Jamie Baker — Analyst, JPMorgan
Good afternoon, everybody. Gus, question on the 85% extension rate. What takes place with the other 15%? Is that mostly made up of, I don't know, end of lease sales? Is it part outs? Is it customer purchases? I'm just wondering, we all know how strong the environment is, but when a lease does not get extended in this market, just kind of wondering what the outcome is. How common is it that you take the asset back, paint it, and re-lease it, that sort of thing? Just concentrating on the 15%.
Aengus Kelly — CEO, AerCap
You're right, Jamie. It is generally quite rare that the aircraft would come back and be re-leased. The odd time it will, but for the most part, they end up getting parted out.
Jamie Baker — Analyst, JPMorgan
Okay.
Peter Juhas — CFO, AerCap
Just to be clear on that percentage, Jamie, the way we calculate that is that's 85%, 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.
Jamie Baker — Analyst, JPMorgan
Okay. All right. I appreciate the clarification. I didn't realize that. On the follow-up, just the leverage of 2x or 2.05, clearly, lots of firepower at BBB+ to do, I guess, kind of whatever you want here. Mark and I were wondering, have you thought about lowering the target a touch, shooting for upgrades into the low A 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?
Aengus Kelly — CEO, AerCap
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.
Jamie Baker — Analyst, JPMorgan
Okay, that's perfect. 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?
Aengus Kelly — CEO, AerCap
Look, of course, we'll sell assets into those who want to put them into data centers. As it relates to data centers, Jamie, what I would say is we have done extensive work evaluating the aeroderivative opportunity. 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. Now, 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 aeroderivatives. 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 aeroderivatives could be adversely affected. 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. We'll continue to update you as our assessment evolves.
Jamie Baker — Analyst, JPMorgan
I should have made that my first question. Thank you so much, Gus. That's very helpful. Appreciate it.
Aengus Kelly — CEO, AerCap
No problem, Jamie.
Catherine O'Brien — Analyst, Goldman Sachs
Hey, good morning, gentlemen. Thanks for the time. Maybe just a bit of a follow-up on the leverage question, Jamie, if going down that path. Leverage remains well below target and has been for several years. 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? You guys have been quite active on finding incremental opportunities to deploy capital, like the Frontier and Airbus deal last quarter. 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. It feels like something in the mid twos would still give you dry powder for a larger opportunistic deal came up. Maybe you disagree there. Anyways, it's a bit of a long-winded question, just trying to figure out the urgency or lack thereof to take leverage back up and what the potential paths to get there could be.
Peter Juhas — CFO, AerCap
Sure, Catie. Thanks. Look, 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. As you can see, it's been very strong. 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. I think that's really what has been the driver of it. 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, I think you can expect that to continue. Also looking for other opportunities too, and there may be larger opportunities. Some of these things that we've done, the delivery slots are relatively close in, but it didn't result in a lot of capital deployment today. That will be in future years. That's one 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.
Catherine O'Brien — Analyst, Goldman Sachs
Okay. High-class problem. Maybe just one more. The aircraft return from Spirit pre-liquidation, I think they were originally expected to return to service towards year-end. Is that still on track? When will the incremental 10 aircraft return to service? How should we think about these aircraft plus the returning freighter conversions impacting net spread over the next couple quarters? Thanks for all the time, guys.
Peter Juhas — CFO, AerCap
Yeah. That's still our expectation, that we'll see some returning in the fourth quarter. On the other 10 aircraft, those should go out later this year as well. That should be a positive for lease yields, positive for net spread. Some of those freighters coming in as well. Just to look at net spread and lease yields. Obviously year-over-year, lease yield is up about 30 basis points. Net spread's up 50 basis points. 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. 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. Overall, the trend should be upward for lease yield and slightly upward for net spread as well.
Catherine O'Brien — Analyst, Goldman Sachs
Thank you so much, Pete.
Peter Juhas — CFO, AerCap
Sure.
Ron Epstein — Analyst, Bank of America
Hey, good morning, guys. Maybe just following up on-
Peter Juhas — CFO, AerCap
Good morning
Ron Epstein — Analyst, Bank of America
the question that was just asked. How far through are we now, I'm assuming pretty far, of the less favorable leases that were signed COVID and a little bit post-COVID? Is a lot of that kind of worked through already?
