AerCap Holdings N.V. (AER) Earnings Call Transcript

Good day, and welcome to the AerCap Q2 2026 Financial Results Call. 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 Adi Padbah, Head of Investor Relations. Please go ahead.

Thank you, operator, and hello, everyone. Welcome to AerCap's Second Quarter 2026 Conference Call. With me today are our Chief Executive Officer, Angus Kelly; and Chief Financial Officer, Pete Tua. Before we begin today's call, I would like to remind you that some statements that are 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 our statements. . AerCap undertakes no obligation other than that imposed by law to publicly update or revise any forward-looking statements to 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 July 29, 2026. 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 being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation and allow time at the end for Q&A. As a reminder, I will ask that analysts limit themselves to 1 question and 1 follow-up. I will now turn the call over to our CEO, Angus Kelly.

Thank you for joining us for our second quarter 2026 earnings call. This was another strong quarter for AerCap as reflected in our financial results, disciplined capital deployment and increased full year guidance. AerCap's business maintained its momentum in the second quarter as highlighted by our transaction activity. The lease extension rate on passenger aircraft was 85%, well above the long-term average. We also completed $1.4 billion of asset sales during the quarter, generating a gain on sale margin of 20%. These operational highlights reflect both the resilience of our business model, and the continued benefit of the supply/demand imbalance across our industry. Turning to our financial results. We delivered adjusted earnings per share of $5.14 in the second quarter representing an adjusted return on equity of 18%. We also generated $1.5 billion of cash flow from operations. This strong cash generation continues to create significant financial flexibility, enabling us to invest in long-term accretive opportunities while also returning substantial capital to our shareholders. During the quarter, we repurchased more than $690 million of our shares and over $1.4 billion in the first half of the year. In addition, we recently ordered 15 new Boeing 787 aircraft. This is a key highlight, which we will discuss in more detail later in the call. Reflecting our strong first half performance, and positive outlook for the business, we are raising our full year earnings guidance to $16.80 per share, not including any additional gains on asset sales. Our outlook is underpinned by supportive industry backdrop. Let me spend a few minutes discussing the broader market environment. Recent geopolitical challenges have led to higher input costs for airlines and will no doubt put further pressure on airline margins this year. That said, it is expected that the global airline industry will remain healthy in 2026 in aggregates supported by good travel demand, strong load factors and disciplined capacity growth. While global traffic growth has moderated year-over-year. Trends vary by region. The Middle East, Asia Pacific and North America have experienced some weakness in daily flight activity. But Europe, Africa and Latin America have continued to see growth. Overall, the trends we are seeing highlight the resilience of travel demand and the industry's ability to adapt to changing market conditions. For AerCap, this backdrop remains highly supportive. Aircraft and engine availability remain constrained, while airline demand continues to exceed supply. We see this reflected in our leasing activity, lease extensions and asset values. As a result, we remain confident in the long-term outlook for AerCap and the aviation industry more broadly. The supply-demand imbalance is particularly pronounced in the wide-body market. Years of production shortages and delivery delays have constrained the availability of new wide-body aircraft globally. This is clear from the left-hand side chart on Slide 4. Over the past 5 years, airlines have extended service lives of older wide-body aircraft, resulting in over 200 fewer widebody retirements than in the comparable pre-COVID period as you can see on the right-hand side of this slide. More recently, wide-body production rates have begun to recover, and we expect to see an increase in retirement activity among the oldest and least fuel-efficient aircraft. This trend will likely continue as more new technology aircraft enter service. With a large number of aging wide-bodies still in operation, this replacement cycle should support strong demand for wide-body leasing for many years to come. Against this backdrop, our order for 15 Boeing 787 aircraft reflects our conviction in the long-term fundamentals of the wide-body market. We believe the 787 is 1 of the most attractive wide-body assets, combining favorable economics with a broad global customer base and strong secondary market liquidity. Importantly, delivery positions for new 787 aircraft remain extremely limited. AerCap's long-standing relationship with Boeing combined with our scale and ability to execute quickly, gives us a competitive advantage in securing scarce delivery positions. Our 787s will start delivering in 2030 and and run through 2033 and economics that support our long-term return objectives. Today, we not only have the largest 787 fleet, but also the larger 787 order book of any lessor. And therefore, we are uniquely positioned to meet growing airline demand for next general it body aircraft. This strategic investment allows us to capitalize on a prolonged fleet renewal cycle while providing our customers with access to 1 of the most efficient and sought-after aircraft types in the market. Turning to Slide 5. This investment is also a good example of the capital allocation framework that guides every decision we make. We continue to deploy capital with discipline and flexibility directing it towards opportunities that we believe offer the most attractive long-term risk-adjusted returns, while maintaining capacity to return capital to shareholders. So far this year, we have added 131 aircraft to our order book, returned more than $1.5 billion to our shareholders through share repurchases and dividends and still of approximately $3 billion of excess capital available to deploy. In closing, AerCap delivered another strong quarter. Our global platform, consistent execution, disciplined capital allocation and active portfolio management continue to position us to capitalize on opportunities across the market. And with that, I'll now hand the call over to Pete to review our financials.

