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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Air Lease Corporation Q4 and Year End 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded.
And I would now like to introduce your host for today's conference, Ms. Mary Liz DePalma, Head of Investor Relations. Ma'am, you may begin.
Good afternoon everyone and welcome to Air Lease Corporation's fourth Quarter and Year End 2017 earnings call. This is Mary Liz DePalma, and I'm joined this afternoon by Steve Hazy, our Executive Chairman; John Plueger, our Chief Executive Officer and President; and Greg Willis, our Executive Vice President and Chief Financial Officer.
Earlier today, we published our fourth quarter and year end 2017 results. A copy of our earnings release is available on the Investors section of our website at www.airleasecorp.com. This conference call is being webcast and recorded today, Thursday, February 22, 2018 and the webcast will be available for replay on our website. At this time all participants in this call are in listen-only mode. At the conclusion of today's conference call instructions will be given for the question-answer session.
Before we begin, please note that certain statements in this conference call, including certain answers to your questions are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expenses and stock-based compensation expense. These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today, February 22, 2018.
These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Air Lease Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we'll be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on equity are non-GAAP measures.
A description of our reasons for utilizing these non-GAAP measures as well as our definition of them and the reconciliation to corresponding GAAP measures can be found in the earnings release and 10-Q we issued today. This release can be found in both the Investors and Press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our Chief Executive Officer and President, John Plueger.
Thanks, Mary Liz. Good afternoon to all of you and thank you for joining us. I'm very pleased to report that Air Lease closed a strong quarter and another successful year in 2017. Excluding the benefit of favorable Tax Reform ALC achieved diluted earnings per share of a $1.06 for the fourth quarter, up 19% from the same period of 2016 and ALC's diluted EPS was $3.65 for the full year, up 6% from the full-year 2016.
Including the positive impact of Tax Reform for the fourth quarter, we're reporting diluted EPS of $4.22 including $3.16 per diluted share due to the remeasurement of our deferred tax liability as a result of the Tax Cuts and Jobs Act. As a result of Tax Reform ALC's effective tax rate will be approximately 22% going forward, a decrease from our historical effective tax rate of 35.5%. This means that 38% more of ALC's pre-tax earnings will hit the bottom line, thereby building shareholder equity faster than previously planned.
As we look around the marketplace, we see good opportunities to deploy this capital to generate strong returns for our shareholders in line with our current returns. ALC achieved a number of milestones in 2017, to start Air Lease now has exceeded $15 billion in total assets, up 12% from $14 billion in 2016 and up almost 70% in the past five years.
Total revenues exceeded $1.5 billion for the first time in 2017, up 7% year-over-year alone and up more than 75% over the past five years. Since inception just eight years ago, our platform has grown to almost 300 aircraft owned and managed by ALC today. This growth has been achieved with a focus on profitability and shareholder returns in mind and without sacrifice to our profit margins. In fact, over the last four years ALC has averaged an adjusted pre-tax margin of 42%.
IATA reported just earlier this month that in 2017 global passenger traffic rose 7.6% compared to 2016, yet again well above the 10 year average annual growth rate of 5.5%. Load factors were the record calendar year high of 81.4% in 2017. IATA forecast passenger growth of 6% for 2018 again above the average annual growth rate. This strong industry backdrop with growing levels of passenger traffic and an ongoing need to replace aging aircraft has driven all around demand for ALC aircraft.
Looking forward with a view towards our customers, IATA is projecting an overall growth in global airline profitability for 2018, with slight margin or yield compression forecasted for the airlines. Despite the slight expected compression we believe the industry continues to be in relatively good shape and envision no change in demand going forward.
Over the fourth quarter ALC delivered 12 aircraft, including eight new aircraft from our order book and four used aircraft purchased in the secondary market. Included in our new aircraft deliveries was our first 737-8 MAX to LOT Polish Airlines and A350-900 to Malaysia Airlines. The demand for new aircraft continues to drive our forward lease placements, which remain at a very robust 97% through 2019 and now 79% to through 2020. So we are nearly done with placements through 2020. These placements together with the aircraft we already have on lease result in ALC having over $23 billion in committed cash flows.
We also profitably sold two aircraft in the fourth quarter, one to ALC's managed business and one to an airline customers. We see continued demand for the used aircraft in our fleet. As many of you are aware over the last three years ALC sold $2.8 billion worth of aircraft and as a result, only 10% of our current fleet is comprised of aircraft over eight years of age, which means we now have fewer candidates for sale.
So in 2018, we will remain opportunistic as it relates to potential sales as we always do, but sitting here today, I can tell you that we anticipate no aircraft sales in the first half of 2018. As to our side car platforms and management businesses they are all performing well and proceeding on track. They continue to complement our core business nicely. ALC has commitments to purchase over $27 billion worth of aircraft, a total of 368 new aircraft from Airbus and Boeing with deliveries through 2023.
