Ryan McKenna - Head, Strategic Planning Steve Hazy - Chairman and Chief Executive Officer John Plueger - President and Chief Operating Officer Greg Willis - Senior Vice President and Chief Financial Officer.

Jason Arnold - RBC Capital Markets Helane Becker - Cowen Jamie Baker - JPMorgan Arren Cyganovich - D.A. Davidson Mike Linenberg - Deutsche Bank Kristine Liwag - Bank of America Nathan Hong - Morgan Stanley Christopher Nolan - FBR & Company Moshe Orenbuch - Credit Suisse.

Good day, ladies and gentlemen and thank you for standing by and welcome to the Air Lease Corporation’s Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference maybe recorded. It’s now my pleasure to turn the floor over to Ryan McKenna, Head of Strategic Planning. Sir, floor is yours..

Good afternoon, everyone and welcome to Air Lease Corporation’s third quarter 2015 earnings call. This is Ryan McKenna and I am joined this afternoon by Steve Hazy, our Chairman and Chief Executive Officer; John Plueger, our President and Chief Operating Officer; and Greg Willis, our Senior Vice President and Chief Financial Officer.

Earlier today, we published our third quarter 2015 results. A copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, November 5, 2015 and the webcast will be available for replay on our website.

[Operator Instructions] Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense and stock-based compensation expense.

These statements and any projections as to the company’s future performance represent management’s estimates of future results and speak only as of today, November 5, 2015. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations.

Please refer to our filings with the Securities and Exchange Commission for a more detailed description of the risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events.

In addition, certain financial measures we will use during this call, such as adjusted net income and adjusted diluted earnings per share, are non-GAAP measures.

A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q we issued today. This release can be found in both the Investors and Press section of our website at www.airleasecorp.com.

Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chairman and Chief Executive Officer, Steve Hazy..

Thank you, Ryan. Good afternoon and thank you for joining us today. I am pleased to report that for the third quarter of 2015, Air Lease grew our top line revenues to $313 million versus $262 million in the third quarter of 2014, an increase of 19.5%.

Our income before taxes increased to $120 million from $96 million in Q3 of 2014, representing a profit growth of 24.2%. Additionally, our diluted EPS grew to $0.71 per share for the quarter compared with $0.58 in the third quarter of 2014, which is an increase in our EPS of 22.4%.

And finally, we delivered another strong pre-tax profit margin for our company this quarter at 38%. The financial returns and the metrics of our core leasing business were excellent and we continue to deliver record and consistent results.

We have heard questions about the slowing GDP growth in emerging markets, potential slowdown in China, currency concerns, M&A activity, production rate concerns and increases and residual values of current aircraft.

While it is a good thing that many more people are focusing on our industry than ever before, I want to be absolutely clear that none of these topics are new issues or matters that we haven’t dealt with many times before.

We have seen all of these concerns come and go over my 40 plus years in the industry and I think there has been a great deal of overreaction recently in the media. The core of our business is passenger demand for air travel and all other matters are derivative of this demand picture.

Through the end of September of this year, passenger traffic globally has grown 6.7%, while capacity globally has grown at 6.2% according to data released today by the International Air Transport Association. Furthermore, load factors came in at a very strong 80.3% thus far this year.

These are overwhelmingly positive figures and indicate a very healthy picture for the core demand and supply of air travel.

We serve this demand with current aircraft in our fleet as well as the new pipeline that is yet to deliver and this passenger demand on a global scale has created an environment, which has allowed our customers to perform well broadly.

In order to handle this increase in passenger demand, the manufacturers have continued to push production rates higher. We always want to see the OEMs slightly undersupply their market to maintain healthy aircraft values and lease rates and we believe broadly this is occurring. Both manufacturers have overbooked their single-aisle aircraft orders.

Further, let me remind you that the OEMs have never in their history been able to hold production rates on current generation aircraft when leading into the introduction of a new program. We have said this over and over again and this is okay.

If they are able to sell all the aircraft in this bridge period to the new aircraft program introduction that would be a green outcome. If they are not able to sell all the planes, we would expect them to adjust the production rates and that can also be a realistic outcome.

Let me remind you that aircraft today are being built exactly to a customer-order specification rather than built on-spec and then wait on a dealer’s lot to be sold. We do not believe that the major OEMs have any incentive to produce whitetail aircraft and this very fact protects asset values in existing fleet and also with future deliveries.

Capital continues to flow into our industry both at the airline level and to the leasing community. We view this very positively for all players. Recently, there have been numerous transactions for whole businesses and for large portfolios over the past number of months and values remained strong and robust.

Discontinued interest from those who are actually deploying capital speaks for itself. Aircraft values are strong and remain highly desirable cash generating assets to own and manage.

Owing to the strong performance of ALC since inception and the confidence that we have in our future continued growth, ALC’s Board of Directors has just declared a 25% increase in our quarterly cash dividend to shareholders from $0.04 per quarter to $0.05 per quarter per share.

We have delivered excellent results while building the best-in-class fleet on long-term leases with globally diversified airline customers. At this time, I would like to turn this over to John Plueger, our President and Chief Operating Officer, who will further discuss our operations and strategic positioning..