Thanks, Aengus. Good morning, everyone. We delivered another strong quarter, and I'll start reviewing our financial results on Slide 6. Our GAAP net income for the second quarter was $726 million or $4.59 per share. The impact of purchase accounting adjustments was $129 million for the quarter or $0.82 per share. That included lease premium amortization of $26 million, maintenance rights amortization of $36 million related to maintenance revenue and maintenance rights amortization of $67 million related to leasing expenses. . During the second quarter, we had $28 million of recoveries related to the Ukraine conflict or $0.18 per share. The net tax effect of all these items was $15 million or $0.10 per share. As a result, our adjusted net income for the second quarter was $811 million or $5.14 per share. That represents an adjusted ROE of 18% for the second quarter. Turning to Slide 7. I'll briefly go through the main drivers that affected our results. Basic lease rents were $1.67 billion, maintenance revenues remained elevated this quarter at $177 million. Our net maintenance contribution, which is maintenance revenue less leasing expenses after taking into account purchase accounting adjustments, was $131 million this quarter. That's higher than usual due to the timing of maintenance revenue, transition expenses and claims. As I mentioned last quarter, that maintenance contribution has been higher than normal for the first half of this year, but we expect it to return to more normal levels in the second half of the year. Net gain on sale of assets was $223 million for the second quarter, the sales environment continued to be strong, and we sold 38 of our owned assets for total sales revenue of $1.4 billion. That resulted in an unlevered gain on sale margin of 20% for the quarter, which is equivalent to a multiple of 1.7x book value on an equity basis. As of June 30, we had just over $400 million worth of assets held for sale. Interest expense was $468 million for the second quarter and income tax expense was $123 million, reflecting an effective tax rate of 15.5%. Turning to Slide 8. Our liquidity position continues to be very strong. As of June 30, our total sources of liquidity were approximately $22 billion. That includes just under $1.7 billion of cash, $10 billion of revolvers and $3 billion of other committed facilities as well as estimated sales and operating cash flow. Our sources to uses coverage ratio was 1.9x, which reflects excess cash coverage of around $10 billion. Our leverage ratio at the end of June was 2.0:1, which is about the same as last quarter. Our operating cash flow was $1.5 billion for the quarter, and our secured debt to total assets ratio was 9%. And in line with the record low level reported last quarter. Our average cost of debt was 4.2%. During the second quarter, we bought back 4.9 million shares for a total of $691 million. Together with our repurchases in the first quarter, we repurchased over 6% of our shares outstanding at the beginning of this year. Since 2023, we bought back 93 million shares or almost 40% of our outstanding shares for a total of $8 billion. Turning to Slide 9. On our last earnings call in February, we projected adjusted earnings per share of $14.50, which included $1.50 of gains on sale from the first quarter. As Gus mentioned, Today, we're raising our full year 2026 adjusted EPS guidance to approximately $16.80. We're increasing our estimated EPS excluding gains on sale to approximately $14, and we're also including the $2.80 of gains on sale from the first half of the year. However, we have not included any gains on sale for the second half of the year. In the first half, the drivers of the outperformance relative to guidance were gains on asset sales of $514 million, higher net maintenance contribution and other income. We've completed $2.8 billion of asset sales in the first 6 months of this year. And as a result, we currently expect asset sales for the full year 2026 to be in the range of $4 billion to $5 billion. In closing, AerCap has continued its strong performance this quarter. We generated adjusted EPS of $5.14 and adjusted ROE of 18%. So far this year, we've returned over $1.5 billion to shareholders, and we've made significant additions to our forward orders with Airbus and Boeing, as we continue to grow our fleet with new technology, fuel-efficient aircraft. And today, we've once again raised our EPS guidance. All of this indicates our confidence in the value of AerCap today and into the future. And with that, operator, we can open up the call for Q&A.

