Good day ladies and gentlemen. And welcome to Air Lease’s Fourth Quarter 2018 Earnings Conference Call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s call is being recorded for replay purposes.

I’d now like to hand the conference over to Mary Liz DePalma, Head of Investor Relations. Please go ahead..

Thank you. Hello, everyone. And welcome to Air Lease Corporation’s fourth quarter and year end 2018 earnings call. This is Mary Liz DePalma and I am joined this afternoon by Steve Hazy, our Executive Chairman; John Plueger, our Chief Executive Officer and President; and Greg Willis, our Executive Vice President and Chief Financial Officer.

Earlier today we published our fourth quarter and year end 2018 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, February 21, 2019, and the webcast will be available for replay on our website.

At this time all participants of this call are in listen-only mode. At the conclusion of today’s conference call, instructions will be given for the Q&A session.

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.

This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense items.

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 February 21, 2019. 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 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 be using during the call such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pretax return on equity are non-GAAP measures.

Our 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 our earnings release and 10-K issued today. This release can be found in both 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 CEO and President, John Plueger..

Thanks, Mary Liz. Well, good afternoon to all of you and thank you for joining us. I am happy to report that Air Lease enjoyed another good quarter and year. For the fourth quarter, we recorded diluted earnings per share of $1.24. Our revenues were up 13% over last year’s fourth quarter and our portfolio metrics remained strong and consistent.

Our balance sheet grew to $18.5 billion with 275 owned aircraft at the end of the year. During the quarter we took delivery of 12 new aircraft from our order book and sold five aircraft, two Thunderbolt II, one to Blackbird Capital II and two aircraft to third-party buyers.

One of our scheduled fourth quarter order book aircraft did slip into Q1 this year as we are still experiencing delivery delays from Airbus, which we anticipate will continue through the first half of 2020.

For the full year 2018, we achieved diluted earnings per share of $4.60, a pre-tax margin of 38.1%, a 14.3% pre-tax return on equity and $1.25 billion of operating cash flow.

It was truly a busy and productive year, including a significant new order for Boeing aircraft that we announced at the Farnborough Air Show, robust single and twin-aisle lease placements to our ever-expanding customer base, which Steve will highlight with you, considerable success in the debt capital markets issuing $3 billion in unsecured and senior unsecured notes and expanding our bank facilities and of course closing our highly successful Thunderbolt II midlife aircraft management platform.

ALC now stands with 708 aircraft owned, managed and on from order. We have 91% of our order book placed on long-term leases through 2020 with no change to-date in the good pace of forward lease placements. As a result of our placement progress, ALC continues to have significant forward visibility with almost $26 billion in total committed rentals.

So with 2018 behind us, how is 2019 looking so far? Well, first and foremost, we are excited, because 2019 will be a high growth year for ALC with 80 aircraft delivering all of which are under long-term profitable lease contracts.

That growth will be funded by a prudent combination of our liquidity, including operating cash flow, senior unsecured notes issuance, expanding bank and capital markets access and aircraft sales. Greg will review with you further on the progress we have already made on the debt capital markets side and our funding plan.

On the aircraft sales side, demand from buyers remains strong. For example, since the beginning of there, we have met with a very significant number of qualified potential buyers, most of whom reached out to us. We also told you last quarter we were contemplating another Thunderbolt transaction and work on that is ongoing.

Having said that, the diversified fire base we have for our aircraft allows us to be not dependent on any individual sales channels or structure such as the ABS market.

Furthermore, let me remind you that our Blackbird Capital II joint venture provide us with adjunct capital to take advantage of opportunistic transactions as they may arise and provides an ongoing avenue for management of customer concentration.

In summary, suffice to say that we remain diligent in all regards as it relates to financing and sales and that the growth ahead of us will be achieved without sacrifice to our key financial targets and investment grade ratings.

Second, looking at 2019, overall lease demand remains robust fueled by continued global passenger growth and replacement of aging aircraft. We do not see that any signs of potential slowing of global economic growth is impacting the airline marketplace or demand for our aircraft.

We have made good progress on lease placements this year including China as you will continue to see from our press releases. Yes, the leasing market is highly competitive but that has been the case for several years now and you see our fulfillment metrics remain consistent.

We still see our key order book competitors and the major players being rational and disciplined.

Remember a key metric is lease rate factor versus just a lease rate itself as this is a function of what you get in lease rate versus what the aircraft cost you and we believe our aircraft cost base is from our large scale and evolving order book gives us a key competitive advantage.

Also remember that the lease rate is not the only economic element in a lease transaction. For example return conditions are also important in the total economic equation and may change the value of the aircraft and we continue to remain disciplined in this area.

As we predicted, we believe the over-saturated sale-leaseback market is showing signs of slowing and we have not really seen any more significant new entrants from China in the leasing space for well over a year now.

Let me remind you that ALC is not a player in the sale-leaseback market and our order book model means that we control the new aircraft positions which on an overall basis still remain in short supply. Third for 2019, the health of our global airline customers remains positive overall.

