Hello, everyone. Good morning to those of you in the European time zones, and good afternoon to everyone who's joining us from Asia. Welcome to our Bloomberg Intelligence webinar today with Avation PLC's Executive Chairman, Jeff Chatfield. We will be talking today on the leasing recovery and innovation in the industry. A few things to sort of just go over administratively. I just want to remind everyone that today's presentation will be recorded. It will be available for playback. Those of you who are Bloomberg Terminal subscribers, it will be on the terminal, and there will be a link, I believe, as well on Avation's Investor Relations page. Later in the session, we will be doing Q&A.
When you have a question, please just type it into the Q&A box, which you should see at the bottom of your screen in terms of the Zoom controls. A quick introduction to those of you who may not be familiar with Bloomberg Intelligence. We're a global research team within Bloomberg. There's around 350 to 400 research professionals globally in offices around the world. We are covering industries, companies, both from the equity and the credit side, but we also have analysts covering strategy, quant, ESG, government litigation, et cetera, as well. You're able to find us on the terminal under BI. I think with that, I'd like to just get into our main event today.
I'll just do a quick introduction of myself and of Jeff, and also give you a quick rundown on how today's format will go. In the beginning, we will have around 20 minutes where Jeff will be presenting a presentation on the company and his views on broader sort of industry trends. After that, Jeff and I will have a fireside chat format where I'll interview on some key topics and trends of the day, which I think are of interest to both debt and equity investors in the aircraft leasing space. Then we'll finally open up to all the participants for Q&A for the final 20 minutes. We'll do a 20 20 20 type format. A quick word on myself.
I've been covering the aircraft and leasing space or the airline and leasing space in Asia-Pacific for more than 25 years now. I spent a long time on the sales side with investment banks, but I've also worked with aircraft leasing companies on the risk management side, and I also have done work in aircraft debt origination as well for commercial banks. I joined Bloomberg Intelligence about a year ago to be their senior equity research analyst for aviation in Asia-Pacific. I'd also then now like to introduce our main speaker today, Jeff Chatfield. Jeff's had a long history in aviation. I've known him myself personally for more than 10 years, I'd say, Jeff. He, you know, used to run an airline in Australia. He's been running a leasing company now for many years.
He started Avation PLC in 2006, and has grown that into be one of the premier sort of regional aircraft and other asset class lessors in the space. This company, Avation, was listed on the main board of the London Stock Exchange in 2010. With that, I think, Jeff, it's probably time to hand the mic over to you, for your presentation. Thanks.
Thanks, Tim. I'll just work out how to share the presentation with everyone and hopefully the, I noticed the volume was going up and down a little bit earlier. I assume that's okay now. Here's the presentation. We're presenting Avation PLC initially. We're listed on the London Stock Exchange. We issue bonds in the United States. We also have a bond, a warrant as well listed. The company has been going for since 2006. The snapshot at the moment, we own 36 commercial aircraft with 17 airline customers around the world, customers located in 14 countries. We're sort of unique in that we do all our wide-body, narrow-body, and turboprop aircraft. We have 6.2 year weighted average aircraft age.
Commercial aircraft usually last 25 years, so we have a very young fleet. We have 5.3 years remaining lease term on average, $907 million in aircraft, and $514 million in contracted revenues. That's sort of income that is contracted. Of our fleet, we are very interested in ATR 72 aircraft because clearly there's a monopoly situation with ATR. They are carbon friendly, very low CO2. Probably the only commercial aircraft that can be 100% sustainable aviation fuel from 2025. We like modern narrow-body aircraft as well, so we have a number of those. We really like Airbus A321s and Airbus A220s. We own two wide-body commercial aircraft, an A330 and a 777.
We're sort of by value, we're 51% narrow-body. Some of our history and competencies. Since inception, we've purchased 73 aircraft. We've executed 80 leases. We've financed $1.9 billion worth of debt. We've sold 37 aircraft. We've transitioned between airlines, 13. We've repossessed 19, and we managed to sell two purchase options. During COVID, which has been the challenge for all of the lessors, we had a deferral scheme, so we lent airlines money for a while. We rearranged our capital structure. We managed to pay off $322 million of our own debt, which was important to delever the company, so we're now quite unlevered, actually. We transitioned 11 aircraft, and we're now fully placed. We've placed 100% of our inventory. We've got nothing left to place at the moment.
The outcome of all that is we have delivered 69 aircraft. We've traded, which means sold, bought and sold 54%. Our net asset value per share over our history has gone from $0.42 to $3.42. We paid out $0.43 dividends. This is an interesting fact for this industry because, you know, as I said earlier, we're one of the few lessors that do all three. We, in terms of arrears as of March 2023, 22% were associated with turboprops, 78% narrow-body and 0% wide-body, which means, in reality, the narrow-body aircraft are financially quite, more risky than the other two types. Our net asset value per share has consistently grown, even during COVID. It's at 13.8% per annum, which is good.
