AerCap Holdings N.V. Q3 FY2021 Earnings Call

Good day and welcome to the AerCap Holdings N.V. Third Quarter 2021 financial results. Today's conference is being recorded and a transcript will be available following the call on the Company's website. At this time, I would like to turn the conference over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir.

Thank you, Operator, and hello, everyone. Welcome to our third quarter 2021 conference call. With me today is our Chief Executive Officer, Aengus Kelly, and our Chief Financial Officer, Peter Juhas. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation other than that imposed by law to publicly update or advise any forward-looking statements, to reflect future events, information, or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AerCap's earnings release dated November 10th, 2021. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and this webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation and we'll allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to 1 question and 1 follow-up. I will now turn the call over to Aengus Kelly.

Good morning, everyone. And thank you for joining us for our third quarter 2021 earnings call. I am pleased to report a strong quarter of earnings with $434 million of net income or $3.35 of earnings-per-share. Importantly, the positive trends we observed for the last several quarters relating to operating cash flows, to facilities balances, accounts receivable balances, and improving demand for aircraft continued in the third quarter. These positive trends are underpinned by the strong recovery in global air travel. More and more countries are opening their borders to international travel, driven by the huge success of the vaccination program and the subsequent easing of government restrictions. As you will see from the slide, the three key markets of the world are the U.S., Europe, and China, which today contribute 50% more flights each day than the rest of the world combined. Since the GECAS announcement in March, travel has rebounded by 38% in these three markets and by 26% in the rest of the world. This is well ahead of our expectations at the time, and also shows the potential for further progress in 2022. In the U.S., we saw a strong rebound beginning in January and this continued through most of the summer with domestic leisure traffic close to 2019 levels. Although there was some temporary softness in traffic in August and September as a result of the Delta variant, most of the U.S. majors that have recently reported highlighted improving booking trends moving into the fourth quarter. In addition, the reopening of the U.S. international market earlier this week should provide a significant boost to long-haul travel demand. It was encouraging to hear from the airlines that bookings surged in the days and weeks following the announcement, a clear sign of the pent-up demand that exists. The transatlantic market is the most important long-haul market for both business and leisure, providing healthy yields for airlines and strong demand for wide-body aircraft. The successful reopening of the North Atlantic markets will give other airlines and airport operators around the world the confidence to follow. While it's too early to say how quickly business demand will return, this is a critical first step. In Europe, the strong recovery has been sustained by the success of the vaccine roll-out and the digital COVID certificate, which has made international travel much easier for airlines, airport operators, and travelers. China is the most important market in Asia and has also fared well with high levels of domestic demand. Although there have been periods of turbulence due to regional outbreaks and increased travel restrictions, these have been transient in nature, and demand for air travel has bounced back each time, proving the resilience of the Chinese domestic markets. As a group, these three markets are back to 85% of total flights relative to 2019 levels. In the rest of the world, South America and India have shown recent signs of improvement. But the one region that has been harder hit is Southeast Asia. Even there though, we have seen countries like Thailand and Malaysia pivot towards a living with COVID approach, which coupled with the continued roll-outs of the vaccine should also spur recovery in this region. Likewise, Australia, which has had one of the strictest quarantine requirements in place since the pandemic began, has started to reopen to international travel. While the full reopening of Australia will take some time, we have already seen evidence of a number of carriers starting to rebuild their domestic networks in advance of greater inbound travel. As an example, Qantas combined with Jetstar was operating one return flight per day between Sydney and Melbourne. They moved to 18 return flights today after the state border opened and expect to operate 37 by Christmas. This is still well below the 58 per day that we're seeing pre-pandemic, but a significant step forward nonetheless. Turning to GCAF, we were delighted to announce the closing of the transaction following an extremely successful bond offering and the receipt of all regulatory approvals. And although we only closed the deal last week, there are a number of areas I would like to highlight that have pleasantly surprised me. AerCap has always had a high degree of communication with its customers, but the level of communication and the substance of this communication has intensified materially. AerCap is the most important lessor in the world and simply reaches a much wider base of customers: from legacy carriers, LCCs, regional carriers, helicopter operators, freight operators, wet lessors, and engine leasing customers. Engine leasing in particular provides a new lens into the markets. This business runs on much shorter lead times than aircraft leasing. As new business deals are done weeks in advance, rather than months and years in advance on the aircraft side. This gives us an important window into the thought process of an airline and their confidence in our recovery. If we can see they are prepared to invest large amounts of capital in putting their engines through shop visits and leasing from us to cater for them. The same is true of our interactions with the OEMs as we are, by far, the largest owner of commercial aircraft in the world and their biggest customer. I am pleased to see the level of cash we're collecting every day from our customers too. And whilst we're not out of the woods yet when it comes to COVID, I do believe that with further progress on vaccinations, the new treatments announced last week, the transatlantic market reopening, and a pathway out of this in Asia, that it's only a matter of time before the market fully recovers. Now, not only does this transaction provide us with an extremely attractive portfolio of customers. Just as importantly, we also gained a group of highly talented colleagues across a variety of functions who will challenge and enhance the AerCap team to ensure we remain the industry leader. It is clear from the level of lease placements, aircraft sales, and purchases of both companies that we have the right people and the right products to position AerCap well for the future. Having the right product available to your customers is crucial. And this is why AerCap's fleet will be comprised of 75% new technology aircraft by 2024. These new technology assets, such as the A320 Neo and the 737 Max, are the most in-demand aircraft in the world, reducing airlines' operating costs and carbon emissions, and helping them to meet their sustainability commitments. Having the most desirable portfolio of assets will ensure that AerCap maintains its global customer footprint and franchise. So, in summary, this quarter was an important reflection point for the Company. As our strong results demonstrate, AerCap continues to recover from the effects of the COVID-19 pandemic. The GECAS transaction brings a portfolio of well-priced assets and a deeply experienced team of people that will further enhance AerCap's position as the lessor of choice for airlines around the world. With that, I will hand the call over to Pete for a detailed review of our financial performance.