Thanks, Steve. Our core leasing operations remain strong and our customers are performing well. During 2015, our team has signed leases on 67 aircraft and added 17 new customers. There is no stronger signal for demand for high quality new and used aircraft and those results indicate.

The lease rates on our current fleet are consistent and unchanged and the forward placements are continuing at these expected levels. This past quarter, we took delivery of 9 aircraft from our order book. We acquired three incremental units and we sold four aircraft.

We continue to execute our business with the consistency that our airline partners and investors have come to expect. On that note, I feel compelled to advise that the constant up and down of market prognosticators about the value of individual aircraft is entirely overdone.

Aircraft values simply don’t swing in value anywhere near the quantum that Delta’s CEO recently indicated. Prices that he indicated simply don’t exist in the market for normal aircraft that are well-maintained. These wide-body aircraft generates strong economic returns for their operators and that doesn’t change based upon public opinion of the day.

Now, you can always find exceptions to the rule in every aircraft type. And within each aircraft type at any age, you will experience periods of greater or lesser supply. But there are normal – but these are all normal data points within today’s overall good and healthy aircraft marketplace.

And owing to that overall good and healthy marketplace, we are 100% leased in 2015 and placed, 100% placed in 2016, 86% placed in 2017. So in summary, we are right on track with how we target aircraft placements from our order book 18 months to 36 months ahead of delivery.

I will remind you that as we seize upon additional future aircraft opportunities, such as incremental aircraft we obtain from aircraft manufacturers, these placement percentages and our forward pipeline will vary slightly quarter-to-quarter. The management side and our business continues to increase nicely.

During the quarter, we increased our managed fleet to 26 aircraft and this business is tracking as we expected. Blackbird Capital One continues to ramp up. We now have lined up nearly $1 billion of aircraft that are currently in the fleet over delivery in ‘16 and ‘17.

Our marketing team is using this pool of flexible capital as another tool for us to help us outcompete in the marketplace. As we fill up the $2 billion fund, we will look to grow or managed business even further with subsequent funds at the appropriate time.

As we look forward to the fourth quarter, we will deliver six aircraft from our order book totaling about $461 million in capital commitments. I would like to remind you that the full revenue impact of those deliveries will not be realized until the following quarter and will be offset by sales activity during the quarter.

Let me turn this over now to Greg Willis, our CFO, who will work you through our financial results that will believe differentiates ALC.

Greg?.

Thanks, John. This quarter I want to focus on the cash earnings of our business. I am going to take a few minutes to introduce our revised non-GAAP measures, adjusted net income and adjusted diluted earnings per share.

For the third quarter, we recorded adjusted net income of $132 million, which represented an increase by 22% resulting in adjusted diluted earnings per share of $1.20.

Our adjusted net income is GAAP net income adjusted to exclude the effects of non-cash items including deferred taxes, stock-based compensation expense, the amortization of debt discounts and issuance costs along with our litigation settlement expense, which as previously discussed is a one-time non-recurring charge.

We view these adjustments as key to understanding and evaluating the operating performance of the company while providing insight into the cash earnings of the business and it’s how ALC’s management evaluates our business. The third quarter is typically a light quarter in terms of capital expenditures and aircraft sales.

This proved to be the case this year as well as expected. We ended the third quarter at our target debt to equity ratio of 2.5 to 1. This ratio is driven by the timing of the capital expenditures tied to our order book. And as we expected, to be quarterly cyclicality in this ratio as we go forward.

However, there is no change to our long-term target debt-to-equity ratio of 2.5 to 1. There have been several developments in the financing side of the business. First, I am very pleased that Standard & Poor’s has recognized Air Lease’s strengthening credit profile and have changed their outlook on our corporate credit rating to positive.

We continue to benefit from diversified funding sources, our low leverage unencumbered balance sheet and the strength of our core business. In August, we issued $500 million senior unsecured notes due in 2018, which bear interest at two and five eights percent.

We would like to de-tap the market in August side stepping the ensuing market volatility in September and October. We are looking forward to repayment of – one of our first unrated bonds in January 2016, which is when a $500 million 3-year bond is scheduled to mature and bears interest at 4.5%.

This will save the company nearly $10 million in interest expense annually. Also during the quarter, we entered into agreement to increase the capacity of our unsecured revolving credit facility. We increased the size of the facility to $2.8 billion and maintained the pricing at LIBOR plus 1.25 with no LIBOR floor.

This facility provides us with a substantial amount of financial flexibility and is a great source of liquidity for our business. We ended the quarter with a strong liquidity balance of $2.8 billion. I am very pleased to report that our composite cost of funds ticked down slightly to 3.6%.

Our unsecured debt increased to 88% of our debt portfolio, which is a key metric in evaluating the strength of our investment grade capital structure. And our fixed rate debt reached 81% further demonstrating the stability and predictability of our funding structure.

Furthermore, as we have continued to execute on our financing strategy, our investment grade credit metrics have continued to improve. This concludes my review of the results and financing activities of the company and I will now turn it back to Ryan..