Our share price hasn't tracked that. Our NAV has achieved that. Our customer base is all over the world. We like modern technology and good airlines, ranging from Air Tahiti to Fiji, Philippine Airlines, Vietjet, Mandarin Airlines, which is in Taiwan, easyJet, airBaltic, which is a big customer, DAT, Braathens, and others. We're all over the place, and we like diversification. On the market, Tim was, in his introduction, speaking of the market, we think that the global, if you like, airline capacity will be within 1% of 2019 sometime later this year. That means that that's a recovery from COVID in terms of airline capacity.
Broken down a little bit in terms of asset type, there is an argument that single-aisle has actually exceeded the other type 2019 levels. ATRs have almost fully recovered, which is great. Some other types are behind. Clearly, the wide-body are not there yet, as are other types of turboprops and regional jets. The two strongest recovery aircraft are single-aisle narrow-body aircraft and ATRs. Just on the ATR, a little bit more, it's this very successful program. There's 200 operators. There's more operators of ATRs than 737s. There's 1,800 aircraft sold. There's 1,600 deliveries. 1 billion passengers. It's a very successful program. Great customer base all over the world. Some of those names in this slide, you'll see on our slide.
There's a huge opportunity in this area in that because there's 1,200 turboprop aircraft over retirement age, which means there's a massive demand. There will be a massive demand for replacement in the coming years. Because you know, aircraft don't last forever, and they need to be replaced. Hence, there's a big opportunity in that sector. Fortunately for us, ATR are on the road towards 100% sustainable aviation fuel capacity. One of our customers has already flown in June 2022, flew a flight with 100% sustainable aviation fuel in both engines. It's anticipated that by 2025, all of the ATRs will be 100% sustainable aviation fuel compatible, which is a very important milestone. They'll meet very low CO2 emission rules. We're a believer in the green financing.
In December 2019, we actually did the first aircraft lessor of a green loan with Deutsche Bank. That was for two ATR 72 aircraft. That was an important milestone. Our order book is we have 28 purchase rights for new aircraft with the new engine type, which is more fuel efficient and sustainable aviation fuel compatible. They run out to June 2027. The company's got a lot of growth optionality about it to deliver low CO2 aircraft. We also have two on order for next year's delivery, which we are in the process of placing at the moment. On values, we see our opinion is that aircraft valuations are rising. The narrow-body base has certainly recovered. Wide-bodies are gradually improving in line with the, obviously, the general market dynamics.
Clearly, interest rates are an issue. We, our leases are 100% hedged, so we have a basically 99% fixed cost of borrowing. Our borrowing is at 6.08%, which compares favorably with many other lessors, which you can see on this slide. Some recent issues by some of the big lessors in the world have been above our sort of cost of funds, which is an interesting trend. Some of the smaller ones have paid very high yields. At the moment, our focus is to make sure that we're 100% utilized, which we are. It's interesting that the ATR turboprops have a lower rate arrears compared to narrow bodies, which is an interesting sort of credit dynamic.
ATRs are at the forefront of CO2, reducing CO2 emissions. We're fully hedged, which we're super pleased about because we started that program some years ago. That's an introduction to our company. You know, we're leveraging our competencies. We're harnessing the ATR innovation in terms of low CO2 stuff. Clearly, inflation's great for aircraft valuations and driving them up. If you own aircraft, it's a good thing. We're 100% hedged. What I might do is pass it back to Tim to continue.
Thanks, Jeff. Appreciate that introduction to the company and some of your thoughts on the market. I apologize earlier, there must have been some issues with the microphone. How is it coming through now? Jeff, is that better?
Well, I can hear you fine. Maybe you just stick at a constant distance from the mic.
I don't think I was moving, but great. All right, why don't we get into some, you know, I think, a little deeper dive into some of the topics of the day. Things maybe that you did actually raise in your presentation. It looks like we ended the 20 minutes a little early, so we've got maybe some more time for Q&A at the end. For the next 20 minutes or so, let's have this chat. I think, look, the first thing when I think of investing in the space right now, whether I'm a debt investor or I'm an equity investor in aircraft leasing, has to be co-cost of funds, rising interest rates. You did touch upon that in your presentation.
Of course, the opposite side of that is lease rate factors and where they're going? Are they advancing quick enough to begin to cover the cost of debt? Every year, of course, leases roll off. The old legacy ones, re-replace them with some new higher lease rate factors, hopefully. Of course, the debt rolls off, and you have to maybe replace that with higher cost debt. I mean, let's talk a little bit about the dynamics and what you're seeing there in the marketplace. Maybe what your marketing teams are seeing in terms of campaigns, airlines, you know, willingness to pay those higher rates? Is the shortage of, you know, new aircraft with the OEM supply chain issues, et cetera, and booming airline demand, is that actually having an impact on lease rates that you're seeing?