Thanks, Gus. Good morning, everyone. Our total revenues for the third quarter were $1 billion $454 million, an increase of 42% from $127 billion for the third quarter of 2020. Basic lease rents were lower in the third quarter primarily due to lease restructurings, aircraft transitions, and the impact of airline bankruptcies. This includes the impact of cash accounting, which was $75 million for the quarter. With the recovery in air travel progressing, and after a stronger summer, most airlines are in a significantly better financial position today. And we can see this in our third quarter numbers. Our cash collection rate was 99% for the third quarter, our deferral balance decreased by $36 million to $427 million, and our trade receivables fell by almost $80 million as of September 30th. So, on a combined basis, deferral balances and trade receivables fell by 17% in the third quarter, which leaves us in a good position as we approach the winter months. Maintenance rents were $110 million in the third quarter, which was an increase from $91 million in 2020, primarily due to higher maintenance revenue recognized as a result of lease terminations. In terms of aircraft sales, during the third quarter, we sold 11 of our owned aircraft for a total of $101 million. The aircraft we sold were an average of 20 years old and our net gain on sales for the quarter was $38 million. Other income was $459 million for the third quarter, the vast majority of which was the sale of most of our remaining unsecured claims with LATAM Airlines. We recognized $409 million of other income in the third quarter related to the LATAM claims sale. We received the cash proceeds in early October. Those did not contribute to operating cash flow for the third quarter but will instead come through in the fourth quarter. Turning now to expenses. Our total expenses were $955 million for the third quarter, a decrease from $1.851 billion for the third quarter of 2020. The main reason for the decrease was the lower level of impairments this year. We recorded asset impairments of $49 million in the third quarter, which related to lease terminations and were largely offset by maintenance revenue. Our depreciation and amortization expense was $393 million for the third quarter, a decrease from $416 million last year, primarily due to a lower lease assets balance. Interest expense was $287 million for the quarter, down from $307 million last year, mainly due to a lower debt balance. Loss on debt extinguishment was $3 million in the third quarter compared to $43 million last year when we completed a debt tender and prepayment of a large amount of bonds. Other leasing expenses were $54 million for the third quarter, an increase from $40 million in 2020, and the increase was mainly due to higher default and restructuring-related costs during the quarter. Our SG&A expenses were $68 million for the quarter compared to $61 million for the third quarter of 2020. And finally, in the third quarter, we recognized expenses of $101 million related to the GECAS transaction. This primarily represents the cost of the bridge financing facility that we put in place back in March, which was terminated when we closed the transaction. So overall, in the third quarter, AerCap generated net income of $434 million or $3.35 a share, excluding the costs related to the GECAS transaction of $101 million pre-tax or $88 million after-tax, net income for the third quarter was $522 million or $4.04 per share. We continue to maintain a strong liquidity position. Pro Forma for the GECAS transaction, our total sources of liquidity were around $18 billion, which resulted in the next 12 months sources to uses ratio of 2.1 times. That's well above our current target of 1.5 times. Our excess cash coverage also remained high at around $9 billion. As I mentioned earlier, our cash collections continue to be strong at around 99%, and our operating cash flow was $788 million for the third quarter. We continue to maintain a very strong balance sheet. Our leverage ratio on a standalone basis at the end of the quarter was 2.3:1, which means that pro forma for the GECAS transaction, our leverage ratio was 2.8:1. That puts us well on our way to get back down to our target ratio of 2.7:1 in 2022. Our secured debt percentage decreased as a result of the recent financing we did, which was predominantly unsecured. So, on a pro forma basis as of September 30th, our secured debt was around 16% of our total assets. So overall, we had a positive quarter with net income of $434 million and EPS of $3.35. We saw improvements in cash collections leading to a significant reduction in our deferrals and trade receivables balances. We had very strong demand for our recent financings and both our $21 billion unsecured bond offering and our $2 billion secured term loan were heavily oversubscribed, which demonstrates the market's confidence in AerCap, as well as in the sector generally. And of course, the interest cost of around 2.6% for an average tenure of just over 7 years on those financings positions us well for lower costs going forward. Now with the GECAS transaction closed, we look forward to completing the integration of our two companies and continuing to deliver for our customers and our investors. And with that, operator, you can open up the call for Q&A.

