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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to today's AerCap Holdings Fourth Quarter and Full Year 2017 Results Conference Call. At this time, all participants are in a listen-only mode. This call is being webcast and an audio version of the call will be available on the company's website. The call is also being recorded for replay purposes.
I will now hand the call over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir.
Thank you, Operator, and hello, everyone. Welcome to our fourth quarter 2017 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Pete Juhas.
Before we begin today's call, I would like to remind you that some statements made during this conference call which are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation, other than that imposed by law, to publicly update or revise any forward-looking statements to reflect future events, information, or circumstances that arise after this call.
Further information concerning issues that could materially affect performance can be found in AerCap's earnings release dated February 14, 2018. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay.
I will now turn the call over to Aengus Kelly.
Thank you, Joe. Good morning, everyone, and thank you for joining us for our 2017 fourth quarter earnings call. I am pleased to report another quarter of consistent earnings and profitability.
During Q4, we generated earnings per share of $1.67 and net income of $266 million, for the full-year, EPS of $6.43 and net income of $1.1 billion.
During Q4, the AerCap platform successfully executed 100 aircraft transactions, including 46 leases, 25 purchases, and the sale of 29 aircraft, more than one transaction every day. Our utilization rate remained high during the year at over 99%. We continue to see good demand for aircraft on a global basis, evidenced by another year of strong RPK growth of 7.6% for IATA. As we look into 2018, we expect to see this growth trend continue.
We have not observed a decline in demand, due to the recent increase in oil prices. Of course, it should be noticed that for many carriers, a significant portion of the rise in oil prices has been offset by U.S. dollar weakness. During 2017, we saw significant demand in the Europe, Middle East, and Africa region, and the return to growth in the Russian market.
We remained active sellers of Mid-Life aircraft in the quarter, selling 27 owned and two managed aircraft. These aircraft had an average age of 14 years.
We achieved an average gain on sale of approximately 8%. We also agreed the sale of an $800 million portfolio of 21 aircraft to Peregrine Aviation, an investment entity established by NCB Capital which is a subsidiary of the largest bank in Saudi Arabia.
We expect the sales of the individual aircraft to close primarily in Q1 2018. This, along with the continued delivery of new technology aircraft, has reduced the average age of our fleets to 6.8 years at the end of 2017, down from 7.4 years 12 months earlier. We expect this to move towards the low sixes over the next couple of years.
Our average remaining lease term is also trending positively; it now stands at 6.9 years, up from 6.4 years 12 months ago.
In relation to aircraft purchases, we expect to deliver approximately $6 billion of aircraft assets in 2018, reinforcing the return to asset growth which began again in Q4. This level of delivery may be impacted by recent developments on the Pratt & Whitney Geared Turbofan Engine. It is too early to say what impact this latest issue will have on our 2018 delivery profile. What we can say is that the A320neo is delivering excellent fuel burn savings for our customers and it continues to be in demand. This is evidenced by the strength of our forward-order placements. AerCap has now placed 170 A320neo. As a result of the demand we see for the aircraft, we exercised a follow-on option for 50 A320neos in December.
On the liability side of our business, we continue to lengthen the average tenure of our debt. Our last four unsecured bond deals raised $3 billion at attractive rates with a five-year, a seven-year, and two 10-year maturities. We continue to manage our balance sheet conservatively ending the year with $9.6 billion of available liquidity and an adjusted debt equity ratio of 2.8 to 1.
Our share repurchase program continued during the quarter. We repurchased 5.3 million shares for $272 million which brings the total number of shares repurchased since June 2015 to approximately 64 million shares at a cost of $2.8 billion. This gives an average price of $44.08 per share and has resulted in over 30% of the company being repurchased. We're also announcing a new share repurchase program of $200 million.
Of course, with such a large portfolio, we always have issues with individual customers. However on a global basis, we continue to see robust demand for aircraft both from airlines and investors, as well as a supportive financing environment both from the banks and the capital markets.
With that, I will hand it over to Pete, before we have the Q&A session.
Great. Thanks, Gus. Good morning everyone.
