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

Good day, and welcome to the AerCap Holdings N.V. Q3 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'd like to turn the conference over to Mr. Adi Padba, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to AerCap's Third Quarter 2026 Earnings Call. With me today are CEO, Angus Kelly; and our CFO, Pete Juhas. Please note that today's call may contain forward-looking statements which involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. Further information concerning these issues can be found in AerCap's latest earnings release and our filings with the SEC. A copy of the earnings release and conference call presentation are available on our website at aercap.com. We undertake no duty to update any forward-looking statements, except required by law. I'll now turn the call over to our CEO, Angus Kelly.

Thank you for joining us for our third quarter 2026 earnings call. AerCap delivered another excellent quarter with record performance across a number of key financial metrics, leading us to raise our full year 2026 guidance. Our results . Once again demonstrates the resilience and stability of the global platform we have built over 2 decades as a public company. Starting with our financial highlights on Slide 3. We delivered record adjusted earnings per share of $6.56 in the third quarter, translating to a record adjusted return on equity of 22%. The Demand for our assets remain strong and continues to outstrip available supply. While this dynamic is supporting lease rates and asset sale opportunities, AerCap's long-term performance is driven by our ability to actively manage and optimize assets throughout their life cycle. It is this capability that continues to differentiate our platform. and underpins our strong view of the business going forward. We continue to return significant capital to shareholders in the third quarter. repurchasing $783 million worth of shares and just over $2.2 billion year-to-date, representing approximately 10% of AerCap's outstanding shares at the beginning of the year. Reflecting our performance and positive outlook, we are raising our full year 2026 earnings guidance to $20.70 per share, excluding any additional gains on asset sales in the fourth quarter. Turning to our core leasing business and current industry dynamics. While our discussions with customers focus on long-term fleet planning decisions, those determine capacity here in the future. Higher get fuel prices have created uncertainty for some airlines and are impacting their near-term profitability. As jet fuel remains at these elevated levels, we would expect airlines to seek proactive measures to strengthen liquidity and protect topologies. Our platform is uniquely positioned to navigate challenges the airline industry faces. And in many instances, this type of backdrop can create opportunity for AerCap such as through incremental sale and leaseback activities. Today, our order book is fully placed through the end of 2027 and 80% placed through the end of 2028. The -- and this is taking into account the 131 new aircraft added to our order book this year. Combined with an average remaining lease term of over 7 years, this gives us tremendous visibility into future earnings and underscores the durability of our business model. Turning to Slide 4. Let me begin by saying that we've continued to take advantage of the very strong secondary markets to the quality of our portfolio. During the third quarter, we sold 70 owned assets for $1.1 billion of sales proce -- at an unlevered gain on sale margin of 45%, equivalent to 2.6x book equity. Today, 83% of our aircraft lease is comprised of new technology Fraser aircraft, a direct result of our continued focus on portfolio optimization for the last 15 years. Turning to the growth of our order book. You've heard me say before that it cannot be a buyer at a seller's market at the same time. Yet, despite a high and constrained supply environment, we have significantly expanded our order book since 2024, and without compromising our return thresholds. Our scale and industry relationships have given us access to opportunities that others simply cannot reach. Today, we have an order book of new technology aircraft with delivery positions beginning in 2027 that we believe will create substantial long-term shareholder value. Continuing with the theme of capital allocation. AerCap has been defined throughout its history by the balanced deployment of capital across growth, shareholder returns and financial strength. As we show on Slide 5, since the closing of the GECAS acquisition at the end of 2021, we have committed more than $30 billion to new technology assets, repurchased almost 40% of our outstanding shares and continued to strengthen our balance sheet. Today, AerCap is a high investment-grade company with BBB+ Baa1 credit ratings. Turning to Slide 6. Our performance in 2022 demonstrates the successful execution of our strategy. Over that period, AerCap has delivered compound annual growth of 23% in adjusted earnings per share and 18% in book value per share. Our superior long-term returns are a result of a platform that combines global scale, unique information advantages, deep customer relationships and ownership of the most valuable aviation assets. In closing, this business is not simply about buying, leasing and selling aircraft. It is about actively managing aviation assets throughout their life cycle, allocating capital where we see the most attractive returns and using our market leadership and expertise to create value at every stage of ownership. This is what makes AerCap's earnings power durable and continues to drive long-term value creation for our shareholders. I will now hand the call over to Pete to review the financials in more detail.

