AerCap Holdings N.V. Q2 FY2024 Earnings Call

Please stand by. Good day, and welcome to the AerCap’s Q2 2024 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'd 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 second quarter 2024 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 that differ materially from those expressed or implied in such statements. AerCap undertakes no obligation other than that imposed by law to publicly update or revise 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 August 1, 2024. 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 is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through the earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I'll now turn the call over to Aengus Kelly.

Thank you for joining us for our second quarter 2024 earnings call. I am pleased to report another quarter of strong earnings for AerCap generating adjusted net income of $592 million, and adjusted earnings per share of $3.01. These results reflect widespread demand for our assets, strong cash collections, and a constant focus on execution. As a result, I am pleased to increase our earnings guidance for the year to $9.20 to approximately $10.25, not including gains on sale in the second half of the year. On capital allocation, I am delighted to announce more organic growth this quarter with the closing of 36 aircraft transactions with our customer Spirit Airlines. This is the third transaction in the last seven months that we have closed on a bilateral basis with the customer, taking the total purchase commitments to over 50 neo and MAX aircraft. This is of course in addition to the transaction for 150 new CFM LEAP engines with SES that we announced at the Capital Markets Day. Year-to-date we have spent $3.2 billion on flight equipment and returned over $720 million to our shareholders in the form of stock repurchases and dividends. Importantly, this was all done without leveraging our balance sheet. We are also announcing another dividend of $0.25 per share for Q2, which will be payable in early September. These highlights showcase the power of the AerCap platform. Demand for aviation assets continues to be robust as reflected in our consistently high levels of activity. Over the last three months, AerCap executed 246 transactions across aircraft, engines, and helicopters, comprising 162 lease agreements, 47 purchases, and 37 sales. The rate of aircraft extensions, which we discussed at a recent Capital Markets Day, continues to be elevated at over 80% in Q2. On the sales side, the shortage of aircraft in the system is supporting strong gains on sale, leading to unlevered margins of over 20% in the quarter, or approximately 1.7 times book equity. 90% of our sales revenue was generated from sales to airlines and other leasing companies who are keen to gain access to aircraft, and I expect this will continue to be the case for some time. Of note, at the end of Q2, the U.S. is now our largest market, at 14.6% of revenues. This is due to the combination of strong placements of aircraft into the U.S., as well as strong demand from buyers for our Chinese aircraft. As a result, China now represents 14% of our assets, down from over 20% at its peak. On the purchase side, our investment in new technology equipment continued with the delivery of 25 new aircraft, including A320neos, 737 MAXs, A220s, 787s, and A330neos from our order book. We also took delivery of a further 20 engines, which were mostly new technology LEAP engines from CFM. As I said at the beginning of the call, one particularly notable deal that we signed just this week was with Airbus and Spirit Airlines in the U.S. We have agreed to purchase 36 A320neo family aircraft. This transaction results in AerCap assuming 36 aircraft from Spirit's order book and the related pre-delivery payments. This is the third example in the last seven months where we have been able to execute a bilateral transaction to acquire aircraft with a customer that results in a win-win outcome for our customer and for AerCap. These aircraft are set to deliver in 2027 and 2028, which match well with the profile of our existing order book, and is far sooner than we would otherwise have been able to negotiate directly with Airbus and gives us an opportunity to support a long-term customer simultaneously. Furthermore, we will also backstop up to 52 A320neo family aircraft in Spirit's order book if needed. These additional aircraft would deliver from 2029 onwards. This deal takes our total aircraft added this year to over 50 and I am confident there will be similar opportunities for organic growth to come. The smaller number of aircraft delivering into the system as a result of the OEM delays has provided some respite to airlines from a financing perspective, but this will change over time and AerCap is well positioned to take advantage of it. This is another example of where AerCap sets itself apart with its customers. We can step in while others cannot because of our ability, speed, and experience to execute rapidly and in scale. Similar to our approach to share repurchases and dividends, our approach to organic growth is also measured and disciplined and ensures that we generate strong long-term returns for our shareholders with an appropriate level of risk. AerCap's cash flows are the strongest in the industry, not just on an absolute basis but on a relative basis also. We are generating approximately 25% more operating cash flow per dollar of assets than any of the other large leasing companies and this also sets us apart. This discipline, along with the ongoing strength in our cash flows, was recently recognized by all three major credit rating agencies, where AerCap was upgraded to Baa1 by Moody's, BBB+ by S&P and our BBB flat rating was put in positive outlook by Fitch. These are the highest ratings of any aircraft lessor in the world on a standalone basis and are a clear appreciation of how we run the company in a balanced and sustainable way. So in summary, this was another great quarter for AerCap with broad-based demand for our assets, strong cash generation, and positive momentum on our credit ratings. We continue to see attractive opportunities to deploy capital through opportunistic organic investment, the delivery of our order book, ongoing share repurchases, and quarterly dividends and look forward to showing the evidence of this strategy in the quarters and years to come. With that, I will hand the call over to Pete for a detailed review of financial performance and favorable outlook for 2024. Thank you.