I'll start on Slide 5 of the presentation. For the fourth quarter, our reported net income was $266 million. For the fourth quarter of 2016, we had higher than normal net income of $365 million, due primarily to a couple of large one-time items including a termination fee and a gain on a note receivable that was repaid earlier than we had expected.
For the full-year 2017, our net income was $1,076 million compared to $1,047 million in 2016. Our diluted earnings per share for the fourth quarter was $1.67 compared with $2.01 in the fourth quarter of 2016, which was also higher than normal due to the same factors as net income.
For the full-year, we saw an increase of 16% in our EPS from $5.52 in 2016 to $6.43 in 2017. This was primarily driven by strong earnings as well as the repurchase of 48.7 million shares during 2016 and 2017.
On Slide 6, over the past year we've seen a 16% increase in our book value per share from $49.33 in 2016 to $57.20 at the end of the year. Again that's been achieved through a combination of strong earnings as well as substantial share repurchases over the past year.
During 2017, we repurchased 23.7 million shares for just over $1.1 billion, and as Gus mentioned, since June of 2015, we've bought back over 30% of our outstanding shares.
On Slide 7, our total revenue was $1,263 million for the fourth quarter and $5,037 million for the full-year. Our basic lease rents for the fourth quarter were $1,035 million. As we see in prior quarters, basic lease rents decreased primarily due to the sale of Mid-Life and older aircraft over the past year which reduced the average age of our fleet.
Our maintenance revenues for the fourth quarter were $163 million, a slight increase over the past year. We had higher than normal maintenance revenues in both the fourth quarter of 2016 and the fourth quarter of 2017. In 2017, this was driven primarily by lease terminations, including as a result of the Monarch Airlines default. Some of the benefits that we saw come through the maintenance revenue line were offset by higher leasing expenses this quarter and will also be offset by additional leasing expenses in 2018 related to these aircraft.
Our net gain on sales was $49 million for the fourth quarter compared to $59 million a year ago. In the fourth quarter, we continued to sell Mid-Life and older aircraft at attractive prices. For the full-year, we had $229 million of gains on sales of around $2.4 billion.
Our other income was $17 million for the fourth quarter, a decrease from $89 million last year. As I mentioned earlier, the other income line was elevated in the fourth quarter of 2016, as a result of those one-time items.
Turning to Slide 8, our net interest margin was $760 million for the quarter and $3,096 million for the full-year. Our average lease assets were down for the full-year but were up by about $550 million for the fourth quarter of 2017 compared to the fourth quarter of 2016. This was due largely to the ramp up of deliveries in the fourth quarter.
During 2017, we took delivery of $5.3 billion worth of new aircraft, including over $2 billion in the fourth quarter alone, and we sold $2.4 billion of older and Mid-Life aircraft during the year. The net effect of this activity was to bring down the average age of our fleet from 7.4 years at the end of 2016 to 6.8 years at the end of 2017. Since the new aircraft have lower yields than older aircraft, when we sold our aircraft and replaced them with delivery to new aircraft, this reduces our overall yield as well as our net spread.
Now of course, we've been selling these older aircraft to improve the quality of our fleet, we've also reinvested the proceeds from selling these aircrafts at a premium to book value to fund a significant amount of share buybacks at a discount to book value.
Our net spread was 8.8% for the fourth quarter, 9% for the year which is in line with the guidance we gave at our Investor Day in November. In addition to the decrease in average age, the other factor that impacted our net spread for the full-year was the increase in our average cost of debt from 3.7% to 3.9%, as we continue to issue new longer-term bonds that replaced expiring shorter-term ILFC notes.
Slide 9 here are some additional detail on our aircraft sales activity during the quarter. During the fourth quarter we sold 27 of our owned aircraft that were in average of 14 years old. We also placed two aircraft on long-term leases and reclassified them from operating to finance leases.
As Gus mentioned, in December, we announced the sale of an aircraft portfolio to NCB Capital and our sales in the fourth quarter included four aircraft from that portfolio. We expect most of the remaining aircraft sales from this portfolio to be completed during the first quarter of 2018.
Our net gain on sales was $49 million for the quarter and $229 million for the full-year. This represents a margin of 8% for the quarter and around 10.5% for the full-year. Our ability to sell significant amounts of older and Mid-Life aircraft at a gain illustrates the strong demand for these assets that we continue to see from investors.
