Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended February 28, 2021. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q (this “report”), other than characterizations of historical fact, are forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA and Adjusted EBITDA and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on our historical performance and that of our subsidiaries and on our current plans, estimates and expectations and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any such forward-looking statements which are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. These risks or uncertainties include, but are not limited to, those described from time to time in Aircastle’s filings with the Securities and Exchange Commission (the “SEC”) and previously disclosed under “Risk Factors” in Part I - Item 1A of Aircastle’s Annual Report on Form 10-K for the year ended February 28, 2021. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.
WEBSITE AND ACCESS TO THE COMPANY’S REPORTS
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are available free of charge through our website at www.aircastle.com under “Investors — Tax Information (PFIC).”
The information on the Company’s Internet website is not part of, nor incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.
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OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of August 31, 2021, we owned and managed on behalf of our joint ventures 264 aircraft leased to 76 lessees located in 42 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are generally subject to net leases whereby the lessee is responsible for maintaining the aircraft and paying operational, maintenance and insurance costs. However, in many cases we are obligated to pay a specified portion of maintenance or modification costs. As of August 31, 2021, the net book value of our flight equipment (including flight equipment held for lease and net investment in leases, or “net book value”) was $6.76 billion compared to $6.69 billion at February 28, 2021. Our total revenues, net income (loss) and Adjusted EBITDA for the three and six months ended August 31, 2021 were $157.7 million and $323.5 million, $9.8 million and $0.1 million, and $197.5 million and $345.8 million, respectively.
Historically, growth in commercial air traffic has been correlated with world economic activity. Prior to the COVID-19 pandemic, commercial air traffic growth expanded at a rate 1.3 to 2 times that of global GDP growth. This expansion of air travel has driven growth in the world aircraft fleet; and there are approximately 24,000 commercial mainline passenger and freighter aircraft in the world fleet today. Aircraft leasing companies own approximately 52% of the world’s commercial jet aircraft. Under normal circumstances, we would expect the global fleet to continue expanding at a two to four percent average annual rate.
COVID-19 has had an unprecedented negative impact on the aviation sector, resulting in a dramatic slowdown in air traffic. While there have been some improvements in certain markets recently, according to IATA, as of August 31, 2021, air travel was still down to approximately 44% compared to normal levels and a full recovery to pre-pandemic levels is not expected for several years. Substantially all the world’s airlines have experienced financial difficulties and liquidity challenges, including many of our customers. While we believe long-term demand for air travel will return to historical trends over time, the near-term impacts of COVID-19’s economic shock are material; the extent and duration of those impacts cannot currently be determined.
Even as the airline industry begins to recover, airlines continue to seek support from their respective governments, raise debt and equity, delay or cancel new aircraft orders, furlough employees, request concessions from lessors, and in certain cases, seek judicial protection. As of October 8, 2021, our total deferrals, net of repayments, were $101.8 million. These deferrals have been granted to twenty customers for an average of six to nine months of lease rentals and represent 18% of Lease rental and Direct financing and sales-type lease revenues for the twelve months ended August 31, 2021. Of the total deferrals, $89.8 million is included in Accounts receivable or Other assets as of August 31, 2021, with the balance representing future lease payments. Approximately 77% of our total deferrals as of October 8, 2021, have been agreed to as part of broader lease restructurings. These generally include term extensions, better security packages, or other valuable consideration in exchange for near-term economic concessions. Some have repayment terms that extend beyond twelve months and in a limited number of situations, we have agreed to broader lease restructurings that do not include the full repayment of all of lease payments.
If air traffic remains depressed and our customers are unable to obtain sufficient funds from private, governmental or other sources, we may need to grant additional deferrals to certain customers or extend the period of repayment for deferrals we have already made. We may ultimately not be able to collect all the amounts we have deferred.
As of October 8, 2021, six of our customers are subject to judicial insolvency proceedings or similar protection. These customers lease 22 aircraft, which represent 13% of our net book value of flight equipment (including Flight equipment held for lease and Net investment in leases, or “net book value”) and 10% of our Lease rental and direct financing and sales-type lease revenue as of and for the twelve months ended August 31, 2021. We are actively engaged in these judicial proceedings to protect our economic interests. However, the outcome of these proceedings is uncertain and could result in these customers negotiating reductions in aircraft lease rentals, rejecting their leases or taking other actions that could adversely impact us or the value of our aircraft. Based on historic experience, the judicial process can take up to twelve to eighteen months to be resolved. As a result of these proceedings, the recognition of lease rental revenue for certain customers may be done on a cash basis of accounting rather than the accrual method depending on the customers’ lease security arrangements.
