border traffic, and an absence of capital markets access have compounded the difficulties that the region's airlines face, with the principal exception of Singapore. We continue to face delivery issues for new aircraft. 10 Boeing 787s did not deliver as expected during the first half of 2021, and we continue to experience delivery delays with the A320neo family as well. In relation to our Board of Directors, we welcome our new Chairman, Mr. Chen Huaiyu, and the appointment of two Non-executive Directors, Mr. Wang Xiao and Madam Wei Hanguang.
With Madam Wei's appointment, we now have one of the most balanced Board of Directors in both the aircraft operating leasing industry and amongst companies listed on the Hong Kong Stock Exchange. I'll hand the call over to David to speak to our operations and business development, and then Steven will take over for a more detailed review of our P&L and balance sheet.
Thank you, Robert. Operationally, we had a busy and productive first half of the year, and during this period, we continued to face restrictions on working from the office from time to time in every one of our locations other than Tianjin. The energy and resilience demonstrated by our team with the foundation of our digital workplace transformation enhancements enabled us to work in a coordinated way with our customers, suppliers, and other stakeholders. With the opening up of travel in some parts of the world, we have now begun to get back on airplanes for the important business of resuming face-to-face meetings with our business partners, which was a very welcome development. At the same time, we continue to make employee health and safety a top priority.
Elsewhere, we continued our high engagement rate on ESG matters during the period, and we remained carbon neutral for our direct emissions during the first half of 2021. Despite the impact of changes in social distancing regulations that affected some of our volunteering activities, our teams in Singapore and London were able to undertake community-based events during the first half, and we added another three community outreach projects since the end of June, organized by our New York and Singapore teams. We also continue to support charitable organizations that we've partnered with consistently over the past decade or more, including Airlink and Orbis. Turning to our portfolio, in the first half of 2021, we delivered 34 aircraft to airline customers, of which six were purchased by the customer at delivery.
Of the total 28 net new aircraft deliveries, 10 were from our manufacturer order book and 18 were purchase and leasebacks with airlines. Our total fleet stood at 536 aircraft at the end of June, comprising 377 owned and 37 managed aircraft with an order book of 122 aircraft. In the first half, we continued to improve the quality of the portfolio, and all of our deliveries were latest technology, including 11 A320neo family aircraft, 16 737 MAX aircraft, and one Boeing 787 aircraft. These new deliveries were placed on lease to well-established airlines that included Air China, United Airlines, TUI, Wizz, and Scoot, a member of the Singapore Airlines Group. We sold nine aircraft from the owned fleet during the first half, compared to five aircraft sold in the first half of 2020.
Our pipeline for the second half of 2021 remains robust, with 37 new aircraft scheduled for delivery. We expect five of these to be purchased by airline customers on delivery, leaving 32 expected net new aircraft deliveries in the second half of this year. I would caution, however, that there is a risk of further manufacturer delivery delays during the balance of the year. As I mentioned at the beginning of my remarks, our owned portfolio stood at 377 aircraft at the end of the first half of the year. 369 of these aircraft were on lease. Six were off lease and have signed leases in place with deliveries scheduled in the second half of this year. Two narrow-body aircraft are off lease and in active remarketing.
During the period, we transitioned four used aircraft to new airline customers, representing a combination of normal transition work following scheduled lease expiry and putting repossessed aircraft back on revenue. The transitions included two A330s that we remarketed for a managed customer. We ended the first half with utilization of 99.6% on the owned portfolio. The weighted average age of our owned portfolio was 3.7 years at the end of June, once again, one of the youngest in the aircraft operating lease industry. We also have one of the industry's longest weighted average remaining lease term for our owned portfolio at 8.1 years. This embedded owned aircraft portfolio of $20 billion is the company's earnings engine for our future performance, and we will continue to improve it with deliveries of new technology aircraft, sales primarily of previous technology aircraft, and transitions to new customers to keep the fleet generating revenue.
With that, I'll turn it over to Steven.
Thank you, David. Before I start on a more detailed breakdown of our numbers, I would like to remind you that our financials for the comparable period of the first half of 2020 were still relatively unaffected by the impact of COVID-19, and that first half result was in fact a record for BOC Aviation. As Robert outlined, we have reported a net profit after tax of $254 million for the first half of 2021. This equates to post-tax earnings of $0.37 per share, down 21% from the first half of 2020. Core earnings rose by 5% to $434 million compared with first half 2020. This improvement in core earnings was driven by a 4% year-on-year rise in lease revenue, reflecting the growth in the net book value of our fleet, offset by a fall in our net lease yield to 7.5%.