Thank you. My view on it is airlines seem to have been very interested in second-hand aircraft, that may be because they're, in general, they're cheaper than new aircraft. We could, if we had more inventory, it would be easy to place, which is completely different to, say, what? 12 months ago. Clearly interest rates are a real issue for them because the reason airlines lease from lessors is the lessors may have equipment available, but also it's quite a good deal for them. It gives airlines operational leverage. What's fascinating to me is that some of the investment-grade lessors are willing to go out and issue quite high-yield bonds to finance aircraft. They have to be passing those costs on to their customers or else they'll go out of business, and they're not.
Clearly, you know, there's evidence that airlines are paying more. It's an interesting dynamic, between new and old aircraft. We're not seeing, if you like, massive demand for new aircraft. We're seeing great demand for second-hand aircraft. I think the reason is just lease rate, is cost for the airlines. I mean, the airlines are still recovering from COVID, and they want aircraft, but are not really willing yet to pay, overpay for them. It's a very interesting market. I think that'll catch up because, you know, there's no, very few ATRs available out there. It's very hard to get second-hand, unleased, good, narrow-body aircraft at the moment.
Clearly, there's supply chain issues that mean that to fix an aircraft takes a lot of time, as well as new aircraft are not being delivered. It is a very interesting and complicated market, is the answer to that question, I think.
Is the, d o you think that some of the, let's say, I wouldn't say downgrade, that may be the wrong word, but the airlines looking to lease in secondhand aircraft because they're potentially cheaper is also a function of the fact that lease rates are increasing for the newer aircraft because there's so far in demand? Is there an element of that in the market dynamic at the moment?
Inflation means that aircraft are more expensive. Your lease rate factor could be the same. If the price of the planes, a new one's $10 million more than you thought it was, then clearly it's gonna be more money each month. I think, you know, a lot of these airlines are suffering a bit of sticker price shock where they've done deals in COVID at, for low, low lease rents for a while. These are running out or will run out, now they're thinking about they're gonna have to pay double the rent, which might be the same lease rate factor, it's twice the amount of money for a new aircraft that does the same thing.
Right.
To be, you know, to be frank, the current generation of aircraft are not that much more fuel efficient than the last generation. Have technological risk in that, you know, they're not all 100% SAF yet. There's issues around there. You've also got, you know, issues around the engines and all this sort of things. If you're an operator, if I was running an airline, I used to run an airline, but if I was running an airline now, I'd be very interested in actually the old stuff because it'd be cheaper, more reliable, you know how it works, and there's a lot of good things going for it. Anyway, at some point, you're gonna have to bite the bullet and go for new planes.
Yeah. I mean, I think in terms of sustainability and ESG, which just seems to be becoming more ever present in terms of discussions every day, that again, you're gonna have to, like you say, bite the bullet and get the new aircraft. I mean, speaking of new aircraft, you raised something there about the engines. you know, you've got your, you've got some A220s. They're running the Pratt GTFs. Are you seeing, you know, from your own customer base issues with engines in particular, or is that not really a factor for the moment?
Well, in the preparation for this call, I did a bit of research for you, Tim. You see, you sort of warned me on that question. I thought I'd. The answer is we're exposed to it in the sense that we have two customers that have a lot of GTF engines. Both of those customers have managed that issue extremely well. During COVID, one of our customers is Vietjet. During COVID, they basically identified four deficiencies with the GTF engines in their fleet, including in our aircraft, and they managed to get them all shop visited during COVID. They're 100% operating now. There's no issue for that customer because they managed it really well.
The other one that's exposed to is airBaltic. They've sort of had the same thing. I understand that Pratt & Whitney have been very, very aggressive in fixing up the issues around the A220 engines, and they're not as bad because the A220 is a lighter aircraft. It's a more modern aircraft. The engines are not doing as much work. They haven't had problems either. In our customer base, it looks like everything's okay. You know, obviously, if you read the press, some airlines are struggling with a few issues, which may be a combination of technology as well as management.
Got it. Thinking about growth channels for the company, I think you touched a little bit on that and where your focuses might be in the next few years. I'm thinking about, you know, pre-COVID, Avation was beginning to diversify its asset classes a little bit, you know, going into more wide body and narrow body from a historical ATR focus, as you mentioned.
Just thinking about like the lessons learned coming out of COVID and, you know, where you see the growth channels for the company, both from an asset side, so, you know, wide bodies, narrow bodies, tweaks to the turboprops, and also I think from an origination channel side, that is the state of the leaseback market, which seems to be very competitive at the moment, and I think the lease rate factors are not as strong there, versus actually increasing your order book or, you know, exercising some purchase rights, et cetera. Kind of two questions in there, asset classes and then which channel in terms of growth, yeah.