LATAM, our second largest customer, is included in the above group and represents 7% of our net book value of flight equipment and 6% of our Lease rental revenue as of and for the twelve months ended August 31, 2021. We have
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signed restructured leases for all thirteen of the LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process. During the three months ended August 31, 2021, the Company entered into claims sale and purchase agreements with a third party for the sale of certain unsecured claims filed by various Aircastle entities against LATAM Airlines Group S.A. and certain of its subsidiaries in the Chapter 11 case captioned LATAM Airlines Group S.A., et al., Case No. 20-11254 (JLG) (Jointly Administered). The allowed amount of our unsecured claims was approved by the Bankruptcy Court. Proceeds from the sales of these claims in the amount of $55.2 million were received during the three and six months ended August 31, 2021 and recognized in Other income (expense).
We believe that our long-standing business strategy of maintaining conservative leverage, limiting long-term financial commitments and focusing our portfolio on more liquid narrow-body aircraft will enable us to manage through the COVID-19 crisis. Our portfolio of primarily mid-life, narrow-body aircraft should remain attractive relative to new technology aircraft due to their lower capital costs in an environment of tight airline margins and low fuel prices.
We believe that we have sufficient liquidity to meet our contractual obligations over the next twelve months and as of October 1, 2021, total liquidity of $2.4 billion includes $1.4 billion of undrawn credit facilities, $0.3 billion of unrestricted cash, $0.3 billion of contracted asset sales and $0.4 billion of projected operating cash flows through September 30, 2022. As of August 31, 2021, we have commitments to acquire 24 aircraft for $801.8 million between 2021-2025.
We also believe our platform and personnel position us to effectively manage through the COVID-19 crisis and will enable us to take advantage of new investment opportunities when they arise. Our Company employs a team of experienced senior professionals with extensive industry and financial experience. Our leadership team members have an average of more than twenty years of relevant industry experience, including managing through prior downturns in the aviation industry, like the 2008 global financial crisis and the September 11, 2001 terror attacks.
Fiscal Year 2021 Lease Expirations and Lease Placements
At August 31, 2021, the Company had seventeen off-lease aircraft and seventeen aircraft with scheduled lease expirations in fiscal 2021. As of October 8, 2021, of these 34 aircraft, we have eleven aircraft, which account for 4.2% of our net book value at August 31, 2021, still to be placed or sold.
Fiscal Years 2022-2025 Lease Expirations and Lease Placements
Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the fiscal years 2022-2025, representing the percentage of our net book value of flight equipment (including flight equipment held for lease and net investment in leases) at August 31, 2021, specified below:
• 2022: 18 aircraft, representing 5%;
• 2023: 44 aircraft, representing 13%;
• 2024: 53 aircraft, representing 20%; and
• 2025: 38 aircraft, representing 16%.
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Acquisitions and Sales
During the six months ended August 31, 2021, we acquired eight aircraft for $353.3 million. As of October 8, 2021, we acquired no additional aircraft. At August 31, 2021, we had commitments to acquire 24 aircraft for $801.8 million. Of this amount, $152.3 million represents commitments for the remainder of fiscal year 2021.
During the six months ended August 31, 2021, we sold four aircraft and other flight equipment for net proceeds of $77.9 million, and recognized net gains on sales of $10.5 million. As of October 8, 2021, we have sold one additional aircraft.
The following table sets forth certain information with respect to the aircraft owned by us as of August 31, 2021:
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
Owned Aircraft As of
August 31,
2021 (1)
As of
August 31,
2020 (1)
Net Book Value of Flight Equipment $ 6,761 $ 7,121
Net Book Value of Unencumbered Flight Equipment $ 5,593 $ 5,578
Number of Aircraft 255 273
Number of Unencumbered Aircraft 223 237
Number of Lessees 76 80
Number of Countries 42 45
Weighted Average Age (years) (2)
10.6 10.5
Weighted Average Remaining Lease Term (years) (2)
4.6 4.2
Weighted Average Fleet Utilization during the three months ended August 31, 2021 and 2020 (3)
94.1 % 93.6 %
Weighted Average Fleet Utilization during the six months ended August 31, 2021 and 2020 (3)
93.6 % 95.1 %
Portfolio Yield for the three months ended August 31, 2021 and 2020 (4)
8.7 % 8.8 %
Portfolio Yield for the six months ended August 31, 2021 and 2020 (4)
8.5 % 9.5 %
Managed Aircraft on behalf of Joint Venture
Net Book Value of Flight Equipment $ 305 $ 319
Number of Aircraft 9 9
(1) Calculated using net book value at period end.
