Ladies and gentlemen, welcome to BOC Aviation Limited's 2024 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, Ray, and welcome everybody to BOC Aviation's earnings call to discuss our interim results for the six months ended the 30th of June, 2024. With me today are our Chief Executive Officer and Managing Director, Steven Townend, our Chief Operating Officer, Tom Chandler, and our Chief Financial Officer, Wu Jianguang. 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 announcement 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.
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, and thank you to everyone for joining us for our 2024 interim results earnings call, where a combination of core business growth and aircraft recoveries drove a record first half performance. We are delighted to report net profit after tax of $460 million for first half 2024, equivalent to earnings per share of $0.66. This compared with net profit after tax of $262 million in first half 2023. Adjusted for recoveries, core net profit after tax rose to $284 million. Our board has declared an interim dividend of $0.1988 per share, payable on tenth of October, an increase of 76% on the interim dividend paid for 2023.
This is consistent with our policy of distributing 30% of reported net profit after tax for the first six months of the year. Our total revenues and other income rose 11% to $1.2 billion for first half 2024. We ended the period with total assets at $24.3 billion, and net assets per share up 5% since end 2023 to $8.73. Our collection rate remained above 100%, as airline customers continued to make previously deferred payments, and this helped to lift our operating cash flow net of interest to a midyear record of $908 million. We finished the first half with cash and undrawn committed liquidity of $5.5 billion.
The broader aviation environment remains in good health, with airline traffic for most of the world's carriers rising over 13% in the first half of 2024, according to IATA, which expects its airline members to generate over $30 billion in earnings for the full year, up 11% on 2023. This will have been achieved on sustained growth in global passenger demand, which has continued to expand faster than capacity and has enabled airlines to maintain fares at current levels. IATA members' load factor for the six months to June was a record 83%, as demand continued to outpace supply, especially in our home markets of Asia Pacific, where international traffic rose 35% in first half 2024. All major international markets continued to witness demand growth, and this has allowed us to leverage our strengths as a truly global lessor.
This was reflected in the pattern of our first half deliveries that were made to airline customers that included IndiGo, SAS, American, Icelandair, Air Canada, and TUI. The nature of our ownership and our global presence allow us to provide solutions to airlines wherever they may be. Matching deliveries to this demand, however, remains a challenge for the whole industry, including ourselves, and we expect this situation to continue through to at least 2026. The capacity shortfall from aircraft delivery delays is also being compounded by the engine servicing requirements specific to a large number of current generation aircraft. Tom will detail the efforts that we're making to expand our business against this backdrop later on the call.
However, over time, we will see value from this tightness of supply, as we are placing the balance of our inventory, including order book positions and aircraft with maturing leases, at lease rates that are above the portfolio average. While constraints on the delivery of new aircraft do exist, we still expect global financing requirements for new aircraft deliveries to grow by over 5% this year to around $90 billion, with the lease proportion of aircraft financing steady at over 50%. Looking further ahead, the dollar value of financing requirements is expected to rise by about two-thirds by 2027, based on the most recently available delivery schedules from the major manufacturers, providing real growth in our addressable market. Elsewhere, aside from the equity market volatility in early August, global financial and commodity markets have had a relative period of calm so far in 2024.
The U.S. dollar exchange rate and the average price of jet fuel, both key drivers of airline cost bases, have been flat. Meanwhile, we've started to see interest rates retreat from their highs. The average five-year U.S. Treasury rate has fallen by about 100 basis points since its 2024 peak in April, and markets are currently expecting the Federal Reserve to begin cutting rates in September. This would be positive Parash , given the structure of our funding, and as a reminder, all else being unchanged, every annualized 10 basis point reduction in our cost of funds dollars. In March this year, we recovered two Boeing 747 freighter aircraft, the value of which had previously been written down to zero.
The reversal of this impairment contributed most of the $176 million in NPAT, attributable to recoveries included in our first half results, and built on insurance settlements already reported for 2023. We continue to pursue all possible avenues for further recovery, but remain unable to provide guidance on what form this may take, when it might occur, or the future value of any future settlements. At the board level, we welcomed Madam Zhang Xiaolu, as our new Chairman in June, following the earlier resignation of Mr. Liu Jin. Madam Zhang was Vice Chairman of the board and an executive of the company for four years prior to this appointment. Elsewhere, Madam Liu Yunfei joined the board, while Mr. Wang Xiao stood down. We thank Mr. Liu and Mr. Wang for their contribution.
I'll now hand the call over to Tom to speak to our operations and business development, and then Jianguang will present a more detailed review of our P&L and balance sheet.