ALC's fleet will more than double in size over the next five years as we deliver over 300 aircraft from Airbus and Boeing. We expect 45 of these aircraft to deliver in 2018 accounting for approximately $3.7 billion of capital expenditures. As should be no surprise to you, we anticipate further delays in our deliveries from Airbus due to engine issues. So, as happened in 2017, there may be shifts from quarter-to-quarter in CapEx.
The commitment table in our 10-K, includes deliveries as best as we know them today. Right now, we anticipate 10 A320 or 21 Pratt Whitney power neos accounting for approximately 15% of the year's total CapEx delivering in 2018. In the wake of these ongoing delays, we continue to help our impacted customers by extending existing leases, offering substitute aircraft and seeking other remedies from the OEMs. The leasing industry and ALC in particular shines in its ability to solve problems and smooth over rough spots in the industry, acting as a buffer and stabilizer and Air Lease does so profitably.
As to other perceive challenges ahead, of course, we're looking at higher interest rates, but fortunately, all of you who followed us know that we have interest rate adjusters in our lease contracts for forward deliveries, which increased our lease rates, as interest rates rise. Additionally 85% of our debt is fixed on the long end of our maturity curve with 15% floating, more on the short end.
We continue to issue prudently in the debt capital markets, enjoying very strong demand on our bond offerings which Greg Willis will talk to you more about. And as a result, you've seen a continued drop in our overall cost of funds. So I believe we're in good shape as to the interest rate environment.
We believe, lease rates for the industry will rise over time as a result of interest rate increases. Equally as important of how we left 2017 is how we enter 2018 and I can tell you we believe in the strength of our business. And with the tailwinds from additional capital available through Tax Reform the ALC team proceeds enthusiastically and confidently into the remainder of 2018. I want to extend a heartfelt thanks to our outstanding team of ALC who delivered our results for 2017. They are quite simply, the best in the business.
In conclusion, 2017 was a great year for Air Lease. Accordingly, our Board of Directors declared a quarterly cash dividend of $0.10 per share on our outstanding common stock for the fourth quarter of 2017.
And with that, let me now turn the call over to our Executive Chairman, Steve Hazy, who will provide further ALC remarks and color on the industry. Steve, over to you.
Thanks, John. That was very good. I echo John's sentiment surrounding Air Lease's strong performance in 2017. And the strong outlook for our business going forward. Air Lease is firing on all cylinders consistently and our team continues to execute on our business plan and deliver outstanding financial and operating results. The strategy that we envisioned at the inception of the company, only eight years ago continues to underpin the strength of the results you see today.
We are continuously setting new milestones as we execute with diligence and focus and we are now concentrated on the landscape ahead, how we can best serve our airline customers and generate superior returns to our shareholders. On the back of a strong 2017, fundamentals in the operating environment continue to be very, very healthy. We have now seen several consecutive years of overall global airline profitability.
Interest rates and fuel are rising, but at a manageable pace. Globally passenger traffic continues to grow ahead of our expectations and the substantial replacement cycle for aircraft is further driving demand for our leases.
We see continued demand from our customers globally. In Asia, for example, this demand is further validated by IATA's report that passenger traffic in the Asia-Pacific region increased 10% in 2017. We're also very pleased to observe that demand out of Europe specifically Eastern and Southern Europe is very strong and grew at a fast cliff in 2017. And that continues in the first two months of 2018. For Europe, overall IATA reported that passenger traffic increased more than 8% year-over-year, with load factors of almost 84%.
In the Middle East there has been incremental need from the LCCs and ULCCs as we have mentioned in the past few calls, there continues to be an improving airline picture in Latin America. So despite a few airline bankruptcies in 2017 as in most other years, this is nothing new to our industry and we believe the operating environment for airlines remains healthy.
Over the last several years the aircraft lessor community has used our relationships and knowledge of the marketplace and the various regions of the world to help propel the industry when airlines are healthy or assist with moving our mobile assets worldwide when airlines need release.
Moreover, as key players of scale in the space we have worked hard to validate the strength of the lessor business model proving that the right aircraft assets are strong source of resilient cash flows. The success that Air Lease and other large lessors have had together with search for returns in the low interest rate environment have resulted in new interest and an emergence of new capital particularly in the sale leaseback market. There are a few items related to this that I'd like to touch on.
Throughout 2017, there were key reminders that the protections built into our lease agreements, the flexibility gain from our largely unsecured capital structure are vital. There is no better example of this than the Air Berlin and Monarch situations where we were able to find new lessees for the aircraft quickly and at no loss to Air Lease. That is largely due to the fact that ALC collected substantial cash security deposits and cash maintenance reserves and that the aircraft will not - were not encumbered so we could act with maximum speed and efficiency.
We continue this discipline going forward on security deposits, maintenance reserves and very strong return conditions. Another common misconception is that our airline customers are choosing a lessor solely based on price. But that is unique to the sale leaseback market where ALC is not active as a participant.
I remind you that oftentimes, we have been working with an airline for years before a lease agreement is signed and at this other factors such as delivery positions, availability of aircraft which are two of just many items taken into account when an airline is evaluating an aircraft lease. While we remain very competitive on price most of our campaigns are not one solely on that factor alone.
