We have a lot to talk about. Some interesting news, as I mentioned yesterday. People are still going to be coming into the room, but I do want to get started because there's plenty to talk about. Very pleased to introduce the first session of our afternoon. A man who, as with many of our presenters today, requires no introduction, so I'll be brief. Mr. Aengus Kelly, Chairman and CEO of AerCap, the largest lessor in the world. A couple of modest acquisitions or so over the last few years. Very interesting progression and growth of fleet. Lots of stuff going on and some interesting news yesterday, so I don't need to say any more. Let's turn it over to Gus Kelly to give an update on AerCap and maybe expand a little bit on what we heard or read yesterday. Gus.
Doug, first of all, thanks very much for having us here today. As always, the premier conference in the sector. You okay?
Yeah, sorry. Apologies.
I was just thanking you, Doug.
No, no, no.
No, it's a fantastic conference. Thank you for having us all here. The attendance is great. Thank you for all coming along to it. For these things, I think it's much better to have Q&A. I can stand up here and say how many airplanes AerCap has and how many we lease. I don't think that's particularly additive to you learning much about the industry. Just ask me whatever you want. Please go ahead. You must have some questions. I'll just have a couple of brief slides. Let me see here. People talk about supply-demand. What's happening out there? We have seen for a long period of time a supply-demand imbalance. We don't believe that supply-demand imbalance will come into equilibrium for probably the best part of the five or six years.
Even when it does, you never really see periods of significant oversupply in this industry. You will see regions where you may have operators that have issues, but on a global basis, you will not see any extended period of oversupply in the industry. We never have. Now, why is that? Boeing and Airbus, of course, just want to produce as many airplanes as they can. They do not care about the aircraft once it flies over the fence. The sooner they can make one to replace it, the better. That is their business model. There is nothing wrong. It is not a criticism. There is a handbrake in the whole industry, which is the engine guys. Boeing and Airbus get paid $1 when the airplane flies over the fence. The engine guys get $0.3 . They get the rest of it over 20 years of maintenance.
Every year there's a fight between Boeing and Airbus and the engine guy saying Boeing and Airbus will say, "We want to produce 150 aircraft." The engine guys will say to themselves, "If we do 150, we think the market's 100. The extra 50 that come in, they will cannibalize the most lucrative part of our business, which is the last engine shop visit on an 18- 20-year-old aircraft." That's the least profitable part of an engine manufacturer's business is selling a new engine because they lose cash. They'll never, ever let the system get too out of balance. Even though I think we're going to be in a situation of significant undersupply, both narrow and wide for the next five, odd years on a global basis, you'll never have that situation.
We've never had it where you get a massive oversupply of aircraft for a sustained period. As I said, a lot of that goes back to the engine guys. Specific to this particular period, what we have here is the levels of aircraft that just were not built because Boeing stopped production in 1978, 1977. Effectively, the MAX also. Airbus drastically reduced the A320 production, their wide-body production. Even if we could get back to the production levels that Airbus and Boeing were at in 2018, there would still be a significant shortfall in the industry because of the gap that has to be made up, let alone before we get to growth. We have the engine issues as well themselves, which are causing less aircraft to spend less time in service.
The engine durability issue will get better over time, but it'll take a fair period of time. That, again, will mean that there'll be less seats in service than the airlines want, which will increase the demand for aircraft. Sales activity is something that is reflective of that because it's easy for me to stand up here and say, "Lease rates are up," etc., "Demand is up." One thing that really shows it to you is the buyer base. What's happening on the air? We're the biggest seller of aircraft in the world of used aircraft. What we're seeing over the course of the last three years is that the airlines have become the major buyer of aircraft from us. Why is that? Because they know the delivery schedules from Boeing and Airbus won't happen.
They know that they have to have the lift in place for the long term. If the airlines felt that this was a 12, 24-month issue—and it's not fair to just blame Boeing and Airbus because they know that the engines are spending much longer in the shop. It's the biggest engine leasing company in the world. We have an unrivaled visibility into what's happening to every CFM and GE engine every week. We know we're in the shop, how long they're spending in the shop, what the turn times are. Given that we've just so many engines in our own fleet, we monitor all of those engines going through the shop. We can see the turn times are longer. That means the airlines need to have additional lift.