[Operator Instructions] We will take our first question from Jamie Baker with JPMorgan.

So Gus, question on the 85% extension rate. So what takes place with the other 15%? Is that mostly made up of, I don't know, end of lease sales? Is it part out? Is it customer purchases? I'm just wondering, we all know how strong the environment is, but when at least is not extended in this market. Just kind of wondering what the outcome is, how common is it that you take the asset back pain and release it. That's what I think just concentrating on the 15%. .

You're right, Jamie. It is generally quite rare that the aircraft would come back and be re-leased. The old time it will. But for the most part, they end up getting part of that.

Just to be clear on that percentage, Jamie, so the way we calculate that is that's 85%. So of everything that is either going out on lease again to a new customer or being extended, that's the denominator. 85% extended, 15% re-leased, and we've excluded aircraft that are being sold. .

Okay. All right. I appreciate the clarification. I didn't realize that. And then on the follow-up, just the leverage of 2x or 2.05 clearly, lots of firepower at BBB+ to do like guess kind of whatever you want here. But Mark and I were one, have you thought about lowering the targeted touch shooting for upgrades into the low 8 range? Or in this environment, does that even make sense in terms of the marginal savings? Maybe you're just better off buying more stock or maybe another platform? Any thoughts on that?

Well, look, certainly, Jamie, with the history of the business over the last 20 years, generating the returns we have where we are the best part of 1,000 over treasuries every year after-tax GAAP ROE with the tremendous operating cash flows, we certainly feel that a move into the A category is deserved and warranted. .

Okay. That's perfect. And just back to my first question quickly. Anything in those numbers, the 85% and the 15% as it relates to engine cores going into data centers?

Look, of course, when we'll sell assets into those who want to put them into data centers. But as it relates to data centers, Jamie, what I would say is -- we have done extensive work evaluating the aeroderivative opportunity. And we began serious discussions in this area at the start of the year with commercial aerospace OEMs, multiple supply chain participants and some of the largest owners and operators of OEM-produced aeroderivative turbines. That the work we've done includes assessing channel partners, understanding engine to power generation conversion processes quantifying the associated upfront costs, evaluating life cycle maintenance requirements, reliability and analyzing the addressable market opportunity for this form of power. Now we've held numerous diligence sessions and site visits. We were able to observe the operation and maintenance of these turbines firsthand the aeroderivative turbines and that gave us tremendous insight into how this market has evolved and strengthened in recent years. It's clear that there is strong demand for gas-powered turbines today. Every aspect of this opportunity from conversion and installation to operation and long-term maintenance requires specialized expertise and substantial operational experience. From AerCap's perspective, pursuing this opportunity would require strong strategic partners and access to the full suite of capabilities needed to convert, install, operate and maintain these assets on a long-term basis. The risks we're assessing include operational performance, future costs and alternative power supply solutions. While the technology to convert aerospace engines into gas-powered turbines is already established, there is a perception in the market that converted units may in the long term, be less efficient than the OEM produced aero derivatives. Whether this proves to be the case over the long term remains to be seen. It was also evident in our research that both data center operators and hyperscalers would strongly prefer to be connected to the grid over time. If and when that becomes possible remains a key uncertainty, should grid capacity expand materially or alternative technologies improve. Demand for aero derivatives could be adversely effective. Taking all this into account, any opportunity in this area must be evaluated against the industry-leading returns that AerCap generates in our core business. While we continue to see encouraging signs in the aeroderivative market, we will remain prudent and will only pursue opportunities where we believe we have the right partners, sufficient operational capabilities and a clear path to generating shareholder value over the long term. And we'll continue to update you as our assessment evolves.