Peter Juhas — CFO, AerCap
Yeah. 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. Essentially, we replaced the existing lease terms when we restructured those, for the most part. That is a pretty long roll-off. I think I mentioned last year, it was about six more years that would take to roll off. Maybe over the next five years you'll see that. It's kind of a long-term positive trend that you see. That should be coming in. That's one of the things that's contributing to that growth in the portfolio yield and the improvement in net spread.
Ron Epstein — Analyst, Bank of America
Yeah, I was going to say, the portfolio yields should just get a natural lift off of that over the next several years.
Peter Juhas — CFO, AerCap
Exactly.
Ron Epstein — Analyst, Bank of America
A quick question for Gus. Going back to the last question that Jamie asked on the aeroderivative stuff. What would be the right partner? What expertise, what are you looking for to feel comfortable that, okay, this is something we might want to invest in?
Aengus Kelly — CEO, AerCap
You got to remember, Ron, it's a very significant investment in every engine. You need-
Ron Epstein — Analyst, Bank of America
Yeah
Aengus Kelly — CEO, AerCap
a long-term demand, you need the right partner. Our focus is in ensuring we approach this, as I said, with the right strategic partner. One that can bring
Ron Epstein — Analyst, Bank of America
Yeah
Aengus Kelly — CEO, AerCap
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 one with the long-term conviction regarding the longevity and durability
Ron Epstein — Analyst, Bank of America
Yeah
Aengus Kelly — CEO, AerCap
of the opportunity.
Ron Epstein — Analyst, Bank of America
Got it. Maybe just one last one, if I can. For the engine leasing business itself, and supporting those engines, are you guys having any problem getting parts and the supply chain, what you need to keep those engines flying?
Aengus Kelly — CEO, AerCap
Sorry, could you just repeat the last bit, Ron? You just broke up. Have we had any problems with?
Ron Epstein — Analyst, Bank of America
Yeah, sorry about that. Any problems with the supply chain, getting the components you need to support the engines, particularly the CFM56s that you have on lease?
Aengus Kelly — CEO, AerCap
Well, Ron, as you know, one of our businesses supports the CFM product globally. At any given time, we're probably moving 50 engines around the world any given day for GE and CFM. 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 pre-bought.
Ron Epstein — Analyst, Bank of America
Right
Aengus Kelly — CEO, AerCap
expendable parts that airlines tend to, I won't use the word pilfer, but when you're in that business, moving engines 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 years in advance. We have various facilities around the world where we stockpile 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.
Ron Epstein — Analyst, Bank of America
Got it. Cool. All right. Thank you, guys. Yeah. Thanks.
John Godyn — Analyst, Citigroup
Hey, guys. Thanks for taking my question. Gus, you spent a bit of time talking about the supply-demand in wide-bodies, which 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, retirement rates and anything of note on modern versus older engine types.
Aengus Kelly — CEO, AerCap
Look, we still see very strong demand. I suppose to be fair, the prime aircraft of all is the A321neo. If you have A321neos, you're going to place that no problem. They'd be fairly scarce. That's the clear market leader, and that's where it's so vital for Boeing to get the MAX 10 certified. Once Boeing do that, it will actually help the MAX 8. The MAX 8 is a very good airplane. Airlines that operate the MAX 8 and the A320neo would argue that the MAX 8 may be even a slightly superior aircraft. Commonality and operating leverage, having a one-family type of aircraft is vital. That's what's held back, I would say, the placement activity on the MAX 8 versus the A320neo family, but I think that will reverse when the MAX 10 comes into it, when it gets certified and starts delivering.
No, we'd certainly see very strong demand out there still for the narrow body new tech aircraft. On the older tech aircraft, you can see as well that, particularly that's what a lot of our sales are focused on, there's tremendous demand. A lot of that is supported, of course, by the demand for engine overhauls. The cost of an engine overhaul shop visit is relatively high, so people will be inclined just to buy engines off us to avoid shop visits, then we might give the airframe to our own parts business in Memphis, AerCap Materials, where we will tear down the airframe ourselves after having sold the engines.
John Godyn — Analyst, Citigroup
Great. If I could just ask about your take on next gen narrow body. Obviously, it was in the headlines quite a bit last week on the back of Farnborough, I'm just curious what you think the customer reception would be for a new narrow body.