Thank you, Steven. Our operational and business development report is as follows: We delivered 19 aircraft to nine different airline customers, of which one was purchased by the customer at delivery, giving us 18 net new aircraft deliveries for the half, an improvement on last year's 50. We also signed lease commitments for 55 aircraft. As at the end of June, our total fleet stood at 680 aircraft, comprising 429 owned, 32 managed, and an order book of 219, representing committed CapEx of $12 billion. Our order book was stable, with 14 aircraft added during first half 2024. 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 delivery positions underpin our fleet growth over the balance of the decade.
Our new deliveries during the half were all fuel efficient, latest technology, narrow-body aircraft, including 3 A220, 9 A320neo Family, and 7 737-8 aircraft. As Steven alluded to earlier, we continue to see the impact of manufacturer delivery delays, with 7 aircraft that were scheduled for delivery in the first half of 2024 being delayed into the second half. As at June 30, we had been notified of 6 aircraft that would shift into 2025. But since then, we've received delay notifications in respect of a further 9 aircraft, now not expected until next year. The causes of the delays are varied, including airframe and engine supply chains not being able to keep pace with planned production rate increases.
Despite delays, we are currently committed to deliver 47 aircraft to airline customers this year, including 29 in the second half, and we continue to see opportunities to build on this. During the period, we transitioned 9 used, owned, and managed aircraft to airline customers, with only 3 freighter aircraft and 1 single-aisle aircraft off lease at the end of the half. All 3 of the freighters have been committed for lease with a single airline customer, with delivery expected to complete this quarter. The weighted average age of our owned portfolio was 4.9 years at the end of June, remaining one of the youngest in the aircraft leasing industry. We also continue to have one of the industry's longest weighted average remaining lease terms for our owned portfolio at 7.9 years.
The proportion of our fleet that is latest technology continues to rise, as we take delivery of new aircraft and sell older ones. Today, this stands at 79%, up from 77% at the end of 2023. The average appraised value of our operating lease fleet continues to rise, and was $21.3 billion as at the end of June, representing a 14% premium to that fleet's net book value. We sold 15 aircraft from the owned fleet in the first half of 2024, improving on first half 2023's three aircraft sales, and we are well positioned to achieve our target of over 20 aircraft sales for the year. These aircraft had an average age of 10 years, around twice the fleet average.
Ongoing improvements in aircraft values lifted our gain on sale margin to 14.3% from 10.6% at the end of 2023. Our lease rate factor, at 9.8%, was unchanged from first half 2023, reflecting the timing effects of older aircraft sold and the delayed delivery of new aircraft. Net lease yield was also unchanged at 7%. We raised $3 billion in new financing, comprised $1 billion from the debt capital markets, with a further $2 billion from facilities with our banking group of 50 banks. This, combined with a record operating cash flow, net of interest, at $908 million, sourced fund our over $750 million of CapEx and repaid $2.7 billion in maturing bonds and loans.
We only have another $0.9 billion of debt obligations scheduled for repayment over the balance of the year, which together with our anticipated CapEx, can be funded from our cash flow and our committed liquidity of $5.5 billion. We remain on track to achieve the ESG targets set for 2025 as part of our Hong Kong Stock Exchange listing requirement. As we seek to limit our impact on the environment, lower direct emissions relative to growth, diversify our workforce, and invest in the most fuel-efficient aircraft. Following recent boardroom changes, four of our 11 directors are female, including for the second time in our history, our chairman. This is considerably ahead of today's Hong Kong Stock Exchange company average of 16%, and even ahead of the 30% target set by the exchange for the end of 2030.
During the half, we continued to be active in the communities where we are based, with almost half of our employees around the world participating in a total of eight CSR events. In Singapore, we arranged volunteering sessions with long-term partners, Food from the Heart and Willing Hearts Soup Kitchens. Elsewhere, our Tianjin and New York offices participated in a clothing donation program, as well as supporting the West Side Campaign Against Hunger. That concludes the overview of our operations and business development performance for the first half of 2024, and with that, I'll now turn it to Jianguang for a deeper review of our financial performance.
Thank you, Tom. As Steven mentioned earlier, we reported a net profit after tax of $460 million for first half of 2024, equivalent earnings of $0.66 a share, and the best interim profits reported in our history. Total revenue was $1.2 billion, raised 11% on first half of 2023, with contributions from all aspects of our business. Lease rental income was $928 million, reflecting a stable lease rate factor. Finance lease revenue again rose strongly up to $96 million, as finance receivables increased 20% from a year ago to $3 billion. Our aircraft sales were up 300% to $56 million compared with first half of 2023, as we lifted the number of aircraft sold to 50 versus 3 aircraft in first half of 2023.