We will take our next question from Catherine O'Brien with Goldman Sachs. .

Maybe just a bit of a follow-up on the leverage question, Jamie is going down that path. Leverage remains well below target and has been for several years. And as I know the team won't deploy capital to growth just for growth's sake. What does it take to see leverage get back closer to target? Do you need OEM deliveries to start to pick up? Because you guys have been quite active on finding incremental opportunities to pull capital like the frontier and Airbus seal last quarter, but leverage continues to decline. Should we expect to see a potential step up in capital deployment to shareholders? I guess I'm mainly just trying to get a sense of how much of a priority making the balance sheet more efficient is, because it feels like something in the mid-2s would still get you -- give you dry powder for larger opportunistic deal came up, but maybe you disagree there. Anyway, a bit of a long-winded question. I was just trying to figure out the urgency or lack thereof to take leverage back up and what the potential past get there could be?

Sure, Katy. Thanks. Look, so the main reason why leverage has remained so low has really been just the performance of the business and how much cash and capital we've been generating. And as you can see, it's been very strong. And so despite the fact that we bought back 6% of the shares in the first half of this year and all of the commitments we've made in terms of new orders and that type of thing, Nonetheless, the leverage ratio has remained the same. And so I think that's really what has been the driver of it. So we are committing capital. Now you're right. We have a lot of dry powder available, which is good. We will continue to deploy that. Look, we've got amounts remaining in our existing share repurchase program. We obviously see that as attractive. And so I think you can expect that continue, but also looking for other opportunities, too. And there may be larger opportunities. I mean some of these things that we've done the delivery thoughts are relatively close in, but it didn't result in a lot of capital deployment today. But that will be in future years, right? So that's 1 of the things that we've been doing I think over time, obviously, we'd expect it to get back to those mid-2s levels, but it will take some time to get there, I think.

Okay. High-class problem. Maybe just 1 more. The aircraft return from Spirit location, I think they were originally expected to return to service towards year-end. Is that still on track? And when will the incremental 10 aircraft return to May return to service -- and how should we think about these aircraft plus the returning freighter conversions impacting that spread over the next couple of quarters?

Yes. So that's still our expectation that we'll see returning in the fourth quarter. And on the other 10 aircraft, those should go out later this year as well. So that should be a positive for lease yields, positive for net spread, some of those free tes coming in as well. I mean just to look at net spread and lease yields. So obviously, year-over-year lease yield is up about 30 basis points, net spreads up 50 basis points and net spread has been flat for the last few quarters as you've seen. That's despite all those Spirit aircraft, the downtime associated with those. So we should see it coming up somewhat over the next couple of quarters. And that's going to depend, obviously, on those redeliveries of those aircraft. But overall, the trend should be upward for lease yield and slightly up for net spread as well. .

We will take our next question from Ron Epstein with Bank of America .

Maybe just following up on the question that was just asked. How far through are we now -- I'm assuming pretty far of the, I guess, the less favorable leases that were signed kind of COVID and a little bit post-COVID. Is a lot of that kind of work through already? .