Thanks, Gus. Good morning, everyone. AerCap delivered another record quarter, and I'll start by reviewing our financial results on Slide 7. Our GAAP net income for the third quarter was $949 million or $6.17 per share. The impact of purchase accounting adjustments was $71 million for the quarter or $0.46 a share. That includes lease premium amortization of $23 million, maintenance rights amortization of $35 million related to maintenance revenue and maintenance rights amortization of $14 million related to leasing expenses. . The net tax effect of all these items was $11 million or $0.07 a share. As a result, our adjusted net income for the third quarter was $1.09 billion or $6.56 per share. That represents adjusted ROE of 22% for the quarter. Turning to Slide 8, I'll briefly go through the main drivers that affected our results for the quarter. Basic lease rents were $1.698 billion reflecting continued growth in our fleet and a strong leasing environment. Maintenance revenues remained elevated during the third quarter at $267 million before purchase accounting adjustments. Our net maintenance contribution, which is maintenance revenue less leasing expenses after taking purchase accounting adjustments into account, was $184 million for the quarter. As we've noted previously, maintenance contribution is event-driven and can vary significantly from quarter-to-quarter. Our net maintenance contribution has been particularly strong this year, which is based on a number of factors including the timing of end of lease compensation, maintenance reserve releases, buyouts and transition activity. We would expect net maintenance contribution to return to a more normal level of $50 million a quarter in 2027. Net gain on sale of assets was $353 million for the third quarter. The sales environment remains very strong, and we sold 70 of our owned assets for total sales revenue of $1.1 billion with an unlevered gain on sale margin of approximately 45%. The Other income was $97 million, primarily consisting of interest income and management fee income. In the third quarter, we also recognized $27 million of other income related to sales of investments. Interest expense was $475 million for the third quarter Leasing expenses were $131 million, including $14 million of maintenance rights amortization. Income from equity method investments was $73 million in the third quarter. that was higher than normal due to income from our SES joint venture. Income tax expense was $123 million for the quarter, reflecting an effective tax rate of 12.3%. The that's lower than usual due to some discrete tax items. Excluding those items, for the full year, we would expect our effective tax rate to be approximately 15%. Turning to Slide 9. Our liquidity position continues to be very strong. As of September 30, our total sources of liquidity were approximately $22 billion. This includes approximately $2.5 billion of cash $10 billion of revolvers and $3 billion of other committed facilities as well as estimated asset sales and operating cash flow. Our sources to uses coverage ratio was 1.8x, which reflects excess cash coverage of around $10 billion. Our adjusted leverage ratio at the end of September remained similar to last quarter at 2x net debt to equity. Our operating cash flow was $1.8 billion for the quarter. Our secured debt-to-total assets ratio decreased to 8%, down from 9% last quarter. Our average cost of debt was 4.2%, the same as last quarter. During the third quarter, we bought back 5.3 million shares for a total of approximately $783 million. We also announced a new $1 billion share repurchase program in September. As Gus mentioned, for the first 9 months of 2026, we returned more than $2.2 billion to shareholders through share repurchases, representing approximately 10% of the shares outstanding at the beginning of the year. In addition, we made our tenth consecutive quarterly dividend payment. We have increased our dividend each year and have paid over $500 million in dividends since the introduction of our dividend in 2024. Turning to Slide 10. Following our continued strong performance during the third quarter, we're raising our full year 2026 adjusted EPS guidance -- we now expect adjusted EPS of approximately $20.70 for the full year. This reflects approximately $16 of adjusted EPS, excluding gains on sale. It also includes $4.70 of gains on sale recognized during the first 9 months of the year. It is before any additional gains on sale for the fourth quarter. The principal drivers of the outperformance relative to our previous guidance have been strong gains in asset sales, higher net maintenance contribution and higher other income. We generated approximately $866 million of gains on sale during the first 9 months of 2026, including a record $353 million in the third quarter. Last quarter, I said we expected asset sales for the full year to be in the range of $4 billion to $5 billion. However, based on our performance to date and the continued strength of the sales market, we currently expect full year 2026 asset sales to come in over $5 billion. Our net maintenance contribution has been particularly strong for the first 9 months of this year at $453 million. As I mentioned earlier, we would expect it to return to a more normal level of around $50 million a quarter in 2027. We Other income was also higher than normal at $266 million for the first 9 months of the year. In closing, AerCap continued its strong performance with another record quarter -- we generated adjusted EPS of $6.56, adjusted ROE of 22% and gain on sale of $353 million. Today, we're raising our full year adjusted EPS guidance to approximately $20.70 before including any additional fourth quarter gains on sale. This positive outlook and strong performance to date reflect the strength of our platform, the quality of our portfolio and our disciplined approach to capital allocation. With that, operator, we can open up the call for Q&A.