Aengus Kelly — CEO, AerCap
I don't think anyone's bringing one out today. I think if it were to come today, the customer reception would be very cool. I think over time, as the existing technology improves, matures, and starts to deliver the on-wing time that was originally envisaged, that goes for all, be it Airbus, Boeing, Pratt, CFM, et cetera. I do believe that will happen over the course of the next four or five odd years. At that point in time, I think it may be more sensible than for the launch of a new narrow body. I can't see any significant numbers being delivered before the back end of the next decade. Launch, it's one thing. Delivery of significant numbers of aircraft is what's relevant to us. I just don't see that happening before the end of the next decade.
We're a long way off there.
John Godyn — Analyst, Citigroup
Thank you for the thoughts.
Shannon Doherty — Analyst, Deutsche Bank
Thanks for taking my question, and congrats on the great results. Gus, this is your first direct wide-body order in many years, and you've previously expressed some hesitancy in placing direct OEM orders. Why now? Do you think that wide-body supply will get worse before moving into the next decade? If I may, if you were any other customer of Boeing's, when would your 15 wide-bodies start delivering?
Aengus Kelly — CEO, AerCap
I could only talk about when AerCap starts delivering. We know the slots are very rare, and I think it was a combination, as I said in my prepared comments, of the long-standing relationship with Boeing, being the biggest owner of 787s in the world, and being able to place close-in slots quickly. Certainly, if you're Boeing, you do not want to be dealing with someone who doesn't have huge knowledge and capability in moving wide bodies. Narrow bodies are easier to move, but wide bodies are far more challenging. You really want to have confidence, if you've got near-term slots available, that the entity that you're dealing with can definitely move them and move them very efficiently. I think that's our track record there. It was a very important as part of the deal, our ability to move quickly, et cetera.
I can't speak for when Boeing would offer wide-body slots to anyone else, but I would imagine they'd be materially later. My hesitancy in dealing with the OEMs directly, I don't have any hesitancy. I never have in dealing with them. I just don't like rolling up at the Farnborough, the Bourget tent and waiting in line for them taking an order. You want to make sure you do it on your terms, when the terms are right, and when that happens, of course, we'll do as many as we think are economically viable for our shareholders.
Shannon Doherty — Analyst, Deutsche Bank
Great, thanks. Separately, how big are your LEAP and CFM56 portfolios today at SES? How many engines are off lease, and can you give us any color on lease rates that you're seeing for the two types? Thanks for the questions.
Aengus Kelly — CEO, AerCap
Could you just repeat that? Sorry, could you just repeat that question?
Shannon Doherty — Analyst, Deutsche Bank
Oh, yeah. How big are your LEAP and CFM56 portfolios today at SES, how many engines are off lease? If you have any color on lease rates too, that'd be great.
Aengus Kelly — CEO, AerCap
De minimis numbers. There's a shortage of CFM56 and LEAP engines globally around the world. Anything that's on the ground, it's either there's a home for it in the next couple of weeks or it's in transition. I wouldn't think As I said, de minimis amounts. Is that okay?
Moshe Orenbuch — Analyst, TD Cowen
Great, thanks. I guess, Pete, when you talked about the full year gain on sale, you mentioned $4 billion-$5 billion. I think you did nearly $3 billion in the first half. Can you talk a little bit about what's left to do in the second half and what the demands from the buyer community looks like?
Peter Juhas — CFO, AerCap
Sure. Demand continues to be very strong. We have about $400 million of held for sale assets at the moment, but we have a number of other sales that are in the pipeline. While the first half of the year was high, I don't expect us to replicate that first half of the year. I still think, in the $4 billion-$5 billion range, that would be a record number for us for the full year. We do feel pretty confident that we'll be in that range. That's indicative of the demand that we see globally. That's holding up very well, and you're seeing that pretty much across the board and at high margins, as you have seen. I think that's really just the first half of the year was extremely high.
Second half of the year, I think will still be high, but not as high.
Moshe Orenbuch — Analyst, TD Cowen
Got it. One of the other aspects of that high level of sales is that it reduces your existing fleet. This quarter you actually had, on a period-end basis, growth in the net fleet for the first time in a few quarters. Can you talk a little bit about the outlook for the second half there, given what you've got in orders, and maybe discuss how the Spirit aircraft fit into that? I guess they're technically in the fleet, but will start to generate revenue. Can you talk about the outlook for growth in the fleet in the second half and into 2027?