Yes, there will be further airline failures this year as we have seen with Germania for example where ALC had no aircraft on lease and no exposure as with that insolvency filing. Looking back in history, almost every year we see airline bankruptcies and that is the same view looking forward.

The airliner landscape continues to evolve primarily with the expansion of low cost and ultra low cost carriers. Airlines large and small need to continue to determine their business model, their niche, and the strength. Some fail in this task, which brings me to a key point. ALC has prudent risk management practices in place.

Our views on placing aircraft with a specific airline and how each lease is constructed is built from decades of experience.

As far as airlines in the risk headlines today we have no aircraft at Avianca Brazil, none in Jet Airways, none in Norwegian Internet Germany as I mentioned earlier and we protect our existing business averages with security deposits and maintenance reserves.

We don’t always get it perfect, but as we stated before biggest risk mitigating evolve is the quality of your aircraft, picking the most modern young widely distributed aircraft in the world.

Where we do run into problems such as the primary Denmark last year we have no HR delivered there but rather have four commitments which we were able to lease elsewhere. Fourth, we do remain watchful on several important industrial areas.

Specifically, the industrial recovery Airbus stabilization of new generation engine technical problems and overall production rates of the OEMs. We continue to receive delay notices from Airbus and recently there have been some assessor gearbox and other issues in the prior turbo fan engine which continue to impact our customers.

While we believe that Airbus has their industrial recovery plan in place and that getting your arms around these issues we fall just short of saying that these problems are fully behind us. And as we have stated for quite some time now we remain concerned about the global supply chain requirements for ongoing ramp-up in single oil production rates.

Fifth, and finally for 2019, we continue to work with both Boeing and Airbus on new aircraft programs specifically the NMA or 797 at Boeing and A321 XLR Airbus. There are still key decisions to be made across all fronts on these programs, and ALC continues to evaluate the merits and market potential of these potential new aircraft types.

The absorption of the C Series by Airbus and Egypt program by Boeing does bring the new dynamic to the lower end aircraft size of the marketplace and ALC continues to evaluate these products and the role in the global marketplace. We have reached no decisions yet, but we are studying closely.

Let me close by thanking our best-in-class team at Air Lease here for another year of award-winning work and award-winning is correct. We received many awards for 2018.

As well, a special thanks to our Board of Directors, our suppliers, financiers, joint venture partners, customers and investors for their continued belief and support in Air Lease Corporation. Let me now turn this over to our Executive Chairman, Steve Hazy, to provide his commentary and color.

Steve?.

Thanks, John. We are extremely pleased with the results our fourth quarter and the full year 2018, and I too would like to thank the Air Lease team for their professionalism and dedication which continue to differentiate ALC in the industry. I do not need to tell any of you that 2018 was an interesting year with various attention grabbing headlines.

We saw interest rates rise and volatility in oil prices, along with you all we went headlines in trade and as typical we saw some airlines run into difficulty. Despite questions and concerns on all these items one important item prevailed.

The global growth in air passenger traffic continued further driving the need for new aircraft to satisfy growth, as well as replacement needs of the airlines worldwide. The International air transport service patient reported for 2018 industry-wide revenue passenger kilometers were up 6.5% with low factors of the 82%.

Looking ahead, I had a forecasting RPK growth in 2019 of about 6%.

As someone who is been in the industry for five decades I can tell you that this growth is impressive and further demonstrates that air travel really has become the world’s former mass transportation with room for additional expansion as economies mature and middle classes continue to grow.

Air Lease has been working diligently to help our myriad of airline customers in all regions at a world modernize their fleet and craft strategically plans as they look to expand their operations. We have achieved a number of multiple deliveries just over the last few months.

For example on widebody aircraft we delivered the first 787-9 to anyway an area in Taiwan. We delivered our first 833900 neo aircraft in December two TLP Airport you go. For narrowbody aircraft we delivered the first A321 Neo to Air New Zealand the first Boeing 737 Max to S7 Airlines which will be operated by the unit Globas Airlines.

The first 737 Max aircraft that came in Airways making the airline the first Max operator in the Caribbean and the first Boeing 737 Max nine aircraft to Airways making them the premier Max operator of -9 to the South Pacific region.

We take pride in being at the forefront of introducing new aircraft types to specific airline customers or regions and these are just a few examples of our success in doing so. This spring we are delivering the first of eight new A320neo LR long range aircraft to Aer Lingus.

The first of six A321new LRS to Arabia and the first of four A321 new LRs to Air Astana. Additionally, we just signed the first three new A321new LR leases with SAS Scandinavian Airline System. Over the past two months, we have also announced meaningful placements with both new and long-time customers.

At the end of November we announced a very important placement of 15 new narrowbody Airbus aircraft to Estrada a new customer and Indian full service airline as a joint venture between the Tata Group in India and Singapore airlines. We remain very, very selective about our placements in India but we have not written off this market.

As with any placement it is important to evaluate the circumstances, but ultimately we will support a quality well run and well financed airline. According to IATA, India’s domestic market recorded the fastest full year domestic growth rate for the fourth quarter in a row of almost 19%.