[Operator Instructions] And we'll go first to Jamie Baker with JPMorgan.

So as 1 lessor that was here in New York last week for airline economics, mentioned that certain appraisers believe certain midlife values and lease rates have peaked a little bit more on narrowbodies and widebodies. And I don't know, it sounds plausible given what's happening with fuel and spirits shut down and capacity cuts and all that. But the less oring question Mid East based, by the way, specifically said they're not seeing that and the appraisers are wrong. We're not uniquely concerned, but I don't know, directionally, Mark, and I wanted to ask, which side you come down on in this regard?

Thanks, Jamie. Well, I can only talk to AerCap and you can see in the quarter what we did with selling a wide array of assets of 70 aircraft and generate a 2.6x book equity in our gain and sale. Now that's a combination of having the right assets. We've been looking at this portfolio for 15 years, always every day. Where do we want the portfolio to be in 10 years, not tomorrow, not the day after, not yesterday. -- and looking at the trends at the -- where the industry is going, and that shapes our portfolio for the future. And we're highly confident that the assets we have are very well positioned for the future, and that's evidenced by the results that you see this quarter. And in fact, mover quarter for a long, long time.

Excellent. And then for Pete, if we could just quickly revisit financial policy. Obviously, the model is working. Leverage is nicely below 2.7x target. But any updated thoughts since well, basically since we spoke 90 days ago, in terms of tightening this maybe to 2.5x in making a stronger argument for low A ratings, I mean, with base rates obviously up and spread dispersion increasing. It just seems to market that the benefit of borrowing costs within a rating would be, I don't know, increasingly advantageous -- thanks in advance.

Sure. Thanks, Jamie. Yes, look, we would welcome an upgrade. And I think the performance of the company in many ways, you can see how strongly we've performed over many years would certainly merit and upgrade -- that being said, we haven't changed any of our policies. Our stated target of leverage is 2.7x. But as you noted, we've been running well below that for a while. The main driver of that really has been just the extremely strong earnings that we've produced quarter after quarter over the last year. and even before that, but particularly this year. And even though we have been buying back a lot of stock, 10% of the stock so far year-to-date nonetheless, just given how much capital we've been generating, the leverage ratio has continued to stay where it has been at around I do think that, that will increase going forward. I mean, that is our plan. But obviously, given the strong results, that is depressing that leverage ratio.

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

Great. Gusan, Peter, as you look at the combination of the order book, which really does start picking up in Q4, the Spirit and Frontier and the other kind of opportunities that might arise. How do you think about sort of CapEx over the coming year or 2? And how does that translate into kind of -- or does that translate into growth in dollars of basic lease rents. with that?

So Moshe, I mean, if we look at CapEx for fourth quarter, it should be -- cash CapEx should be around $1.5 billion for the rest of this year. And then around $6 billion, 2027, maybe $5.5 billion or so. And we could add to that. Obviously, I mean, you've seen, particularly on the engine side, those tend to be shorter in. And so I wouldn't be surprised if you saw some additions to that from there. And then if there are other things that we can do in terms of sale leasebacks maybe not on to that. Obviously, on the other side, you can see some delays as well as you're well aware. But roughly, those are the numbers that we're looking at over the next couple of years.

I would add there. Mosaic I would add there, if you just step back and look at the company today, we're generating record ROEs we are generating record cash flow, but the balance sheet is a fortress ology. It's never been stronger. 2:1 debt equity, high investment-grade company, BBB+, Baa1, and returning massive amounts to shareholders, but finally still, we have the ability tomorrow if we wished to deploy $40 billion approximately of capital if we wanted to. We have $3.7 billion of available excess equity, you lever that up at $14 billion. It's a very enviable position for the company to be in, and it hasn't come at the sacrifice of any shareholder returns at all. .

Clearly, clearly. And the other -- the follow-up question that I wanted to ask also kind of dovetails into that because you've been selling a higher percentage of the fleet, I guess, at higher games. And you mentioned that probably going to stay high in Q4 -- is there -- as you kind of look at the fleet and our thinking about that optimization, is there a way to think about like how you -- what percentage of the fleet you enter 2027 that could be subject to that? Is there just any way that we could sort of think about how to how to think about the percentage of the fleet that's up for sale in the future.