Thanks, Gus. Good morning, everyone. Our GAAP net income for the second quarter was $448 million or $2.28 per share. The impact of purchase accounting adjustments was $169 million for the quarter or $0.86 a share. That included lease premium amortization of $32 million, which reduced basic lease rents; maintenance rights amortization of $99 million, which reduced maintenance revenue; and maintenance rights amortization of $37 million, which increased leasing expenses. The tax effect of these purchase accounting adjustments was $25 million or $0.13 a share. So taking all of that into account, our adjusted net income for the second quarter was $592 million or $3.01 per share. I will briefly go through the main drivers that affected our results for the second quarter. Basic lease rents were $1,568 million. That’s a slight decrease from last quarter, which is primarily due to aircraft coming off power-by-the-hour rent arrangements, as I have mentioned on previous earnings calls. Basic lease rents reflected $32 million of lease premium amortization, which reduces basic lease rents. Maintenance revenues for the second quarter were $180 million, reflecting $99 million in maintenance rights assets that were amortized to maintenance revenue during the quarter. So in other words, maintenance revenue would have been $99 million higher or $279 million without this amortization. Maintenance revenues were higher than normal this quarter, primarily due to higher amounts of end of lease payments that we received during the quarter, and that is due to the timing of lease maturities. Net gain on sale of assets was $129 million for the second quarter. We sold 31 of our owned assets during the quarter for total sales revenue of $793 million. That resulted in an unlevered gain on sale margin of 20% for the quarter. As of June 30th, we had $105 million worth of assets held for sale. Other income was $81 million for the quarter, which consisted primarily of interest income and certain one-time items. Interest income has been higher this year. We're seeing higher interest income on our cash balances due to the higher interest rate environment. It's worth pointing out that our calculation of net spread includes interest expenses but does not include any interest income. If we were to include interest income, that would increase our net spread for the second quarter by around 35 basis points, which has a greater impact than it has been historically. For example, in 2019, prior to COVID, this impact would have been only around 10 basis points. During the second quarter, we recorded asset impairments of $28 million, and these related primarily to returns of older aircraft where we received end of lease compensation payments, and they were more than offset by related maintenance revenues. Interest expense was $478 million for the quarter, which included $5 million of mark-to-market losses on interest rate derivatives. Leasing expenses were $173 million for the quarter, including $37 million in maintenance rights amortization expenses. And finally, income tax expense for the second quarter was $76 million, which represented an effective tax rate of 15.5%. We continue to maintain a strong liquidity position. As of June 30th, our total sources of liquidity, including unsecured revolvers, other committed facilities, cash, operating cash flow, and estimated sales over the next 12 months was approximately $20 billion. That compares to uses of cash of around $12 billion, resulting in next 12 months' sources-to-uses coverage ratio of around 1.7 times. We've increased our target coverage ratio from 1.2 times to 1.5 times, which is closer to where we've generally been running over the past couple of years. And as you can see, today we're still well above this revised target with excess cash coverage of around $8 billion. Our leverage ratio at the end of the quarter was 2.4 to 1, basically the same as last quarter. Our operating cash flow was approximately $1.4 billion for the second quarter, driven by continued strong cash collections. Our secured debt-to-total assets ratio is 12% at the end of June, down from 14% last quarter due to the reduction in the size of some of our secured facilities. Our average cost of debt was 3.8% for the second quarter, down slightly from the first quarter, primarily due to refinancing some term loans at lower margins. During the second quarter, we repurchased 3.9 million shares at an average price of $88.66 for a total of $345 million. We also paid our first quarterly dividend of $0.25 a share in the second quarter. Our book value per share was $89.47 as of June 30th, an increase of 25% over the last 12 months. In February, we projected adjusted earnings per share of $7.50 to $8.50 for the full year 2024, not including any gains on sale. On our last earnings call, given the strong performance in the first quarter, including higher maintenance revenues, we raised our guidance to the top end of that range. Given our strong performance during the second quarter, we are now raising our guidance for full year 2024 to approximately $9.0 of adjusted EPS, not including any gains on sale. We've had around $1.25 of gains on sale in the first half of the year, so when we add those gains, that takes us to a new estimate of approximately $10.25 of adjusted EPS for full year 2024, not including any gains on sale for the second half of the year. So overall, AerCap continued to perform very well during the second quarter. We continue to see a strong environment for leasing as well as asset sales, which is reflected in both the volume of sales and the gain on sale margin this quarter. We're deploying capital towards attractive opportunities across all of our businesses, particularly in aircraft and engine leasing, and we continue to buy back stock and paid our first quarterly dividend. We continue to generate strong cash flows that in turn result in greater profitability and financial flexibility. This quarter, we were upgraded by Moody's to Baa1 and by S&P to BBB+, and we were put on positive outlook by Fitch, which continues the positive rating trajectory we've had for several years. With these strong results and a positive outlook going forward, we're now raising our guidance for full year 2024. And with that, operator, we can now open up the call for Q&A.