India has incredible growth opportunities ahead and we feel that Tata Group footprints in India and Singapore Airlines of that expertise will allow this airline to be successful for many years to come both operating domestic Indian routes as well as regional international routes.

Then in January, we delivered the first of what will be the 12 new A321neo aircraft to Vietnam Airlines one of the fastest growing airlines in Asia.

ALC has a two-decade relationship with Vietnam Airlines during which we played an instrumental role in helping them design their fleet plans and positioning them for success and these A321neo placements were integral for us to continue that relationship with the important carrier Vietnam Airlines.

This spring we will also be delivering Vietnam Airlines the first of eight Boeing 787-10 aircraft from Air Lease. We have three new A330 900new airline customers in the first half of 2019 starting with and four more deliveries to peer peer Portugal in the coming weeks.

So as you can see our team continues to work diligently to find the right deals with the airlines that we believe will succeed long-term with our effort. We focus relentlessly on airline credit quality.

I think it’s very important to point out that many of the macro factors that impact airline and create headlines, whether it be oil prices or foreign exchange movements.

For example, do not necessarily directly impact the performance and profitability of the aircraft lessor, nor does it change the value or support we can provide to our customers as they adjusted to a changing operating environment.

As John mentioned earlier, we are no stranger to the fact that we operate in an industry where airline failures are the norm year after year.

We remain extremely vigilant, adequately protecting ourselves, with cash security deposits reserves and economically justifiable lease rates and we move quickly when we feel that situation is unfolding and could have negative consequences.

As a result, we are proud to say that despite over 200 airline failures of all sizes since ALC was born in 2010 our company has taken zero, I repeat zero credit loss during the last nine years.

Our $26 billion order book represents only roughly 3% of the total capital needed to fund the industry’s $800 billion of aircraft deliveries between 2019 through 2023.

The news within our industry are quite large and there is no requirement that we transact with airlines or in regions where we do not feel that success can be achieved via long-term lease on one of our modern aircraft.

We have the opportunity to be extremely selective opportunistic on placements which should allow ALC to continue to differentiate its financial performance from the competition, especially players on the sale -- in the sale-leaseback market who have been deploying capital less strategically.

ALC stands out among aircraft lessors and our airline customers and these customers can testify to that in the coming periods. And with that, I will turn the call over to our CFO, Greg Willis to provide an update on ALC’s financing activities for the quarter ended December 31, 2018..

Thank you, Steve. As mentioned earlier we recorded another great quarter and full year results. Our results were largely driven by our net growth in our fleet, with our key portfolio metrics of portfolio yield lease term remaining and average age all remaining constant.

For the fourth quarter of 2018, ALC generated revenues of approximately $450 million, up almost 13% year-over-year including $437 million of rentals and $13 million of aircraft sales trading and other activities.

As John noted, our fleet activity included the purchase of 12 new aircraft, representing $881 million of aircraft investment and sales proceeds of $154 million, included in aircraft sales training and other is approximately $5 million of management fees and $4 million of gains on sales.

Turning to expenses, you will see that our interest expense increased year-over-year, primarily due to the rise in average balances which drives the growth in our fleet. Despite the rise in prevailing interest rates over the last year, our composite rate only increased 26 basis points over the last 12 months.

This is primarily attributable to us maintaining a very high level of fixed rate debt, which currently stands at 86% of our debt portfolio. Year-over-year depreciation continues to track the growth of our fleet and SG&A represented approximately 5.8% of revenues, as compared to 6.4% of revenues for the fourth quarter of last year.

We continue to expect that over time our revenue growth will outpace our SG& A growth. We run a highly efficient organization with 97 employees servicing now $18.5 billion in total assets and we see this efficiency driving shareholder value into the future. We continue to benefit from Tax Reform through the reduction of the corporate tax rate.

ALC ended 2018 with an effective tax rate of 20.2 as a result of the effects of Tax Reform. Looking forward to 2019 we expect to deliver 80 aircraft representing approximately $6.5 billion in aircraft investments. As of today we are expecting $1.4 billion in Q1, $2.8 billion in Q2, $1.7 billion in Q3 and $680 million in Q4.

We expect the deliveries in the first quarterly weighted towards the second half of the quarter. We will continue to evaluate sales opportunities throughout 2019 and we currently anticipate selling approximately $1 billion of aircraft, with the majority of this volume occurring in the second, third and fourth quarters of the year.

Currently, we have six aircraft remaining to be transferred to Thunderbolt II, which you expect to be transferred by the end of the second quarter.

ALC continues to click Reynolds for those aircraft that have not yet been transferred into Thunderbolt II and therefore we anticipate that based on how the timing of aggressive counting works most of the gains on the remaining aircraft will be accounted for in the rental line item as opposed to gain on sale line.

However there is no change to our overall economics the deal that we finalized last back in August. Moving to the financing side our business, as always we evaluate and seek out the most cost efficient financing for ALC.