Over the long-term, gain on sales have generally been in the 5% to 10% range, although as you've seen it can move around a fair amount depending on the composition of the asset sales.
The fourth quarter was a record one for AerCap in terms of both the number of aircraft deliveries and the amount of CapEx. In the fourth quarter, we took delivery of 25 new aircraft including 15 from the A320neo family, four Airbus A350s, and six Boeing 787s, that brought our total deliveries for the year to 58 aircraft and our total CapEx for the year to $5.3 billion.
Next slide. Our maintenance rights expenses were $76 million for the fourth quarter, down from $95 million for the fourth quarter of 2016. This was driven by the level of maintenance activity as well as lower maintenance rights intangible asset balance.
Our other leasing expenses were $66 million for the quarter and increased from $49 million last year. This was primarily the result of expenses related to the Air Berlin and Monarch defaults and as discussed at the Investor Day, we will have some costs associated with these going into 2018.
Our SG&A expenses were $96 million for the quarter basically flat compared to the fourth quarter of 2016. We've been putting in place a new equity awards program to replace the old program from 2014 that is maturing. The overall cost of the new program will be lower, but there is some frontloading expenses associated with the new program that led to a higher stock-based compensation expense in the fourth quarter. For the full-year 2018, we expect stock-based comp expense to be in line with 2017, but it will be frontloaded with about two-thirds of that expense coming in the first half of the year. Overall, we expect our SG&A expense to be down slightly in 2018 compared to 2017.
We had asset impairments of $10 million this quarter that's primarily related to lease terminations and was more than offset by maintenance revenue recognized as a result of these terminations.
Slide 11, we continue to maintain a very strong liquidity position, as of December 31, we had available liquidity of $9.6 billion. Together with our operating cash flows that gives us total sources of $12.8 billion which is 1.4 times our cash needs of $9.3 billion over the next 12 months. This amounts to excess coverage of around $3.5 billion.
So to wrap up 2017 was another year of strong operating and financial performance for the company. We completed 402 aircraft transactions more than one a day. We continue to improve the quality of our fleet by selling 2.4 billion of Mid-Life and older aircraft and taking delivery of 58 new technology aircraft. We placed around 95% of our forward order book through the end of 2019. We generated over $5 billion of revenue, over $3 billion of operating cash flow, close to $1.1 billion of earnings, and record EPS of $6.43, and we returned over $1.1 billion of capital to create long-term value for our shareholders.
With that, now we will turn it over for Q&A.
Thank you. [Operator Instructions].
We will now take our first question from Catherine O'Brien from Deutsche Bank. Please go ahead.
Good morning gentlemen. I'm just going to ask one and then I'm going to hand it over to my colleague, Mike Linenberg, for a follow-up. So do you think if we do see rates start to rise some of the capital that is more recently been attracted to the business of the relative yield might start to exit and if they do, do you think the more established leasing companies have the capacity to pick up the aircraft that could have come to the market or do you think there might end up being some distortion?
I think some of the capital is here to stay Catherine but I do think there's quite a few tourists in the sector who have arrived here due to the paucity of yields evaded but another asset classes. So as other asset classes, the yields on those increase I have no doubt that we will see money leave the sector. I do think we'll see increased opportunity for people like ourselves, if we do continue to see rising rates.
Hey, Gus, just -- Mike Linenberg here. I want to ask you this -- this was a comment that you made at a conference a few weeks ago and I don't know if it was out of context or not, it was your view on Boeing's this new mid-market airplane, you talked about how you thought that it would be targeted more towards leisure dominated seasonal routes and therefore it would be tough to get a wider user base, is that -- I mean is that your thoughts, I mean is that and how did you come to that conclusion or maybe that was even taken out of context because when I saw that I thought that was, it just didn't seem right but maybe there's more to it.
It might be out of context, Mike. But I mean just briefly to comment on the airplane, I would say that we are leasing many airplanes into the market where that aircraft will go. That mission is done by A330s, 767s, and A321s, mainly older 767s and A330s. For a new airplane successfully dislodged those very reliable tried and tested assets it will have to come in at a competitive price.