Thanks Greg. That concludes management’s remarks. For the question-and-answer session each participant will be allowed one question and one follow-up. Now I would like to hand the call over to the operator.

Operator?.

Thank you, sir. [Operator Instructions] And it looks like our first question in queue comes from the line of Jason Arnold with RBC Capital Markets. Please go ahead. Your line is now open..

Hi good afternoon, guys. Nice results this quarter and thanks for the color on the industry and air demand very helpful.

Just to start with maybe you can talk about the three incremental aircraft added to the fleet in the quarter, were those opportunistic adds and maybe you can comment on the market and if you are seeing additional opportunities to kind of make these incremental adds going forward as well?.

Yes. During the quarter, we acquired three Boeing 737NGs from one of our airline customers as part of our larger broader placement of new generation aircraft both single line and wide-body aircraft. We acquired these three aircraft on 4-year leases and two of those aircraft we have subsequently sold during the fourth quarter.

One of the aircrafts, which is the youngest of the three, we have retained in our own portfolio..

Great.

And do you see – I mean more of these relationships that you continue bringing on with newer ones, I would imagine would offer potentially additional incremental opportunity of this type?.

Yes. We have done a number of transactions both with Boeing and Airbus where we are picking up some incremental aircraft for deliveries in 2016 and in 2017. And all of those aircraft that we have either accelerated or acquired incrementally have been placed on long-term leases.

So the answer to your question is, yes we are pursuing incremental opportunities especially with the strong aircraft sales activity in 2015. We have room to acquire additional aircraft as we go forward beyond the current order pipeline that we have..

Excellent. Thank you. And then just maybe one for Greg, typical timeframe if there is such a thing for rating moves after being on rating watch positive, is there any additional thoughts that you have around that and maybe any additional color you could think of off of incremental benefits on a funding cost perspective would be helpful? Thanks..

First Jason I would refer you back to the S&P report that was published to give you further color on S&P’s response. I think that, obviously we are hopeful that our ratings upgrade will eventually come and I think that will benefit us on the capital ratings side going forward.

Maybe you should look to other BBB flat rated entities to get gauge the amount of pickup there is potential for our funding costs when we issue bonds into the market..

Okay, perfect. Thanks for the color..

Thanks Jason..

Thank you, sir. Our next questioner in queue comes from the line of Helane Becker with Cowen. Please go ahead. Your line is now open..

Thanks very much operator. Hi guys. Thank you very much for the time. So….

Hi Helane..

So this is one question I have for you, your fleet mix shifted in the quarter around with big increase in the Middle East and Africa and kind of declines elsewhere around the world, is that by design or is that just the way that deliveries worked that quarter?.

These were two Boeing 777s that we have actually ordered about 2 years ago and they were finally delivered to the airline in that region. We do not anticipate that there will be a significant change in the overall mix.

But on a quarter-to-quarter basis, a couple of 777s or a couple of wide-body aircraft, which have a value between $250 million to $300 million can shift those decimal points a little bit here and there.

But our basic portfolio strategy is not just changed in terms of the allocation of assets in Asia, Greater Europe, Middle East, Africa, Australia, New Zealand and North America, South America. So, we are staying within a narrow band in all of those regions to maintain that global diversification..

Okay, okay. That’s great. That makes a lot of sense. Thank you..

I mean, just to give you an example, this week, we delivered a new 777-300ER to one of the largest European network carriers. And next week, we are delivering another new 777-300ER to a large Asian scheduled airline. So, as I say on these wide-body aircraft, a singular transaction still has an impact on the overall ratios down to a few decimal points.

But I wouldn’t read into that as being a change in our focus and our diversification..

Okay.

Is that from your order book, this 777?.

Yes, yes..

Okay. Nice to see that demand. My other question is really with respect to capital allocation, you guys increased the dividend versus like your share repurchase program. Is that kind of the way we should think about capital allocation as you would prefer a dividend to the Board….

Yes. I mean, we are obviously capital-intensive company that is generating, as I indicated earlier, 38% profit margin. We believe at those margins it’s better to deploy our capital to buy aircraft assets that are highly in demand and continue to generate profits from those assets rather than spend several $100 million buying back shares.

What we have seen in other players in the industry is that sometimes they have these share buyback programs, but they don’t really move the needle on a long-term basis. There might be a short-term blip, but we haven’t seen any real meaningful long-term impact on share prices in our segment of the industry..

Fair enough. Thank you very much. have a nice day..

Thank you so much. Nice to hear from you..

Thank you, ma’am. Our next question comes from the line of Jamie Baker with JPMorgan. Please go ahead. Your line is open..

Hey, good afternoon everybody. First question and this one might seem a little bit off the wall, but a few hours ago, Russia has suspended the certification of the 73.

My question is whether aircraft leases ever have any sort of force majeure clause that would allow the airline to return the asset to the lessor in the event its certification is pulled.

I know it seems like a stretch, but I am already taking the questions from clients?.

Yes, your information is not correct. I hate to correct you..

No, on this issue, I welcome the correction, Steve..