Finally, I would like to touch on something, John noted interest rates. We are entering a period of rising rates and we need to see how this new capital will behave. Meanwhile, our airlines know Air Lease is a reliable strong partner and we know that funding for our mostly non-investment grade customer base will rise more quickly than our own costs. So we would expect this to result in incremental and robust demand for aircraft leases, which ultimately provide our airline customers with more flexibility and capital release.
So in conclusion, our view is that there are blue skies ahead regardless of some noise in the marketplace. Air Lease's success is driven off the same fundamentals that allowed us to achieve the level of success we have today. And those are choosing the right aircraft types, placing a solid order book years into the future, including appropriate protections in our agreements and continue to manage our capital structure smartly and conservatively.
The dynamics of the industry will continue to evolve, but it is the very consistency of sticking to ALC's founding principle and our strong disciplines that allow us to succeed and be a reliable long-term partner to the airline industry that we always have been.
And with that, I will turn the call over to our CFO, Greg to provide an update on ALC's financing activities for the quarter.
Thank you, Steve. As mentioned earlier group we reported another great quarter, generating diluted earnings per share of $1.06 before the effective Tax Reform, which added an additional $3.16 to the quarter. The quarterly results were driven by a number of factors which I'll spend a few minutes walking you through the details.
First off our total revenues increased by 7.6% to 398 million, which was driven by our aircraft activity and our portfolio lease yields remaining constant. The fourth quarter was our largest quarter of the year in terms of CapEx. Our team purchased 12 aircraft, representing $904 million in CapEx, of which 60% delivered in December. Aircraft sales, trading and other activities increased slightly to $20 million, which included $14.4 million in gains from the sale of two aircraft, and the insured loss of two aircraft, as well as $3 million in management fees.
Also contributing to the increase in revenues was an increase in overhaul revenue, net of amortization of initial direct costs. The increase stems from the recognition of end of lease income from the Air Berlin and Monarch bankruptcies and it is a testament to the strength of our lease security packages. Lease security packages protect us against airline and credit events and are used to offset the impact of lost revenue during the periods of transitions. Shelter us from the cost incurred during these transitions and provide the security against the condition of the aircraft.
As we said in the last call, we experienced strong demand for these aircraft and have executed lease agreement with new airlines. And as you would expect, we anticipate the remainder of these aircraft will be delivered in the first quarter. Accordingly this end of lease income is more than offset the transition costs that elevated our SG&A in the quarter and compensated us for these aircraft not contributing rental revenue in the period, which an aggregate represented $7 million.
Transitioning to expenses, first off SG&A was higher when compared to the prior year and prior quarter. And as I just noted this is partially result of the aircraft transition costs. As you'll recall, SG&A was exceptionally low in the third quarter as there were fewer transitional related items. It's worth highlighting that we ended the year with 87 employees with over $15 billion assets. We continue to deliver best-in-class operating efficiency and expect that our revenue growth will continue to outpace our SG&A growth going forward.
Second, interest expense for the quarter was slightly higher as compared to the third quarter of 2017 as a result of higher debt balances. You'll see however that we continue to benefit from a reduction of our composite cost of funds. Our composite cost of funds is now 3.2%, down more than 6% for the year ended 2016 and our fixed rate cost is now 3.3%, down more than a 100 basis points from 2014, when the 10-year treasury was at similar levels as it is today.
Transitioning to tax, as a result of the Tax Cuts and Job Act passed in December 2017 we recorded a net tax benefit of $354 million in fourth quarter, resulting in the remit - resulting from the remeasurement of our deferred tax liabilities at the new statutory rate of 21%. This revaluation increased ALC's equity base providing us increased flexibility for opportunistic growth.
In addition to the effects of Tax Reform we recorded $11 million tax benefit from the utilization of foreign tax credits in the fourth quarter. Going forward, we expect our effective tax rate to be approximately 22% as compared to around 35.5% historically.
Looking forward in 2018 we expect to deliver 45 aircraft from our order book, representing $3.7 billion in capital expenditures. We are expecting $440 million in CapEx in Q1, $1.25 billion in Q2, $770 million in Q3 and $1.2 billion in Q4. Consistent with prior years these numbers do not include any incremental purchases and as it relates to aircraft sales consistent with John's comments, we are anticipating new aircraft sales in the first half of 2018.
Moving to the financing side of the business, since our last call, we issued $2.3 billion in senior unsecured notes across the curve issuing 3s, 5s,7s and 10s. The weighted average cost of these issuances was 3% with the weighted average life of these issuances being 6.4 years. ALC ended 2017 with a substantial level of liquidity at $3.2 billion, including our four year revolving credit facility which stands at $3.9 billion.
Looking ahead, we remain committed to our financing strategies of 80% fixed rate debt, 90% unsecured debt and a debt to equity target ratio of 2.5 to 1. As of 12/31 in 2017 we were at 85% fixed, 95% unsecured and a debt to equity ratio of 2.35.