Okay, okay. So it's a crowded space and they're going to have to differentiate themselves in order to get a bite from someone like yourselves. Okay, that makes sense. Okay, thank you.
No problem.
[Operator Instructions].
We will now take our next question from Jason Arnold from RBC Capital Markets. Please go ahead.
Hi guys. I'm just wondering if you can speak about how the $800 million Peregrine sales came to fruition. Was this a marketed portfolio or was this kind of an inbound from them and then should we expect similar gain on sale on those aircraft as we've seen recently?
The transaction itself came about, Jim, through a series of one-on-one discussions that we had, it did come actually from an inbound call initially, but there was a portfolio of aircraft that we were looking to move and then we've got a great working relationship now with our partners NCB Capital and so we're delighted to be able to close the deal.
Great. And then on the gain on sale side, I mean 5% to 10% seem kind of within that range?
Yes, that's the range.
Okay. And then I guess another one on the rising rate question, key input into determining lease rates is interest rate so maybe you can speak a bit on how you'd expect lease rates to trend here assuming this isn't another false start on the upside on rates?
Yes, now assuming that it isn't another false start exactly and then what you see is that for the forward lease agreements coming off or forward order and all of those will have an interest rate adjustment component to them. So if rates rise then there's a corresponding rise in the lease rental to offset the rising rates.
Now more generally than on used airplanes, there tends to be about a six month lag between the rising rates and the rising lease rates, so also a six month lag on the way down as well. But it will only impact a few airplanes; it won't have any material impact. The key really is not the magnitude that they get the ultimate level that they get to but it's the velocity they move us. And if we see a reasonably controlled grind higher of lease rates that will be a good thing, we're assuming that that reflects a stronger global economy with improved GDP outlook will lead to some inflation of the asset value also.
And as I mentioned earlier, it will probably lead to the departure of some of the tourist capital that has come into the space. Of course the big risk would be if you hadn't hedged yourself before rates began to rise and you are running an open book, which as you know, AerCap does not.
Excellent, great color. Like you said I mean obviously a good thing to be asset rich and have inflation potential kick-in, so thanks for the color.
No problem.
Our next question comes from Gary Liebowitz from Wells Fargo Securities. Please go ahead.
Thank you, Operator. It does looks like your utilization in the fourth quarter was down around to 98% or so. Just wondering as you re-market some of the Air Berlin and Monarch claims, how quickly can you get that back up to your usual sort of mid-99 level?
Yes, Gary, that should be coming up; I mean you're right that's the primary driver during the fourth quarter as we transition those aircrafts. So we should see it going back up to 99, for the 99 plus during 2018.
By mid-2018, will all those planes will be back in service?
Yes, it will be, if not before.
Okay. And also ,Gus, just a broad question I mean there is a lot of chatter out there about possible lessors looking to sell portfolios of large piece of their portfolio, can you just go over your appetite for large scale M&A and would you entertain deals that are not as accretive to earnings as buying back your own stock?
Gary, look we're always looking at allocation of capital, there are four avenues for us. We can do sale leasebacks in the markets, we can buy from the manufacturers, we can buy another company, we can buy ourselves, I'm excluding repayment of debt because we have delevered quite a bit over the last few years. And so, we're always looking what’s the most attractive alternative and we've been very disciplined stewards of capital. And if we believe that buying ourselves is a greater benefit to the company long-term then we'll do that which you know, look -- we look at all the different opportunities be it sales leaseback if interest rates rise a bit, I think we'll see more opportunity there and the OEMs at the moment they're fairly full, and the M&A we haven't seen much yet in that regard over the last couple of years we've looked at all the different processes, but we've been very disciplined, Gary. So you can see our behavior over the last three years and we didn't pull the trigger on any of the M&A processes and bought back 30% of AerCap instead.
Our next question comes from Helane Becker from Cowen. Please go ahead.
Thanks, Operator. Hi, everybody. Thank you so much for your time this morning. Just a question on the delivery schedule as I look at I guess it's Slide 16, the E2s and the E190s that are delivering beginning next year, can you just talk about the appetite you're seeing for those aircraft number one? And number two can you just comment I don't think you did or at least I didn't see it in the press release, what percent of the order book, you're placed forward at this point? Thank you.