In the fourth quarter we found that the bank markets to be extremely receptive allowing us to raise additional capital from October to February and in early January ALC completed our of our medium-term of program, which provides significant flexibility in regards to the issuance timing global market access, ultimately raising $700 million in senior unsecured notes at 4.25%.

ALC to maintain a strong liquidity position of $4.3 billion at year end. As of today our next bond maturity is not until January 2020. We ended the year with slightly below our 2.5 times debt to equity target at 2.4 times, which is largely a result of our $200 million convertible note maturing on December 1, 2018.

We anticipate returning to our debt to equity target in 2019 and I would remind you that while 2.5 times is our target this is not cap and we regularly to fluctuate above and below this level based on the timing of aircraft investments and sales.

We also remain committed to our financing strategies of 80% fixed rate debt and 90% unsecured debt and again ended the year benefiting from the three investment grade ratings all with stable outlook.

As we plan for the remainder of 2019, we estimate that $6.5 billion in aircraft investments between now and the end of the year will be funded with $3 billion to $4 billion in debt financing, $1 billion of aircraft sales and the balance coming from operating cash flow.

I’d like to highlight the strength of our operating cash flow which is up 18% year-over-year driven by the growth in our fleet. This is the heart of the highly contractual nature of our assets, which provides for a clear path for growth and visibility to our shareholders.

This concludes my review of the results and the financing activities of the company and I will now turn it back to Mary Liz..

Thanks, Greg. This includes management’s remarks. For the question-and-answer session each participant will be allowed one question and one follow-up. I’d like to hand the call over to the operator to open the line to the Q&A session..

Thank you. [Operator Instructions] Our first question comes from Vincent Caintic with Stephens. Your line is now open..

Hi. Thanks, and good afternoon, guys. Just first a broad overview question as we are going into 2019.

Just wondering if you can highlight anything you expect to be different, any trends that you are looking to 2019 versus what we have seen in 2018?.

Well, I would just comment that it doesn’t appear that we are going to see, although, it’s very hard to predict, the fuel price volatility we saw in 2018. Look nobody can make any guarantees, but I think that that might be a bit different.

We had a spike in currency fluctuation as well in 2018, and again, that seems to appear to have a more stable outlook, as well as a more stable interest rate outlook. I mean as we are going into ‘18 mid-year there was a lot more forecast of rising interest rates, the Fed that was much more hawkish, now that tone has changed.

But I think from the some acceptance of our remarks, hopefully, in our prepared remarks you see that overall we see continued growth and stability in the overall marketplace and with our airline customers. So we have no real aspects that we can tell that’s going to be fundamentally negative or any different than what we have outlined..

Okay. Great. Thank you. And the -- on that point about rate, so the Fed has stopped rising interest rates. But just wondering if you expect to see rates -- lease rates expand from what Fed has raised.

And then also any views on cost of funds, you had a recent debt issuance, I think, that was -- I read a very good spread, but your thoughts on the lease rates into 2019 and then the impact to cost of funds?.

Well, look lease rate factors have been pretty stable and consistent on our forward placements over the last several months. Ultimately, as we have always said, a rising interest rate environment does work its way through the leasing sector, any financial sector. We expect that to be true. There is always a lag.

Yes, there is a competitive factors, but at the end of the day over a longer period of time, lease rates do follow interest rate. So I don’t see any change..

And then on the financing side our business we maintain a lot of activity to be opportunistic. We recognize there will be several windows to access capital and we like to be in a position where we can take advantage to those as you saw do in January.

I think looking back in the fourth quarter, as I mentioned in my prepared remarks, we accessed the unsecured term loan market and took down approximately $600 million at LIBOR plus 112, which was a fantastic deal for us.

And I think you are going to -- looking forward you are going to see us remain opportunistic to take advantages of those windows and those markets when they present themselves..

Okay. Great. Thanks so much guys..

Thanks Vincent..

Thank you. Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open..

Great. Thanks.

I think that you did talk about the amount of CapEx in 2019, obviously, being not just a surprise, but being at a higher level and Greg how are you going to finance it? Just talk a little bit maybe about what that might do if you think about carrying that out to the end of the year in terms of your other metrics in terms of what it would mean for the growth rate in the fleet, and perhaps, age and related metrics?.

Okay. I mean in terms of our portfolio metrics, we don’t see a change, basically looking at our deliveries that are in the pipeline. We don’t see a meaningful change in our portfolio lease yield, our age or our average lease term remaining. On the financing side also we are keeping our target of 2.5 to 1 as we have for many years.

Clearly we will go up and down around that target, but there is no change to the outlook there as well..

The only thing I want to add to what Greg is said is that on the new aircraft delivering this year, the lease terms are longer..

Okay..

And on the aircraft they will be selling..

Yeah..

So most of our new leases are generally running 12 years, some have slightly shorter terms, but the used aircraft we are selling obviously have much shorter lease terms remaining..

Got it. Thanks, Steve. And John you had talked a little bit about the potential for some of the delays kind of continuing for deliveries into 2019. Any discussion about the benefits that you might receive in return or any kind of remedies? Thanks.