Other income rose 26% to $58 million, reflecting a wider range of contributions from the manufacturers, insurance settlements, and utilized maintenance reserves and security deposits. Interest and fee income was down 10% to $36 million in first half 2024 because of low contributions from pre-delivery payment financing. Turning to costs, our two largest expenses continue to account for over 90% of the total. We adjusted for $175 million write-back of aircraft impairments. Depreciation, which remains our largest expense at $399 million, was largely flat compared to first half of 2023, reflecting sales activities for operating leased aircraft and those finance leased aircraft, for which depreciation is not incurred. Finance expenses, our second-largest item, rose to $358 million.
This was mainly due to a high cost of debt of 4.6% per annum in first half of 2024, compared with 3.9% previous year, with gross debt higher by $460 million as at June 2024, compared with end June 2023. Excluding reversal effects , aircraft impairment of $5.5 billion are similar to last year. Moving to a balance sheet, we ended the half year with total assets $24.3 billion, funded by debt of $16.3 billion. Total equity reached a record of $6.1 billion, compared with $5.7 billion at the end of 2023. This was mainly attributable to profit of the period and partially offset by the payment of dividends amounting to $189 million.
Loans and borrowings increased to $6.3 billion as a result of fleet growth, with gross debt to equity down at 2.7 times as earnings rose more rapidly than debt balances. Rating agencies, S&P and Fitch, both confirmed our A-minus rating during first half of 2024. Finally, our effective tax rate was 9.7% in first half 2024, lower than first half 2023's rate of 11.4%, mainly due to the write back impairment losses. I will now hand the call back to Steven for his closing remarks.
Thanks, Jianguang. We continue to appreciate the support of our board, our staff, our investors, and our other stakeholders as we focus on building today's earnings base and tomorrow's delivery pipeline. Passenger traffic and airline demand for new aircraft remain strong, and this is reflected in both aircraft lease rates and aircraft valuations. Challenges do remain, however, especially around receiving aircraft deliveries as contractually scheduled, and this will be an ongoing feature for at least the next 12 months. Notwithstanding this, we remain optimistic regarding the balance of 2024 and the outlook for 2025. Our access to over $5 billion in financial liquidity and our order book of 219 aircraft positions us well to support our airline customers' growth ambitions.
Meanwhile, the premium of our fleet market value to net book value provides an additional $2.5 billion in equity upside, not reflected in our financial statements. With that, I conclude 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've now time for Q&A, and out of fairness to others, request that each participant restricts 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. We're now beginning a question and answer session. In the interest of time, participants are limited to one question each. If you have any follow-up question, please join the queue again. Participants with a question 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. Once again, star one one on your telephone keypad now. Our first question comes from the phone, the line of Jason Sum from DBS Bank. Your line is open. Please go ahead.
Hi, good evening. Can you hear me?
Yes, we can hear you, Jason, go ahead.
Hi, good evening, everyone. Just wanted to ask one question. So I noticed that AerCap recently acquired a large chunk of aircraft from Spirit order book, increasing their exposures with airlines for a fairly weak credit profile. So, is adopting a similar strategy something you are considering as well to expand your fleet, or do you prefer to focus on more credit worthy, more credit worthy counterparties? Because I just noticed that, your, your gearing ratio at this point in time is pretty low compared to your target levels, and, I was just wondering if there are any other avenues that you're exploring to deploy capital is within this, persistently slow delivery environment.
Thanks, Jason. Good question. I think if you look at what we've done historically, we've always topped up our own order profile with these purchase, lease back type of deals, which you're talking about. We've already concluded a small number of those this year, with smaller numbers of aircraft, so we haven't been announcing them individually, but you will have seen some of them in our press releases. And we continue to look for those larger opportunities when they arise. I think the key is always to make sure that the overall package makes sense. And so if you're getting the right aircraft at the right price, then, you know, you can look down, further down the credit spectrum at what you're doing.
Clearly, if you're paying a full price for an aircraft, then you need to be much more careful. And I think the approach that, you know, some of our peers have taken, and which we have taken in the past, you know, still follows exactly that path. And so you may well see us making some announcements here during the rest of this year as we look to add to the current scheduled deliveries through that purchase and lease back market.
Thank you.
Our next question comes from the line of Amy Chen from Citi. Your line is open. Please go ahead.