Sure. On the E2s we now we've gone either under lease contracts or LOI 40% of the E2 order book. So there is and there is quite a number of discussions going on out there around the world, I think it's clear that the recent acquisition or the acquisition that is in progress of Bombardier by Airbus validates the space and of course the public interest that Boeing has expressed in Embraer also validates the space.
In terms of the placement activity on an overall basis, we have placed many airplanes way into the future but if you just look out over the next 24 months to the end of 2019, we're 95% placed.
That's great. Thank you so much. All my other --
Over 95% placed.
Great. Thank you. All my other questions were asked and answered.
You're welcome.
Our next question comes from Ross Harvey from DAVY. Please go ahead.
Hi there. Thanks for taking my question. I've got two. So firstly on that delivery schedule, I noticed that there was five aircraft for the Max that are now scheduled for 2018 delivery versus 2019 which was previously guided at the Q3. I'm just wondering what's behind that and in the context of the GTF issues could there be further change in that delivery schedule and maybe you might just talk about how much you can actually potentially benefit from those engine issues around your on-placed aircraft for 2018 and 2019. And just a short one for Pete, can you just discuss any further funding plans you might have for 2018 in particular in the context of the expected rate increases?
Sure. Ross, let me start with the move to the Max's that was really just due to a customer wanting to accelerate those. So we were able to do it for them, so that worked out well.
In terms of funding and then I will let Gus comment more generally on the GTF. In terms of our funding for the year, so as you saw, as Gus mentioned, we've done some longer term funding, we've tried to frontload that. But we will be -- we do expect to come back to the market with a number of unsecured bond yields during the year and then we've got a bunch of secured funding to do. So given that it's a pretty heavy CapEx year for us, we will be back to the market a number of times.
Turning to the GTF to answer your question, it is a minority share of the population that's impacted with a total of 43 engines on 32 aircraft, of which 21 aircraft have one of the engines on them. So the vast majority of the aircraft remain in service. The impact for us in our delivery schedule, as I said in my prepared comments, is just too early to tell at the moment and we are working with Pratt & Whitney and through the issues though.
Now of course it does improve demand to some extent for existing aircrafts that are available right now but it's very rare that you would have an A320 available for lease in the current year i.e. in 2018, as you know, we place all our airplanes 12 to 24 months out.
Our next question comes from Justine Fisher from Goldman Sachs. Please go ahead.
The first question I have is on the E2 placement. I was wondering if you could give us a bit of color about the mission that those aircraft are going to serve. I mean are they replacing other aircraft of similar size or replacing aircraft for those airlines that were previous generation Embraer's or those customers saying great we found a new mission for this circa 100 seat market and it's going to open up a new market for us because I'm asking to just get a little more color around how much demand there is for aircraft of that size for growth markets as opposed to just maybe just replacing old technology?
Well, it's not a 100 seat market and the E2-195 is where most of the activity is and in a two-class configuration you're in the mid-120s and in a very dense configuration you will get up to 144.
So it's not a 100 seat market. What we are seeing of course, what is generating some interest in it is that Boeing and Airbus have left that market space, sub-150 seats. And so we are seeing demand there and for customers who are looking at that 120 to 140 seat space and it's a mixture of missions, some are connecting into hub in a large domestic market, others are with the GTF engine on board, and the fuel burn that it brings are looking at some longer missions. So it's a mix.
Okay. Okay. Do you think that Boeing and Airbus left that market because it wasn't though they just didn't see the demand or because they have production lines where they can make a lot more money selling to larger variants of their narrow-bodies?
It's a combination of factors, Justine. The other thing though you have to remember is that the heart of the Boeing and Airbus families is 320 and the 737. So those airplanes do well when they are upgauged, they improve the ways efficiency. But when they're down-gauged they actually become heavy airplanes like an A319 and A318 and a 737. And they are not as efficient. So that's one of the reasons Boeing and Airbus left that because of the fact airplanes are not as efficient because they're derivatives of a bigger airplane going into a smaller market.