They can't just rely on Boeing and Airbus because even if they delivered on time, they know those airplanes won't operate for as long. The aircraft will have to come off. The engines will have to come off for maintenance more frequently than expected. All that means is that airlines know they're going to be short capacity. We have sold a couple of hundred airplanes, 18-20-year-old airplanes to airlines because they know it's a long-term issue. They never thought they'd be buying these aircraft. They fully expected when they ordered the MAXs and the NEOs that they would be the airplanes they'd be operating, not 18-20-year-old 737s, 700s, 800s, A319s, A320s. That's the reality of where we are. We'll come to Q&A in a sec. As I said, look, overall, the supply-demand dynamic, supply is very tight.
It's going to be tight for a long time to come. That's driven by the time on wing of these engines, how long they can last. If the engine doesn't stay on wing as long as expected, then you need a replacement aircraft. You need replacement capacity, or you need replacement engines. There's a scarcity of spare engines in the world today. That won't change either anytime soon. More and more of them are needed to support the in-service fleet, to keep that flying. Overall, I would say as we look out at the moment, I don't see the supply-demand dynamic changing for the best part of this decade. Even when it does, as I said, the engine guys will keep a lid on the amount of supply that Boeing and Airbus can put into the system.
Some of you then will probably want to understand what happened with our insurance claim in Russia. I can't say a huge amount about it, but what I can say is that that was a long process over the best part of the last 12 months that a lot of people worked on with a lot of different entities in different parts of the world to make it happen. I always told you that we would receive a lot of money at some point in the future. Still, we will receive more, whether it's when we'll get it, what format it will come from, I don't know. I was never in any doubt that we would receive significant funds. It may well come through the insurance courts in the U.K., or I should say the courts in the U.K. for the insurance claim or other ways.
I have no doubt that a significant sum will be received over time.
Doug.
Great. I'm joined on stage by my equity research colleague, Hillary. This time seems like a debt conference, but it is also an equity conference. We're very pleased that we have the public aircraft lessors here as well, AerCap, the largest of them. I'll turn it over first to Hillary to ask a couple of questions with an equity slant.
I do have a question regarding the settlement yesterday. Could you just go over the background? You'd mentioned 12 months. How did the discussion start? Who started it? What was the motivation behind for the Russian insurance company to get this done? Just kind of a background.
Yeah, we can't say too much about all of that. What we can say was an awful lot of hard work by a lot of committed people to make that happen. As you can imagine, you have to deal with issues in Europe, the U.S., and other parts of the world, including Russia, to get everybody there. I mean, it's an important first step. Of course, the reinsurers were involved as well. The point of the matter is that, as I said, when this issue happened with the seizure of our aircraft, we always knew that a lot would come. The avenues that the funds will flow from, they can be varied, but I have no doubt that they will come.
Just one more question following up, and then we can switch topics. Do you think this is a one-off event, or do you think there are other Russian insurance companies that would be willing to do the same?
I can't say, Hillary.
Oh, can I try one follow-up? As IR Grimace says, why these airplanes? I guess, personally, the first thing I did was check my old GECAS AerCap ABS transactions. Why these airplanes? Why not others? What's the thinking on their side? What about my planes?
Your planes?
I'm possessive towards my ABS market.
Oh, sorry. I have to ask your manager about that, Joe. Sorry, Doug. No, I mean, look, a lot of it comes down to presence, capability. What can you get done? What can realistically the largest player in the world do versus others? There is a big difference. That is true of any aspect of the business.
We'll leave Russia then for a moment. Back to Hillary.
Okay. The $645 million proceeds, what's the most likely thing you would do with the extra cash?
I think, look, if you look at the leverage of the company today, we're down to two and a half times. I think we've taken that well below the debt equity target of 2.7 times. I don't think it would make sense probably to put more of us to reducing leverage further. I suspect we think that our share offers incredible value at the moment. We've been able to sell our own older airplanes at very significant premiums. So far this year, I think we're selling at 180% of book and buying back our shares at 82% of book. I think that's a trade you got to do all day. The cheapest airplanes, if we can consistently sell our less desirable assets at significant premiums and buy back our stock at a discounted book, they're the cheapest airplanes in the world.
Boeing and Airbus would not sell me an airplane any more close to where I can buy my own.
Yeah. To that point, you're selling older aircraft, 17, 18, 19-year-old. You've mentioned that airlines are buying them. How does that compare versus historically?
Historically, they would have bought less. They would have bought 15%-20% as opposed to 50%. There's still plenty of financial buyers out there. At the moment, financial buyers are very sensitive to the funding cost. An airline, not so much. If you look at an airline's cost structure, of course, they want every cost to be lower, do not get me wrong. Having the metals is far more important than whether there's a slight increase in ownership costs. If you look at that airline P&L, fuel, labor, there are multiples and multiples of ownership costs. If you do not have the metal, you have got problems.