As John noted revaluing our deferred tax liability in fourth quarter resulted in our debt to equity ratio decreasing to 2.35 times. However, there is no change to our target leverage ratio of 2.5 times.
This concludes my review of the results and financing activities of the company. I'll now turn it back to Mary Liz.
Thanks, Greg. This concludes management's remarks. For the question participant each participant will be allowed to ask one question and one follow-up. I'd like to turn the call over to the operator to open the lines to the Q&A.
[Operator Instructions] Our first question comes from the line of Jason Arnold with RBC Capital Markets. Your line is now open.
Hey, good afternoon guys. Just curious if you have any further color or thoughts around what you might do with the $354 million uptick to the equity account, just curious the other taxman there. I mean, basic math wise it's I guess a $1.2 billion of extra aircraft, you could theoretically by now, but any other color there would be helpful.
Well, Jason. I hope I alluded to or came up strongly in my opening remarks. Yes, we see this great opportunities in the marketplace to deploy this effectively additional capital in that - and those are our plans. We have already closed - we've already signed an LOI in a couple of additional aircraft more are on the way. And we continue to work with the manufacturers and accelerating anything forward that we can, but basically we believe in deployment of that capital consistently and along the same lines as we deploy the rest of our capital.
Okay, great. And then I guess a follow-up, just curious if you can update us on your views around the supply chain. Some of the OEMs are talking about some further production rate hikes and just curious to hear your updated thoughts there?
I think the OEMs are making adjustments based on demand and also on the supply chain's ability to sustain that demand. We've seen increases in the 787-9, 787-10 production rates. We've seen decreases in the Boeing 777 production rates leading up to the introduction of the Boeing 777X planned for 2020.We've seen reduction in production rates on the A330s as the A330neo comes online later this year. The A350 production rates are almost now at 10 a month. So that's the target rate that Airbus has forecast.
And on the single aisle airplanes category you see the results that Boeing and Airbus published in terms of how many units they actually delivered in 2017. And you can just divide that by 12 and see what the average output was.
There was a surge of deliveries for both companies Airbus and Boeing in December month to get as many aircraft delivered to their customers, we will see a much slower level of activity in January and February. But both are working very hard to make some small production rate increases on a progressive basis. And basically to cure a problem that they have and that they are overbooked right now on single aisle aircraft. They have more orders for the next three years, than they can actually produce.
So you are going to see some reshuffling of some deliveries by some airlines. You will see decelerations, you will see some postponements, you will see some accelerations like Air Lease. So I think overall it's a pretty balanced equation.
Excellent, thanks very much for the color, guys.
You're welcome, Jason.
Thank you. And our next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open.
Great, thanks. Greg you talked a little bit about some of the impact on the revenue side of the aircraft that you took back. Is all of that in other income is some of it and how do - some of it in the lease in the quarter lease revenue line. Where does that show up?
It shows up in the rental revenue line if you look in the MD&A, you can see it, we call out overhaul revenue, net of prepaid lease cost amortization and you can see that number right there.
Got it. Okay. Yes I haven't had a chance to go through that yet.
Of course. Yes.
And I guess as kind of a follow-up, there has been some a bit of disruption to in the leasing market in terms of the corporate ownership of a couple of lessors some real, some talked about any thoughts about whether that kind of creates opportunities for Air Lease between some of the things that we've heard about from Nordic and some…
What do you mean by disruption?
Well, I mean, there are companies that have talked about putting things up, Nordic Aviation possibly be its leasing business up for sale and obviously the issues that are around the ownership of Avalon.
Right, so Moshe thanks. We constantly review as we should all these opportunities and anything it's for sale you can rest assure that many investment banks bring them promptly to our attention. We always have an inherent bias to buy assets and we are poised and now with a lot of capital to buy well-priced assets, but on a disciplined basis.
In terms of anything else that's for sale, I think our answer is as it always is we always take a look and if we see that there is any strategic advantages beyond just bulk purchases of fleets or aircraft we will act accordingly.
But so far we like our organic growth and anything that we would do from an M&A perspective outcomes with a lot of trade-offs, and we look at those trade-offs. But at the end of the day, I can only tell you rest assure that we do evaluate any opportunities and whenever we see something that looks appealing we will act on it. But so far, I know what you're talking about in terms of ownership, et cetera. We're watching the landscape and looking for opportunities and that's about all I can say.
As John said earlier, we actually will more than double in size in the next roughly four and half to five years. So, to our organic growth even if we don't add any incremental orders or we don't purchase opportunistic groups of aircraft or distressed situations the company has a very strong growth path ahead of it over the next four or five years without any M&A activity.
If however there is an M&A opportunity, which is significantly accretive and boost our overall shareholder value, we're certainly going to take a look at.
Yes, look, we certainly do not feel that we have any lack of scale. So doing something just for scale overnight or in a - is just not something that we find that we're sort of in the industry, we're able to compete very, very effectively and we believe we have quite sufficient scale today.
Got it, thanks very much.
You're welcome.
Thank you. And our next question comes from the line of Jamie Baker with JPMorgan. Your line is now open.