(2) Weighted by net book value.
(3) Aircraft on-lease days as a percent of total days in period weighted by net book value. The decrease from our historical utilization rate for the three months ended August 31, 2021 and 2020, was primarily due to off-lease aircraft as a result of early lease terminations and scheduled lease expirations.
(4) Lease rental revenue, interest income and cash collections on our net investment in leases for the period as a percent of the average net book value for the period; quarterly information is annualized. The calculation of portfolio yield includes our net investment in leases in the average net book value, and the interest income and cash collections from our net investment in lease rentals.
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PORTFOLIO DIVERSIFICATION
Owned Aircraft as of
August 31, 2021 Owned Aircraft as of
August 31, 2020
Number of
Aircraft % of Net
Book Value (1)
Number of
Aircraft % of Net
Book Value (1)
Aircraft Type
Passenger:
Narrow-body 229 79 % 245 78 %
Wide-body 22 17 % 24 18 %
Total Passenger 251 96 % 269 96 %
Freighter 4 4 % 4 4 %
Total 255 100 % 273 100 %
Manufacturer
Airbus 171 65 % 185 64 %
Boeing 77 33 % 83 34 %
Embraer 7 2 % 5 2 %
Total 255 100 % 273 100 %
Regional Diversification
Asia and Pacific 74 33 % 89 39 %
Europe 96 29 % 99 28 %
Middle East and Africa 10 4 % 11 4 %
North America 33 15 % 28 10 %
South America 25 13 % 26 13 %
Off-lease 17 (2)
6 % 20 (3)
6 %
Total 255 100 % 273 100 %
(1) Calculated using net book value at period end.
(2) Of the seventeen off-lease aircraft at August 31, 2021, we have two narrow-body aircraft and three wide-body aircraft which we are currently marketing for lease or sale.
(3) Of the twenty off-lease aircraft at August 31, 2020, we have three wide-body aircraft which we are currently marketing for lease or sale.
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Our largest customer represents approximately 7% of our net book value at August 31, 2021. The top ten customers for aircraft we owned at August 31, 2021, are as follows:
Customer Country Percent of Net Book Value Number of
Aircraft
IndiGo India 7.5% 11
LATAM (1)
Chile 7.4% 13
Iberia Spain 3.8% 15
easyJet United Kingdom 3.8% 21
Air Canada Canada 3.6% 5
Lion Air Indonesia 3.4% 7
Frontier Airlines United States 3.0% 4
Aerolineas Argentinas Argentina 2.9% 5
American Airlines United States 2.7% 7
AirBridgeCargo (2)
Russia 2.5% 2
Total top ten customers 40.6% 90
All other customers 59.4% 165
Total all customers 100.0% 255
(1) LATAM filed for Chapter 11 in May 2020. We have signed restructured leases for all thirteen of the LATAM aircraft, subject only to LATAM emerging from the Chapter 11 process.
(2) Guaranteed by Volga-Dnepr Airlines. We have one additional aircraft on lease with an affiliate.
Finance
We operate in a capital-intensive industry and have a demonstrated track record of raising substantial amounts of capital over the last sixteen years. Since our inception in late 2004, we have raised $2.09 billion in equity capital from private and public investors. We also raised $18.92 billion in debt capital from a variety of sources including export credit agency-backed debt, commercial bank debt, the aircraft securitization markets and the unsecured bond market. The diversity and global nature of our financing sources demonstrates our ability to adapt to changing market conditions and seize new growth opportunities.
We intend to fund new investments through cash on hand, funds generated from operations, maintenance payments received from lessees, secured and unsecured borrowings for aircraft, draws on our revolving credit facilities and proceeds from any future aircraft sales. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Liquidity and Capital Resources — Secured Debt Financings” and “Liquidity and Capital Resources — Unsecured Debt Financings” below.
