Aircastle's CEO Hosts Limited Analyst Meeting (Transcript)

Aircastle LTD (AYR)

Limited Analyst Meeting Call

April 12, 2012 12:15 pm ET


Frank Constantinople - SVP, IR

Ron Wainshal - CEO

Dave Walton - COO, General Counsel

Roy Chandran - EVP, Capital Markets

Mike Inglese - CFO



Frank Constantinople

Good afternoon everyone and welcome to Aircastle's 2012 Investor Day. For those of you I have not had the opportunity to meet I am Frank Constantinople, I am Aircastle's Senior Vice President of Investor Relations. We have an interesting agenda which we hope you will find useful. The presentation today will be broken into four parts. Ron Wainshal, Aircastle's Chief Executive Officer will begin by discussing our business strategy and providing an industry update. Ron will be followed by Dave Walton, our COO and General Counsel and Dave will review Aircastle's aircraft portfolio and credit process. Roy Chandran, our EVP of Capital Markets will then provide an update on the financing markets which we think you will find interesting and Mike Inglese, Aircastle's CFO will provide a financial review and update of the company's financial profile.

We will begin the presentation shortly, but I would like to mention that this meeting is being webcast and afterwards the webcast replay will be available on our website at along with the accompanying PowerPoint presentation materials that we're presenting here today. I would also like to point out that the statements today which are not historical facts may be deemed forward-looking statements and actual results may differ materially from the estimates or expectations expressed in those statements and certain facts that could cause actual results to differ materially from Aircastle Ltd's expectations are detailed in our SEC filings which can also be found on our website.

I will direct you to Page 2 of today's presentation for the full forward-looking statement therein. And I will now turn the presentation over to Ron.

Ron Wainshal

Thanks Frank. Welcome everybody. A lot of new faces and some familiar ones. I'll step back and give you a brief overview of the company which we have started from scratch basically seven years ago and over that period of time we have built I think a very distinctive top shelf aircraft lessor that we are the first of our breed to go public back in 2006 and we have been sort of on a frontend of a lot of things in terms of the industry. Our approach to the markets is unique I think both in terms of the investment strategy and also in terms of the capital structure.

We will spend a lot of time talking about both, but I think it's important to note that they are integrated and what we do and how we finance it, has to go hand-in-hand, it's a financing business at the end of the day and I don't think that carries through throughout business. In any case we have had a very eventful last 12 months or so, we have invested $1 billion during 2011. We've continued that this year and I'll cover that in greater detail and we have been very active in terms of the capital market.

During the course of the presentation I'm really going to focus not only in terms of trying to give you a sense for what we are doing and why, but how we are different as well. So taking a step back, we are in a business that's growing, the commercial aircraft is a $400 billion to $500 billion space and it's growing. It is growing basically with GDP across the world and as that pie grows, the share that aircraft lessors occupy is bigger. Our portfolio is modern, it is in demand, it is diverse. In terms of our maturity profile, it is pretty well spaced out.

What are the things that makes us different, we will cover this in some depth is our cargo market strategy and we are the leader in that space. Throughout the business' life and we live in a cyclical industry, we have done an exceptionally good job of keeping our planes flying. I think in general the sector is probably underappreciated in that respect, but I think within our space we are among the best if not the best. What are the other things that's worth noting is our approach of acquiring aircraft.

We buy aircraft wherever we see good value. It's not a one-dimensional strategy of buying only from the OEMs or from airlines who sell leasebacks. We have acquired aircraft just about whatever which way you can imagine, more than 80 transactions with more than 60 counterparties. Through the last several years which have been economically a little bit more sensitive than we would have preferred. We have managed to keep our earnings and our cash flows very strong and that's continuing and one of the underpinnings to that is our capital structure.

We have got a very conservative capital structure which we are continuing to improve on. The bond yield that we just completed a few weeks ago is another big step in the direction, we have created a huge unencumbered asset base and that asset base in turn throws off a very strong revenue stream.

Finally, the management team is top notch, we have gone and cherry picked from the very best out there. We have got real scalability, in fact I think we can double our portfolio of size and still keep basically the same overhead structure and we are all very focused on making sure that we are accruing to shareholder value. We improved our ROE, we have improved the payout in terms of our dividends and we were very mindful of stock price movements and stock buyback programs. So it's all bit of a balance here.

So with that let me turn in and go and address the general marketplace. As I mentioned Air Traffic's long-term growth, time series, in fact if you go and look at passenger traffic since 1970, there has only been three years where traffic contracted. One of those years was in 2009, so we have recovered very nicely from that and we are continuing on the same historical trajectory of around 1.5 times GDP growth in terms of Air traffic growth. Air freight which I mentioned is an important part of our business is a little bit more volatile.

And that sector tends to lead the economy or the passenger market a little more economically sensitive. In my view we have seen the corner turned and as we look at the projections from IATA, the International Transport Association calls for growth of around 4% to 5% over the next several years. And that pretty much marries up with 1.5 times of GDP type of growth rate.

What’s driving that growth rate, primarily, is the emerging economies. China, India, Brazil, Turkey, Russia, there is a number of others but those countries in particular now account for almost a third of the deliveries. And that's going to continue to grow. That's where our market is growing and that's where our portfolio is shifting.

And, in fact, if you look at the world fleet, the 17,000 or so aircrafts that are flying around today will probably double over the next 20 years. Now, that's a long period of time but if you look at the deliveries that are coming this year, it’s nearly $100 billion worth of equipment.

The growth is one aspect but re-fleeting, replacing older and perhaps not so efficient aircraft is another important dynamic. Fuel prices are high. We will cover that. Environmental pressures are growing and those who purvey aircraft with a more efficient and acceptable technology will do well.

One important thing to talk about. It seems really self-evident but aircrafts are portable and what makes them even more portable economically speaking is there is only two manufacturers. That's very different than if you look at other long life assets, and that makes the punchability of aircraft quite strong.

So let me try to illustrate one of the comments I made before. I talked a little bit about the growth in the market. Now let me talk about the growth in the market share. Aircraft leasing effectively was started in the early mid-70s and grew pretty steadily. There's been a few little bumps along the way, but it’s now more than a third of the world’s fleet, and I see that continuing. Why airlines don't reliably make money if you will see below, and these are very expensive, capital intensive businesses, having flexibility over a cycle is an important thing. And frankly, I think we are better group of companies in terms of batching residual risk.

Now it’s also happening and my colleagues will talk about some more. Is it the funding market for airlines is involving in shifting in a very profound way with a demise of traditional assets base lending banks.

Many of the top European banks that would fund small to mid-size airlines just simply getting out of the business or just going out of business all together, and that’s one of the important things they were trying to do strategically.

Now if you look at the bottom, you’ll see aircraft work force make money. They make the money pretty reliably and our customers don’t.

And I don’t see that changing. That’s just going to be one of the reasons why that share of the pie is going to continue to grow my opinion.

So I’ll now take a different tack and talk about aircraft programs. Aircrafts are -- 2011 was actually very interesting and important year in many respect. We saw the launch of several new platforms, a shifting of resources by Boeing and Airbus and also increases in production. I’ll talk about the production first.

If you look at Airbus narrow bodies and Boeing narrow bodies, the production rate is going up 20% to 25% versus say three or four years ago. And that’s continued -- that’s expected to continue. Aircraft production is a long lead time process. There is a 18 to 24 month process, and so even if somebody wanted to increase or decrease production today, if they push the button you have to wait almost till the end of the next year -- I am sorry, the beginning of the falling year to see much of an impact.

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