Hey, good morning guys. This is actually Nish Mani on for Jamie. I want to ask you about the new mid-size aircraft type that could potentially launch from Boeing and I was hoping to get your thoughts on whether you would expect a launch potentially this year at an Air Show or if you think of this come down the road and whether or not you've thought about any launch customers being lessors relative to airline customers?
Yes, Boeing would love nothing more than for Air Lease to be a launch [ph] customer. Look for the last five or six years, we have been deeply and in great detail engaged with Boeing on defining what is the optimal aircraft size and capability, because they do have a gap between the 737 and 787, an airplane that could replace 757, 767 some of the older smaller wide-body aircraft. And I think Boeing is going through a continued refinement of that definition, they're also looking very closely internally as to what the cost of implementing such a program and then coming up with an economical pricing formula that the airlines and the leasing community can actually afford and justify.
So that process is ongoing. I know that Boeing had a lot of resources dedicated to this, but we're just not in a position to make any predictions whether it would be launched at the Air Show this year, next year, or later this year, it's all going to come together. The business case has to come together for Boeing, the supply chain has to be properly lined up to avoid the catastrophes of the 787 startup, it's got to be affordable, it has to be an airplane that's capable of filling those gaps that I mentioned earlier. And there has to be an attractive economic proposition for the lessors and the airlines.
And when all those things are satisfied then we would hope to see progress, but we just don't see that in the next couple of months. I mean, this is a very ambitious undertaking and with lots of moving pieces and just keep your eyes and ears open to developments.
Nish, it's price, price, price.
I'm sure the guys in Brent [ph] don't want to hear that necessarily. Just one quick follow-up question. We've talked in the past about low-cost long-haul operators and the disruptive threat they can kind of pose over the Atlantic. Since we have had that conversation Norwegian in particular have seen losses increase and part of that has obviously been driven by the transatlantic activity. My question is, have you guys thought about kind of that business model, having changed over the past several months and years or are you still optimistic on that business model, and is that an area where Air Lease wants to increasingly be exposed to?
Yes, look, I understand your question. There's always been a classic question about the long-haul low cost model, but truthfully we think that train has left the station, while there may be properly squeeze of the Norwegian from a macro perspective, whether a low cost long haul operator is formed or birth from a legacy carrier like we have examples of today or whether it's a standalone Norwegian there's just too many examples and folding into those examples, even using single aisle aircraft like a number of carriers doing across the Atlantic and you point out, we believe the long-haul low-cost model is probably here to stay.
Yes, no question.
And it's so far out of the gate that there really is no going back.
You do have to observe however that the North Atlantic of land market is very seasonal, it's highly seasonal. So a long haul low-cost operator doesn't have a network balance to offset some of that degradation in traffic in the winter months is going to have issues in the fourth and the first quarter.
So what we'll see is some of these airlines will make adjustments to perhaps capture North-South traffic or entry into the Caribbean or other ways of sort of neutralizing those seasonalities, because when you have a very high capital cost airplane flying 400 hours a month and you're flying at a 50% or 60% load factor there is no way to make money. So, these airlines will have to figure out ways of using those assets year around on an efficient basis.
Now, what we've seen in other parts of the world like AirAsia X and Jetstar which is owned by Qantas those airlines are now profitable on a year around basis because they have been around longer and they've made adjustments to the way they operate their networks. So we do see some light at the end of the tunnel, but Norwegian definitely has challenges. We don't have any aircraft there, but they'll have to deal with these realities of the marketplace.
Okay, that's really helpful color guys. Thank you so much for the time, I really appreciate it.
Thanks, Nish.
Thank you. And our next question comes from the line of Vincent Caintic with Stephens. Your line is now open.
Thanks. Good afternoon, guys. Wanted to focus on the interest rate impact specifically. So maybe a couple of things. First, if you can give us a flavor of how quickly should we start to see maybe lease rates rise, rental income was strong this quarter, just kind of wanted to get a sense for that.
And then broadly speaking from your experience how does rates rising effect, how airlines think about the attractiveness of leasing versus other types of aircraft financing? And then on lessor competition, I'm wondering what you've seen in the past how rising rates competition. You've heard some competitors with liquidity issues maybe they funded short. And so Steve alluded to ALC being reliable partner and so how do you think about other competition going forward? Thanks.
So Vincent, I will take the first one with regard to lease rates. On our new delivering airplanes that have interest rate adjusters we're seeing the impact of a rising rate environment show up today. So, as a function of those adjusters rates rise, our leased rates adjust at delivery. So we are definitely seeing the benefit of those adjusters.
As to your second part of your question, Vincent, can you repeat the second part?
Right, so just, I guess how airlines view the attractiveness of leasing versus other types of financing in rising rates? And then also how does other aircraft the lessor competition that you see out there, how do they behave in a rising rate environment, particularly some of them might not have that much funds?
Look as compared to alternative forms of financing airlines that finance classically through their balance sheet. Whether it's double ATC or whatever financing structure those costs are going to go up. And I think we made the point earlier that most of our customers are non-investment grade credits. And so we believe their interest rate cost will probably go up at a faster clip than ours will as an investment grade company.