Thank you.

Thank you, Operator and hello, everyone. Welcome to our third quarter earnings call.

Ladies and gentlemen, we will now take questions. We will start with our first question from Andrew Lobbenberg from HSBC. Please go ahead. Your line is open.

Oh, lovely. Thank you. Can you talk a little bit about when we might see lease rates climbing? It looks to me that they were flattish year-on-year, but obviously we still got the transitions going on. But equally once the transitions go on, I think through this winter, we're going to have quite a lot of power by the hour. Yeah, when should we expect or how vigorously should we expect lease rates to decline? Thank you.

Let me start on that, and then Pete can comment on the power by the hour range during the winter. It's fair to say that we are seeing upward movement in lease rates for certain types of aircraft already. The recovery in lease rates is being led by new technology narrow-body assets. Specifically, the A321 Neo hasn't really decreased much, and we're definitely observing an increase there. We're also experiencing good movement with the MAX 8; it's now trending close to where an A320neo would trend for future placements. So, we are definitely seeing that. Additionally, aircraft values are also increasing, as shown by the sales we've been executing. You can see some of the gain on sale in this quarter's earnings. Pete, would you like to comment on the near-term impact of power by the hour?

Certainly, Andrew. When we consider basic lease rents and our lease yields, the main factor influencing them is the number of aircraft currently in transition and awaiting delivery to new lessees. This is the most significant aspect at play. As these aircraft are delivered, we will begin to see revenue generation resume. This is expected to occur over the next few quarters, with the majority of deliveries happening soon. For instance, once the A350s we acquired from LATAM and placed with Delta are delivered, the revenue flow will resume. Additionally, as airlines transition off cash accounting, this will also affect that revenue line, contributing to an increase. Regarding PBH rents, over the coming quarters, we will see airlines moving away from those arrangements, as they were initially established at the start of the leases, with airlines moving from PBH periods to standard monthly fixed rentals. This transition is anticipated to take place in early 2022 for the most part. Generally, if you assess our revenues, I believe this quarter marks the lowest point for us, and we should observe a recovery moving forward.

That's lovely, that's clear. Thank you.

Sure.

Thank you. We will now take our next question from Mark DeVries from Barclays. Please go ahead, your line is open.

Thank you. I appreciate there's probably a lot of work still going on evaluating the planes you acquired, but any sense for when we'll get some clarity on some of the Pro Forma accounting impacts of the deal, whether it's a maintenance rights asset or how much you collected from the cash light box?