Thank you. We'll go first to Jamie Baker with JP Morgan.

Hey, good afternoon, gentlemen. So Gus, you called out the Spirit deal for 36 airplanes, the backstop on another, I think you said 52. I mean, look, Spirit's a weaker credit. I'm not asking you to deride a customer, but we have to wonder what additional steps you've taken to protect against a deferral or potential insolvencies. So how is this deal different from a more plain vanilla transaction? And if it's not, I guess you just believe you can handle the remarketing effort if it comes to that?

Yeah, look, I think, Jamie, here this is a win-win for ourselves and for Spirit. It provides them, as you allude to, some much-needed liquidity. It provides us with extremely attractive, the most attractive aircraft in the world, the A321neo in a timeframe that would be impossible to get us in 2027 and 2028 on what we believe are attractive terms for our shareholders. So that's the genesis really behind it, Jamie. And like we move an airplane every 24 hours somewhere in the world.

Okay, fair enough. And then second, so Mark and I are, we all keep hearing about how tight global aircraft supply is, and we don't disagree, but at the same time, you have these massive guides down from several U.S. airlines. You've got some Western airlines, both discounted and full service, that are guiding down. The Singapore results yesterday were soft. I mean, we're trying to reconcile airline results with aircraft supply and, well, quite honestly, we're having a hard time. How do you reconcile those two realities? Thanks in advance.