So we see that actually as a net positive in how airlines view the operating lease specifically. Competitively everyone paves for money I don't care where you're from. And so, I really see everybody on a more equal playing field there with the cost of funds going up. That's a consequence that all financiers and lessors have to have. I think the advantage that we have is with our investment grade credit, we're going to continue to enjoy benefit as to what our most of our customers could borrow at.
I would just add that as rates rise, the sale leaseback guys aren't as committed to - the ones without order books are not committed to the business. So you don't know for certain that they're going to be there next year or not, they have CapEx target that they like to deploy capital and if there is other opportunities that are more attractive to them they are going to deploy that capital elsewhere. So it's hard to say if they will be there as compared to us where we have an order book and we are committed to the business.
Okay, excellent. Thanks so much, guys.
Thanks, Vincent.
Thank you and our next question comes from the line of Catherine O'Brien with Deutsche Bank. Your line is now open.
Good afternoon, gentlemen. So I am going to ask first one and hand it over to my colleague, Michael for follow-up. So my question is, can you talk about how you expect management revenue to grow over the medium term. Do you guys have any target in terms of percentage of total revenue. And then also given your comments earlier on to your expected sales for 2018. Should we assume your managed fleet and the associated revenue will grow at a slower pace this year than in 2017?
The management fees is tied to assets under management and as we find attractive opportunities for our managed ventures. They will take us on and those will drive management fees. We haven't given color as to how fast we see - we anticipate those fees growing, but as we find good opportunities from that are suitable the management ventures will buy them and then they'll start generating management fees. But the first and foremost step is to figure out - is to find assets that are profitable for our partners because we want them to be there for the long-term.
Okay. And so then just given your comments on fewer sales this year that includes sales into your management as well, correct?
Well, what we said is that in the first half of 2018 we're not currently planning or projecting sales because we're trying to build up the own portfolio as much as possible, but to the extent that we find attractive assets to put into the managed platforms, we will do so.
Yes, we try to keep the asset decision separate from the capital.
Yes, look if we - we are asset managers and we are residual asset managers. So if we find unbelievable we do have a lot of people coming to us, but we just have less aircraft in the eight year and old space to sell. So even though we say we don't anticipate any there is a - the first half of the year there is some chance that someone may come to us and we may make a determination opportunistically as we always do, so okay we'll sell it. But we're just calling at it this year here today.
But in the first half of the year, yes, I was, just going to say the first half of the year. We're more focused on building our balance sheet, our revenues on the leasing side, our core business, because we did have this impact in the fourth quarter of the tax law change that gives us more capital to employ.
So we're focused on growing the company as opposed to shedding assets. But we're out in the marketplace looking for assets into the managed platform. And we are working very hard on that t add additional aircraft to the managed platforms. Along with additional assets for our basic core business. So, first half of the year we're very focused on building the business and growing assets and revenues.
Great, I will pass on to Mike for a follow-up. Thank you.
Yes, hi gentlemen, just a quick kind of technical question there have been some reports out there that Airbus is considering another stretch of the A321neo I guess, as an response to Boeing's NMA aircraft and I'm just based on your knowledge in customers. I mean, you are stretching A321neo and you got a really narrow shell and obviously you are going to need more powerful engines on one hand but then if you are looking at what 260 people in a narrow shell, what is it takes 45 minutes for people to get on and off the airplane. Is that even logistically would that be possible, certainly not for an airline like a low costs carry doing quick turn just your thoughts on that?
Yes, Boeing already tried that with the 757-300 and even though on paper it's the lowest seat mile cost single aisle airplane. It didn't sell very well. I think there are opportunities for Airbus to make some relatively small improvements to the A321neo. But our belief is, with the current management changes and issues that Airbus is facing, I don't think this is their number one priority right now. And I think it's also in their interest to see what Boeing doesn't do before they make any product decisions along those lines.
What has already been announced by Airbus previously is they are looking at a slightly higher weight version that can accommodate some more seats, a few more seats but not a drastic model stretch or re-wing or anything else like that I'm sure there's many things on the drawing board. But right now what seems the most obvious and the easiest to do is a little bit of gross weight increase and a few more seats.
But that would involve additional engines thrust and obviously that an issue that they'll have to sort out with CFM and with Pratt & Whitney. On their list of priorities, if you think 10 of the highest. I don't believe that the - what we call the super A321 is right now at the top of the list.
Okay, alright that's helpful. Thanks, gentlemen.
Thanks, Mike.
Thank you. And our next question comes from the line of Helane Becker with Cowen. Your line is now open.
Thanks, operator. Hi, everybody. Thank you so much for your time today. Just a couple of questions. The first question is with respect to that geography, maybe you can give us an update on what you're seeing in your various markets and I noticed that in the past year, you've actually leased in more aircraft to the EMEA region, specifically actually Middle East and Africa. Is that trends that you think will exist going forward?