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RESULTS OF OPERATIONS
Comparison of the three months ended August 31, 2021 to the three months ended August 31, 2020:
Three Months Ended August 31,
2021 2020
(Dollars in thousands)
Revenues:
Lease rental revenue $ 137,589 $ 150,895
Direct financing and sales-type lease revenue
2,776 4,747
Amortization of lease premiums, discounts and incentives (5,835) (4,629)
Maintenance revenue
21,218 20,034
Total lease revenue 155,748 171,047
Gain (loss) on sale of flight equipment 1,502 (848)
Other revenue 402 1,123
Total revenues 157,652 171,322
Operating expenses:
Depreciation 83,391 86,749
Interest, net 55,413 55,324
Selling, general and administrative 15,996 13,555
Impairment of flight equipment 21,232 212,387
Maintenance and other costs 8,087 4,271
Total operating expenses 184,119 372,286
Other income (expense):
Loss on extinguishment of debt (14,132) (57)
Merger expenses — 27
Other 57,609 (173)
Total other income (expense) 43,477 (203)
Income (loss) from continuing operations before income taxes and earnings of unconsolidated equity method investments 17,010 (201,167)
Income tax provision 7,665 13,020
Earnings of unconsolidated equity method investments, net of tax 458 674
Net income (loss) $ 9,803 $ (213,513)
Revenues
Total revenues decreased by $13.7 million for the three months ended August 31, 2021 as compared to the three months ended August 31, 2020.
Lease rental revenue decreased by $13.3 million as a result of:
• a $7.3 million decrease due to the sale of twelve aircraft since June 1, 2020;
• an $8.5 million decrease due to lease extensions, amendments transitions and other changes; and
• a $2.5 million decrease due to early lease terminations and the recognition of lease rental revenue for certain customers using a cash basis of accounting rather than an accrual method – see Note 1 regarding our lease revenue recognition policy.
This decrease was partially offset by a $5.0 million increase in revenue, reflecting the impact of ten aircraft purchased since June 1, 2020.
Direct financing and sales-type lease revenue decreased $2.0 million for the three months ended August 31, 2021, as compared to the three months ended August 31, 2020, primarily attributable to the early lease terminations of one aircraft and the transfer of six aircraft to operating leases.
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Amortization of lease premiums, discounts and lease incentives consisted of the following:
Three Months Ended August 31,
2021 2020
(Dollars in thousands)
Amortization of lease premiums $ (3,597) $ (3,374)
Amortization of lease discounts 227 264
Amortization of lease incentives (2,465) (1,519)
Amortization of lease premiums, discounts and incentives $ (5,835) $ (4,629)
Maintenance revenue. For the three months ended August 31, 2021, we recorded $21.2 million of maintenance revenue, comprised primarily of $17.0 million related to the early lease terminations of three narrow-body aircraft. For the three months ended August 31, 2020, we recorded $20.0 million of maintenance revenue primarily related to the early lease terminations of three narrow-body aircraft.
Gain (loss) on sale of flight equipment increased $2.4 million to a gain of $1.5 million for the three months ended August 31, 2021 as compared to a loss of $0.8 million for the three months ended August 31, 2020. We sold one aircraft in each of the three month periods ended August 31, 2021 and 2020.
Operating expenses
Total operating expenses decreased by $188.2 million for the three months ended August 31, 2021, as compared to the three months ended August 31, 2020.
Depreciation expense decreased by $3.4 million for the three months ended August 31, 2021 as compared to the three months ended August 31, 2020, primarily attributable to a decrease of $5.6 million resulting from twelve aircraft sold since June 1, 2020 and lower depreciation on aircraft subject to impairment charges recorded during 2021. This was partially offset by higher depreciation of $2.4 million due to ten aircraft acquired since June 1, 2020.
Interest, net consisted of the following:
Three Months Ended August 31,
2021 2020
(Dollars in thousands)
Interest on borrowings and other liabilities $ 51,807 $ 52,638
Amortization of deferred financing fees and debt discount 4,193 3,402
Interest expense 56,000 56,040
Less: Interest income (382) (716)
Less: Capitalized interest (205) —
Interest, net $ 55,413 $ 55,324
Selling, general and administrative expenses for the three months ended August 31, 2021 increased $2.4 million as compared to the three months ended August 31, 2020, due to higher personnel costs, partially offset by a decrease in the provision for credit losses related to the change in our allowance for credit losses.