Hi, thank you for the opportunity. I wanted to follow up on your comment earlier. I'm not sure if I caught it correctly. It is on the sensitivity of funding costs of the potential Fed rate cuts. Also, I would like to know, you know, on the funding cost is definitely a big positive, but also, when we sign new leases, there will be interest rate adjustments. So net, net, how would this declining interest rate impact our overall earnings? Thank you.
Thanks, Amy. I think net, net, it is positive for us. It gives us a tailwind for two or three reasons. You know, I think the number I gave you earlier was that for each 10 basis points reduction in our average funding costs, it will improve our net profit after tax by about $3.6 million. But I think, you know, we do benefit firstly, because approximately 30% of our funding is floating rate, and so, you know, within 3 months of any interest rate cut, we start to see the benefit of that flowing through. And what you have to bear in mind, if you think about the fact that we have a portfolio today of $24 billion of aircraft, in any one year, we only take delivery of an additional $4 billion.
And so if your funding costs on the core fleet is going down, your return on the core fleet goes up, and that's a far bigger effect than if lease rates come down on the other side, on the new aircraft that you're placing. I think also we are protected from that to a certain extent right now, from what I was talking about earlier in the prepared remarks, when I was talking about the strength of demand for aircraft and the shortage of supply. And so it's not just directly related to interest rates, there's that supply-demand element to it as well.
Thank you. That's very clear.
Our next question from Joshua Samuel, from Mawer. The line is open. Please go ahead.
Hi, are you all able to hear me?
Yes, we can hear you, Joshua. Go ahead.
Great. Hey, good evening. So just a question on the net lease deals. I'm just wondering, what is the current, you know, incremental net lease deals that you are signing? How does it look like for the aircraft that you're leasing out at the moment?
So I think the simplest way to think about it right now is that incremental leases that we are signing today, as we said, are above the portfolio average, and so, you know, are above that level. So once those start to deliver, we should see value from it. I think that one of the key reasons you haven't seen it starting to move yet is that low level of new deliveries coming in, and once they start to flow through, we should start to see the benefit coming from it.
Got it. And if I may ask a follow-up question on just taxes. So, how should I be thinking of the long-term kind of effective tax rate that should be applicable to the company? And I'm coming from the context of, you know, global minimum tax rate, which is expected, I think, next year. How has thinking on, you know, long-term tax rates changed, if any?
So I think if we look at the long term, it's clear that globally, you know, people are moving towards that global minimum tax rate. You know, it will be different in different jurisdictions. It'll depend where we own aircraft, which is very much, withholding tax driven rather than income tax driven. But I think inevitably what we will see over time is that it moves up more closer to that minimum 15%. The, you know... We've yet to see the full detail from Singapore as to how that will work in terms of the refundable investment credits that they're going to be proposing. And so we're waiting to see the full detail on that, but inevitably will be that it will track upwards over time.
Got it. Thank you very much.
Our next question, Mr. Bruce Chu, from HSBC. Your line is open. Please go ahead.
Hello, can you hear me?
Yes, we can hear you, Bruce.
Hello.
Go ahead.
Yeah. Hi, this is for us here, actually. So just for the-
Oh, hey, hey, Bruce. How are you?
Yeah, I'm very good. I just have two, if I may. First, with respect to the delays that you are experiencing from Boeing, do you expect this issue to linger on going into 2025? And with that regard, how confident we are at this stage of hitting our $4 billion CapEx target for this year?
A great question. Also before I start, just to make it clear that this is not just a Boeing issue. You know, we are seeing delays from all manufacturers at the moment, from all airframe manufacturers and all engine manufacturers. And so, you know, it is both our Boeing deliveries and our Airbus deliveries that are affected. You know, we tried very hard when we put out these numbers and when we posted our presentation to reflect the very latest that we have in our expected delivery schedules from both for this year. And so, you know, we maintained that target that we're trying to achieve.
Clearly, the delays make it more challenging, but you know, we expect to be able to top up further from where we are today as we work our way through the second half of the year.
Okay, so maybe more purchase and leaseback.
I think the, you know, we will be looking at more purchase and leasebacks. I think there will be opportunities arising for us to do more PDP financing. I think, you know, as we start to see both Boeing and Airbus, they keep delaying today's deliveries, but they still have to come at some point in time. And when we can see them starting to ramp up the deliveries in 2026 and 2027, the point at which airlines have to start making those PDP payments comes towards the end of this year. And as you know, that historically has been quite a good revenue driver for us.