Yes. What the Russian authorities are saying is that 737, a classic aircraft that are currently on foreign registry either Cayman Islands or Ireland or Bermuda, they would like to pull those aircraft back on to Russian registry, so that the Russian equivalent of the FA can inspect those aircraft.

This is a knee-jerk reaction to the A321 accident that occurred on Saturday. And I want to tell you that what they are talking about is the re-registration of the aircraft, not withdrawing the certificate..

Okay..

In other words, they are talking about the domicile of registration, not the actual flyability of the aircraft. I just want to make that absolutely crystal clear, because Aeroflot itself has a fleet of 737-800s that happen to be registered in Bermuda. In fact, virtually all of Aeroflot’s aircraft are registered in Bermuda, not in Russia.

Only their Sukhoi Superjet 100s are registered in Russia. Every other plane they own or lease are registered in Bermuda..

That’s perfect. I appreciate you clearing that up. Back to Air Lease and relative I suppose to Helane’s question on the recent 777 placements.

In light of all of the discussions about this potential wide-body glut, would you be willing to give a bit more specifics on how the lease rates for these very, very recent placements on the 300ERs compared to placements that you might have made, call it, 2 years ago? Just so we have some actual data around the comments that you made as part of the prepared remarks..

Right. John will comment on specifics. I just want to make a statement with regards to Boeing 777 family, which has gotten sort of a lot of attention.

I want to point out that our 777 fleet is composed entirely of 777-300ERs with a fleet age of less than two years average with the exception of one relatively young 777-200ER that’s on a long-term lease to KLM.

And so these general comments about 777 residual issues really have no impact on Air Lease whatsoever since we have either just delivered in the last few quarters, our new 777s and we have several more to deliver in 2016. So essentially, those aircraft are in 12-year leases. So, we don’t see any residual value impact until 2026, 2027 timeframe..

So, let – Jamie, let me take that a little bit further and give a little more specifics.

Today, if you cross – look across the landscape of about, I don’t know, 9, 10 different appraisers, plus the range of transactions we have seen in the marketplace specifically you are talking about 10-year-old normal Boeing 777-200ERs, i.e., a 2000 build aircraft, that values ranging anywhere from like $45 million to north of $70 million depending upon the condition of the aircraft..

And the engine types..

And the engine types. Any 10-year-old used 777-200ER you could buy for $10 million which by the way we have not seen in the marketplace will be in run-out condition within engine overhauls, landing gear overhauls, major airframe checks, interior and plane entertainment replacement, all that stuff could cost $30 million, $40 million to complete.

The fact of matter is that today we will sustain lower fuel price of the 777-200ER offers a pretty good value to the airlines. In fact, the last passenger 777-200ER aircraft was delivered to Asiana Airlines in July of 2013 and earlier that year and in 2012 to ANA and to Asiana.

And by the way, if ALC could find half life 2005 in 777-200ERs at anywhere near $10 million even though we are a new aircraft player we are probably buying all for cash today. Now Singapore Airlines, which was referred to in Delta’s comments, they have got about 23 Boeing 777-200ERs in their fleet today with an average age of about 12.9 years.

And now the 300ER, that’s 777-300ER as Steve is indicating is really the gold standard of current generation international long-haul flying by majority of the world’s largest global carriers.

Now, if you go over to the A330 fleet, which was also mentioned by Delta, the A330-300 entered into the service in January of 1994 with Air Inter of France, now those early aircraft are now 21 years old with limited gross weights of 212, 214 tons and they don’t compare with current A330s now offering up to 242 tons of gross weight.

In fact, we at ALC took the first A330-200s in 1998 when we ran the company leasing them to Canada 3000. Those early A330-200s now are about 17 years old and they have got marketplace values and lease rates commensurate with their age. And Singapore Airlines, by the way, doesn’t even operate A330-200s.

They operate about 31 A330-300s with an average age of about 3.82 years.

So, ALC is not seeing, I am quoting directly here from the Q&A session of Delta’s recent earnings release, we are not seeing “a huge bubble in excess wide-body airplanes around the world” nor do we see that “the market appears to be for 777-200s about 9 to 10 years old at prices about $10 million” or we also don’t see “on A330-200 the lease rate is about a fifth of what would be new.” So, look, prices of aircraft do naturally decline with age.

So, yes, they are going to be lower in the future than they are today. I mean, there is nothing earth-shattering there. But such broad generalizations just don’t hold up across these fleet types globally across the marketplace. Neither Singapore Airlines nor any other major airline can dispose of 70 wide-bodies over a short period of time.

So, over the normal course of aircraft replacement, the market has demonstrated pretty well overall balance, looks to remain so both for wide-bodies, narrow-bodies in any specific aircraft type, as I mentioned in my remarks, there are exemptions.

There are certainly times of greater supply and lesser supply, but nothing we see today nor in the foreseeable future indicates impending gross imbalance or gluts or bubbles. And by the way, ALC congratulates Delta for being a co-launch customer with ALC on the A330neo as well as their order for new A350-900 aircraft..