Impairment of aircraft. During the three months ended August 31, 2021, we recorded impairment charges of $21.2 million, of which $18.0 million were transactional impairments, primarily related to two narrow-body aircraft resulting from early lease terminations. The Company recognized $16.1 million of maintenance revenue for these two aircraft. During the three months ended August 31, 2020, we recorded transactional impairment charges totaling $212.4 million, of which $169.3 million were transactional impairments related to four wide-body and two narrow-body aircraft. The Company recognized $9.3 million of maintenance revenue related to these six aircraft during the three months ended August 31, 2020. The impairment charges were attributable to early lease terminations, judicial insolvency proceedings, or as a result of our annual recoverability assessment.
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Maintenance and other costs were $8.1 million for the three months ended August 31, 2021, an increase of $3.8 million as compared to the three months ended August 31, 2020, primarily attributable to higher costs for aircraft that returned due to lease terminations and are being transitioned to new lessees.
Other income (expense)
Total other income (expense) increased by $43.7 million for the three months ended August 31, 2021, as compared to the three months ended August 31, 2020. During the three months ended August 31, 2021, the Company recognized $55.2 million of proceeds from the sales of unsecured claims related to the LATAM Bankruptcy into Other income (expense) – see Note 1. This was partially offset by a $14.1 million loss on extinguishment of debt related to the early redemption in full of $500.0 million outstanding aggregate principal amount of our 5.5 % Senior Notes due 2022.
Income tax provision
Our income tax provision for the three months ended August 31, 2021 and 2020 was $7.7 million and $13.0 million, respectively. The decrease in our income tax provision of $5.4 million was primarily attributable to changes in the mix of pre-tax book income/(loss) in Bermuda, Ireland and the United States. The three months ended August 31, 2021 included income from the sales of unsecured claims related to the LATAM Bankruptcy, which was recorded in a low tax jurisdiction. Further, the three months ended August 31, 2020 included discrete items related to stock compensation and the impact of the CARES Act.
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RESULTS OF OPERATIONS
Comparison of the six months ended August 31, 2021 to the six months ended August 31, 2020:
Six Months Ended August 31,
2021 2020
(Dollars in thousands)
Revenues:
Lease rental revenue $ 269,714 $ 334,073
Direct financing and sales-type lease revenue 5,653 10,064
Amortization of lease premiums, discounts and incentives (11,159) (11,975)
Maintenance revenue 47,694 96,665
Total lease revenue 311,902 428,827
Gain on sale of flight equipment 10,524 11,230
Other revenue 1,036 13,793
Total revenues 323,462 453,850
Operating expenses:
Depreciation 165,782 175,961
Interest, net 113,450 114,050
Selling, general and administrative 31,585 61,006
Impairment of flight equipment 41,815 289,685
Maintenance and other costs 15,615 9,837
Total operating expenses 368,247 650,539
Other income (expense):
Loss on extinguishment of debt (14,156) (65)
Merger expenses — (32,042)
Other 57,619 (192)
Total other income (expense) 43,463 (32,299)
Loss from continuing operations before income taxes and earnings of unconsolidated equity method investments (1,322) (228,988)
Income tax (benefit) provision (627) 12,469
Earnings of unconsolidated equity method investments, net of tax 745 1,405
Net income (loss) $ 50 $ (240,052)
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Revenues
Total revenues decreased $130.4 million for the six months ended August 31, 2021 as compared to the six months ended August 31, 2020.
Lease rental revenue decreased by $64.4 million as a result of:
• a $46.2 million decrease due to early lease terminations and the recognition of lease rental revenue for certain customers using a cash basis of accounting rather than an accrual method – see Note 1 regarding our lease revenue recognition policy;
• a $14.3 million decrease due to the sale of thirteen aircraft since March 1, 2020; and
• a $11.3 decrease due to lease extensions, amendments, transitions and other changes.
This decrease was partially offset by a $7.5 million increase in revenue, reflecting the impact of thirteen aircraft purchased since March 1, 2020.