Moshe, I'll over to Pete in a second. But first of all, the reason we sell assets is always with the long-term strategy of where do we want the portfolio to be in 10, 15 years' time. It's because of that long dated thinking 15 years ago that the portfolio is where it is today. 83% focused on new tech assets of race and freight is the strongest part of the market evolve and 1 that we expect to grow. . But I would say sales have been elevated in the last year or 2, driven in some part by our focus on reducing our Chinese exposure, which has fallen very significantly over the course of the last 4 years. And I'd expect us to go into '27, '28 that those sales to Chinese of Chinese assets will slow down as our exposure has reduced materially there. Pete, anything you want to add?

Yes. I mean, I mentioned, Moshe, in my prepared remarks that we expect to have sales of over $5 billion this year. So that is an extraordinary number. more typically, we would generally guide to $2.5 billion to $3 billion of sales. So I would expect at this point, it probably normalizes to something like that. But -- but it really depends. And obviously, it could be higher. The market has been extremely strong, and we have been selling into that Sure. .

We'll go next to Shannon Dauder with Deutsche Bank.

But it's hard to imagine that lease rates go up much more from here if the high fuel price environment lasts through next year, which assets are being most impacted today -- or is it possible that the supply are means so concerning that lease rates can move higher?

I'd say Shan, where lease rate goal is more a function of interest rates. So lease rates go up as interest rates go up. I can tell you that now, any aircraft in our order book that's leased to deliver in the next 2 years. If interest rates go up, it goes up with them. That happens. It's in the contracts -- in the stock market, if you are in assets heavily focused on older tech assets, that may be a more challenging market in the near term. . But where AerCap is focused in the freight business, in the new tech in -- particularly in our engine business, we don't see that type of pressure. There will be the odd asset here and there if we have to take them back. But that's the general thrust of the business. I wouldn't say that for AerCap's asset base as we look out over the next few years that I would see any significant movement in lease rates other than that, that's driven by interest rates, apart from the odd 1 here and there.

And as my follow-up, 1 engine lessor recently noted that spare engine values could begin to come down, just given the large number of young narrowbodies being torn down for engines and spare parts and not hitting the market. I mean we're at something like over 100 narrowbodies that have been parted out. It's pretty amazing. Do you agree with this view?

Look, we are by far in a way the biggest engine lessor in the world, and we have a lot more visibility than anyone else. And I think we are going to see sustained engine demand for a long time to come. The key to the valuation of the demand for engines will be can the time on way of new technology assets improved dramatically in harsh environments. . And I think that is a long for the engine OEMs. I don't see that happening. There will be gradual improvements but I don't really see that happening. March environments 30 years ago were a minority of the global economy. But as emerging markets have boomed what we have seen is that a much greater portion of the global economy is focused in those countries that are parter climates. And I really don't see demand for new tech engines tapering off. Then again, if you're in certain engine types that are all technology that had boost recently, then perhaps the statement you're saying could be true all right? But that's not where AerCap is focused. We've always looked to the long term in the future.

We'll go next to Ron Epstein with Bank of America.

From the team. Maybe just 2 quick ones. As a follow-up to the previous question. I guess, what's your expectation just for aircraft retirements as we go into next year and the following year. There's some debate in the market if we're going to see some title wave of retirements or not? And then how would that impact you guys?

I doubt we'll see a tide wave, particularly in widebodies. The wide-body market is extraordinarily strong. We're seeing customers overhaul A380 interiors. That says everything wrong right there. We're at most fuel-inefficient aircraft ever built, and it is being overhauled with $25 million interior cabinet spend. So that is all I can say about the wide-body market. I don't think I can say anything else about how strong it is. . On the narrow bodies, I think it's fair to say, all right. Will we see large retirements and tightly . Probably not. We will see some for sure if oil stays high. But again, Ron, as it pertains to AerCap, as I mentioned, 83% of our book is Newtek, and it is a freight business and our exposure to the other assets is mainly focused on the high demand, most like the 737, A320, 330. So from our perspective, I don't see it having an impact on us. But like everything in life Ron, you may have had guys who are out there buying different asset types, different asset quality, different maintenance standards a key really is when you're trans-- if an asset comes back to you, if you bought an asset of someone on the asset comes back and the maintenance return condition, if you don't have the expertise to manage maintenance term, to manage the paperwork to manage the transition from 1 jurisdiction to another, which is a very difficult thing to do. Then I suspect that's where some guys could get caught out because not very, very few people have the infrastructure to rapidly and efficiently move aging assets around the world. We do, of course, and we do it more than anyone.