I wonder if I could interject a strategic question. You have a nice timeline showing the various acquisitions. I'll go back in time and conference years. Acquisition of GECAS announced March 2021. I think it was in September of 2019. I asked you up on stage. You're at about 1,000 airplanes. ILFC acquisition went well. Everything integrated. At what point do you get this economies of scale and what might be too big a number to simply manage? The answer you gave back then was somewhere around 2,000 airplanes, which happened to be about 200 airplanes more than AerCap plus GECAS. I will ask the same question. Now that you've had two successful integrations, much bigger in scale relative to a bigger market even, where are the diseconomies of scale, if any, and how many units is too big?
Look, it's worked out pretty well, Doug, so far. I mean, if you just step back and put it all aside and say, as I said, we can stand up here and say demand is very strong. My values are great. I'm making margins. But as a debt investor and equity investor, just step back and say, in November 2021, we closed a GE transaction for $30 billion. It is worth noting that a private equity shop was bidding $40 billion for the same platform prior to the COVID. And indeed, when we announced the transaction, it was at $28 billion. The only reason it got to $30 billion was the run-up in the stock. But what happened since then? We put on a lot of leverage to do that. Objective number one at that time, we have to make sure operationally we can cope with this amount of aircraft.
Our IT systems, internal autos, your technical team, the engine management business, that all this can be dealt with. The capability had to be there. That's the most important thing because you can do a great deal, but if you can't keep the trains running on time, you're going to run into trouble sooner or later. A huge amount of focus went into making sure that the operations were capable of dealing with that quantum of aircraft, which they have been. The outcome of that was we beat every target we gave the street. We delivered much faster than expected, got to our target ratings much faster than expected.
Even despite having to take a $2.5 billion charge direct to the equity line when the Russian invasion started, we were able to overcome that as well, recoup that $2.5 billion through the operating earnings of the business, put the company in a position where just this year alone, in addition to having done all that, delivered the business, taken the $2.5 billion Russian hit, we are still in a position to do $1.5 billion of buybacks this year as of June 30. That was all done in a space of 20 months. I think rather than me saying, "Were we able to cope with it?" anecdotally, that is the hard reality of it, that we were able to do something like that on a balance sheet of that size and a company of that scale.
There's certainly been a couple of large portfolios which would have allowed a step function increase. Presumably, the pitch books made their way to AerCap House. As you look forward, or even looking back at those two opportunities, perhaps, what might have been attractive, what wasn't unattractive? Your leverage certainly allowed something to be done if you chose to. Strategies going forward, just expand on other possibilities.
Look, I think you always want to have a strong balance sheet. That underpins everything. As I said, our debt equity ratio is two and a half times. COVID, we kept it low as well. That gives you the position of strength. When you have that position of strength, you're able to do things like take advantage of opportunity. At the moment, of course, look at the leasing business, buying back our own shares is a no-brainer. There's no way any airplane, Boeing and Airbus are going to sound to make any sense given where our share price is. Given that we bought ILFC at enormous discounts, we bought GECAS at enormous discounts. That's the planes I'm buying. There's no way in the world that they can match that Boeing and Airbus. From my perspective at the moment, we have tremendous value in the company.
We're going to harvest that value. As I said, keep the debt equity ratio in the right place and then use that capital to buy our own shares. Now, look, you can see, of course, in the private market, as always, these platforms trade at significant premiums to book. We saw last week a reasonably small platform get purchased, $3.5 billion size for about 1.35 times book, which is consistent with most of the historic private trades. As I said to you, historically, we sell at a gain and sell. We're about 1.35 times book, give or take, on our gain and sale. That's our less desirable assets. While we can continue to sell our assets at a big premium, private transactions for platforms are going at significant premiums to book.
Yet, we can buy our own shares in the market at significant discounts. That is just the way forward. Doug, we are not here to be big for the sake of being big. The idea here is to create as much value as possible for our stakeholders within appropriate risk tolerances.
You made a comment, I think it was on the last earnings call, that you do not want to be the one lining up at the chalet to place orders in a very hot market, which certainly it seems we are in now with people placing orders out to 2029 and perhaps even beyond. I guess what happens? You have got 300 airplanes on order. Ultimately, they deliver, admittedly with delays. Is it a matter of just having to wait until, forgive me, the next crisis to place an order? How do you avoid just having the backlog diminish and just less to do other than replacement?