Direct financing and sales-type lease revenue decreased $4.4 million for the six months ended August 31, 2021, as compared to the six months ended August 31, 2020, primarily attributable to the early lease terminations of eight aircraft and the transition of seven aircraft to operating leases.
Amortization of lease premiums, discounts and lease incentives :
Six Months Ended August 31,
2021 2020
(Dollars in thousands)
Amortization of lease premiums $ (6,500) $ (8,466)
Amortization of lease discounts 457 548
Amortization of lease incentives (5,116) (4,057)
Amortization of lease premiums, discounts and incentives $ (11,159) $ (11,975)
The decrease in amortization of lease premiums of $2.0 million for the six months ended August 31, 2021 as compared to the six months ended August 31, 2020 was primarily due to early lease terminations.
Maintenance revenue . For the six months ended August 31, 2021, we recorded $47.7 million of maintenance revenue, comprised primarily of $41.9 million related to the scheduled lease expirations of four narrow-body aircraft and the early lease terminations of three narrow-body and one wide-body aircraft. In addition, we recorded $5.4 million of maintenance revenue related to one narrow-body and one wide-body aircraft for which the customers are subject to judicial insolvency proceedings or similar protection. For the six months ended August 31, 2020, we recorded $96.7 million of maintenance revenue, comprised primarily of $59.4 million related to the early lease terminations of thirteen narrow-body aircraft and $36.3 million related to the scheduled lease expirations of three narrow-body and one wide-body aircraft.
Gain on sale of flight equipment decreased $0.7 million to $10.5 million for the six months ended August 31, 2021 as compared to $11.2 million for the six months ended August 31, 2020. During the six months ended August 31, 2021, we sold four aircraft, as compared to the sale of three aircraft during the six months ended August 31, 2020. Gain on sale for the six months ended August 31, 2020 was primarily attributable to the receipt of insurance proceeds for one aircraft which was disposed.
Other revenue decreased $12.8 million to $1.0 million for the six months ended August 31, 2021 as compared to $13.8 million for the six months ended August 31, 2020. The six months ended August 31, 2020 included $12.8 million of security deposits recognized into revenue related to the early lease terminations of seven narrow-body aircraft.
Operating expenses
Total operating expenses decreased $282.3 million for the six months ended August 31, 2021 as compared to the six months ended August 31, 2020.
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Depreciation expense decreased $10.2 million for the six months ended August 31, 2021 as compared to the six months ended August 31, 2020. The decrease is primarily comprised of $13.8 million resulting from fourteen aircraft sold since March 1, 2020 and lower depreciation related to aircraft subject to aircraft impairments. This was partially offset by a $4.2 million increase in depreciation due to thirteen aircraft acquired since March 1, 2020.
Interest, net consisted of the following:
Six Months Ended August 31,
2021 2020
(Dollars in thousands)
Interest on borrowings and other liabilities $ 106,135 $ 108,483
Amortization of deferred financing fees and debt discount 8,384 6,713
Interest expense 114,519 115,196
Less: Interest income (712) (1,146)
Less: Capitalized interest (357) —
Interest, net $ 113,450 $ 114,050
Interest, net decreased $0.6 million due to a lower weighted average debt outstanding and cost of borrowing.
Selling, general and administrative expenses decreased $29.4 million, primarily attributable to a decrease in share-based compensation expense of $28.0 million as a result of the completion of the Merger. The six months ended August 31, 2020 also included a provision for credit losses of $4.5 million related to the change in our allowance for credit losses.
Impairment of aircraft. During the six months ended August 31, 2021, the Company recorded impairment charges totaling $41.8 million, of which $38.6 million were transactional impairments, primarily related to four narrow-body aircraft and resulted from three early lease terminations and one scheduled lease expiration. The Company recognized $37.1 million of maintenance revenue for these four aircraft.
During the six months ended August 31, 2020, the Company recorded impairment charges totaling $289.7 million, of which $246.6 million were transactional impairments, primarily related to twelve narrow-body and five wide-body aircraft. The Company recognized $92.2 million of maintenance and security deposits into revenue for these seventeen aircraft. The impairment charges were attributable to early lease terminations, scheduled lease expirations, lessee defaults, judicial insolvency proceedings, or as a result of our annual recoverability assessment.
Maintenance and other costs were $15.6 million for the six months ended August 31, 2021, an increase of $5.8 million as compared to the six months ended August 31, 2020, primarily attributable to higher costs for aircraft that returned due to lease terminations and are being transitioned to new lessees.