No. Look we obviously we have huge relationships with both Airbus and Boeing. So we don’t comment on specifics as to what remedies we might have.

I would just say that we actually look at this with two very focused eyes, of course, the first focus is on our own company and impacts of any delays, which you have seen us in the past we have deployed CapEx where we have had significant delays in the aircraft.

I think the overall delays are less than they were last year, but they are still continuing. We are still getting notices. But the second and I would say more important aspect not minimizing impact to Air Lease, because I think we know how to deal with that from our own book, our own business.

I am more concerned about our customers frankly and that’s where the biggest impact is and we hate to have customers that have problems because of engine problems or they were -- they put an aircraft in their fleet schedule as of May 1 and now they are not going to get it until June or July and they miss the whole summer season.

Frankly that’s our biggest focus is our customers. We can take care of our own, but it’s our customers and it’s our job to try and do that.

And we spent a great deal, a great deal amount of time this past year trying to help our customers, working with them with the manufacturers, trying to get them relief in every share of form, extending leases even to the extent of finding other aircraft from other leasing companies that we might be able to plug in to fill any gap.

So I would say the biggest concern in exercise remains just taking care of our customers..

Okay. Thanks very much..

Thank you. Our next question comes from Scott Valentine with Compass Point. Your line is now open..

Thank you and good afternoon. Just a follow-up question, John I think you talked about sale leaseback market, I guess it’s been a lot of market capital you know pushing down returns there.

You commented about it deteriorating a little bit, does that mean there’s capital coming into the market or you are still seeing a very competitive environment there?.

Yeah. Frankly, I think, some of the lease rates, the returns have spooked people and you just have don’t have as much robust interest and people just have to be able to make a decent buck on their deployed capital and right now in the most aggressive parts of the sale leaseback market, that’s not achievable.

So, I think nature takes its course and I just think, listen we are not in the sale leaseback market so it’s wrong for us to say that we know every transaction, we don’t. But we keep track as closely possible we can and we just don’t see as much frothiness that we did last year or the year before.

I think people make their decisions and you do have market bottoms and I think we have reached it on the sale-leaseback site..

Yeah.

The other issues, Scott, on the sale leasebacks is that we saw a lot of lessors did not exercise the kind of discipline that we do on things like deposits upfront, maintenance reserves, technical return conditions and also what we found is that many of the sale leaseback lessors made unrealistic assumptions on residual values to kind of mathematically justify the low lease rates and we just don’t engage in that type of assumptions..

Okay.

And then just a follow-up, does the weaker sale leaseback market have any impact on used aircraft values, do you see that spilling over into demand for used aircraft in the secondary market?.

The new aircraft sale leaseback suite are not -- do not correlate to the used market whatsoever. It’s two different segments in a market..

Yeah. I think you have seen a lot of activity in the used sales market. So I don’t think you are seeing that type of spill over..

What we are saying, Scott, is continued extensions of aircraft that are eight years to 12 years old where airlines come to us and say, look we have a lease coming off in 2019 or 2020 or even ‘21, we would like to extend those leases, three years, four years, five more years.

We are seeing that a lot of that going on right now, especially since the oil prices have moderated a bit from their highs in 2018..

All right. Thanks very much..

You are welcome..

Thanks Scott..

Thank you. Our next question comes from Michael Linenberg with Deutsche Bank. Your line is now open..

Hey, John and Steve. I guess, just a couple here. When we look at what’s going on with a carrier in India and one in Brazil and it looks -- thankfully it looks like you are not involved in either situations, but it does look like we are seeing at testing here of Cape Town.

And I am just curious that your thoughts kind of the picture I think in the past from you guys have been pretty upfront about the limitations of Cape Town and maybe there is a lesson that we learn here, some big picture takeaways in both those jurisdictions that we are currently watching play out?.

Look I will only comment that we at Air Lease have never relied I guess is the proper word. We have never relied on the trappings of Cape Town, its effectiveness especially in all these other jurisdictions.

And all I can say is you see what you see and but never ever do we ever rely on just a purely legal point for the securitization and our risk mitigation. If you are down to having to rely on Cape Town you haven’t done your homework..

Okay..

My opinion is much stronger, John, but I am going to voice it..

That’s fine. And then just my second, Steve and John look, you guys -- you think back a few years now. I mean we are going back to late ‘90s, 2000, when we saw some of the noise limitation rules put into fact and the reason I am bringing that up is, I believe January 1, 2020 we see high kiosk [ph], of course, implementation kick in.

I know it’s on a voluntary basis, but as you know this has to do with carbon footprints and airlines who participate having to make some payments, and obviously, I think it’s become mandatory maybe 2024, 2025.

But when I think back with the noise limitations that went into effect, there was a significant impact on values of aircraft either that weren’t stage three compliant and I am just curious as we see some of these environmental regulations kick in where people have now start paying for the carbon offset.

Do we see more -- a similar impact on some of the older aircraft or is it more gradual that you think over the next few years?.