Turning to other sources of revenue, interest and fee income amounted to $95 million, 27% of the first half 2020 level, as we generated more fee income from predelivery payment transactions and included full-period contributions from six aircraft that we classify as finance leases. These reflect the robustness of the leases that we agree with our airline customers. Gains on aircraft sales were $3 million. Turning to our two largest expenses, which combined account for 85% of the total. Depreciation, our largest expense item, increased by 15% relative to first half 2020. Finance expenses increased 7% to $236 million. An increase in our borrowings to fund investment in more aircraft was offset by lower interest rates.
Our average cost of funds improved to 2.9% per annum in the first half of 2021 from 3.2% in 2020. During the first half, we recorded an $84 million asset impairment related to the carrying value of 28 aircraft delivered in prior years, and we provided for impairment losses on financial assets of $63 million, representing those lease receivables from certain airline customers that exceeded security deposits. Both of these charges exceeded first half 2020 levels when the full effects of the pandemic had yet to be felt on airline cash flows and appraised aircraft values. We had capital expenditure of over $1 billion in the first half of 2021, primarily related to our aircraft deliveries and predelivery payments. We had committed CapEx of $2.5 billion for the second half as at 30th of June and would expect total CapEx for 2021 of up to $4 billion.
During the period, S&P Global Ratings and Fitch Ratings reaffirmed our industry-leading A- credit rating as we tapped the capital markets, with S&P also lifting our outlook from negative to stable. We raised $1.5 billion in the debt capital markets, as these remain supportive, and our indebtedness rose just 2% to $17.1 billion as at 30th of June, compared with end 2020. While our gross debt to equity remained in our target range at 3.4:1 Our fundraising included a debut $1 billion bond issuance from our U.S. subsidiary as we geographically aligned our financing with our aircraft purchases. Support from investors and bankers, together with robust and internally generated cash flows, saw us repay $1.1 billion in debt maturities. Leaving us just over $700 million of scheduled repayments in the second half of 2021.
These obligations and our target CapEx can be funded from our cash and committed liquidity of $5.8 billion. Just a final comment also on our tax provisions. Our tax rate increased to 11.7%, up from 8.6% for the first half of 2020. This was predominantly due to more assets being booked in our U.S. subsidiary, plus the future increase in U.K. tax from 2023 that was enacted in June. Now back to Robert for his final comments.
Thanks, Steve. We would like to recognize the efforts of our directors and colleagues who have retained their focus and drive through a very volatile and challenging period. Thank all of our customers, suppliers, and shareholders for their partnership. We thank you for your persistence and hard work, culminating in achieving the milestone of $5 billion of cumulative profits on the back of 27 years of unbroken profitability. As distinct from this time last year, our path ahead appears clearer as visible recovery in passenger and freight volumes continues in those markets with robust vaccination rates. The global recovery will continue to be uneven, but we remain confident in the outlook for airline passenger growth, starting with domestic growth, followed by regional, and then long-haul international markets. Improved traffic volumes will have a positive impact on our customers and thus on our company.
This concludes our review of the industry, our company's financials, and our outlook, and I'll pass the call back to Tim.
Thanks, Robert. This wraps up management's formal commentary. Before we break for Q&A, though, I'd like to remind you that on the basis of today's consensus estimates, as a company, we're trading on a forward dividend yield of 4.6% versus a Hong Kong market average of 3.2%. We now have time for Q&A, and out of fairness to others, request that each participant restrict themselves to one question and one 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, Tim. We will now begin the question and answer session. The first question comes from Arnaud from JK Capital Management. Your question, please.
Hello. Hi. Am I audible?
Yeah.
Arnaud from JK Capital Management. I was hearing the Cathay Pacific's recent results call where they were talking about the landing slots in other geographies like the European Union, where there is a risk of them losing some of the landing slots which they have gained over years. Could you give some color on what kind of implications you have as a lessor for some of your clients who might face a risk of losing their landing slots and eventually don't know what to do with their aircraft?
Okay. Well, it's going to be difficult for us to comment on which clients are going to win and lose on this, what I can tell you is the same number of slots means the same number of aircraft flying. In aggregate, there won't be a change in demand in the market. It's just going to be a shifting between different customers.