I've never cared much about a backlog one way or the other, to be honest. You'll always get—I mean, this industry grows all the time. There's always opportunity. We've grown more than anyone in the industry has ever even thought possible. I couldn't care less about backlogs. If there's a good deal to be done with Boeing and Airbus, we'll go and do it. The last time I ordered airplanes from Airbus was March 2020. Nobody was there. That's the time to buy. No one else in the world came next or near them. That's when you buy. We bought the GECAS deal in COVID, that order book. We bought the ILFC order book in COVID. The original business was bought out of distress from the German owners of the business. Look, Boeing and Airbus know our price targets. If they don't get there, I don't care.
There's plenty of opportunity in this business, as you've demonstrated. It could be, say, a lease back. It can be our engine business, which we've grown quite a lot and we'll continue to grow our engine business as well. I mean, the objective here is to create value for you. You are the people who paint it. You are the people who put the money into the business. That's all I care about. I do not care less about Boeing and Airbus as shareholders. I care about you. That's all we care about. I couldn't give a damn about being at an air show making an announcement. More is the fool if you do it. You do it when it's right. You pay me, not Airbus and Boeing. Doug, look, if the opportunity is there, we're going to do it.
If it's not, this is who pays my wages.
We talked a lot about airplanes. You talked about engines. There is also freight. I guess if I were to play the old game of which of these things is not like the other, it would be helicopters. I am wondering, experience with helicopters, what you are thinking there. How does it fit in with the rest of the portfolio? Are there synergies or is it something that is just different but has to fly up in the air like everything else?
The helicopter business, of course, is not as germane to the business as obviously engines and the freight business. The helicopter business has done extremely well. It was seven years ago, probably 85% oil and gas. Today, it's about 55%. It's a bit smaller now today. It is doing very well. We've got a great team there that are running it. As we see what's happening globally as it comes to scarce resources and energy. Also on the supply side, what's helped a lot there is that the two main manufacturers of commercial helicopters, Airbus and Leonardo, have a very big focus now on military production for those production lines. We've seen less supply in that sector.
On the freight, your acquired organization, GECAS, was the initiator of the 777-300ER conversion program, now one of, call it, three conversion lines that are in some process of development. What's going on there? We heard comments earlier today that with the strength of the passenger market, are you going to be converting quite as many as you thought? Is there a better opportunity simply flying people rather than boxes?
Certainly, if the freight market was on fire, of course, two or three years ago, it was never going to be the case that you were going to have the same levels of yields. They were not going to last. By the same token, while it has come off, of course, the advent of e-commerce has opened up a very different freight demand than we had 12, 13 years ago when it was focused on countermeasures, things like gold bullion and drill bits, pharmaceuticals. There is a much bigger market out there. The 777 program is seeing that. We have at least nearly all of the 777s that we have designated for the program already. They will start delivering in the near future. That freight business is still a profitable business. Right now, of course, look, the passenger market is very strong.
The business case to put more into freight is harder to get there than it was previously when the freight market was high and the PAX market was not in demand. Freight will always be a part of our business. You could tell that the GECAS had big expertise in that for a long time.
Right. Hillary?
Yeah. I asked this question earlier today to another lessor. Just on a high level, currently, lessors own about 50%, I guess a little over 50% of the total global fleet. Do you expect that number to continue to go up? Have we kind of plateaued, do you think?
I'd say by value, it's well above 50%, Hillary. I think that will—the value number, I think, will continue to increase. I think that's the case. It's a bit like Hilton Hotels don't own any hotels any longer. I just think that's a reality as we go forward for a myriad of reasons why airlines will continue to own on a global basis less and less. Of course, there'll be a few outlier airlines that will own a disproportionate amount of their fleet. I think more and more we'll see that just trend away. It's been going up for a long time. The numbers are very big, though. When you think of the quantum of deliveries that are coming into the market every year, I mean, okay, the last couple of years, they've been less.
I'm sure we're going to get up to a situation where we'll deliver Boeing and Airbus maybe $100 billion plus of commercial aircraft. Just to stand still, then the lessors have to come up with $50 billion. That's a lot. That's a lot. Now, with Deutsche Bank here behind us, that's not a problem, is it, Doug?
Not at all. Always here to support our clients and customers. A follow-up on that. You said certain airlines will always want to own and prefer not to lease. Double ATC market, one avenue of finance. I guess, though, also, is there the fact that there are certain aircraft types that lessors probably should not be playing in or should only be playing in very cautiously? Would you like to place an order or do an SLB on a 777X or if launched an A350-1100?