Mike, I think, it validates our strategy of putting our asset into the youngest and most environmentally friendly aircraft. We have seen regulations where it is age limits. Some countries say, if an airplane is older than 15 years old, it can’t be imported. We have seen the impact of taxation and fees imposed on European airlines.

We think that trend will continue. So I think the way to differentiate ourselves is to offer the airlines the best airplanes that contract that particular cost and then redeploy some of the middle aged aircraft in other regions of the world that are not yet impacted by those type of regulations..

Mike I have one other thought. Keep in mind that if you look at the next the latest generation the most modern generation of aircraft the neos, the MAXs, the 787, the A330.

If you just look at the sheer volume and quality of those aircraft that are delivered to-date and even over the next five years, it is still a small fraction small fraction of the global fleet. So my only point in saying that is that any aircraft that isn’t of that something.

For example, the 737-800 are wonderful bread and butter aircraft worldwide, even the 777, the current A330 -- of the current A330 CEO and 321 CEO, these aircraft are not going to lose value overnight. It will take a tremendous amount of time….

Right..

… for the global fleet to replenish and re-up the new aircraft types so a long amount of time. So despite the regulations are et cetera the reality is that used aircraft values are not going to drop off the cliff..

I mean the math Michael is speaks simple. There is almost 25,000 jest now, western built jets that are over 100 seats and what the production rates are at Airbus, Boeing, Embraer. There is no way that I am seeing in the next five years to seven years there will be less than 10,000 new airplanes build.

You have several thousand airplanes will retire or be converted to freighters. So as John said this is a long-term process regardless of these regulatory constraints..

Okay. All right. Thanks, gentlemen. Appreciate it..

Thanks, Mike..

Our next question comes from Kristine Liwag with Bank of America Merrill Lynch. Your line is now open..

John and Steve, your China exposure as a percent of net book value is the lowest we have seen in the past few years and it looks like at the end of the quarter at 17%.

Can you discuss what’s driving the shift away from China and you can you provide more color on the activity that you are seeing here?.

Yeah. I think it’s pretty clear Kristine. There is no shift away. This was a -- our China business has been building over the past five years, six years, seven years. We have had great success in China and this simply is a product of our overall fleet growing, our replacements in other areas, you will see continued placements in China from us this year.

That business is going well. But look we are growing bigger. Our balance sheet this year is going to be excess of $20 billion and it was always a plan as we mapped out our strategy. It was always our plan that China was going to be reducing in total over time and our plan is occurring exactly as we anticipated it.

It’s not knee-jerk reaction to trade tensions or anything else like that rather it’s a result of four years to five years to six years of planning and looking forward at our placements and our overall fleet growth is just getting bigger in the world..

Yeah. So you will continue to see Kristine China and if you include Hong Kong and Macau, we will probably hover around one-sixth of our fleet, so somewhere between say 15% and 18% in that range for the foreseeable future..

That’s helpful.

And then with your lease placements pretty high now for 2020, when you look at the contracts that you have signed there, what does your net book value look like by region by the end of 2020, where do you expect to see the uptick in growth?.

Well, it’s not going to be tremendously different from what we have today. Generally speaking it’s going to be 42%, 43% overall in Asia and we have talked about our current percentage I think is for 17% of that is for China.

You are going to have Europe which has been growing quite nicely for us a little north of 30% and then you are going to have you are going to have the Middle East and other areas all fall normally. So it’s not going to be a tremendous diversity from our distribution today in our net book value..

Yeah. You will probably see a small pick up a few decimal points in Latin America and Caribbean because of new deliveries. For example, we just announced four new MAXs at Caribbean Airlines and we have three more deliveries to Cayman Airways and we have some other transactions in South America. So we see a little increase there.

I think Europe will probably grow faster than our total fleet average, but again as John said it will not deviate very much from where it was at the end of the year..

Yeah. The one think and the Benoit of the U.S. Tax Reform, we have placed more aircraft in U.S. and so you may see our US content up a few percentage points.

Just by way of reminder Tax Reform allows us to take the full amount of the aircraft cost in one year in the first year if we place it -- whether it’s Airbus or going if we place it in service for the U.S. operator.

So that is -- we can do the math on that and we can tax effect that and that gives us a little bit extra stimulus for the U.S., but you are not going to see a huge quantum of growth..

I think one last thing to point out though moving from regions to maybe individual customer concentrations. I think from a risk standard point our average customer concentration is below 2%. So we are running an incredibly diversified both airline customers and we do so very prudently with very strong security factors..

That’s helpful. And then if I could squeeze one last one, we were doing some work on the global in-service fleet and it looks like there could be a widebody placement coming in the mid-2020s particularly in the U.S. Now with your business model the U.S. hasn’t been a big factor for growth for you and also U.S.

airlines have very many avenues to get capital.

Do you think that -- what do you think would have to change in the industry for you to play a part of that widebody replacement in the U.S., do you think that could be an area of growth and what you think has to happen for you to be a player there?.