Yeah. That would be like, for example, some of the Asian customers who are flying to Europe losing to some European airline company, which may or may not be your client. It's like the possibility of you shifting the lease from one to the other or deploying the aircraft from one airline to the other may not be as simplistic. I don't know. I just wanted to know how do you view this as a risk concern going forward?
We look at the macro situation in the market and demand for overall aircraft. That's what drives our analysis, then we will react to individual customer requirements as they come up. Until any such allocation or reallocation takes place, it's very difficult for us to preempt that.
Understood. Okay. Thanks.
Thanks.
Thank you. Next, we have Kim Wong from UBS. Your question, please.
Hi, guys. Can you guys hear me?
Yes.
Hi. Thanks for taking my question. I have a quick one. With the impairment across the aircraft and trade receivables being relatively high because of COVID, which one of the two would you think pose a greater near-term risk with the rise of kind of the Delta variant across much of Asia-Pacific? I have a kind of quick follow-up on, I guess, the composition after that. Thanks. Which one of the two is, I guess, the bigger risk there is?
The way to think about it is there are two different types of impairment.
Right.
Where we're talking about an impairment related to cash payments, that's related to the individual customer, and it may be a short-term thing where we'll see recovery. Generally, if you look at our history, and you look at our collection rates, you'll see during periods, normally after a downturn, we have greater than 100% collection rates. Those tend to be sort of recoverable fairly quickly. The second type, the impairment of aircraft, is, remember, our book values stay the same. What moves is the appraiser's view of the marketplace and their view of asset values. Obviously, at the moment, they have a worse view today than they would've had two years ago, which is why their appraised values have come down.
Under our accounting policy, we have to do a semi-annual impairment test. The way that you recover any of that impairment is through a future sale of the aircraft with the lease attached. That is likely to take a longer period.
Right. Understood. Maybe can I get a follow-up on the lease terms? I noticed in the charts and presentation pack that the average lease term declined marginally to 8.1 years versus 8.6 years in 2020 and 8.4 in 2019. Is it a kind of early sign that newer customers are opting for shorter term leases to weather through the current environment?
No, we're not seeing that at all. The average lease terms we're seeing on new lease commitments are certainly the same. Where you do see some impact on that during a downturn, though, is maybe on used aircraft. You may write shorter terms whilst the conditions are less favorable. It's more likely to be in the used aircraft portfolio that brings down your average than on the new aircraft.
Thank you. Next, we have Tushar from Somerset. Your question please.
Hi there. Thanks for the call. I had a question on basically your strategy. Going forward, if you see AerCap and GE Capital Aviation merging, how does that impact the competition within the industry? Specifically with COVID as well, has there been a change in the strategy of what type of airline customers you're targeting or what sort of terms you're offering in terms of loan to value or deposits or any such changes?
Okay. Let me touch on the AerCap GECAS situation first. Clearly, you will put together the two largest players in the market, and they will be the largest player. If you think of the four core competencies in our business, purchasing aircraft, leasing aircraft, financing, and selling aircraft with lease attached, I think the one where we're going to see most impact is the last one. I think the management of AerCap have been fairly open on this, that they would expect to sell down a reasonable amount of the merged portfolio after the transaction is closed. That's where we expect to see the greatest impact. We're very competitive on funding, and obviously we have a higher credit rating than they do. In terms of buying from the manufacturers, I don't think it affects us. We do things for manufacturers that they don't.
Our strategic positioning, I think, doesn't change there. On the leasing market, what I would say is, clearly when you put together two portfolios, David mentioned the engine of our growth is our $20 billion portfolio. They're going to have a much bigger used aircraft portfolio with older aircraft than us. Clearly they're going to be very busy placing those planes as they come off lease. Bear in mind, both those companies have a shorter lease term remaining than we do. That answers your first question. Can you just say the second question again? I didn't quite catch all of it.
In terms of the COVID-19 impact on any terms which you provide your customers, do you require higher deposits from them? Or, in terms of the type of airline customers also which you would be offering these leases, have you narrowed down your conditions or criteria in terms of which clients you would be focusing on from now on?
Okay. When we look at how we approach different clients, we have a fairly robust risk management system within BOC Aviation, and we will look at, obviously, how those credit ratings move throughout the cycle. Clearly, unfortunately, during a downturn, your average credit rating does get slightly worse because your customers will have produced generally losses for the year 2020. We will tend to offer terms commensurate with the risk rating of the customer. That's the way we tend to think. We look at risk-adjusted returns, and that takes into account the security that we take, both in the form of security deposits and maintenance reserves for any future maintenance liability.