Got you. Got you. And then maybe a question for Pete. Can you why is the maintenance revenues less leasing impairments going to be around $50 million annualized. You guys have usually been pretty ahead of this. Just trying to understand, is this a conservative view? Or how are you thinking about that?

Well, that's normally what we would expect over the long term to be around that number of $50 million and if I look back at, say, 2025, we were around $200 million for the full year in 2024. We are on $160 million. So it's in that ballpark. This year, it's been much higher and really that's driven by 3 key factors. The first is we've had a significant number of large end of lease payments on older assets this quarter but also throughout this year. So that's contributed Second, we've had higher buyout income. So these are maintenance buyouts that we do on a mostly for older aircraft. And third, we've had some lease terminations that result in an upfront release of maintenance reserves. And so it always depends upon the transactions that you have coming through each quarter. That's why it tends to bounce around. But all of those things have been quite strong this year. But over time, we expect those to normalize and get back down to that around $50 million net technical number per quarter.

We'll take our next question from John Godin with Citigroup.

Got obviously, financial distress is a topic again with fuel prices where they are and the prospect of escalation, I guess, in the Middle East, post the U.S. midterms, -- can you just do a bit of a round-the-world update on what you're seeing in different regions? And just give us a general temperature check on financial stress as you see it, if fuel stays here.

Now of course, everyone says the solution to high oil, it's high oil. And ultimately, that will be true. But you are right. Of course, there are airlines in different parts of the world do face challenges. I would say not so much by geography. A lot of it is to do with the product offering that they have. For the most part, those airlines that are catering solely to an economy class low-fare model without the ability to offer a product that has some pricing in elasticity or demanding elasticity, those guys are struggling a bit. So I'd say, and particularly where they have to fly long haul because it's not so bad if you're a Ryanair dancing around Europe where your average stage length is 2 hours. You're not really killing yourself with fuel if a low-fare model if you're a very low cost base. But if you fly in 5 hours, fuel is a much more important part of your network. So I would say the guys that we would be more concerned about is the longer haul for 3.5- to 5-hour stage lands, low-cost marble. That's just under a bit of pressure because their customer base can only pay so much. But most of the airlines around the world are able to pass on to varying degrees, a reasonable proportion of the increase in fuel costs. If we look back of our history over the last 20-plus years as a public company, our bad debt cost or credit costs have averaged less than 1% a year. So AerCap is uniquely positioned to move assets around the world because of the infrastructure if we have it to use different methods to monetize the assets, do we sell them? Do we put them into the engine business, do we put them into our part-out business, et cetera. And again, with the scale that we have around the world enables us to do things as simply others can't. And no 1 is wishing for the continuation of the war, of course, or high fuel prices and stress with our customers. But in the past, that has sometimes presented opportunities for us, which we have been able to take advantage of.

That's a great overview. And just changing gears, could I revisit Aerobie and just get your latest thinking there? All the all the demands on power from AI, all those forecasts just keep going higher. And it seems like we're at a point where the rubber meets the road on that. So I'm curious where you guys stand.

Sure. And I did reference that in the last call, and it's something we have looked at very closely for the whole for now 10 months. And there's a number of factors involved, as I referenced before, a longevity of demand, which is vital because it's a very expensive thing to do. The hurdle rate that an engine in AerCap the alternative use of that engine in AerCap has to get to -- is very high, as you can see from our results, the consistency of our results and then finding the right partners to do it. We have had significant discussions -- now look, all that being said, of course, we're selling engines to people who are going into the Arbor business. And I would say this, of course, if you have power now, as I referenced on the prior call, if there is a significant premium, a very significant premium available to you right now with Power now. Whether that premium will be there, in 6, 8, 10 years time when it's what you need given the investments you make is less clear.

We'll go next to Catherine O'Brien with Goldman Sachs.

Team. Thanks for the time. Maybe 1 more on the asset sales. Would it be fair to say that the elevated sales in the last 2 years were really driven more by portfolio management versus I've heard this for a few people trying to cash in on gain on sale margin driven by some view of the cycle. And I guess any thoughts on how we should think about the level of asset sales going forward? On a high level over the next couple of years, is there maybe a good rule of thumb in terms of percentage of the fleet tied to average age or something? Or it's really just entirely situational based on the information you have each year.