I have a view that our lessor at the moment, if they can grow, should be growing, so it depends on their cost of funds. You know, the investment grade lessors should be buying everything they can because clearly the supply channel issues of aircraft deliveries are not gonna go away in the next few years. They should be grabbing as much existing aircraft as they can, as they can finance at a reasonable price. You know, we're looking at a lot of trading opportunities. You know, we've made a fortune out of literally trading aircraft, and we've sold more aircraft than what's in our fleet, if you know what I mean. We've done very well out of that.
In terms of valuations, you know, the most recent aircraft we sold was at a premium to book of, like, 15%. You know, it's a very, very good market to sell aircraft into, which makes it a hard market to buy them. Anyway. In terms of growth, responsible growth, the world is changing and the low CO2 thing is a real thing. It's a real issue that airlines really will face, that passengers will face, you've gotta deal with it, which means you've gotta go for modern technology aircraft. You've gotta have modern engines, assuming they work. You know, the ATR stuff is perfectly placed for that, we're fortunate enough, we're probably I think we're the world's largest option holder.
You know, we've got a half a billion dollars worth of options out to 2027 on new aircraft that are, you know, perfectly low CO2 and all the ESG stuff and easy to finance through green financing and all those good things. There's a growth channel for us. We also love the A220 market for similar reasons. You know, the A220 is the only modern jet out there. You know, the Airbus A220-300 is a fantastic aircraft and investors should really get into it. Unfortunately, they're not making many. Airbus is not capable of delivering many of them. There's an issue there. You can't actually buy many. I don't think there's any for sale in the world at the moment. It's a hard market to grow in.
I think the people that will do well are the investment grade companies, people with really good trading teams that can buy and sell aircraft. People with order books of modern technology like ATRs, like A220s and probably A321neos. They're the three probably best investments out there. And in our case, we can trade aircraft, we can place aircraft and place new ATR 72s, for example, and grow that way. Certainly, there's plenty of growth out there. The easy way to grow at the moment would be if you had a good credit rating, you could find some value in the trading market.
You know, to the question, if it's hard to get aircraft right now, obviously, then I guess maybe it's more of a wish list kind of thing than if you could get aircraft, where would you wanna increase your exposure to? You mentioned that your wide-bodies, for example, you know, they're not in arrears at all. A lot of people would say, "Well, that's a riskier end of the market." You know, obviously, more capital put at risk or to put to work. Would you, given the wherewithal, would you want to increase wide-bodies at the moment, reduce narrow-bodies, you know, versus turboprops, et cetera? Where do you think that kind of diversification.
Well, it's a risk reward thing. The least riskiest thing you can do at the moment is something like an A321neo, because they're so popular. They're the perfect aircraft. They're like a wide-body only they've got single-aisle with two engines. You know, they're very good. They're a very good aircraft. You know, we would increase our exposure to Airbus A220s, and we would increase our exposure to ATR 72s. We're unlikely to increase our exposure to twin-aisle old technology aircraft because I think that they will have, there'll be governments putting taxes on travel and CO2 and all the rest of it, and hence, there's issues around that. I think the compelling value equation is actually the ATR market because they're not that expensive. There's 200 operators out there.
It's just a matter of doing the work to go and find them.
Any comment about, again, the sale and leaseback channel? Obviously, you've got your own purchase rights. Is the sale and leaseback market something you want your marketing teams out there and in on those campaigns? It's really probably looking at the right time to exercise your own order book?
I think that the best way is lessor to lessor trading. It's not airline to lessor sale and leaseback. There's a number of reasons there. I mean, the biggest obvious one is the airlines with order books, there was COVID and delays in delivery, there's been escalation in price. When they signed up for, you know, I'm picking numbers, you know, they signed up for $50 million, and what they thought they'd signed up to might now be, at delivery, might be $60 million. There's a bit of a mismatch there through inflation and escalation that may make some of those aircraft really expensive. I don't know how good or I don't know how liquid or strong the SLB market really is.
I don't know how big it is right now. Whereas I think lessor to lessor trading is pretty strong.
Good. Good. Any comments on, o bviously, it's a global market. Any comments on any pockets of strong demand for the aircraft that you're, you know, that you're looking at? Obviously, you've got everything placed at the moment, but I'm just wondering if there are, you know, given, like, for example, regional aircraft, they're sort of a different demand profile in terms of the globe versus maybe narrow-bodies, et cetera. Any comments about anything interesting there?
Well, we're sold out at the moment. I mean, All airlines seem to be looking for aircraft because they lost a lot during COVID. I think, A lot of them are gonna be shocked when the leases that they got extended during COVID run out, because the lessors will be saying, "Great, we'll have the plane back," or the rates will be doubled. There's gonna be a few issues out there. There'll be airlines looking for aircraft mainly on price dynamics because they'll be worried about what they're gonna pay for them.