I know. Just one last, with respect to, like, now that the rates have peaked, is it fair to say that in terms of your average borrowing cost in any half, first half is pretty much as good as it get or as bad as it gets?
... I'm not sure I've seen a pattern from one half. But I'm not sure I've seen a pattern from one half to another. I think it's always a question of, if you look at our average funding cost and then look at the marginal funding cost that we would achieve. And so, you know, if you look at where our five-year bonds are currently trading, it will give you a sense of, if we were to issue new debt today, where would that be relative to our average funding cost? The key thing that we need to see is that pricing on our secondary bonds comes down below the average, because that's where you get the benefit on that side.
On the other side, on the floating rate, as I talked earlier, you know, we will start to see the effects of that coming through, quickly, once rates do start to move. But again, if you look at where base rates currently are, base short-term rates, you know, they're still above 5%, and so we do need a substantive movement to get it back below the average funding cost.
Fair enough. Thank you, and have a great evening.
Thanks, Parash.
Our next question, Jason Sum from DBS Bank. Your line is open, please go ahead.
Hi, thank you. Just, one follow-up question. Maybe could you share a bit more on, what extension rates are looking like today? And, maybe also provide, a bit more details on, the parties that are involved in the recent aircraft sale transaction. Were these mostly to other lessors, or were there-- was there an uptick in interest from other parties, like airlines or other, other forms of investors?
Yeah, sure. And so I think if I talk about the aircraft sales first, what we are seeing is actually strong demand across the board. I think that, you know, for the smaller players in the market that don't have an order book, for them to buy aircraft right now is a challenge. And so that has been pushing up the pricing, and we've seen that driving through into the increased gains on sales that we're achieving. But to your point, we are also seeing demand from airlines as we're getting towards the end of leases, where they want to continue operating the aircraft, and they're at that point now in the cycle where they're generating cash again and want to bring more assets onto the balance sheet.
We're having a lot of very interesting discussions around that. So, it's both sides that are driving that up. On your other question, regarding extension lease rates, you know, we have seen those strengthen a lot. I think we started to see that materially already last year, and we've seen that continue into this year. And we're seeing it in two different ways. I think we're seeing that, you know, we are extending probably close to 90% of all leases at the moment, which is much higher than obviously we were seeing two or three years ago. And we're extending them much further out. So if I look at today, any aircraft that we've got due to come back off lease, either this year or next year, is already placed out.
And so, you know, we're seeing people being prepared to pay more to retain aircraft, but also trying to make sure further out that they're retaining them, so that they can make sure they've got their own fleet that they believe that they require.
Yeah, sure. Can I just check what would a normal level look like maybe in 2019 for extension lease rates, the extension of leases?
So it obviously depends on what type of aircraft, what vintage, you know, all those different things. But I think, you know, we are certainly back at the levels that we saw in 2019, and for some aircraft types, I think we're ahead of that.
Okay, great. Thank you. That's really helpful.
Okay, thanks.
Our next question, Karen Wu from Credit Suisse. Your line is open. Please go ahead.
Can you hear me?
Yes, we can hear you, Karen, go ahead.
Yes. I actually have a question about your aircraft-owned finance lease. Because I noticed that the rental yield for these aircraft-owned finance lease actually went up year on year, while the operating lease rental yield remains there. So I just wonder, like. So for this aircraft, it's like still a leaseback transaction, right? So is it because such transaction that you have a shorter term, or how come it is like less sticky than the operating lease terms? And what is your strategy on this type of transaction? Because I see the aircraft number jumped from 2 aircraft to like 47 and now 59. So I wonder what is your strategy on this one?
Okay. It's so the financial lease is a, I guess, it's an interesting product that we have. Clearly, it's not our core. The core will always be the operating lease. But at certain points in the cycle, as we talked about earlier, we have airlines wanting to start to own more aircraft, but still at the point in the cycle where capital markets have been slow to come back to the aviation industry. And so there's been a little bit of a gap between the volume of financing that airlines were seeking and the volume that the capital markets could provide, which has meant there was then a gap in the market for us to do these types of transactions at good returns.
As I've said before, I don't necessarily expect this to be a product that we can deploy throughout the cycle, because gaps like that typically will get traded away as we move through the cycle. But it's something that we've been able to take advantage of, both last year and this year. And we're continuing to see that we're adding further transactions.
If there are no further questions, we'll draw a line under today's call. Thank you, everybody, for dialing in. If you do have any follow-ups, please don't hesitate to contact Kelly or myself. We look forward to speaking to you in the next six months. Thank you very much and good night.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.