Peter Juhas — CFO, AerCap
Sure. Yeah, Moshe. The Spirit aircraft are in the fleet. They're still flight equipment. I would expect the fleet to grow slightly during the latter half of the year. Obviously, these high sales volumes are impacting that as well. I think we'll see it maybe go up a little bit, but not a huge increase this year.
Moshe Orenbuch — Analyst, TD Cowen
Got it. All right. Thanks very much.
Peter Juhas — CFO, AerCap
Sure.
Speaker — Analyst, Morgan Stanley
Hi. Good morning. This is Gaby on for Kristine. Thanks for taking the question. Going back to Shannon's question here a little, in March you placed your largest ever direct Airbus order for 100 A320neo family aircraft, then in July you added 15 Boeing 787s. That's a pretty meaningful acceleration in direct OEM commitments after several years of a pretty selective ordering. Is there anything that's changed in your assessment of OEM pricing and delivery economics? Are we entering a period where lessors can once again negotiate attractive terms on new aircraft, or do you still view the market as one where Boeing and Airbus retain most of the bargaining power?
Aengus Kelly — CEO, AerCap
I think if we look at the recent Airbus orders, we've clocked up almost 200 aircraft with Airbus in the last two years. They are order books, to all intents and purposes, that we have taken over from airlines. That made it far more attractive. Of course, the contracting party ultimately is Airbus, but the entity that had the order book were entities that we helped, be it Spirit, be it Frontier. In return for that assistance, we were able to step into those delivery slots, which otherwise would not be available. As you saw, those delivery slots begin, I think, as early as late 2027, 2028, 2029, 2030, 2031, 2032, as opposed if we'd gone to Airbus and Boeing on the narrow bodies and ordered large numbers of aircraft, your order stream would probably start towards the end of that order stream.
That has tremendous impact on economics, because if you think of your paying escalation every year, say escalation is 4%, and you can take delivery of your equipment, you order at the same time, give or take, but you can get delivery four years earlier than a competitor, then your purchase price is probably 16%, 17% less at the end of the day. That's an enormous advantage. The ability to execute transactions like that comes back to AerCap's unique capabilities. Scale gives you the ability to interact on these opportunities, but it's unique capabilities to take engines out, to move them into our leasing pools that enable us to take AOG aircraft out of customers like Frontier and create revenue right away. In the case of Spirit, our confidence in being able to re-lease the aircraft, to work with the airline, et cetera.
These are things to move very quickly, gave us the advantages that we had there in getting those order books, which just would not be available in any circumstance if you were to go to Airbus or Boeing directly.
Speaker — Analyst, Morgan Stanley
Great. Thanks so much.
Cordelia Dang — Analyst, Barclays
Hi, this is Cordelia on for Terry Ma with Barclays. Thanks for taking my question. Just talking about gain on sale margins for a second, they continue to remain attractive in the current environment at 20%. I guess what's the durability of these elevated, call it high teens to low twenties gain on sale margins?
Aengus Kelly — CEO, AerCap
Well, look, what I would say when it comes to selling aircraft, Cordelia, the gain on sale is never a driver. The decision to sell the assets is what do we think the value of the asset is on our books and what do we think we can get for it? Whether that generates a 5% gain, 10% gain, or 50% gain, I don't care. What I care about is after the sale of that asset, is the company a better company? Did I sell an asset that was better than our average asset? Our average asset has 200 seats, it's probably seven years old, and it's probably on lease for seven years. After I sell this asset, is that average asset improved or disimproved? That's the key question, because that's what protects long-term shareholder value.
Once we decide to sell, of course, we use the huge network we have to maximize the gain on sale. That's where you see there that we've always printed strong gain on sales for 20 years, year in, year out. Pete, maybe you want to comment on how they vacillate quarter in, quarter out.
Peter Juhas — CFO, AerCap
Sure. Cordelia, I think it's just worth looking. If you look at quarterly, you see a fair amount of variation in these margins. Just to give you an example, last year, first quarter was 35%, second quarter 18%, third quarter 28%, fourth quarter 24%. First quarter this year is 24%, now it's 20%. They move around a lot. There's not really a discernible trend there, I can't discern it anyway, in terms of how that works. It just depends on what happens to close in that quarter, and the volumes that you have. I think there are a number of factors that are contributing to these high margins, which we would expect to continue. One has been the strong environment that we've talked about a lot.