Guys, I appreciate that. If I could just squeeze a third one in and it’s a simple yes or no, on last week’s Airbus call, they talked about ramping the 350 deliveries in ‘16, doubling the rate so getting to, I guess, that’s a little over 30 units of output. I think most of us were thinking at least 45.

I am just curious if the A350 ramp right now is consistent with what you have been assuming and consistent with the delivery schedule that’s in your pipeline and hence in our earnings models..

Well, the ramp up on the brand-new wide-body new generation is tremendously challenging for both Airbus and Boeing. And we just spent a day with Airbus leadership after the Wings Club event.

So I think they are doing the best they can to get the A350 production levels up to the region that they like to achieve, which is around ten a month in the next 4 years. And I really would defer the details on specific deliveries in 2016 Airbus and Rolls-Royce the engine supplier.

And whatever predictions we would make today looking back in December of 2016 would probably be different by several aircraft units. But I can tell you that Airbus has exercised great caution and not overpromising on the A350. And they don’t want to have some of the issues that Boeing had to deal with disappointing customers.

So I think they are using a very programmatic, very careful approach, making sure that all the suppliers and all the vendors and subcontractors can support this ramp-up in deliveries. That’s kind of a long-winded answer, it doesn’t say yes or no, but it’s a very complex business to manufacture and deliver new wide-body aircraft.

And I think Airbus is doing their very best to satisfy their customer needs..

Thank you, sir. It looks like our next question will come from the line of Arren Cyganovich with D.A. Davidson. Please go ahead. Your line is now open..

Thanks. I guess staying on the production theme. Airbus had mentioned that they are looking to increase the narrow-body production to 60 per month by 2019, what are your thoughts on the market’s ability to handle that, the potential from them to actually reach that.

And just how you think about potential opportunities possibly from just adding to that added production, because it’s I guess pretty big relevant to what they are currently doing now, so I think it’s like 200 – over 200 aircraft per year versus what they are actually putting on these days?.

Yes. Look, I think Steve actually hit that square on the head in his remarks on our preliminary before the Q&A here. The bottom line is that there is continued to be very, very strong demand and overbooking monthly by these – by both manufacturers actually, certainly Airbus on the single aisle series.

We know in fact, that they went through a pretty rigorous and they have been going through a very rigorous process to determine what is the optimal level to go to because to Steve’s point, they have build this aircraft for every single customer.

So we believe that although we as aircraft and asset owners, we always love to see a little shortage – short supply in the marketplace. And if you look back on 30-plus years of experience, the number of 60 a month does sound high.

The fact of the matter is if you really scrub the production backlogs and even if you take out some orders that you might deem questionable or unsure of the delivery, the demand is there to support those levels. I mean, Boeing and Airbus is not going out there to produce whitetail.

So I think what we are going to see is simply more and more of those aircraft as they are produced I think will generate both replacement and growth opportunities. They will be focused in Asia and the Middle East. We don’t see it necessarily as any negative impact to our business. The leasing companies have already ordered their product.

And don’t forget that the manufacturers, especially Airbus in this case does exactly look at the leasing content and who the end users are as a part of the equation to increase production rates..

By 2019, there will be approximately 20,000 single-aisle aircraft in that 737, A320 family size category. So Airbus builds 700 aircraft in 2019, of A319 2021 NEOs. That would represent only a 3.5% of the total fleet of single-aisle aircraft in operation in 2019.

So while the number of 60 a month or roughly 700 a year is historically looking back a very high number. If you look at the total embedded fleet of jet aircraft in that size category in operation by 2019, it’s only about a 3.5% of that fleet..

That’s helpful. Thanks.

And then just from a modeling perspective, what – you mentioned the two aircraft that you sold in the fourth quarter, what’s your expectations for selling from the fleet in the fourth quarter?.

We have an ongoing program to keep our fleet young. This year, we sold already roughly $750 million….

$711 million..

$711 million worth of aircraft. So it’s an ongoing effort every quarter. We are selling some of our older airplanes, but we never postulate forward specifically the number of quantities of units or the number dollar value of aircraft sold. It’s a highly optimistic market.

And I think we have consistently said every earnings call to now that we have been surprised with the level of demand. We have actually – we have sold far more aircraft than we thought we would ever about a year ago.

If we go back a year from now or a year back, so it continues to surprise us, but we just don’t offer guidance as to how much we are going to sell or how many units..

And we are in a pretty strong position financially. We have $2.8 billion in liquidity and we are at our debt-to-equity target of 2.5 to 1. So I think we are in a pretty comfortable position to allow us to be very selective about opportunities to sell airplanes..

And we consistently evaluate assets that are potential sales candidates. And we look at what is the earning value of those assets if we continue to lease them versus selling them at the appropriate economic value. So we have a number of ongoing sales activities on used aircraft.

And you will continue to see what’s consummate sales transactions virtually every quarter..

Okay, thank you..

Thanks..

Thank you, sir. Our next question comes from the Mike Linenberg with Deutsche Bank. Please go ahead. Your line is open..

Hi, Mike..

Hi, Greg. Hey everyone. Hey, I wanted – Steve and John, I want to go back to your point about the ramp up Airbus I guess 42 a month now and it’s moving towards 60 over the next 4 years, I know Boeing is moving up as well.