Well, as you know, American, Delta and United, which are the major widebody operators of passenger aircraft have all placed significant orders with Boeing, Airbus. Delta as you know has a lot of A330-900s coming, A350 fleet has been placed to 747s. United has A350-900s and a lot of 787-9s and 787-10s.

American has up there 787 order last year for both as -8s to replace or 767s and -9s. I think United still get a few more 777-300ER. So I think the U.S. carriers have actually topped up pretty nicely on their widebody orders for 2019, ‘20, ‘21, ‘22. I don’t see a lot of opportunities for Air Lease on the widebody side in the domestics.

I think our main emphasis in the U.S. will be on single-aisle aircraft like 737 MAX A320, A321neos, I would say that’s where we will focus our U.S. business in the next couple of years..

I think a global picture Kristine I will make a comment, I think, I might have made at your conference and that is if you look forward, right now the largest twin aisle widebodies have been a little slow. For example it’s no secret the 777x from Boeing has been slow in sales, the A350-1000, etcetera.

But at the end of the day there is a huge replacement market in the ‘22 through ‘25 timeframe where the youngest 777-200ERs will be replaced the oldest 777-300ERs will be replaced, the -- and remaining A340s and et cetera and any aircraft like that.

So I do think you will see a pickup in the largest widebody growth in that period just simply as a reflection our retirement of the large widebodies of the types I just mentioned..

There’s still 747 is that airlines like Qantas and British Airways in Asia so, as John says, we see the international segment on our widebody activity as being the most active..

Great. Thank you guys..

You are welcome..

You are welcome..

Thank you. Our next question comes from the line of Jamie Baker with JPMorgan. Your line is now open..

Hey. Good afternoon, guys. This is Nish Mani on for Jamie. I was wondering if you could comment a little bit on the supply side dynamics, obviously, traffic market demand remains strong and you noted that there are some that comes as relates to kind of a pickup with the airline bankruptcies and shutdowns, but how did the supply side factor into this.

I mean is it your view is that Boeing and Airbus have the production rates kind of roughly in balance with how you think about demand in 2019 and ‘20?.

Well, I think, the overall answer is, yes. We believe in the rational -- duopoly is still rational etcetera. However, we remain concerned because the supply chain is very -- they are very constrained and increasing rates is very, very tough. In our own business we find delays and sometimes in getting seats.

We find delays in other aspects, sometimes just getting even engines in and out of the shop at the MROs, they are fully booked and we don’t have to do it, our airline customers do it, but we work with them et cetera, all across the Board.

Sometimes in the new aircraft programs and our deliveries, we get notices delays not because of an engine, but because some widget or component is in short supply or they have replace it, etcetera. So there is just a lot of I think vulnerability and I know that the OEMs themselves echo supreme confidence in their ability to do this.

I am just telling you we remain concerned because of things we see and hear and watch every day with our customers and with our deliveries.

So we have the people on the ground to lose and in Seattle and everywhere our technical people monitor availabilities everywhere, our whole materials management group, which supplies all of the avionics, seats, gallies [ph], wheels, tires, brakes for aircraft, monitor availability and when could we get in and what we are going to change an aircraft from A and B.

So all I’d say is, it’s pretty tight and any one single thing could be a disruption. We have seen that in Airbus. So look it’s not -- I am saying as -- we say this for a long time it’s not so slam dunk in our review..

The other thing we are watching is the quality of the backlog from buyers like Jet Airways and Norwegian and Lion Air and VHF and others. The question is can these airlines absorb all of the planes that they have ordered. Well, some of those orders transform into options. Will other people step into those positions.

So, that’s something we monitor very, very closely. But as 2019 unfolds, we see pretty solid situation of equilibrium between production and demand..

Okay. That’s very thorough and very helpful. Thank you both guys. And just one kind of follow up on a slightly unrelated topic. You mentioned that at this point in the cycle lease durations are taking up relative to kind of the past few years.

Is there any color you could provide on how this kind of uptick in lease duration shifts between business models? In other words are low cost carriers and kind of more traditional hub and spoke carriers treated differently as you think about the push and pull of longer lease duration, potentially lower lease rates on a nominal basis and thanks again?.

Part of the longer duration is not a financial reason. It is that the maintenance intervals that Airbus and Boeing have been able to get from the regulators have been extended. I will give you a small example. On the 737, going from 800 to a MAX the first heavy check is now nine years instead of eight years.

So same thing on the 787, the A350, the intervals for heavy airframe maintenance have gone longer. So many of the airlines want to match the lease with the maintenance check that’s due at that point in time..

So it is fair to characterize then that if the maintenance check intervals had not changed, the lease be duration probably wouldn’t take either in your view, they are not economic component?.

Well, I would say that’s a significant component, obviously, the maintenance intervals.

But part of it I think you alluded to earlier is, of course, that an airline’s request to get the lowest resets possible, it’s no secret that the longer the other duration is and lease, all leasing companies price lower, that’s just always been the case and so and we are happy to do that.