Another is higher maintenance costs, which translate into, if you have life left on an engine, if it costs more to replace that contributes to higher values for these. You've had inflation over the last several years, which doesn't show any signs of decreasing. These are hard assets, inflation tends to push those residual values and sale prices up. All of those things together, I think, are contributing to it, and we would expect that to continue for a while.
Cordelia Dang — Analyst, Barclays
Super helpful. Thank you.
Peter Juhas — CFO, AerCap
Sure
Cordelia Dang — Analyst, Barclays
A follow-up to the engine derivatives. I'm trying to think about if you can help me dimensionalize potentially the return profile you have to see with the aeroderivative opportunity relative to your existing engine business.
Aengus Kelly — CEO, AerCap
Well, we know what our existing business does, it's very strong returns. As we said, there's a significant investment in the aeroderivatives that requires a very long-term durable demand to be there and have the right partners to make sure that the product delivers the efficiency that the ultimate customer expects, and above all else, reliability. In the data center business, one thing that's become clear to us is if there is any concern about reliability, no one will take your product. It has to be 100% reliable because when these things fire up, if they don't fire up, the data's lost. There's no longer a data center then.
Cordelia Dang — Analyst, Barclays
Got it. Thank you.
Arren Cyganovich — Analyst, Truist Securities
Thanks. Just following up on prior questions around increasing leverage. I think Peter mentioned that there's opportunities sometimes to put big chunky pieces to work. I'm just wondering what you're seeing on that front. Are you seeing portfolios? Consolidation is kind of largely, at least from the larger players, seemingly played out. Do you see other consolidation opportunities out there as well?
Aengus Kelly — CEO, AerCap
Well, first of all, I think the leverage is a function, as Pete mentioned, of the strong results of the business over a very long period of time. In just this quarter gone, we had $1.5 billion of operating cash flow. Of course, operating cash flow excludes any gain on sales. The business, I think for the last 12 months, Pete, is what, close to $6 odd billion of operating cash flow, which is a tremendous amount. It speaks to the underlying core leasing business that we have of engines, aircraft, helicopters. Long may that last. As it pertains to opportunities, certainly in regard to M&A, as you know in the past, we will always be looking at all opportunities in the sector. It has to be something that is accretive to our shareholders.
You can see from our beliefs and our activity over the course of the last four or five years, we've seen the last six months, that we believe the cheapest aircraft are still available, as I said before, every day down at the New York Stock Exchange under the ticker AER, that's where we buy very significant amounts of aircraft. As Pete said, we returned $1.4 billion to shareholders. That's the same as going out and buying about $5.5 billion of aircraft in a sale and leaseback transaction. At economics, we couldn't match. That's why we continue to do that in large scale. Of course, we have to be cognizant too, that we do have a large order book that will deliver, some of that capital over time will be needed too. Of course, we will generate capital.
We want to make sure that AerCap is always able, ready to go whenever a significant opportunity presents itself.
Arren Cyganovich — Analyst, Truist Securities
Thanks, Gus. My follow-up question would be on conversations you're having with airlines. You mentioned some input costs, obviously with oil rising, putting some pressure on margins, but everybody seems to be doing, I guess, fairly well. Has that changed any of your conversations with airlines in terms of maybe opportunities for more sale leasebacks, et cetera?
Aengus Kelly — CEO, AerCap
Not as yet, there's no doubt. Of course, look at these oil prices, and if they're to last, of course, some airlines will feel that, and we'll definitely see impaired profitability. On an overall basis globally, at the moment, we don't see any material impact as yet. Of course, that could change, but at the moment we don't. I would say, of course, over the last 20 years, a public company, every quarter, we reported credit costs, and they've never been a material driver of performance of AerCap. That's down to the ability of the company to move assets rapidly around the world from underperforming to performing airlines and regions. I would say that at the moment, as we look out towards the rest of the year, the airline industry is still on a global basis, healthy.
Arren Cyganovich — Analyst, Truist Securities
Thank you.
Aengus Kelly — CEO, AerCap
Thank you, operator. Thank you all for joining us. Look, AerCap has still significant financial flexibility. We have a strong pipeline of opportunities and a business that continues to perform exceptionally well. I want to thank you for your continued interest and support, and we look forward to speaking with you again in the next quarter. Thank you.