Sure, Mark. You're right; it will be a significant task to review the legacy GECAS fleet. We will do this on an asset-by-asset basis. We'll examine each asset and liability on their balance sheet and evaluate what we expect for the future, including potential lease rates, maintenance revenues, and anticipated expenses. This is a substantial project that we've just started. Once we complete this and are able to have our teams collaborate effectively, with leasing executives and portfolio management interacting freely, we will gain a clearer strategic perspective on these aircraft. All of this will guide our decisions. When we report our fourth-quarter results, you will see the Pro Forma balance sheet, including all the assets outlined. At that time, we will also have more information about the combined company's structure and its expected outcomes.

Okay. That's helpful. Just one clarifying question about the Pro Forma equity in the press release. Is that based on your stock price of $930, and would the debt-to-equity and the implied price to book value per share be higher? Would the equity be higher if you adjusted it to reflect where the stock was on the day of closing?

So that was based on the stock price on the Friday before closing, which was October 29th, when it closed at $59.04. That's what you use because when accounting for it, you multiply the number of shares, 111.5 million, by $59.04. That number won't change and it's really just driven by the stock price on that date.

Okay. Got it. Thank you.

Sure.

Thank you. We will now take our next question from Jamie Baker from JP Morgan. Please go ahead. The line is open.

Hey, good afternoon, everybody. Follow-up on the first question about aircraft values. So, Mark and I noticed that weaker aircraft types, 330's to 700 ERs, the value subscribed to those types was lower than what we think some investors might have been expecting. Did you have any wiggle room to allocate GECAS aircraft value in a way that would minimize the risk of downgrades? Could you just remind us of any rules around that?

Let me begin by discussing our strategy. The crucial point regarding the portfolio we acquired with GECAS is its speed. As I have mentioned repeatedly, the age of the portfolio does not indicate risk. Even if you have a newer 777 or 330, there are substantial risk profiles involved. Both GECAS and AerCap, the industry's two largest players, share the same strategy of avoiding any end-of-life 330s or 777s. This means we did not participate in the growth-at-any-cost approach that some competitors adopted over the past seven or eight years. We have not ordered any triple 777s or 330s in over 11 years. Therefore, the concerns you raised are more pressing for those holding younger assets in those categories. Additionally, GECAS's balance sheet was not formed through overpriced mergers and acquisitions, so there are no purchase price premiums to consider. Even after a $1.5 billion increase since we signed the transaction with GECAS in March, there remains a $3.5 billion discount on the GECAS balance sheet. This is after nearly $1.5 billion in stock appreciation. To summarize, our strategy for assembling the portfolio was sound for both companies. The GECAS portfolio was not built on overpaying for assets, and we are also receiving a significant discount, which allows us to reflect the true market value of those assets if we choose to liquidate them.

Thanks for that, guys. And while I have you, I mean, the asset sale market is very strong at the moment, we had one of your competitors, CEOs tell us that he could sell anything that he wants right now, just wondering if you agree with that assessment and how aggressive you might be in calling the Pro Forma portfolio going forward? Thanks.

But like I don't know who described the common to, but of course you could sell anything for a dollar, I suppose. I'm not entirely certain that that's the case just yet. I mean, look, what I would say is this: as in prior downturns, we're seeing the recovery led by the same assets. So, without question, A320neo Max aircraft values, where they never really got hit that hard to be fair, and the lease rates have ticked up on those. The MAX 8 is making a comeback, that's important. It's important for competition with Airbus 2 actually, that's not just an Airbus market. The MAX 8 is coming back, that's good news. And then we certainly see it on 320, 737s, we see it on 787s at the moment as well. So, it's coming, and I do think that we have seen a significant increase in asset values, from the beginning of this year. That's not in doubt, and we see that in the sales prices that we're getting for our airplanes. Yes, I mean, I would agree with the sentiment, for whichever one my peer said that, but it's slightly more nuanced.

Mark and I appreciate the color. Thanks, guys.

Thank you. We will now take our next question from Cathy O'Brien from Goldman Sachs. Please go ahead. The line is open.