Look, I am in agreement with you that I think that there is significant amount of demand out there and I think that the market will be able to absorb 60 from one and possibly 60 from another. But isn’t a real issue on the supply chain.

And I wanted to sort of get your views on that because about two calls ago, I mean you talked about at the current rate you were seeing challenges at the supply chain level that you hadn’t seen in all your years of being involved with aircraft, and I think you were sort of referring to some of the interior manufacturers.

When you look at some of the commentary out there from some of the other – some of the manufacturers involved how they are still running into issues, I mean if they are running into issues now when we are seeing somewhere in the mid-40s per month, I mean are we getting these on the horizon, do we see relief there or does it get even worse as it relates to seat availability and interiors, etcetera, I mean doesn’t the situation get worse?.

Mike – and by the way, the ability to produce engines at that rate. So Mike, you are 100% spot on, I am glad you raised that. Look, our comments about the overall demand equations supporting those levels is all about that, it’s all about the overall demand equation.

But I will say we do have concerns about the very fact, the supply chain that you brought up.

While both manufacturers are stating that they are very confident, highly confident, this can happen, I can tell you at a day-to-day level, I am working and placing and building these aircraft, we all – we were all the bits and pieces that go into the airplane separately.

And we send all those bits and pieces to Airbus and to Boeing, avionics, seats, galleries, wheels, tires, brakes, APUs, you name it. Plus other things, other smaller bits and pieces of that go into building subassembly components. We don’t have the confidence that the manufacturers seem to have in that supply chain.

So we think that’s going to be the real challenge..

Already, there are concerns amongst our airline customers, for example, on the Pratt & Whitney, GTF, on the LEAP engine on CFM both for the A320 and 737 whether they are able and through all of the hundreds of suppliers that they depend on, the engine guys, whether they can actually meet those objectives.

Now, obviously, they will try to maximize those output capabilities, but building 120 narrow-bodies a month, which involve 240 engines, plus the spare engines that you need to support that is a significant challenge in our opinion. And I think in retrospect we will be proven right..

And so many suppliers have to invest really major sums of money to make that happen. These are very substantial issues and concerns across the supply base. So, I think we would just simply pause where we say it’s not such a slam-dunk..

Okay, great. That’s helpful.

And then just the second question, one of your fellow lessors recently had a, I guess, a bad set of results with one of their aircraft with Malaysian and they went so far as to say that maybe this was a carrier that financial service companies, lessors, etcetera, would probably not – would be likely – not likely to do business with going forward.

And yet as part of their reorganization plan, I would say that you are actually an integral part, you are putting A350s into that company.

From a high level, can you give us like maybe I realize every one of these agreements, there is elements of them that are confidential, but maybe from a high level give us how maybe some comfort on how you are protecting yourself in doing business with a company like that?.

Okay. Let me tell you and this is all public record, Malaysian Airline System has been separated into two legal entities both owned and controlled by the Government of Malaysia.

The Malaysian Airline System, which was the original airline, which had these 777-200s and has the A380s has now been sort of closed off as a separate entity with its own sets of assets and liabilities.

And a new company was formed, which has taken over all the licenses and all of the operating rights of MAS and that’s now called Malaysian Airlines Berhad.

And that is the new entity that is the surviving company going forward did not assume any of the liabilities or obligations of the old MAS and that’s the entity that we leased the A350s to, which in fact will replace their A380s operating to London primarily.

In addition, a lessor can protect itself through security deposits, in cash and also ongoing overall reserves, maintenance reserves on a monthly basis.

The Aircastle transaction that I think you are referring to, I think there was a rear-end adjustment, catch-up adjustment and as much as this contract was with the firm that it’s being sort of folded up, it’s unfortunate that Aircastle was caught in this situation, but our transaction is completely different and it’s with the new entity that’s completely clean and well financed..

Great. That’s really helpful, Steve. Thank you..

You are very welcome..

Thank you. Our next question will come from the line of Kristine Liwag with Bank of America. Please go ahead. Your line is open..

Hi, good afternoon everyone..

Hi, Kristine..

So, I guess another one of your competitors, same competitor was saying that because of cheap oil, airlines are less willing to pay a premium for new next-generation aircraft.

So, from your conversations with your customers, how are airlines balancing forward expectations regarding possible higher interest rates versus a period of prolonged low crude price? And how are these expectations translating to the lease rates for aircraft that you are placing in 2017 versus those you have placed in ‘16?.

Yes, this company we referred to how many new generation aircraft do they have on order?.

Well, you know the answer to that..

So, the bottom line is, as stated in our results, Kristine that…..

It’s the number below 1? Is that the number?.

Anyway….

We suggested we have a little more expertise in that area than potentially these other competitors. So, I don’t think that, that really seems to be the area to focus on, Kristine..

For our results, we have stated in our opening comments and repeatedly, our lease rates remain consistent. Demand remains consistent and strong. Our forward order book, strong placements, lease rates are consistent and holding up on an overall portfolio basis. I don’t know what else we can say..

Yes.