We take that trade all day along and we would always bias towards a longer lease rate like I think most lessors would..

Yeah. We got some 14-year leases on widebody aircraft..

There was really nothing new here but I think -- I do think that all these factors rate versus duration, expanding intervals and then the other thing is if you just look forward at again the production rates and the supply chain etcetera, etcetera.

Securing an aircraft for a longer period of time these days especially if you are a growing operator, you really need to have growing LCC or ULCC, you are adding aircraft quickly. It’s good to secure for a long period of time and you just take away forward risk..

It also shows they have more confidence in the future..

Right..

We just did a deal with an airline in Europe that traditionally was doing eight-year to 10-year leases and we signed up for 13-year leases and again it ties in with both economics and the maintenance intervals..

Okay. That makes sense. As always guys thank you so much for the time. I would appreciate it..

Okay. Thanks..

Thank you. Our next question comes from the line of Josh Sullivan with Seaport Global. Your line is now open..

Hey. Good afternoon..

Hi, Josh..

What other thoughts on the middle of the market aircraft at this point, what characteristics would make it more attractive for your portfolio and I guess what might make it less attractive for whatever the final design ends up looking like?.

Well look I think the NMA, I believe Dennis Muilenburg in their earnings call Boeing said they have sort of pushed off this decision to 2020. As I indicated my prepared remarks there’s many key decisions we made. The engine obviously is one the key of the all. Look, it’s a business case question for Boeing. There is some interest in the aircraft.

On the other hand when you look at the single-aisle products and the twin-aisle products available today, they cover it, you can’t an argument for example on the Airbus side that between the A321Neo and LR neo and possibly the a 321 XLRneo and the A330neo that gap is covered.

So look I think it’s nothing more than what we have always said, which is -- it’s an economic equity. What is the price of the aircraft will tell you how many potential units we think that there is and so it’s just too early to -- it’s really too early to tell.

Some people have said this could be the first twin-aisle aircraft for the ULCC market, that maybe the case. On the other hand, a lot of the major carriers around the world are looking at it. That’s a matter of availability as well, I mean how long do you wait for it. So, it’s still unknown.

I mean, the very fact that Boeing hasn’t gone forward yet doesn’t mean anything more than they are still studying at very, very close with their potential business partners and there is a lot of aircraft choice available today, but cost drives everything and price drives everything..

Okay. And then just one on Thunderbolt.

What other hurdles you are looking at before may be launching another Thunderbolt at this point?.

I think right now we are going to the math of optimizing the portfolio running the traps with the various constituencies, rating agencies, bankers and these deals take a bit of time to pull together. So we are trying to optimize what’s the right portfolio to be put in next and we are fully optimizing those values for Air Lease going forward..

But we have a whole team dedicated to doing that and we are looking forward to with great optimism..

Okay. Great. Thank you..

Thank you..

Thank you. Our next question comes from Rajeev Lalwani with Morgan Stanley. Your line is now open..

Hi, gentlemen. It’s actually Jonathan on for Rajeev.

I was wondering if you would come back to the delivery delays and I was wondering if you would modify the impact, in the last quarter you provided some color there and then as it relates to Boeing are those delays largely resolved?.

Yeah..

Yeah. Boeing I think we are in good shape..

Yeah. Very good..

Airbus changes by the day, so, I think, for us to give you any quantitative data on days or weeks of delays will be….

I do think -- I commented earlier that delays so far this year are less in magnitude than last year. That’s true. But they are still happening and I think last year we said delays were three months to four months on average, they are probably little bit less now. But I think the point we are simply trying to make is that they are still coming.

We are still getting delay notices and it’s just -- we are working through it. We do have confidence in Airbus manager, they are working their industrial plan. We just don’t think it’s over yet..

Right. And we give you in my prepared remarks we went through where we expect in terms of dollar value of aircraft investment by quarter throughout 2019. So you have a -- should have a pretty good base of where we see deliveries as of today, and obviously, that was a good change, but I think that’s the plan as we see it today..

Yeah. The both delivery -- on the both the 787 and 737 MAX are generally on time. The A350 is running pretty well on schedule, but the A330neo and A320, A321neos that’s where we have the biggest issues and we are working with Airbus on a daily basis..

Great. Thanks for the color there.

And then, as it relates to the order book just at a high level what’s the current stance on adding additional aircraft and the potential enemies play a factor?.

Well, look we added -- in the middle of 2018 we added a significant order for with the Boeing company, primarily on single-aisle aircraft and the MAXs and that is just part of our ongoing day-to-day business. We have no -- we can’t -- there’s no current plans in terms of the new technology aircraft that’s still very much under study.

So it’s just premature at this point to comment on the NMA or any other aircraft type at this point..

Got it. That’s fair. Thanks..

Thank you. That was our final question in queue. I would like to turn it back to Ms. DePalma for closing remarks..

Okay. Thank you, everyone. That’s it for our call today and we look forward to speaking with you again after the conclusion of the first quarter. James you can now disconnect the lines. Thank you very much..

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may now disconnect. Have a wonderful day..