Right. Got it. Maybe we'll switch gears a little bit and talk a little bit about risk management. I think, you know, and how maybe your views have changed on this. The pandemic in the last three, four years have changed, I think, the paradigm a little bit. You've had obviously the pandemic, things like the Russian invasion, which has put just entire jurisdiction and jurisdictional risk, geographical risk, to the fore. You've had things in the recent, just weeks even regarding things like Vietnam and India and their adherence to the Cape Town Convention with regard to repossessing aircraft assets. Maybe just touch on a few points on how, you know, Avation may have changing its look or outlook on risk management and some of these trends in the marketplace.
Yeah, thanks for that. I mean, we tend to only place planes in places where we've got a reasonable chance of getting the aircraft back. By policy, you know, in my opinion, and I'm sure other lessors will disagree. You know, during COVID, Russia was an easy place to place aircraft because they wanted them. A lot of lessors placed aircraft in Russia, and now can't get them back. We avoided that by policy because we didn't have a clue on how to repossess an aircraft there. That hasn't changed. You alluded to CTC. There is a belief among a hope among investors and lessors that Cape Town works. I'm on record as saying I actually don't think it does work.
It doesn't work the way it's advertised, which is a shame. You know, during COVID, you know, we had to repossess a lot of aircraft. You know, we repossessed 19. Well, during COVID, we repossessed, I think 18 aircraft. Whereas in our history we'd only ever repossessed one, one prior to that. We had to become almost a mini airline. You know, we had to be able to fly them, we had to have pilots on the payroll, we had to have a maintenance system. The company built a maintenance control system. Like in Europe, we call it a CAMO. You know, we had to establish all that and to be able to move aircraft around.
There was a view that if Cape Town was working correctly, those airlines would make those aircraft available to you and not just leave them at random places around the world. Yeah, there's some questions there that investors might not like the answer to, and that is it's a lot more complicated than what it's supposed to appear. That's my opinion. Other lessors may have a different view. Yeah, I mean, if Cape Town worked, it would be better and easier and things would be cheaper. There are, you know, I don't know whether, I really don't. In times of stress, which is when you need it appears it doesn't work that well, if at all.
Yeah. Look, I mean, I think you're making very strong and important point or at least providing an opinion. From my view, Cape Town does seem to be having some issues. Just again, if we're talking topic of the day here, recent weeks and months in our part of the world. Again, I mentioned India, Vietnam. I think you're mentioning Australia. Yeah, it's got some work to be done there on that front.
Definitely.
I think I'm gonna have one, maybe one other question in terms of just, you know, our fireside chat, and then let's open it up to some broader Q&A. I think it's really the last point is about, it's slightly touching on Russia, but it's a broader issue, I think, with regards to insurance costs and how this will play out. I think you're aware that there are a number of lessors who are suing their insurers and their reinsurers in the marketplace in Ireland, in the U.K., in the United States, I think are the primary venues for those cases. you know, there was a $10 billion, you know, asset grab by Russia, you know, plus or minus a few billion dollars there. Someone's gotta pay for all that.
You know, many of the lessors who are listed and unlisted or have debt listed have publicly, you know, described how much they've written off, somewhere again, around that $8 billion-$10 billion range. I think the lawsuits are in that range as well. If, you know, if the insurers have to pay out, somebody's gotta pay up later on. How do you view what's happening in those markets? Is that a big impact on lessors at the moment? Is it kind of a minor sideshow?
I think, well, it's a $10 billion problem, right? It's a real issue. I think that lessors assume the insurance would work and then have found that maybe the insurers don't have the money. There's a lot of angry lessors out there. How it plays out, you know, it'll play out in the courts. I would have thought eventually, some money would need to change hands because you can't sell insurance and then, "Oh, oops, sorry, we don't have the money. I'm not gonna pay you." That's a tough one, but I do expect there'll be higher premiums. I do expect there'll be plenty of litigation, fortunately not involving us. Thank goodness.
I think it raises interesting questions about what happens to the planes in Russia. You know, at the, you know, presumably hopefully at some time this war ends and those aircraft will come out. The condition of the aircraft then will be problematic because they won't be traceable. They probably won't be able to place them anywhere else. It'll be a tough one. I do think that Russia was a little bit of a dumping ground for aircraft during COVID. The lessors probably should have thought it through a little bit better. Yeah, I have a lot of sympathy for them. You know, the Indian thing at the moment is interesting.
You know, a friend of ours, another, well, another lessor is talking about an aircraft being at remote airports in India, where, you know, the engines have been taken off, and there's just an airframe there. That's a tough one.
Yeah.
That's a really tough one to deal with. Yeah, I mean, what it shows is that the big lessors, the ones that really know what they're doing, you know, the perhaps the investment grade lessors. I mean, we know what we're doing because we can do everything. You know, we've got the technical team and can fly stuff around and the legal team and all the rest of it, which is great. That's a small scale. If you think about the big lessors that are investment grade, they're, you know, they've faced up to their issues in Russia and faced up to the insurance issues and moved on. You know, there's that, you've had a real credit challenge and they've prospered.