Thank you. Next, we have Jason Sanders from DBS Bank. Your question please.
Hi. Good evening. Thank you for the presentation and for taking my question. The first question I have, the Asia-Pacific market still seems to be fairly tepid in terms of flight activity, and BOC has experienced quite a sharp decline in revenue from the region. Lease rates there seem to be under pressure as well. Could you provide some color on the kind of conversations that you're having with customers there? Are they requesting for more deferrals and do you see a potential for restructuring of leases to customers there?
Okay. I think the starting point is, unfortunately, this is Southeast Asia, generally, it's not North Asia. In China, there is only one customer group that we have some payment issues with. It's predominantly a Southeast Asian thing. If you look at a number of our customers and our competitors' customers in Southeast Asia, a number of them have either gone into a formal restructuring process, where they've filed for some type of bankruptcy or insolvency, or they are trying to do the equivalent outside of a formal process that may or may not lead to a formal process. That is what's actually going on in the market. Elsewhere around the world today, we don't have that issue. We've gone through all of those situations in other parts of the world. This is where Southeast Asia is different to other parts of the world.
Thank you. Next, we have Anuj from JK Capital. Your question please.
Hi. Thanks for giving me an opportunity for the follow-up. I wanted to get some sense on the impairments on the aircraft. You did $83.7 million, which was roughly 40 basis points on the fleet value. Should I assume that the predominant portion of this is on the clients that are exposed to Southeast Asia or Middle East? Is there any picture we can draw on what kind of geographies are creating huge pressures on impairment?
To be specific, is the question on the aircraft impairment?
Yeah. The aircraft impairments you have made, which is $83.7 million and 41 basis points on the fleet value. Can I assume that a predominant portion of these impairments were for clients who are exposed to a certain geography, let's say Southeast Asia?
It's a combination of two things when you look at aircraft impairments. It's not just the lessee that you look at, because as Robert talked about earlier, it's driven also by the appraiser's view of aircraft values. The larger part of the impairment that we took this time was related to some wide-body aircraft that we do have leased to some airlines in Southeast Asia.
It is predominantly the other portion of impairments, which is connected to the lease, is predominantly coming from Southeast Asia.
It's more driven by the nature of the assets than the geography, but those two are related this time around.
Thank you. Audio participants with questions to pose, please press zero one on your telephone keypad and you'll be placed in the queue. Next, we have Tushar from Somerset. Your question please.
Hi. Thanks again. If I look at the core rentals, which fell 6%, I am just trying to understand the reason where you have had an increase in the total assets as well. What led to the decrease in the core rental income?
What you're seeing there, I think, and you see this with our comment on the reduction in the net lease yield, is that clearly at this point in the cycle and with COVID-19, there are some airlines where we've had collection issues. We've had some aircraft that have been off lease, although they've been placed back on lease again now. That reduction in rentals for that period is what affects this.
Right. Generally, if I can ask another. If I look at the gross debt to equity, that sort of trended down this year, but it's around 3.5 x. What is the max level you can get to before you have to raise equity?
Generally, what we target, is to be in the range up to about 4x , no more. That's where we've stayed consistently over a long period of time. That's in line with our discussions with the rating agencies to maintain that A- rating that we have.
Right. Okay. Thanks a lot.
Thank you. Next, we have Jason Sanders from DBS Bank. Your question please.
Yeah. Hi. Thank you for taking my follow-up question. I can see that BOC Aviation now expects to take delivery of 71 aircraft in 2021. It's down from 79 previously. Do you think that there could be more delays in the aircraft delivery because of production issues surrounding the A320 and 787?
We mentioned in our prepared remarks, we do think that is a risk for the second half. We're keeping a close eye on that. We've got delivery teams in Airbus and in Boeing, and they're working hard to get those aircraft delivered on time. In some cases, it's really outside of our control. Yeah, that certainly is a risk. At the same time, we're also working to try to add additional balance sheet opportunities for ourselves in the second half.
Yeah, sure. Thank you.
If there are no further questions, I will now hand the session back to you. Please go ahead, Mr. Ross.
Okay. Thank you very much, Jess, and thank you everyone for dialing in. Should you have any further questions, please don't hesitate to contact either myself or Kelly Kang. I'm pretty sure you have all of our contact details on the collaterals. Look forward to speaking to you over the next six months. Thanks again for your support.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.