That's a very fair point to make, Jamie. How, on one hand, can you say that there's tremendous shortage of aircraft when a number of the carriers are saying there's excess capacity in a very large market like the United States? One of the huge challenges the airlines have at the moment, and Allegiant called it out yesterday, Allegiant is a much smaller airline, but they did $30 million cost just associated with not having the MAX aircraft. What they also have, which is very hard to explain to the analysts, is the complexity of trying to keep extending a fleet that you want to get out of. It's very inefficient within the airline. If you're an airline now and you're short the neos or the MAXs or the 787s, you will have trained pilots, you will have bought spare parts, you will have geared up your operation for the entry of those aircraft. When they don't come, your pilots don't sit at home, but effectively they do because you wouldn't have hired them, so you've lower hours being worked overall on average than otherwise you would have. There are hidden costs in the airlines that they have, and they're having to keep prolonging the life of assets they prefer not to have, that are older, that are more complex from a maintenance standpoint, that are more complex from a cabin configuration standpoint, leading to inefficiencies in the airline sector. So, when we say shortage of aircraft, well look, we're saying particularly new aircraft because if the airlines could accelerate their transformation into a single type of asset so that they're only operating one asset, that would give the maximum operational leverage and efficiency. When they're operating multiple fleets, particularly older ones, that's harder to do. So the next thing then is, well, okay, that's fine. How come you're seeing such a strong bid for older aircraft? We're seeing such a strong bid for older aircraft driven by engines, candidly, Jamie. It's really driven by the engines. If you have a 20-year-old airplane and you're an airline and you're saying to yourself, am I going to put this thing through the shop and spend $20 million on overhauling? If it's a full performance restoration, LLPs, am I going to do that? That makes no sense to do that. But I do know the problems with Boeing and Airbus are going to last through the end of the decade. Is there a way I can avoid that massive spend by buying half-life engines or aircraft that have half-life engines off them and thereby avoid the shop business with the engine OEMs? So these are the things that there's hidden inefficiency in the airlines due to the lack of the delivery of the new aircraft. And that's a cost that's very hard for them to explain and get across. But we can see it upfront when we're dealing with the airlines day in, day out of the cost of that complexity. So that's what you're seeing is a big drag on their cost line because it's also fair for people to point out to the airlines, well, your yields are still extremely high. And so that is a hidden, I'm not questioning it, airlines in some cases could do better on costs. There's no question about that. But on a global basis, that's what we see.

We'll go next to Terry Ma with Barclays.

Hi, thank you. Good afternoon. So you mentioned you've done kind of three bilateral transactions similar to the one with Spirit. Are you seeing more of those opportunities come to the market and maybe just talk about what's driving that? And aside from timing differences compared to an OEM order or a particular aircraft type, are there any other advantages like returns or pricing you're getting?

Well, obviously we talked to the OEMs and orders and as you know, we have not been able to reach terms with the OEMs over the last few years, which is that I've always said, fine by me, I don't care if we never buy another airplane again, I care about deploying your capital, our capital, the shareholders at the best risk-reward return for the long term in the business. And certainly if we got an opportunity with the OEMs where it made sense for a regular order, we do that. In instances like the Spirit deal and earlier on with the GOL transaction, it was a situation where we were able to provide assistance to a long-time customer and we were able to get what we felt were attractive assets, well-priced, so we're getting assets we felt in the timeframe and at economic terms that made a lot of sense for our shareholders.

Got it. And then a question for Pete for the net spread. I know you guys don't manage to that, but it's outperformed a bit the last two quarters. So how should we think about that for the rest of the year taking into account any remaining power-by-the-hour cash collections and bond refinancing? And on the bonds you have a few lower-cost bonds coming due later this year, which I'm sure you contemplated into your interest expense guidance at the beginning of the year. But credit spreads have also come in by about 40 basis points. So maybe just put all that together, how should we think about the net spread? Thank you.

Sure. Sure. Well, you're right about that. So obviously we factored in all of our plans for raising debt later this year into our net spread guidance. So basically, as I’ve mentioned before, the main driver of that recently has been those power-by-the-hour leases coming off and reverting to regular lease arrangements. So that's basically all happened now. So I would say, I think for the balance of this year, we should be around where we were for the second quarter because as you said, there are countervailing effects. On the one hand, you've got higher rents coming in. On the other, you have some higher interest expense as well. But I think we'll be around where we are today.