It demonstrated, demonstrates how good their management is and how good the business is and the industry is, and demonstrates the value in having competent management teams to manage losing aircraft.
Great. Jeff, thank you very much for that opportunity to provide some of your insights. I learned a few things. I think those are some great opinions. I hope that the audiences will take away some good stuff from that as well. We're going to go to their questions now. I think I've got about six or so in the queue, let's just start going at them in the order which they're coming in. If you do have a question, please go ahead and just type it in. First question is, can you further discuss Avation's pathway to growth, such as the timeframe for taking delivery of new aircraft and raising external capital, both equity and debt? Will Avation require any new equity investors to utilize its purchase rights?
Good question. We have organic growth opportunities open to us. You know, the next two purchase rights. We've actually paid all the equity required for those, so we can take delivery of those two aircraft and finance them without putting up any more money. So that's a good position to be in. Clearly, the order book goes out some years and, you know, we need to contemplate how we fund that, you know. Historically, we've raised debt, we've raised little bits of equity, we've bought and sold a lot of aircraft, which has made us plenty of money, and we've used a combination of those things to be able to finance growth. When we talk about growth, we're really looking primarily at organic growth, and that means stuff that we finance or can fund easily.
I hope that answers the question. We better move on.
The next one, a quick one. Who bears the maintenance cost of leased aircraft?
If the aircraft's leased to an airline, it's always the airline. If you repossess it, we have to. We don't like repossessing them, but when we repossessed 18 aircraft during COVID, we had to maintain them all. I think it was many millions of dollars, which is now almost finished. Hopefully we don't have to do that again.
Great. Next question. I think this one is from, I believe, from the sell side, John. With regards to Avation's purchase rights, to put it in context, how many ATR 72-600s are you currently anticipating ATR to produce in the next few years? Avation has successfully sold or leased all the aircraft that were off lease as a result of COVID. Other than being secondhand turboprops, and single-aisle aircraft, what were the other key factors airline customers were looking for when you were marketing these? Last question, there's three there, is given the focus on sustainability and the technological change you've spoken about, what are your thoughts post-pandemic on separately leasing aircraft engines? The last one is on just pure engines.
I think ATR can only produce about 35 aircraft a year in the short term, they'll basically be sold out. We have 27 purchase rights over the next few years, and that's a very small amount of aircraft compared with the number of aircraft that are being retired. Which is why there's basically very, very few ATR 72s in the world at the moment for sale. What else? What are they looking for? Airlines are looking for aircraft that they can operate quickly. When they decide-- At the moment, when an airline decides it wants a plane, it wants it really quickly, which is an interesting one given their supply chain problems and OEM issues. The last one, given the focus on sustainability, what are your thoughts on leasing engines?
It's a bad business if you're leasing old engines in the long term. It's probably a fantastic business in the short term. Obviously, each engine type as it comes out is more fuel efficient and better in terms of environmental parameters. I think the engine leasing business, and we've had a little bit of experience here, I think it's a very complicated business, and it's not that investor-friendly. I wouldn't invest in a huge scale engine leasing business, but it's a sort of a side dish to a lessor. You know, a lessor can do it if they really wanna do it, but it's complicated.
Got it. Next question is: How does the current demand for aircraft translate into demand for lessor platforms? Is Avation seeing interest in its platform or fleet in its entirety?
Good question. We have had inbound inquiries for portions of the fleet, but the issue with selling a big proportion of the fleet is we'd have lower revenue. It'd need to be a fantastic price. Quite surprisingly, we have had inbound inquiries for big numbers of aircraft. There hasn't been many lessor platform transactions. There's, you know, always talk and rumors and all the rest of it. In real life, there hasn't been many things happen lately. You know, we sort of, 2019, we had a proposal from an investor to actually buy the company. We haven't had one, we haven't had one lately.
You know, I think over a period of time, I think investors will recognize the value in this sector. I mean, it's done super well out of COVID. You'll see more consolidation. I'm shocked that we're not seeing more investment-grade lessors, not just buy the sub-investment grade ones, 'cause it's an obvious trade, right? It's, you know, you've got a lower cost of funds, therefore you're gonna make more money.
Yeah. We've got a couple of questions it looks like from, I think, Damian of sell-side from Canaccord. I'll do a couple of his and then maybe move on to some others after that. What are the features you are seeing in leasing and aircraft maintenance ecosystem that are different from 2019? How do you think this will develop over time? That's the first one, a follow-up question is.
Oh, I'll answer that.
Okay. Go ahead.
The issue is there's a lot of CO2 issues, so people are looking at new technology and all that sort of stuff. Also, what the supply chain issues. You know, 2019, you didn't have the supply chain. You didn't have to wait 12 months for an aircraft part. So people are now thinking about inventory. You know, do we need to. Airlines are thinking about inventory. You know, do we need to have stuff in stock that we wouldn't have years ago? Which is interesting. All right. Do you wanna do the next one, Damian?