Hi, good morning, everyone. Thanks so much for the time. I know the AerCap delivery book is sold out through 2022. I'm guessing GECAS legacy order book is probably similarly positioned, but correct me if I'm wrong. Can you just speak to how quickly you can start marketing both fleets jointly? And can you walk us through any pluses or minuses you're thinking through to marketing a larger combined order book? Thanks so much.

Well, first of all, yes, the GECAS fleet is similarly placed, and the vast, vast majority of the Delta2 order books actually through the end of '23 are placed on. And when it comes to, of course, as of the day of closing, we've been preparing for that in half of the last six months to hit the ground running, and a lot of work has gone into that. Of course, we were never able to open until the day of closing in any way, shape, or form, coordinate any campaigns. But we've done this before and seven years ago. And so far, we're albeit 10 days in, the coordination has been very good on marketing at the combined fleet.

Okay. Got it. Thank you very much. And then, maybe just one for Pete. Not to be nit-picky in what was a strong quarter, but your cash accounting increased a little bit from last quarter. What drove that? Then just any updates on when you think that unwinds completely. I know you were talking about earlier that you expect 3Q to probably be the bottom. Safe to assume that probably goes for cash accounting as well? Thanks.

Sure. The second quarter number was $54 million for cash accounting. And as I mentioned at the time on our last earnings call, that was impacted by some one-time items which made it kind of artificially low relative to what we would have expected. And so, we went from $100 million during the first quarter to $54 to $75, and I think that number is going to come down from here on out. So, the trend, absent that one-time aspect of it, the trend is going down. I mean, one of the big items on that would have been LATAM, right? And the LATAM is back on accrual accounting now, now that we've restructured the deals with LATAM and the aircraft that are in there. And so that would be a big driver of bringing that down.

Great. Thanks so much for the time.

Sure.

Thanks.

Thank you. We will now take our next message from Hilary Cacanando from Deutsche Bank. Please go ahead. Your line is open.

Hi. Thanks for taking my questions. With the GECAS acquisition now closed and I know you'll be focused on successfully integrating the new operation, and you want to bring your pro forma leverage down to 2.7 times. Could you just provide a little more color around how that'll be done: where you'll be selling assets, raising equity capital, and how you envision your longer-term capital structure to look like?

Sure, thanks, Hilary. So, the primary driver of it will just be our organic cash generation and equity generation. So that on its own would bring us down to that level and below that level. We're starting off at 2.8 to 1, so we're pretty close to it now, that gives us a very good start towards that 2.7 target. But that's the main driver, and then beyond that, asset sales also contribute. The more assets that you sell, you can bring that number down faster, right? Or buy more. But no, I mean we're not planning to raise any equity.

Got you, that's helpful. And then one of your competitors last week talked about production delays to Boeing and Airbus having an impact on their delivery schedule. Are you having the same types of issues with the OEMs in terms of delivery? If you could talk about what you're seeing there. Thank you.

Sure. That's a global phenomenon at the moment and certainly the Boeing issues are well-documented with the issues that are currently on the Max and the 787 line. However, that being said, I would expect Boeing to come through this. It's a very difficult time, but I believe those deliveries will ramp up again as we get into next year, it'll take a bit of time. Mind you, as the largest owner of commercial airplanes in the world, and someone who is a marginal supplier of capacity, that's not entirely a negative thing for us anyway. But needless to say, we're in discussion with the manufacturers and all of them every day.

Thanks for your time. Thank you.

You're welcome.

Thank you. We will now take our next question from Helane Becker from Cowen. Please go ahead. The line is open.

Thanks very much, Operator. Hi, everybody. And thank you very much for the time today. Just two questions. Pete, on the $101 million that you sold those 11 aircraft for and the $38 million net gain, had these aircraft been previously written down?

Most of those aircraft were an average age of about 20 years, with some being older than that. They had been depreciated significantly over time, including older 767s. As a result, there was very little value left associated with them, which is why we wrote them down due to normal depreciation over the years.

Got you. And then, I think you have an order book of about 450 aircraft now combined. Did you say this and I just missed it? And I apologize if you did. Are you going to look and talk to the OEMs about potentially restructuring that order book or beyond 2024 since you're mostly placed through year-end 2023? Or are you just going to go ahead and combine them and hope for the best, so to speak?