We'll go next to Moshe Orenbuch with TD Cowen.

Great. Thanks. Maybe kind of following up a similar line of questioning, given all the things that you do see, do you think that the balance sheet is going to be sort of larger or kind of stable over the next few quarters? How do you see that evolving? I mean, are there other opportunities, things that might come up kind of on a spot basis or anything like that?

Sure. Well, first, welcome back, Moshe. It's good to have you on the call again. So in terms of the balance sheet, we would expect it to grow somewhat during the second half of the year. And that's primarily due to CapEx. So we had about $3 billion of CapEx during the first half of the year. We're expecting a little over $4 billion during the remainder. Now, we don't know if all that will come through. But as Gus mentioned, we've also done some incremental deals as well. So that's really going to be the driver of the balance sheet, increasing for the balance of 2024 and then somewhat in '25 as well, as we look at it, or CapEx, and factoring in some level of sales as well.

Perfect. Thanks. And congratulations on the recent upgrades. But it's also true that your leverage ratio has actually improved over the course of the first half of the year. Can you talk about your thoughts as to how you might manage that in the current environment? Obviously, you've started the dividend. How do you think about share repurchase and other forms of capital deployment over the next several quarters?

Sure. So as you mentioned, this quarter we are at 2.4 to 1 net debt-to-equity. So that is below our target level. It's about where we were last quarter as well. So it's been obviously very positive to get to that point. I think during the remainder of the year, we'll still run below our target. But I think we'll be somewhat closer to that. It really depends on how much we do deploy, obviously. Some of it depends on the CapEx. Because we have more CapEx coming in the second half of the year, you create a little less excess capital. Similarly, we've done a lot of sales in the first half. So we've done $1.7 billion of sales so far this year. I think we'll probably do $2.5 billion for the full year, give or take. So that's been front-end loaded. But I think that it will trend up somewhat, our leverage ratio, but I don't think we'll get to 2.7 times.

We'll go next to Stephen Trent with Citi.

Yes. Good afternoon, everybody, and thank you very much for taking my question. Actually, the first sort of a follow-up on Moshe's question, the credit rating side looks really good. Longer term, do you guys have any sort of bogey in mind, roughly speaking, where you'd hope to be with Moody's and S&P?

Look, I think we're very happy with BBB+, Baa1, which is the highest rated independent lessor there is in the world. We certainly want to push Fitch over the line as well. They're on outlook positive. I think this provides us with extremely competitive funding. If I look at our five-year unsecured spread today, it's around 95 basis points, 96 basis points, which is about 20 basis points north of someone like JP Morgan or Wells Fargo. So that's extremely competitive. We're always very conscious of the balance between return on equity for our shareholder and making sure that we have access to very flexible debt and significant pools of debt. But at some point, of course, if we went much lower, then that would significantly dilute the returns to our shareholders, and we're very conscious of those, how we deploy the capital for our shareholders. And today, you saw, again, organic growth. We've returned $3.4 billion to our shareholders in ’23 and ’24. We have a remaining $600 million left in our share buyback current authorization. And so it's a balance between all those items, but I think I'm very happy with where the rating is today.

Oh, okay Angus, very helpful. And just one other quick, my follow-up here, I appreciate you guys mentioned the U.S. being the biggest market. And you've done some drawdown in China. Could you refresh my memory, geographically speaking, if there's any areas of the world where you're seeing really good momentum at the moment? Thank you.