Yeah, sure. Why don't we do with less transition costs and control over admin costs, a fully utilized fleet implies scope to return to sustained profitability. As Avation does, where will it deploy those profits? Debt reduction, growth, or even dividends? How does the company think about its dividend, capital deployment priorities?
Well, I think I've answered this question before. You know, our focus has been on getting rid of debt because clearly, I mean, over COVID, up till March, sorry, April this year, now it's an unaudited number, so don't shoot me if I'm slightly wrong, but we repaid $322 million in debt. You know, what we've done is what we've talked about, which is to get rid of debt. We're probably under-levered at the moment. Clearly, you know, over time, you know, that'll evolve. The capital structure will evolve. You know, we've been very aggressive in getting rid of debt. Next one.
Okay. Let's do: Is it only a matter of time before ESG becomes more of a factor in determining cost of funding as financiers start to incorporate ESG metrics into their lending policies for Avation? I think that's already happening. Go ahead, Jeff.
We've got banks talking about lowering the cost of money associated with KPIs. You know, if you agree three or four ESG or CO2 KPIs, you can get a lower cost of money. They're paying you to transition. That's a real thing, and it will occur, and it'll drive lessors to focus on new technology aircraft, obviously, and the airlines. You know, that's, you know, it's happened.
Great. I've got one here. I don't know if you can see this one, Jeff, so I'll read it out to you. With airfares up and some airlines reporting record profits, have lessee rental arrears improved? Are all lessees up to date on current and restructured payment schemes? Well, it sounds like they're not from your slide, but why don't you give some detail on that?
Well, they, yeah. I mean, yeah. The answer to that is, A lot of them are doing well. We, you know, when we talk about 88% of what's being owed to us from narrow bodies, you know, that's, you know, a relative number. It's not an absolute number. Like, you know, we don't wanna report in this form on an absolute number. Certainly, the airlines are doing better. They, you know, Some of them are putting their airfares up dramatically, and they're not facing resistance. You know, we had a One of our customers reported that they increased their fares 10% and no one noticed.
Our comment was, "Well, some airlines that we fly, you know, seem to have increased their airfares 100%, and we have noticed." I think, you know, airlines in general, you know, if they're smart, they and do a little bit of yield management, are certainly dramatically increasing their airfares, and they'll have plenty of money to pay their bills. What's the next one?
Follow-up, follow-up from the same questioner. Post-COVID, airline demand for turboprops has increased and ATR supply has tightened with no deliveries in the first quarter of this year. How do you compare the returns of exercising purchase rights to trading those purchase rights?
Great question, complicated answer. You're not allowed to sell purchase rights. Purchase rights are personal to whoever owns them. We can't go and just sell a purchase right. We have to exercise it and then sell an aircraft on delivery, for example. It is possible to do it, and in the past we've done it, and happy to do it in this right circumstances any day of the week. You know, in the broader context, the ATR is the only aircraft in the world at the moment that within a short-term period of time is gonna be 100% SAF. It's virtually zero CO2 now. The impost that governments will put on airfares for that sort of operator are low.
In a way, they're a fantastic investment, because they're sustainable in all, by any way you describe that word.
Great. Where do you see Avation in three to five years? What is your profile, turboprop versus narrow-body versus wide-body? Are airBaltic and Vietjet still the majority of revenues? Do you see Avation participating as a buyer or seller in any M&A? Three or four questions in there.
Well, I don't. No one knows about M&A because clearly, you know, you never know. They're talking about allocation of capital towards turboprops. We like. You know, we've said we like turboprops. We like ATR 72, we like A220s, we like A321s. We will have to exit old technology aircraft at some point because it's a one-way trip for those. You know, the valuation of old technology aircraft will go down. At some point we'll trade them. You'll see greater diversity. We'll be going for more airlines. Yeah, we'll diversify away from the two that you mentioned. We'll have more customers, bigger fleet with new technology. That's the obvious thing for us to do.
Great. Here's another really good question. Why do you think that Avation share price does not match the company NAV?
If I knew the answer to that, it's either risk, investor relations, number of shareholders, market choices. You know, there are people come to us and say, "If you're listed in the United States, your share price will be X," blah, blah. I don't know the answer to that one. It's obviously it's cheap I mean, versus nav. I mean, I'm not allowed to comment too much on share prices. Clearly, you know, over time, hopefully, and results, and good investor relations, things should pick up.
Okay, another ESG question. How important are ESG considerations for the industry going forward in your opinion? Does the inclusion of aircraft leasing in the EU Taxonomy affect your decisions?
I think it's imperative. I think Airlines are always gonna be forced, economically by taxes to go to low CO2 aircraft. I mean, the Europeans are, you know, they could save a lot of fuel as well as carbon dioxide if they had their air traffic control sorted out, system sorted out. Something like 12% of fuel is wasted in Europe by airlines, aircraft sort of changing altitude and direction. You can push back on them. In reality, you know, those governments are pretty aggressive and will tax people that don't change and comply. I think the ATR stuff and the A220 market and the NEO market, when it's sustainable aviation fuel will be strong.