In fact, we had a board meeting yesterday and one of the things that our Board of Directors looks for is they want to see historical trend lines on the aircraft lease factors and financial metrics of all of our leases and then also broken down to the various components, single-aisle aircraft, wide-body aircraft, Boeing aircraft and Airbus aircraft.

And I can tell you that in the last 36 months, we haven’t seen really any deviation of any meaningful mathematical proportion other than very minor, there are hundreds of decimals. So, now one of the factors that’s different from us is we are not on the spot market. We placed our aircraft 18 to 36, sometimes as much as 48 months before delivery.

So, our lease has already pinned down contracted firm on a long horizon. Now, obviously, if somebody has an aircraft today, they have replaced it. It’s not on the right configuration. You have to invest money. There is downtime. There could be issues to someone that has sort of stuck with an airplane. You will have to deal with the economic consequences.

But our business strategy is based on ordering high quantities of aircraft with long-term placements. So, we have immunized ourselves from a lot of those issues..

The low fuel price as we indicated last quarter, I will say it again this quarter, has helped us on the infringes with airlines looking to extend and approach as early for lease extensions on existing airplanes 5, 6, 7, 8, 9-year-old aircraft. That’s a good thing. That’s a good thing and very healthy thing for everything, for everybody.

But in terms of our forward placements through today and the pipeline that we have in lease placements, we are just not seeing any measurable impact of the phenomenon you asked about..

In fact, since the oil prices began to trend downward, we have not had a single airline that has come to ALC and say you know that new aircraft whether it’s a Boeing or Airbus unit that we have contracted with you for the future we would like to delay it or postpone it or cancel it. We have not had that phenomenon.

So, we have really not seen an impact on our portfolio, our types of airplanes. There maybe others that are being impacted, but we haven’t seen it..

Yes. Kristine, one thing I think that’s really important that seems to get lost a lot when those types of sort of one note messages are portrayed by the competitors. There is a lot of reasons that airlines lease brand new aircraft. Fuel is one component.

But certainly, maintenance efficiencies, range capabilities, payload, the capacity, the type of product offering for the customers, it’s really not just a single decision based on a forward fuel forecast. There is a whole lot of factors that go into that.

And I think that if you have got the right aircraft types even within those subfamilies, whether they are brand new aircraft, midlife aircraft, end-of-life aircraft, there is a good strong market for it that we are seeing across the board. And if you pick the right types, you got the best chance to win..

And environmental impact is looming more and more impact every single day across this planet. And the new – only the new, the most young current generation state-of-the-art aircraft address that. It’s not just fuel burn. Fuel burn is the biggest contributor to NOx emissions.

But on the newer power plants, it’s the amount of NOx emission per pound of fuel burned. So, there is many, many other factors besides fuel that derive an airline’s desires for new aircraft and some of these mentioned are mentioned by Ryan.

And I would just add, the environmental issues, I think actually you and I have talked about this before are looming larger as we speak..

Yes. And a follow-up question, you are 100% leased in 2016 and it looks like you have enough capital to cover your aircraft commitments in ‘16 as well.

Can you give us a sense of how much upside you expect to see in that interest margins in ‘16?.

With regard to tightening of our composite rate, I would point you to the maturity, as I mentioned in my remarks earlier, the January ‘16 maturity of $500 million. There is 3-year notes at 4.5%. We also have another $100 million that matures in June 2016 at 5%. So overall, those will be getting refied at lower levels.

And then whatever rate we are able to achieve there given the timing of a potential upgrade may also impact the pricing as well as they will be with an upgrade, there would also be additional tightening on our bank revolver..

So, if lease rates are pretty strong for ‘16 and trending as you have seen it and then your debt costs are also coming down.

So, I mean, your net interest margin should trend down for next year or is it trend up for next year? Is that good to think about it?.

We don’t think about net interest margins, Kristine. We really think about our cash earnings is really what I think is important to focus on, because look we don’t think of ourselves as a bank who is operating on a floating cost of capital. We finance a fixed rate debt..

Should improve if interest – the expense was down..

Correct. We are optimistic that margins could improve in 2016..

Great, thank you very much..

Thanks, Kristine..

Thank you, ma’am. Our next question will come from Nathan Hong with Morgan Stanley. Your line is now open..

Thanks for taking the question. Kind of just taking back off the debt side of it, Greg, I think you mentioned that few debt products that’s out there, that’s going to mature in the upcoming year. But obviously, there is a much larger one in 2017. So, I am actually wondering if there is a potential to actually accelerate the debt retirement.

Is that something that you guys are considering?.

Yes. I think given the cash flow, I don’t think we are going to look to early retire that piece of the item and it is at 5 5/8 we will pay it off at its maturity..

Okay, that’s helpful. And I guess for Steve, we have actually heard that there is a U.S. airline that’s seeking to actually acquire delivery slots from investors, not to lease the aircraft but to own them. So, I am wondering if this is actually a strategy that Air Lease takes into consideration.

And I am kind of just curious whether or not you guys do see that as an attractive transaction?.