I think, at the moment, there's pretty robust demand from the airlines certainly want to keep what they have. That's true across the world. And you saw that in the extension levels, 80%. So, on a global basis, we're extending the vast majority of the assets. It's a very good indicator to start with. In terms of placement and growth, we're certainly seeing strength out of the Middle East. And we will continue to see, it’s I think we're going to see strength out of Asia Pacific, because the Asia Pacific recovery out of COVID has been slower than the Americas or the European market, the two other major markets. And I think that's where we'll see a recovery. If we look at global traffic in June, we exceeded June 2019 by 3%, despite international traffic being down. And that international traffic is predominantly driven, the decline in international traffic is predominantly driven in the Asia Pacific region, which is down about 10 points or 11 points on 2019. So there's lots of room to come back. I suspect that we'll see it in that region. But of course, from our perspective, as we said, look, we will buy, sell, or lease 1,000 aviation assets a year. So from AerCap’s perspective, we have the infrastructure, the capability to rapidly move assets from an underperforming region to a performing region if needs be. But at the moment, it is reasonably robust around the world.

We'll go next to Hillary Cacanando with Deutsche Bank.

Hi, thank you for taking my questions. Just regarding your transaction with Spirit, obviously, you're taking deliveries before 2030 since they're from Spirit's order book. But I was just wondering how long the wait would be at this point if you were to place an order directly with Airbus for narrow bodies and what would the wait time be for the wide bodies? I would imagine it's past 2030 but just wanted to see what they were actually at this point?

I would imagine it is past 2030, Hilary. I mean, any airline orders we've seen recently, particularly on the Airbus side, have deliveries commencing in 2030 and not getting many airplanes in 2030 either. Really, the heart of those orders is 2032, 2033, and beyond. So from our perspective, that's a very long way out there. The ’27, ’28 timeframe we feel is a much more attractive timeframe.

And you would say that's the case for wide bodies as well and same with Boeing? At Boeing as well in terms of being sold out until 2030?

I think it's more, on the wide bodies, you might get one or two before 2030, but it won't be many. Hilary, I cannot so I wouldn’t, if you went for an order, I wouldn't imagine that there'd be much available on the 787 line, to be fair, before 2030. And it's a function of the ramp up to how they get on. But not much would be the short answer.

Got it. And then just a follow-up question. You know, your share buyback strategy obviously has been very accretive, very successful, with the stock trading global value in the past. But I was wondering how we should think about your buyback strategy when the stock is, obviously it’s trading above your book value and I guess going forward as well. Does that change your strategy at all or not much?

Well, look, Hilary, I mean, we've been, as you can see, we kept buying shares throughout the year. We've deployed $700 million for when a lot of the year was above book and we have $600 million in our authorization. So, and we're selling assets at very big premiums to book equities. You can see this quarter was another quarter where we sold at 170% of book. But again, look, what we always look at is, what's the best use of our capital? Is it debt pay down? Is it buybacks? Is it M&A? Is it buying aircraft for organic growth or engines for that matter? And we've done a lot of the latter in the last few months between the big engine transaction and then the aircraft transaction. So we always just try and pick what will generate the best long-term risk-adjusted return for our shareholders.

Got it. Thank you. And, you know, looking forward to seeing you at our conference in September.

You bet.

We'll go next to Kristine Liwag with Morgan Stanley.

Hey, Gus, Peter. There's very strong demand for next generation engines. And can you discuss how you think about the mature size for the Shannon Engine Support JV with Safran? How large could this be? And can you provide more details about the economics of spare engine leasing versus more of your traditional aircraft leasing?