Great. It looks like we've got three questions plus three follow-up questions in around five minutes to top of the hour. Let's see if we can get through these. You mentioned earlier in your comments that lessor-to-lessor trading is looking strong. How do you view and think about the opportunity set to secure used ATRs at reasonable valuations from other lessors? And are you seeing any investment-grade lessors starting to enter into this aircraft segment?
It's a good question. There's not a lot of used ATRs on the market at the moment. We got some info from ATR the other day, there's virtually zero. I don't think there's anything for sale. In terms of IG, people in that segment, there are a couple. There are a couple of smart ones. There are a couple that are in there. It's, it's not a matter of being in the segment because you might have a customer that wants two types of aircraft. You know, a lot of customers will almost be forced to take ATR. You know, if you're a lessor, you wanna provide customers with what they wanna take. You know, they might want a narrow-body and an ATR or a combination. Another one? Move on.
Yeah. Given that a number of Avation's lessees are smaller regional airlines, can you comment on the overall creditworthiness of your lessees? Do you anticipate some problems in terms of individual airlines going bust? Do you take into account the creditworthiness of lessees when you price a lessee?
Absolutely. Yeah. We adjust the price according to the risk of the airline, and we anticipate them that some of them will go bust. Which is why you see us with a lot of names rather than a lot of aircraft with each name. If we think there's a credit out there, you know, we might do one or two aircraft, you know, and not 10 in like the ATRs space. You need diversification, and you need to take into account the creditworthiness of the airline when you price the lease.
Airbus is struggling to cut A220 costs, and as a result, Airbus is reportedly raising the price of the A220 to around $40 million. If this improves valuation, will this make selling one of your A220s a very attractive proposition?
Well, I can't comment on Airbus' price. I don't know if they're struggling to cut costs. I think they're struggling to make them. I think their problem is they're not delivering enough. Yeah, they've got demand for plenty. I don't know if they're, I haven't read that they're trying to struggle, that they're struggling on cost. Yeah, I mean, the valuation's gone up. I would say that all of our A220s are certainly worth more than what we paid for them. Does it make selling them an attractive proposition? Well, they're really good assets. They're probably the best investment in the world at the moment in that sector, so you may not be that smart to sell them.
Yeah. Yeah. My read on that is that because they can't increase production, they can't lower their unit costs on each one they make. That's probably how they're struggling to cut the costs. The other side of the coin you mentioned. You upsized the size of the note buyback to $100 million, but weren't able to repurchase many notes. Is Citi still advising on a refinancing? Okay.
Citi is still involved in the company in the, in the background. We. Yeah, I mean, It's the bond markets. They're grown-ups. They're, they don't like selling you stuff at too much of a discount. I don't think I can say much about that one.
Longer term, beyond SAF, what are the eco technologies that you see the most potential for? I guess this is maybe hydrogen, electric hybrids. I mean, even Personally, I was wondering, you know, De Havilland ZeroAvia, they've got a plan to put, you know, some hybrid engines on a turboprop there. I don't know if ATR does, but that kinda would be wrapped up into that question.
Look, I think SAF will is a strong one in the short term because it does tick a lot of boxes. Aircraft technology takes a while to change. It doesn't change in a sort of a one or two-year timeframe. It changes in a five, 10, 15 year timeframe. I think obviously, there'll be some viable eco technology, whether it's a battery-powered thing, or whether it's hydrogen or something else that establishes itself in the next 10 years, and you'll see it in scale in, you know, 15 years' time. I think some investors think, believe this stuff happens overnight. It's really, it's slow, you know. Engine technology, for example, doesn't actually change much in 15 years.
It's remarkable that ATR are now flying around with 100% sustainable aviation fuel in a turboprop. You know, that engine, the new engine they've got, the new Pratt & Whitney thing that's going on all the ATRs from last December. You know, the PW127XT-M, we're very lucky that our order book covers that. You know, all of our options, we get that engine, which is great. I think it'll be around for a long time. To Ellis Taylor's question, I think you'll see change, but it's a 10-15 year thing, I think, in my view.
Great. Well, Jeff, I think that's all the time we have today. It's top of the hour. I apologize. There were two of follow-up questions we didn't get to, but I think we got to everyone's original question at least once. I don't see any other original ones in the queue. With that, I'm gonna thank everybody for participating. Thank you especially to Jeff for all the insights and opinions. I think that was fantastic. Sounds like there's one more thing, Jeff, you wanna wrap up with?
Well, if people email us questions, we answer them.
Yes.
On the website, there's an Investor Relations. They can ask the questions, and we will answer them.
Great. Great. Thank you very much, everyone. Take care.