Well, it's just one order book now, Helane, and both companies were very proficient in leasing the aircraft in the backlog. And so, the placement strategy that both companies had was very similar, and as I said before, over the years, GECAS has been a very experienced and disciplined buyer of assets. And as I mentioned as well, the GECAS balance sheet wasn't built by overpaying for assets, it's either through M&A or buying end-of-line assets. So, we feel that the order book that GECAS has is well-priced.

Thank you. We will now take our next question from Moshe Orenbuch from Credit Suisse. Please go ahead.

Great. Thanks. Gus, you mentioned that aircraft values have improved. I'm curious if you could elaborate on the improvement you've noticed since you negotiated the transaction, specifically in terms of values, and if you could also discuss the level of interest costs based on the funding you received compared to what you initially estimated when negotiating the transaction.

It's challenging to provide specifics, but I can say that we're clearly seeing improvements led by new technology and narrow-body aircraft. Notably, the value of the 737 has risen significantly. We had previously agreed to sell a batch of 737-800s built in 2013 at the start of the pandemic in March 2020. The buyer later backed out, but we've since sold those aircraft at a higher price than we anticipated before the pandemic. This adjustment accounts for the profitability gained while holding the assets, leading to an overall higher price. Additionally, we expect to see similar trends with new technology wide-body aircraft. As I mentioned earlier, the main concerns for those who have been purchasing airplanes over the last seven or eight years are significant. Neither we nor GECAS have been involved in that. It's worth highlighting that GECAS is the leading freighter business globally, and AerCap now holds the position of the leading freight lessor. We're not just discussing potential; we are the leaders in the 737-800 freighter program and the 777 freighter program, collaborating with IAI as an industrial partner rather than merely being a customer. That's my view on the current market situation.

Thank you. As a follow-up, it appears that you will achieve your target capital level fairly soon. Deliveries are likely to be slower than expected, while the sales market may be stronger than anticipated. Can you discuss your plans for deploying any excess capital you may generate in the upcoming quarters?

Sure, Moshe. And I mean, look, I think if you look at our track record there, we've been very disciplined stewards of the capital and always put the excess capital to work in the best interest of the stakeholders, the business. And you can assume that we'll do the same again. But we started off, as Pete said, in a good place in the debt-equity ratio.

Thank you. We will now take our next caller, Ross Harvey from Davy. Please go ahead. Your line is open.

Yes. Thanks for the time. My questions just revert inbox the aircraft sales. I'm just wondering from a modeling perspective, conditional obviously on a lot of analysis that you're doing on the asset at the moment. But what should we generally expect the next couple of years? I know as a placeholder with then a billion before should we Pro Forma that to something like $2 billion on, you might comment if you can on the stack and remarks, conditions, and things like engines and helicopters in the freighter aircraft just compare to the degree that you can, how quick you can sell assets into those markets on, and what liquidity is like. Thanks.

Sure, Ross. Regarding the total sales volume, I believe that's a reasonable perspective. Previously, the combined companies were generating around $4-5 million a year. I wouldn't anticipate reaching that level next year. Historically, we have guided around $1 billion annually, so I think aiming for $2 billion is reasonable. This, of course, will depend on market conditions and our review of assets regarding which ones we decide to sell. As for the helicopter side, I don't foresee significant numbers coming from that area since helicopters account for about 5% of total assets. Gus, do you have any comments about the engine side?

No, I think similarly, the engine businesses, as you said, is less than 10% of the total assets also, so it'd be driven by the sales side of the business on the sales programs.

Okay, thanks. And just a follow-up then in terms of the integration, I'm just wondering if you got a timeline in mind when you'll consider the two businesses especially integrated on one of the figures that you gave earlier this year was $150 million of SG&A synergies and just wanted, does that remain the case or do you stick with that number? Thanks.

Sure. We are putting in significant effort to integrate the businesses. We are having daily meetings and bringing the teams together, and this has been progressing well so far. However, it will take several quarters to complete. Regarding the $150 million target, I still believe it is a valid goal. I expect significant benefits to be realized by the latter part of next year, particularly by the fourth quarter, at which point we would anticipate achieving a run rate for SG&A that aligns with that target.

Thanks for that.

Thank you, we will now take our next question from Ron Epstein from Bank of America. Please go ahead.

Hey, good morning, guys. I hope you're doing well. I got a couple of quick questions for you. And just what are your thoughts on the A220? It's my understanding Airbus is pushing that hard with the leasing community right now. Just what thoughts do you have on that asset?