Well, I think the way to think about the spares business is there's, I mean, it's big, but it's not unlimited potential for growth in that business because if you think about, there's about 22,000 or 23,000 large commercial aircraft in the world. I'm excluding turboprops and small aircraft. There you've got about, say, 46,000 engines in service. The sparing ratio, depending on the engine type, is 12% to 15%. So that's your spares portfolio. If you say there's 46,000 in service, take 13%, 14%, that's 5,000 engines in change, maybe 5,500 engines. That's the sparing size. As the world's fleet of aircraft grows, then you will have, as I said, the spares requirement will grow by 12% to 15%. So that's how it works. So there's not an unlimited, it's different to aircraft because I said it's only sparing. When it comes to the economics of the engine business model, slightly different than the aircraft business model because an engine really holds its value over the long term as it's overhauled. And the market value of the engine doesn't tend to depreciate a tremendous amount if you've got the right engine. And on the engines, it's fair to say, because of the slower depreciation of the assets, your value in the engine business is created over time, whereas on the aircraft side, you make a lot of your money on the first lease, to be fair. And then at the back end, you're managing engines. So I would say that there's a timing difference in how the two businesses work.

Great, that's very helpful. And as a follow up, I mean, we're starting to see other business models capitalize or try to monetize this engine shortage with an engine leasing company doing more MRO type work, either in modules or full exchanges. I was wondering how interested are you in expanding into something like that? I mean, we're seeing EBITDA margins for those kinds of businesses, be it like 35% or plus, but at the same time, it is a lot more labor intensive and it's more a wrench turning type job. So just checking to see what's your appetite for that? Do you see that attractive? And would that be a lateral shift as you expand out the spare engine leasing business?

I don't think we're going to get into ever overhauling engines, but things like engine swapping, we do that all the time. We've been doing that for 20 years. That's nothing new. And you do it to manage your cost base. And I'm sure if you looked at our EBITDA margin as a company, it would be huge. Pete, what is our EBITDA margin? But while I'm talking, you work it out there, Pete. But I would say, I would say when it comes to the module swaps, of course, you're doing all those things. For example, our biggest department internally is maintenance. Our technical department, how we manage it, because it's our biggest controllable cost. And it's an important part of how you drive AerCap’s profitability. Every time there's an engine going to shop, every single month for every engine, we'll track all the utility usage of that engine. We'll be looking at that engine a year out when it's going into the shop; we'll be saying what parts of it need to be repaired. We'll work with the airline and say, okay, we want your estimate of work that needs to be done on the engine. We'll go through that. Then when the engine is in the shop, we'll be on site to make sure that the work that we want done is being done and there's not excess work being done on the engine. And we'd have experts in every engine type, which many wouldn't have. You know, they'd have generalists. You really have to know inside out high pressure, low pressure turbines of every engine type in your portfolio in order to manage your shop visit costs. But so, yeah, I would say that we do all those things. Pete, what's EBITDA margin?

Yeah, it's around 90%.

90%? Okay.

I'm sorry, could you clarify if your engine exchange business also operates at a 90% EBITDA margin? I just want to make sure I understand.

Engine exchange is part and parcel of every day. I mean, sorry, Kristine. Engine exchange is just part and parcel of what we do every single day in the business. It's reflected there and there's nothing new about that. To be fair, everybody does it. I mean, we sell engines to a lot of people who do exchanges.

We'll take our next question from Anthony Berni with Susquehanna Financial Group.

Good afternoon. This is Anthony on for Chris. Thanks for taking our questions. The adjustments for maintenance rights were a little elevated this quarter relative to recent historicals. I know you mentioned that was due to the timing of the lease return. Should we just try to make sure that we don't have a lot of people who do exchanges? Should we just treat this as a one-time bump, or do you expect elevated maintenance revenue going forward?

Well, there are two elements of that that I would mention here. So we had higher maintenance revenue this quarter, and I do think that we also had that in the first quarter of the year, and really that has been due to more events happening. These are the return of some aircraft on their existing leases and then going out on new leases, so some of those were pretty chunky during the quarter. And so if I look at overall, I'd say that probably boosted our first half earnings by call it $80 million or so, maybe $100 million, and some of that is really timing. So I think that it's been higher in the first half of the year. Some of that was just brought, it just happened to be lumpy there. The normal run rate, normally we would think of like maintenance revenues, less leasing expenses on an adjusted basis of around $30 million to $40 million a quarter, so it's certainly been high the last couple of quarters, but again, that's just timing. And then in terms of the maintenance rights amortization, that has also been high this quarter, and again, that's really driven by events. When the events happen, that amortization is high, so you generally see those things happening in tandem.