Well, we've seen a lot of demand for the growing low cost and ultra-low cost carriers in the Middle East. And so, yes, we have leased additional aircraft to that region, and we think that's - it's pretty straightforward. And as to the rest of our business you see from our tables about Asia is still overall about 43% of our business and about half of that is China.
But I think Steve outlined in his comments the surprising strength we see is still in Europe and Eastern and Southern Europe going forward. And I think we're going to - you're going to see us adding a little bit to South America as that region is improving, Brazil has actually turn the corner we believe is in a positive growth mode, the airlines, Argentina, Chile et cetera, et cetera. Also you see - and as a result, you see a lot more LCC and ULCC growth and startups in that region as well to take advantage of it.
And then may just follow-up with one other question, do you put the UK into Europe category?
Yes, I mean, today they are still formally part of Europe and it's too early to tell what effect on interline and bilateral treaties Brexit will have from a regulatory point of view. So at this point we have aircraft with companies like British Airways. We have aircraft going into Virgin Atlantic, we have Thomas Cook Group. So we have a strong presence there. We've not seen any issues with those customers, but for the time being we count the United Kingdom as part of Europe.
Right. So that was actually my question and you anticipated part of it I was just kind of wondering if we will need to have a bilateral agreement in place for you to continue doing business there or if that's a separate, your business is completely separate from any of their…
Yes, we're not regulated…
We're separated.
It's the individual countries that the United Kingdom will have to negotiate with either collectively as the EU or with individual countries to reinstate what we call the old bilateral airline treaties. But we don't expect the Island of Great Britain to be cut off from the rest of the world in terms of airline transportation. I think there will be deals forged because after all a lot of foreign airlines do tremendous business line to the UK and the UK airlines fly outside the UK.
So I think there will be a solution and it will probably have minimal, if any effect on Air lease.
Yes, I would just say we see no evidence of a decline in demand. We have several ongoing campaign specifically with carriers in the UK, sitting here today, it's just really hard to see that there is any change as a result of Brexit.
Right, okay. And then may I just ask Greg one question about the table on this page - whatever it is, right before the conference call where debt is listed you have export credit financing having declined last year. Is that just maturities rolling off?
Yes, we did a deal back in 2012 for two 737-800s and that just represents the standard amortization profile of the deal.
Yes, it's a 12 year amortization profile and two 737-800s are leased to an Asian, a large Asian airline, where we have an excellent bank guarantee and we issued bonds. So it comes down every what six months.
Yes, quarterly amortization. But those deals were done before they changed the rules and increased upfront fees.
Okay, perfect. Thank you for your help.
Thanks, Helane.
Thank you. Your next question comes from the line of Rajiv Lalwani with Morgan Stanley, your line is now open.
Good afternoon, gentlemen.
Hi, Rajeev.
John actually a question for you, can you just talk about the overall used aircraft market, do you think it's more of a buyer or sellers' market today. It seems like with some of the actions you're taking here in the first half of the year it might be more of a buyer's market, would just love your thoughts?
No, we still have more people coming to us to buy airplanes than frankly, we have to sell is what I'm trying to say in our remarks is with the success of transfer a number of midlife aircraft to Thunderbolt that we did last year. We have just under 10% of our aircraft left in our fleet that are over eight years of age and we adhere to our founding principles, which is we like to enjoy the aircraft for about the first third of its useful life for 25 years, so that's eight plus years in change.
So I would say no, I would say it is still a seller's market for aircraft, as evidenced by everybody that keeps coming to us and others for a robust demand of all aircraft. I think Steve framed it well, we're focusing on growth of our asset base because we're earning good yields, good returns on these products, and we have a little bit of capital now, additionally through the benefit of the Tax Reform Act.
So naturally, we're going to utilize that, grow accordingly, but I would not say no, I don't think it's a buyer's market, I think it is still a seller's market.
Okay, very helpful. And then a separate question, and it relates to your comments around just lease yields going up with higher interest rates. Can you provide maybe some historical perspective should we in fact see some pressure on the sales over the last several years, as interest rates were low such that if they reversed, we should see some upward pressure?
Yes, at our last Investor Day we show our chart of our historical for the lease yield and over the last five, six years and it was incredibly consistent we've a great job of preserving our lease yields as rates went down. Also it graphs out our average age and average lease term to show that those two key variables were almost constant. So we weren't playing with the age of the lease duration.
And then as I mentioned earlier right, we're starting to see upward pressure on our lease rates on aircraft that are delivering with interest rate adjusters as a function of the current higher interest rates environment that we're looking at today.
But it's also really important to point out on the financing side that the last time the 10 year treasury was this high our fixed rate financing costs were 100 basis points higher. So, we've completed the transition to being investment grade. We have BBB ratings from S&P, Fitch and MIS and Kroll and I think we're really strong position with a 5% fixed rate debt.
And as we look back in 2017, we are not seeing margin compression, in other words the difference between the lease rental factors and our cost of funds.
Okay, I will leave it there. Thanks Rajeev.
Thanks, Rajeev.
Thank you. And our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch. Your line is now open.
Hi, good afternoon guys.
