Aircastle LTD 10-Q

ITEM 1A. RISK FACTORS The risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, should be considered together with information included in this report. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations. We are providing the following information regarding changes that have occurred to the previously disclosed risk factors in our 2019 Annual Report on Form 10-K. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our 2019 Annual Report on Form 10-K. 39 The global impact of COVID-19 has significantly impacted, and could continue to significantly and adversely affect, our business, financial condition and results of operations. In December 2019, a novel strain of coronavirus (COVID-19) emerged, which has developed into a pandemic having already led to over three million infections and 200,000 deceased across the globe. The resulting adverse public health developments and the restrictive government measures implemented have adversely and significantly impacted, and could continue to adversely and significantly affect, among other things, our workforce, operations and aircraft related assets (including limitations on our access to, and control over, these assets), and the operations of our customers, vendors and business partners. National and international responses to the virus are quickly developing, fluid and uncertain. The COVID-19 pandemic has severely and negatively impacted air travel and our customers’ financial performance as a result of a variety of factors, including without limitation, quarantines, health-related curfews or “shelter in place” orders, work from home orders or policies, cancellation of business and entertainments events reduced demand for leisure and tourism travel, and the sudden increase in the unemployment rate and changes in consumer spending. These effects have contributed to significant economic disruption, a marked reduction in passenger airline traffic and flight cancellations. According to IATA air travel is down to approximately 20% of normal levels and a recovery to pre-pandemic levels is not expected for several years. IATA estimates this situation will cost the airline industry over $300 billion of lost revenue, a number which may be revised upwards. Reduced demand for air travel or the inability of airlines to operate due to the pandemic or other adverse public health developments could have a significant adverse effect on our lessees’ ability to fulfill their lease payment obligations to us, which could in turn have a significant negative impact on our business, financial condition and results of operations. It is difficult to predict the extent to which the virus will continue to spread. The outbreak could lead to further restrictions, increased flight cancellations, greater reluctance to travel and may further adversely affect passenger airline traffic, the demand for leased aircraft and the financial condition of the aviation industry. The decrease in air travel and downturn in the aviation industry caused by the pandemic has resulted in lower demand for and utilization of aircraft globally (including our aircraft), which could impact the residual value of our aircraft and our ability to lease or sell our aircraft. Some governments have provided, or may provide, financial assistance by various means to airlines and the aviation industry. It is uncertain, however, whether and to what extent this assistance will be provided. Governments may also impose conditions to providing such assistance, such as requiring airlines to retire less fuel-efficient aircraft, limit their acquisitions of aircraft or obtain concessions from their creditors, including aircraft lessors, which could adversely impact our business. We have agreed to defer some near-term lease payments with certain of our airline customers, which they are obliged to repay over time. As of May 7, 2020, we have agreed to defer approximately $70.0 million in near-term lease payments with 35 airlines, including $18.5 million that appear in our Consolidated Balance Sheet as components of Accounts receivable, Net investment in leases, or Other assets as of March 31, 2020. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to extend further deferrals to some of our other customers or to extend the deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred. COVID-19 has also caused us to modify certain of our business practices (including employee work locations, employee travel and cancellation of physical participation in meetings and events), and we may take further actions as required by government authorities or that we determine are in the best interests of our employees, customers, suppliers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus. Our ability to perform critical functions could be negatively impacted. COVID-19 or other adverse public health developments could inhibit our ability to execute our strategic initiatives. While we believe we have sufficient liquidity to meet all of our contractual obligations over the next twelve months from cash on hand, working capital and/or available credit lines, the COVID-19 pandemic’s significant disruption on global financial markets may limit our ability to access capital, and the terms on which we are able to access capital may be substantially less favorable than those existing prior to the pandemic. If we are not able to access capital at a time and on terms acceptable to us, we may encounter difficulty funding our business requirements, including debt repayments when they become due. The adverse impact of the pandemic or other adverse public health developments could result in negative changes in our credit ratings issued by nationally recognized credit rating agencies. If such an event were to occur, it could also adversely affect our access to and cost of financing and, subject to the requirements of our debt agreements, potentially result in the reinstatement of certain restrictive covenants in some of our debt agreements that were previously suspended upon the attainment of investment grade ratings. If such covenants were to be reinstated, they could potentially limit our 40 ability to take advantage of financing, acquisitions, joint venture and other corporate opportunities. Risks Related to our Order of New Embraer E-Jet E2 Aircraft We have lease commitments for fourteen of the 25 Embraer E-Jet E2 aircraft that we contracted to purchase from Embraer and are scheduled for delivery between the third quarter of 2020 and second quarter of 2024. We do not yet have lease commitments for the remaining deliveries nor have we put financing in place for any of the Embraer E-Jet E2 aircraft deliveries. Our ability to lease these aircraft on favorable terms, if at all, may be adversely affected by desirability of this aircraft type and risks to the commercial airline industry generally. If we are unable to obtain commitments for the remaining deliveries or the necessary financing, if needed, or otherwise satisfy our contractual obligations to Embraer, we may be subject to several potential risks, including: • forfeiting advance deposits and progress payments to Embraer, as well as incurring certain significant costs related to these commitments such as contractual damages and legal, accounting and financial advisory expenses; • defaulting on any future lease commitments we may have entered into with respect to these aircraft, which could result in monetary damages and strained relationships with lessees; • failing to realize the benefits of purchasing and leasing such aircraft; and • risking harm to our business reputation, which would make it more difficult to purchase and lease aircraft in the future on agreeable terms, if at all. The Embraer E-Jet E2 is a new aircraft variant and first entered service in April 2018. The Embraer E-Jet E2 aircraft incorporates a modified version of the Pratt & Whitney geared turbofan engine. Airframe and engine manufacturers have occasionally experienced delays and technical difficulties in bringing new aircraft and engine types to market. If any aircraft for which we have made future lease commitments is delayed or if Embraer is unable to produce the aircraft in compliance with the performance specifications, some or all of our affected lessees might be able to terminate their leases with respect to such aircraft. Our purchase agreement with Embraer and the anticipated future leases for these aircraft contain certain cancellation rights related to delays in delivery. Any such termination could strain our relations with those lessees going forward. Lastly, we rely on Embraer to return any advance deposits and progress payments if they are unable to meet their obligations to us, and we may not be able to recover such amounts if Embraer defaults or becomes insolvent. In July 2018, Airbus and Bombardier completed a previously announced partnership for the C-series aircraft (now known as the Airbus A220 model), which competes with the E-Jet E2 aircraft. In December 2018, Boeing and Embraer announced a strategic partnership. In April 2020, Boeing announced the termination of the partnership and that Boeing will no longer be proceeding with the transaction to acquire Embraer’s commercial operations, including the E-Jet E2 aircraft line. The fact that Embraer remains a stand-alone regional jet manufacturer may negatively impact the E-Jet E2 program, although we are presently unable to assess the specific impacts this termination could have with respect to the E-Jet E2 program. Any of these events could materially and adversely affect our financial results and operations. 41