Okay, okay. That's interesting. And then I have another question on lease terms and this is something that we've been asking a few lessors to try and get color around the situation but are you guys seeing lease terms have to change in the aircraft that you're placing as we see a more competitive environment. We haven't heard as much about this a year or two ago but then over the last few months, I've heard a lot more about lessors having to give up some maintenance reserves or lease payments or upside, downside payments with airlines. Are you guys having to change -- to change those terms in your negotiation?
We certainly never going to give up BOL payments, whether you collect them through ongoing maintenance reserves or you collect them at the end of the lease is a different matter. You have to recognize of course, Justine that we're not dealing the credit quality of the industry that was there 12 years ago, when you had an industry that was habitually losing money. We now have an industry where the average credit quality of the carrier is far superior that only people can look back and say I was getting maintenance reserves 12 years ago on a carrier that carrier is a very different airline today and so that is one of the elements that has led to restructuring of some of the security packages for certain airlines but under no circumstances are we waiving return conditions.
Okay. And then last question along that line do you guys feel that when you are in the market selling assets, you can get a premium for assets with those very -- sort of well written leases attached maybe those leases are written a few years ago that have better maintenance return conditions or something like that? Can you get a premium a better premium above the metal because you guys have those leases and the buyers are more willing to buy those leases because they had some better older terms on them?
No, no, I think what goes into a lease is a lot more than that how well a lease is written and there are many, many calls within a lease around security, around for stability of your rights, around security package that you're allowed -- that your lenders put on the assets. So it’s not just about return conditions. That would be very simplistic look at us. I would say that a well written lease insurers execution certainty, a poorly written lease particularly when it comes to operating covenants around what the lessees allowed do with the airplane, you may well get a bit on the airplane when it comes to close buyers may shy away.
So there's a mix of things when it comes into closing a lease, but clearly of course you are seeing a few just having absolute higher level of cash coming off the lease in lease rental then you're going to get more first, that's a fact.
[Operator Instructions].
We will take our next question from Scott Valentin from Compass Point. Please go ahead.
Good afternoon everybody. Thanks for taking my question. Just wanted to focus on the SG&A, I appreciate the color on the share-based compensation the changes there but looking at the linked quarter from the third quarter I think the SG&A excluding share-based comp was about $58 million and then for this quarter it jumped to $67 million, just over $67 million. Just wondering if there is anything one-time in there or was it just a true-up of some other expenses, some accruals?
Sure. Really it was one-time items really employee-related ones and a few cost related to our kind of final cost coming out of our move from Amsterdam to Dublin.
Okay.
That was really the drivers of it.
That increase about call it $9 million increase linked quarter, most of that was kind of one-time in nature?
Yes. I look at that all as one-time.
Okay. All right. And then in terms of the $6 billion of CapEx, do you have a -- I assume the cadence will be more backend loaded given potential Neo issues, is that a fair way to think that would be 70% backend in the second half of the year, 30% in first half?
It will be more spread throughout the year, but depending on the delivery delays that could push it back. Last year was very backend loaded. We took delivery of 25 at the end in Neo out of 58 during the fourth quarter. So it's more spread out than that.
Okay. All right. And then just a final question on the pickup sales you obviously have the large start to the year the $100 million transaction, how should we think about the $1 billion that you guys talked about on Investor Day, it seems like you guys will go above that assuming the environment stays about where it is and gain on sale premiums are coming in between 5% and 10%; is that fair assessment as well?
Yes. So for this at Investor Day, we talked about for this year for 2018 $1.5 billion of sales that's where we projected. I think that we will still be -- we're still on track for that amount, I wouldn't assume it's going to be more than that for the year, but I do think at this point, I would assume that that's frontend loaded.
Okay. All right. Thanks very much.
But I think $1.5 billion is still a good number.
Our next question comes from Kristine Liwag from Bank of America Merrill Lynch. Please go ahead.
Hey good morning guys. In the quarter depreciation expense as a percent of your flight equipment ticked down is 1.3% on a quarterly basis, a fair run rate going forward or was there timing that affected this in the quarter?
Yes, it did tick down. I mean it's ticking down really because of the new aircraft that we've got coming in. So if you look, if you go back to our Investor Day, Kristine, I think that the 5.5% that we estimated for 2018 overall that's a blended rate for the whole year and that includes the maintenance rights amortization that's probably that's still a good number to use.