Yes. So more than half, Ron, we're more than halfway through that. It is a long roll off period for those because some of those were quite long leases. I mean essentially, we replaced the existing lease terms when we restructured those for the most part. And so that is a pretty long roll off. I think I mentioned last year, it was about 6 more years that would take to roll off. So maybe over the next 5 years, you'll see that. So it's kind of a long-term positive trend that you see and that should be coming in. That's 1 of the things that's contributing to that growth in the portfolio yield and the improvement in that spread.

Can say right, the portfolio you just get a natural lift off of that over the next several years. .

Exactly. .

And then a quick question for you guys. And back to the last question that Jamie asked on the aeroderivative stuff. What would be the right partner, kind of what expertise -- what are you looking for to feel comfortable that, okay, this is something we might want to invest in? .

You've got to remember, Ron, it's a very significant investment in every engine. So you need a long-term demand and you need the right partner. Now our focus is in ensuring we approach this, as I said, with the right strategic partner -- 1 that can bring the operational expertise and the capabilities needed to drive long-term value from the opportunity. We have had constructive discussions with a number of potential partners, but have not yet identified, 1 with a long-term conviction regarding the longevity and durability of the opportunity. .

Got it. Got it. Got it. And then maybe just 1 last one, if I can. If you -- for the engine leasing business itself and supporting those engines, are you guys having any problem getting part in the supply chain, what do you need to keep those engines flying.

Sorry, could you just repeat the last bit, Ron, you just broke up how we had any problems with .

Yes, sorry about that. Any problems with the supply chain, getting the components you need to support the engines, particularly the CFM56 that you have on that? .

Well, Ron, as you know, 1 of our businesses supports the CFM product globally. And at any given time, we're probably moving 50 engines around the world in a given day for GE and CFM and we have been able to do that. That takes a lot of planning. We have a number of facilities around the world where we know which parts of an engine will be scarce years in advance from our knowledge and we tend to have prebought a lot of the bendable parts that airlines tend to, I won't say that use the word pilfer -- but when you're in that business moving quickly from A to B to C to D to E to F, you need to really understand what happens to certain consumables on the engines, on the top case, et cetera, and to plan for that year is in advance and we have various facilities around the world where stockpiles of those critical parts. And we have our own infrastructure that can move these assets around faster in a greater scale than anyone else in the world. .

We will take our next question from John Godin with Citi Group. .

Gus, you spent a bit of time talking about the supply/demand in wide-bodies, which is there's a wide gap there. I was hoping that you could talk a bit more about what's going on in narrow bodies where delivery rates have tracked back up and in particular, kind of retirement rates and anything of note on modern-use old older engine types?

Look, we still see very strong demand. I mean, I suppose, to be fair, the prime aircraft of all is the A321 meal. If you have A321 meals, I mean, you're going to -- you're going to place that no problem. And they'd be fairly scarce. And that's the clear market leader, and that's where it's so vital for Boeing to get the MAX 10 certified. And then it will help -- once Boeing do that, it will actually help the Axa. The MAX is a very good airplane. -- airlines that operate the MAX and the A320neo would argue that the Max ate may be even a slightly superior aircraft. But commonality and operating leverage having 1 family type of aircraft is vital. And so that's what's held back, I would say, the placement activity on the MAX 8 versus the A320neo family, but I think that reverse when the MAX 10 comes into when it gets certified, it starts delivering. So no, we'd certainly see very strong demand out there still for the narrow-body Newtek aircraft. And then on the older tech aircraft, you can see as well that particularly that's what a lot of our sales are focused on this tremendous demand. A lot of that is supported, of course, by the demand for engine overhaul, the cost of an engine overhaul shop visit is relatively high. So people will be inclined just to buy engines all of us to avoid shop visits. And then we might give the airframe to our own parts business in Memphis aircraft materials, where we will tear down the airframe ourselves and after having sold the engines.