The A220 is a good airplane. However, the core market will always be the larger variants, which cater to the 160 to 220 seat markets. This area represents the heart of the narrow-body segment, and the A220 will serve to complement the existing options that airlines have. It won't be the main factor in determining an airline's fleet decisions, unlike the Neo, which would compete with the Max. Nevertheless, it does appear to be gaining good traction at this time, and there’s no denying that.

Got it. And then maybe a follow-on. Do you think Boeing needs to do a longer-range aircraft that's got the capacity of the narrow body, be it a bigger narrow-body, a small wide-body or something, but something that could effectively compete in the market where the 757 sits today or maybe something that's a little more capable than the 75, but not ultra-long-haul. Do you think they need to do an airplane there?

I would approach that question in two parts. First, they need to focus on delivering the aircraft already in their backlog, specifically the 737s and 787s, as that is the highest priority. While there may be a need for an aircraft with a longer range, it's important to remember that the core market lies within the 160 to 220 seat capacity. Short-haul flights are what drive global air traffic, typically around 2.5 hours in duration. It's crucial not to focus solely on high-profile routes, such as those from the eastern U.S. to Western Europe; these are niche markets. The primary market for narrow-body aircraft remains short-haul missions, where efficiency in carrying as many passengers as possible over that time frame is key. This fundamental aspect of the market is unlikely to change. There might be a desire for an aircraft to complement this, and the 220 is a good option for that role, benefiting from the robust support from Airbus compared to Bombardier. Additionally, on the larger side of the market, Airbus does have a slight advantage, and Boeing might explore options there. However, when you consider the publicly available data, it’s clear that most airplanes are utilized for missions of 2 to 2.5 hours, underscoring the significance of the short-haul market.

And then, maybe just one last one. What's the issue we're getting maximum out the door? I think we all understand them, 787s and the issues going on with the FAA. But the 73 Max has just been trickling out. I don't know if they're sharing anything with you on that, but what they've shared with the broader community has been pretty sparse to be honest.

I believe we are not the ones building these aircraft. Boeing is responsible for that, but they really need to increase the speed at which they are delivering these airplanes, as this affects the cash flow of the business.

Thank you. We will now take our next question from Vincent Caintic from Stephens. Please go ahead.

Hey, thank you. And thanks for taking my questions. So, first congratulations on the close of the acquisition. And thank you, I saw on the call you've given some details like the SG&A savings and also maybe what we should think from aircraft sales. But maybe if there's any broader guidance or help you could provide for us when we think about the combined GECAS AerCap entity, safer on 2022, when we think about ongoing EPS on book value. Thank you.

Yes, so Vincent, as I mentioned before, I really think that for us right now we're focused on, as I said, assessing the portfolio, doing the whole purchase price allocation process that I mentioned, and looking at what we're going to do for each asset in that fleet. And really once we've done all of that, that's when we can provide more information to you. So, I would expect that one to be when we report fourth quarter results.

Okay. Understood. Thank you. And second question. So, it was nice gain on sale this quarter. And broadly, I was wondering if you could talk about your ongoing strategy when you think about aircraft sales and what you sell. And particularly with your combined entity, you talked about the value of the GECAS portfolio, the recovery of aircraft value. So, when you think about the $34, 35 billion fair value that acquisition, yet the strong gains you're getting. Just wondering if you could talk about the overall strategy when you think of sales. Thank you.

The strategy regarding asset sales won't change. We were targeting aircraft that were on the older end, a mix of wide and narrow bodies. The objective of our portfolio management in our sales is to improve the residual value of the portfolio. There's no point in me going out there selling our prized assets and booking to gain on sale for $10 million, but giving away in essence, $15 million of income with a good credit on a good airplane. That's not the way to run these businesses. And we haven't done that. So, the strategy will be the same as it has been in the past, which is when we do an asset sale, the residual portfolio should be relatively better without those assets in it. Then of course, we'll try and maximize price as much as we can.

Appreciate it. Thanks very much.

Thank you. There are currently no more questions in the queue. I will turn the call back to your host.

Thank you all very much for joining us on the call. We look forward to talking to you in 3 months’ time, if not before.

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.