Hi, Kristine. How are you?
Great. Steve and John the engine OEMs has been pushing part our contracts with these new engine derivatives compared to the previous variants. And so to the extent that they do, how do powered by the hour contracts changed how you think about maintenance costs and maintenance reserve? And then ultimately how do you assess maintenance risk of these new technologies coming into the market.
Well, look, the engine care agreements have actually been there for quite a number of years. And yes, of course, they are pushing the OEMs, engine OEMs are pushing these engine carrier agreements. There is a benefit to us in that it helps our airline customers manage the return - the condition of the engines at return of the lease and we are assured also of the quality maintenance pursuant to delivery of these engines to the OEM shops during the course of the lease
So it actually is a strength to our residual values. As to the reliability, et cetera well things haven't started out really robustly, I would just say, but nevertheless those things are getting fixed and most of the engine care programs properly drafted put the burden back on the engine guys if there is any reliability or performance degradation issues across the board.
So I would say, in a nutshell it helps us with the residual value of our assets and I think it helps our operators because the engine OEMs , it's on their nickel to replace whatever needs fixing or updating or modifying in the new technology engines.
Kristine, one of the things that we're very conscious of and watch very carefully is that that these packages are transportable from one airline to another, in other words, if we have a leased on airline it goes for say seven or eight years, the airline is paid in a certain amount of reserves to the engines supplier under this total care program. And then we lease the aircraft another airline. We want to make sure that those funds that have been paid in and have not being utilized by the OEMs are available to next airline when they have shop visits and other maintenance activity that's covered under the total care agreement.
So that's something that's special and unique to the leasing community to make sure that the assets continue to have the benefit of whatever funding went in there to support the engines.
For the aircraft that are under par by the hour. Does that mean that the lessee pay directly to the engine OEMs, or do they still go through your maintenance reserves in your balance sheet? And then secondly, what percent of your total aircraft order will be under power by the hour?
Well, let me just start with the first part. We have both - so three large engine providers Pratt, Rolls and GE, we have both types of agreements, we have agreements where we are past the reserves and at various points we pass them on to the OEM. We also have where we - where the engine care payments go directly to the OEMs and sometimes we receive a separate reserve for what's called LLPs.
So we have all kinds of agreements. I have no idea what - I mean, we have 360 somewhat airplanes on our forward [indiscernible]. I have no idea what percentage of that total is going to be covered under engine care programs. I mean, just sitting here today that is the business model of the engine manufacturers and by the way, that model transfers risk to them as I indicated in my comments.
So it's hard for us to sit here and say how far forward our order book will be not all of our customers are using the engine care programs. But I would say the majority of the aircraft with the new technology the neos the MAXs, 787s, probably more than half of our customers will want to avail themselves of these engine care programs because they shed risk.
Yes, the other thing is that as more and more airlines, set up their own shops and their own capability to maintain an overhaul these engines then it gives other airline operators that could potentially normally sign up for a total care agreement with the manufacture they might end shop around between the OEMs program and airlines that will offer fixed price contracts to do a shop visit.
So as more and more shops are able to handle these engines, these new technology engines that could actually be some headwinds toward an airline joining this program because they will have various alternatives where to send the engines for heavy maintenance. So we're seeing headwinds and tailwinds at the same time going forward.
Great, thank you very much.
Thanks, Christine.
Thank you. And our next question comes from the line of Scott Valentin with Compass Point. Your line is now open.
Thanks operator. Good afternoon everyone and thank or talking my question. Just with regard to the two aircraft you sold, I think the gain was $14.4 million. Did you guys disclose what the margin was the gain on sale margin was for the aircraft?
$14.4 million includes the two that were sold as well as the ensured loss on the other two aircraft, but we did not we don't disclose individual gains. So you can see on average, if you go to our 10-K what the gain percentage was for the year.
And then I assume nothing will change in the fourth quarter be consistent with the whole year average is that fair?
Correct.
And then on the CapEx the $3.7 billion, does that include any LOIs you mentioned or that's just straight OEM deliveries for the year?
OEM.
OEM only, okay. And then one last follow-up question. There's been some talk about some of the neo MAX lease rates and the premium you are getting over the current tech have you seen any change there in the premium has it declined at all or has it been relatively stable from when you first started putting the orders in and thinking about where lease rates would be the premium would be, when you put the orders in?
Yes, there was some pressure on the premiums last year, but since the very end of the fourth quarter where we begin to see oil prices begin to sort of inch up, the premium again is coming back into life. Obviously for an airline the analysis between current generation versus the neo or MAX a $10, $20 oil price difference does enter the equation. So we are monitoring that very carefully, there is a premium it's not as good as we were hoping, but I think the trend now is getting better.
Okay, thank you.
Thank you, Scott.
Thank you. And I'm showing no further questions at this time, I'd like to return the call to Ms. Mary Liz DePalma for any closing remarks.
Okay, well thank you everyone. That's it for our call today. We'll look forward to speaking with you again after the conclusion of the first quarter. And operator you can now disconnect the lines.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.