Got it. That's very helpful. Thank you. One more question. The leasing expenses were down almost 20% year-over-year, and in the first quarter, they decreased by a solid 10% year-over-year as well. Are you implementing any new strategies to manage costs in that area, and should we anticipate similar year-over-year declines in the second half?

We have previously pointed out that utilizing some of our existing spare engines to avoid engine swaps is a key area for us. This allows us to install an engine, replace it, and bypass unnecessary overhauls and additional costs. This strategy helps in reducing leasing expenses. From a strategic perspective, having the engine leasing business is advantageous because it gives us access to a larger pool of engines that can be used for this purpose.

We'll take our next question from Mariana Perez Mora with Bank of America.

Good morning, everyone. So I'm going to tap again on the U.S. Airlines weakness and them trying to actually retire at this unprofitable capacity, but also recovery to the global traffic. Can you give us some color around how these rates look like today versus a year ago for like the difference of assets like engines and particularly the current generation aircraft where you have like an average of what, like 15 years old average? However, what type of rates are you seeing there versus a year ago?

You're certainly seeing continued increases in that area. We've detailed this in the charts from our Capital Markets Day, showing the significant gains over the past few years across all sectors. This trend remains strong. The key factor for those assets that are 15 to 20 years old is that airlines are willing to pay a premium because it's more cost-effective than conducting a shop visit on an engine. There's no reason to spend 10 million dollars to overhaul a 7B engine when you need both the aircraft and engine operational for the next four or five years, not the next 10 years, which is necessary to recover such an investment. Additionally, you may need to refurbish the cabin if you're planning to keep the airplane running for another decade. In my view, this is a significant driver, and I believe it will continue until the end of the decade, as it will take time for the adoption of new technology assets to ramp up.

And if we were to see this, I'll say, slow down, how strong is the demand? And it's mostly about replacement going forward. How do you manage what you sell versus what you actually extend the lease on for these older aircraft, particularly not just engines?

It really depends on our perspective regarding the assets. If it's an asset we prefer to divest, we'll be more willing to sell it. Our history as a public company over the past 18 to 20 years shows that the average age of the assets we sell tends to be around 15 years. We believe that while values are robust today, they are likely to decline as we approach the end of the decade. This is why we've outlined our strategy in various Investor Day presentations, emphasizing the sunset strategy in our portfolio. We often mention that the average age of a leasing company's portfolio is not a meaningful metric. The important factor is the average age of the individual components of the business. A fleet of younger aircraft like 777s or 737s could lead to losses, as those planes won't be operational in 2035 or 2038 if bought in 2015. At AerCap, we've been very disciplined in this area for the past 12 years, steering clear of ordering such aircraft and actively exiting that segment, as illustrated in the charts shared during the Investor Day.

Thank you. And last one from me. If you were to see more opportunities like the one with Spirit Airlines, where you can actually get orders of new aircraft in the near term, like I imagine like you have, how do you manage your strong balance sheet? And how much are you willing to lever up on like actually taking the opportunity of this environment, if it were to happen?

Well, I think, look, we have plenty of capacity on our balance sheet to take advantage of any opportunities that come in. I'm not concerned about that. It's just having the discipline to pick the right opportunities. We're looking at many different asset acquisition opportunities on a daily basis, but we hit very few of them. The ones we’ve managed to do are ones where we've worked on a bilateral basis with a partner, a customer who's been a partner for a long time and tried to do something that works for them and for AerCap.

This concludes the question-and-answer session. I would like to hand the call back over to Aengus Kelly for any final remarks.

Well, thank you all for joining us today on the call. We look forward to giving an update in three months' time. Thank you.

This does conclude today's conference call. You may now disconnect.