Look, I think you've got to be careful about that. I mean, people, first of all, confuse a young aircraft with a good aircraft. That ain't the case. If you took—say you have an A330 or a 777, the Jewish investors look at it and say, "Oh, it's young. It's a 2017 build, 2016 build." You're going to lose your shirts on that. That airplane will have great, good, strong economic demand out till probably 2031, 2032. At that point in time, it's going to be replaced in enough numbers by the A350s, by the 787s that there won't be much demand. You are sitting on an asset there. You may have only consumed 60% of its life, so the other 40% is gone.
A lot of people bought those assets in 2015, 2016, 2017, 2018 because they wanted to show a young portfolio, get some decent yield in the near term. It is much more nuanced, Doug, than just saying, "Would I buy a 777? Would I want to buy a 6-year-old 737 or a 20-year-old one?" I'll buy a 20-year-old one any day. It is a much better bet. There is no way you are going to get another 18 years out of a 6-year-old 737. You are definitely going to get the 5 years out of your 20-year-old one. You might get it through the value because, ultimately, at 20 years old, an airplane is an engine stamp. That is all it is. The value is all in the engines.
In that regard, when you're trying to create value and look at money, I mean, I know a lot of guys in this room will say, "Young is good. Young is good." It is, but it's got to be far more nuanced than that. Again, when you come to assets that you think of a big user base, it's not just about ones that clearly—it's a user base for the longer term. You mentioned some assets there, like very large assets. Traditionally, very large assets have very small user bases, and it's harder to get your head around those. You'll also have variance within the smaller aircraft types as well where the user base can be declining rapidly.
If you look at how things have trended, I mean, a tailwind for Airbus was the upgazing of aircraft into the 321, where the heart of the market was 160 to 180 seats, really suited the 737-800. As we saw flight restrictions around the world, just here in the U.S., the ability to build additional gates at any major airport where people want to fly to is extremely restricted. Build a new runway in Europe is a non-starter. There has just been this upgazing, which has certainly helped significantly on the development of the Neo program with the 321 getting up to 230 seats. On the opposite of that, as you see, the 319 size, the 700, really struggling quite a bit. It is fairly nuanced, and you have to think about the long-term demand.
As a general rule, Doug, to be fair, you're right. I mean, aircraft that have potentially a very limited user base or shorter economic life, you have to be very careful.
I want to make sure we have time for audience questions. Any questions from the audience? My back left, please.
Hey, guys. I remember last couple of conferences there's a focus on net spread and managing the liability side of the balance sheet. Any thoughts in the current rate environment?
I mean, look, what we're seeing at the moment is lease rates have tracked interest rates. That's evident on the newer airplanes because it's just tied to the contracts. On the used aircraft too, I mean, you're seeing it. It's not a daily mark-to-market, but if you were to say, over the last 12 months, what has the 7-year or, to say, the 5-year treasury averaged and looked at that of what we were getting on lease rates for the same airplane, say, 5 years ago, you'll have passed on that interest rate increase. Net spread is a curious one because, clearly, as you sell older high-yielding assets, because the asset might be on a 12-year lease, if you're getting $300,000 or $400,000, whatever, $300,000 on day one, you're getting $300,000 in year 11 too.
When you sell that asset, of course, that reduces your net spread. By the same token, if you take those proceeds, sell that asset that's less desirable, take those proceeds, buy your own stock back at a discount to book, the EPS is a lot better, and the business you bought the shares in is better too. What you want to do here, it'd be a fool's goal if I was to tell you, "I'm selling all my brand new Neos 350-787s to create capital." I have a worse business afterwards. Yes, I've got a gain on sale, but I've given away the future and franchise of the business to be stupid.
What you want to try and do is, when you sell assets, on average, the average quality assets you sell will hopefully, in your mind, be a slightly inferior quality to the average asset that's left in the business. Sell the inferior one at a gain and buy the superior one at a discount. That's what we're doing at the moment, and that's what we'll keep doing to drive that EPS number and create a lower risk proposition on the balance sheet to the quality of the portfolio.
is a lot more to talk about, and both Hillary and I, I suspect, have lots of additional questions. I do want to make sure that we remain on schedule. I guess thank you so much for your time, for your insights, for your thoughts, and for the news yesterday. Congratulations. Thank you.
Thanks, Doug. Thanks very much. Thanks a lot.