Well, okay, there is one large U.S. airline that currently wants to accelerate the retirement of certain airplanes in their fleet, which are getting older in terms of flight hours and cycles, but we have very specific contractual understandings with both Boeing and Airbus that we don’t participate in selling slots or selling delivery positions.

Our mission is to market these aircraft and bring in new customers and widen the customer base not to simply sell delivery slots that we have secured through our master purchase agreement. So, Air Lease is not going to be selling our delivery positions..

Nathan, also I think you should know that as a point of contract and I am virtually almost every single contract that I am ever aware of a buyer with Airbus or Boeing you have no right to sell a slot. That position is solely and exclusively the property of the manufacturer until the day you buy a transfer title.

Now, you can try and window dress around it by going ahead and buying it and then doing a simultaneous try, but let me tell you something, it’s a large buyer and therefore a large strategic partner with Airbus and Boeing.

The biggest way you could get there higher up was to do some kind of a gimmicky transaction, where you sold a bunch of positions that you have through some sort of post-sale arrangement to a big customer. Our relationships with the manufacturers are too important. They are too strategic. So, we are not going to do that..

Okay, that’s very helpful. Thanks for the time..

Sure..

Thank you, sir. Our next question comes from Christopher Nolan with FBR & Company. You may proceed..

Hi. Strategically, CATs in the news talking about possibly selling their aircraft leasing portfolio.

Does increasing scale, is that a priority for Air Lease Corp or not?.

Well, look we are happy with our growth rate, why don’t you go back and I know you are new with FBR. One of the beauties of starting with a clean sheet of paper company is you are able to create and mold from day one without any legacy issues.

Any transaction that we would do, yes, size and scale have some value but we believe that we are getting that size and scale. But virtually any other company that we would go look to purchase already large group of assets from such companies we would look to purchase would have the following impacts.

One, our average remaining lease maturity of our portfolio would decline. Two, the average age would go up. Three, the overall composite cost of funds would go up. And four, our amount of secured debt, which we worked so hard to reduce with the Holy Grail and sacrosanct of our investment grade rating would go up significantly.

And therefore five, we would look to possibly jeopardize our investment grade rating, which we are never going to do. So sale – scale and size do matter, but at the expense of what.

And we worked very hard at Air Lease to try and create as pure platform that’s going to earn the highest return over time to its shareholders because of the purity of the platform. So we will never say never and we always evaluate all opportunities, but up to now that’s – this is how we see it..

We have had a lot of campaigns in the last 2 years where we compete vigorously against the largest lessors like GECAS and AerCap. And I can tell you that we have won more campaigns with a lot of these airlines both on single-aisle and wide-body aircraft and in no case did we find that our size or scale was a handicap..

Yes.

Chris, I would offer – I know we have chatted about this briefly, but with a fleet of now 235 aircraft on the book with 26 managed, with 387 on order, I can say presumably we have never heard from a single customer that you don’t have the inventory or the balance sheet capability both on-balance sheet or off-balance sheet with our management vehicle to serve the needs of the customer.

And I think in that sense, we feel great about the scale and our ability to offer the solutions to the customers that they really need. So I think we feel good..

Great.

And as a follow-up, what was the Blackbird assets under management, I missed that, I mean I know that was mentioned earlier?.

It’s north of – it’s right now north of $500 million that’s in the – that’s been acquired and close to $1 billion that is – will total to $1 billion that’s not yet delivered, but has been committed to. So those are for forward orders, so another sort of $400 million plus in aircraft assets that we will deliver next year and following year.

So we are right on target with 12 months in having about $1 billion in the offer and another $1 billion to go..

Last question on China, I know Steve was giving comments on the overall macro, can you tell me that all of your Chinese airline customers are current right now?.

Yes, they are..

Great. Thanks for the clarification..

Thank you, sir. And our next question in queue comes from the line of Moshe Orenbuch with Credit Suisse. Please go ahead. Your line is open..

Thanks. Most of my questions actually have been asked and answered.

Just to follow-up a little bit on Blackbird, just wondering if there is what the thoughts are in terms of whether either another vehicle like this or something – anything else that you could kind of do given that there is significant demand it seems like from outside of the large lessor community for ways to enter this business?.

Look, we are always – thanks Moshe. We are always looking at new opportunities. But first and foremost, we want to make sure that the ventures we already have out there specifically Blackbird Capital One works well. As you have heard from Ryan, it’s on track.

But we would like to get to the finish stage and make sure that that’s all done, that the investors are happy.

But having said that you have heard us say several times before that we can see follow-on entities similar to Blackbird and we look at any other potential in the marketplace for other specialized products or something similar or we are always on the look for a new way to spin the business.

And if we can find those opportunities, we – as we found Blackbird, we will seize upon them..

Great. Thanks John..

Thank you. And at this time, I am currently showing no additional questioners in the phone queue. I would like to turn the program back over to management for any additional or closing remarks..

Thank you all very much. That concludes our call for today. We look forward to speaking with you during our 10-K call in the start of 2016..

Thank you, presenters and thank you to all of our attendees for joining us. This will conclude today’s call. Thank you for your participation. And have a wonderful day..