Great. And broadly speaking as your fleet gets younger, how does your depreciation policy change and also is there a particular age in which these new airplanes will have some sort of break in there metal value that you’re expecting?
Yes. So the policy itself doesn't change. I mean the way we approach it is when we get new aircraft we put them on the standard depreciation rate which is in a 25 year useful life to 15% residual value. And then what happens is as they get older particularly early at 15 years, when aircraft are coming up to 15 years, we look at all of them and assess them to say does -- should we accelerate depreciation on this aircraft and that's because at that point, we have a much better idea about the remaining useful life of that aircraft, it may be on an end of life lease for example where there's no, the return condition is low, that type of thing.
And so, I would say it's really the 15-year plus where you see it generally speaking but there are instances where even before that we'll have an idea on the future useful life of the aircraft and we will accelerate depreciation. And bear in mind that we did do that on a lot of them, when we did the ILFC acquisition, we did put a number of aircraft on accelerated depreciation at that point. But generally speaking, I'd say it's around the 15-year mark where you start to see it changing.
Our next question comes from Kevin Crissey from Citigroup. Please go ahead.
Good morning, thanks for the time. I was hoping you could discuss airline profitability around the world and how it factors into your business decisions. By this I mean collectively the airlines around the world are doing better than they have historically on average and I'm wondering whether you think that's something that you plan to assume that is going to continue or you factor into your decisions on fleet and assume that maybe there will be a return to the mean which is lower return on invested capital for the airlines then currently? Thanks.
We do think that there has been a significant improvement in the way most of the world's airlines are managed. Historically, airlines were viewed as a public good and were subject to interference by the state or other entities and were not run for profit. Therefore most management teams at time highlighted their management was to buy airplanes from Boeing and Airbus and put capacity into the system and just continue the problem.
Over the course of the last 10 years because of deregulation, the sale of state-owned carriers and a more general awareness that this industry if managed properly can actually generate a sustainable return on capital has made Airline Managers, I think far more aware of all the costs in their structure and very keen to see what is the best way to add capacity to ensure that they continue with this run of profits. So I would be fairly optimistic the current generation of airline management will be judicious in how much capacity they add and how they source that capacity because they do believe that they can generate a sustainable return on their equity for their shareholders and not for the shareholders of Boeing and Airbus.
Thank you. And maybe to follow that up I think you had a Slide at Investor Day that talked about the utilization, it was an example I think it was the 320 utilization and how they're being used more and basically more effectively and it suggested that there's an increased need for more aircraft because they kind of run out of opportunity on the efficiency side, but it made me think that if they were better managers --
Correct.
If they were better managers, I was thinking that they should be instead of increasing volume, they should be raising prices. If my asset is being used entirely efficiently and I'm out for profits why would I go buy more assets like that seems like the old style of airline management as opposed to raising fare. So maybe if I could talk if you could talk about the balance if airlines are smarter whether they should be raising fares or going for more capacity?
Look, I think when it comes to this Slide we showed, we showed there were two ways for airlines to increase the efficiency of the existing assets they had. One was to increase the daily utilization of the aircraft which has been done, and secondly, was to densify the airplanes and sell more seats.
Now as it goes to adding additional capacity beyond that, I think you're going to -- we look at it on a global basis, we're not focused on any one market at all and there can be variations in a given domestic market or an international market or a section of the international markets but we would say overall that airlines are far more judicious when they add capacity than they have been in the past.
Our next question comes from Scott Valentin from Compass Point. Please go ahead, sir.
Thanks for taking my follow-up. Just a quick housekeeping question, what's the right tax rate you use for 2018, I know in the press release you say for 2017 it was 13.3% and that reflects the U.S. the change in U.S. tax laws that 13.3% is a good number to use for 2018 as well?
Yes, I think that's probably a good number to use that would be somewhere around there 13%, between 13% and 13.5% I would say.
Ladies and gentlemen, as there are no further comments, I would like to turn the call back to our speakers for any closing comments. Please go ahead.
Thank you very much everyone for joining us for the call. We look forward to speaking to you again in three months time.
This concludes today's conference. Thank you for your participation. You may now disconnect.