Other income (expense)
Total other income (expense) increased $75.8 million for the six months ended August 31, 2021, as compared to the six months ended August 31, 2020. During the three months ended August 31, 2021, the Company recognized $55.2 million of proceeds from the sales of unsecured claims related to the LATAM Bankruptcy into Other income (expense). This was partially offset by a $14.1 million loss on extinguishment of debt related to the early redemption in full of $500.0 million outstanding aggregate principal amount of our 5.5 % Senior Notes due 2022. The six months ended August 31, 2020 included $32.1 million of legal and banking costs related to the Merger.
Income tax (benefit) provision
Our income tax (benefit) provision for the six months ended August 31, 2021 was a $0.6 million benefit as compared to a $12.5 million provision for the six months ended August 31, 2020. The decrease in our income tax provision of $13.1 million was primarily attributable to changes in the mix of pre-tax book income/(loss) in Bermuda, Ireland and the United States. The six months ended August 31, 2021 included income from the sale of unsecured claims related to the LATAM Bankruptcy, which was recorded in a low tax jurisdiction. Further, the six months ended August 31, 2020 included discrete items related to stock compensation and the impact of the CARES Act.
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Annual Recoverability Assessment
We plan to perform our annual recoverability assessment of all our aircraft during the fiscal third quarter for the nine months ended November 30, 2021. We continue to closely monitor the impact of COVID-19 on our customers, air traffic, lease rental rates, and aircraft valuations, and have and will continue to perform additional customer and aircraft specific reviews should changes in facts and circumstances arise that may impact the recoverability of our aircraft. We have and will focus on our customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, aircraft with near-term lease expirations, and certain aircraft variants that are more susceptible to the impact of the COVID-19 pandemic and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its undiscounted expected future cash flows. We develop the assumptions used in the recoverability assessment, including those relating to current and future demand for each aircraft type, based on management’s experience in the aircraft leasing industry, as well as information received from third-party sources. Estimates of the undiscounted cash flows for each aircraft type are impacted by changes in contracted and future expected lease rates, residual values, expected scrap values, economic conditions and other factors.
If our estimates or assumptions change, including those related to our customers that have entered judicial insolvency proceedings, we may revise our cash flow assumptions and record future impairment charges. While we believe that the estimates and related assumptions used in our recoverability assessments are appropriate, actual results could differ from those estimates.
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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 – “Summary of Significant Accounting Policies – Organization and Basis of Presentation” in the Notes to Unaudited Consolidated Financial Statements above.
RECENT UNADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 – “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” in the Notes to Unaudited Consolidated Financial Statements above.
LIQUIDITY AND CAPITAL RESOURCES
Our business is very capital intensive, requiring significant investments in order to expand our fleet and to maintain and improve our existing portfolio. Our operations have historically generated a significant amount of cash, primarily from lease rentals and maintenance collections. We have also met our liquidity and capital resource needs by utilizing several sources over time, including:
• various forms of borrowing secured by our aircraft, including bank term facilities, limited recourse securitization financings, and ECA-backed financings for new aircraft acquisitions;
• unsecured indebtedness, including our current unsecured revolving credit facilities, term loan and senior notes;
• asset sales; and
• sales of common and preference shares.
Going forward, we expect to continue to seek liquidity from these sources and other sources, subject to pricing and conditions we consider satisfactory.
During the six months ended August 31, 2021, we met our liquidity and capital resource needs with $179.7 million of cash flow from operations, $77.9 million of cash from the sale of aircraft and other flight equipment, and $393.4 million in net proceeds from our preference share issuance.
As of August 31, 2021, the weighted-average maturity of our secured and unsecured debt financings was 3.5 years and we were in compliance with all applicable covenants.
We have agreed to defer lease payments with certain of our airline customers. As of October 8, 2021, we have agreed to defer approximately $101.8 million of lease payments with twenty airlines, which they are obligated to repay over time. If air traffic remains depressed over an extended period and if our customers are unable to obtain sufficient funds from private, government or other sources, we may need to provide further deferrals to certain customers to extend the deferrals we have previously granted. We may ultimately be unable to collect all the amounts we have deferred. As of August 31, 2021, we hold $77.1 million in security deposits, $518.3 million in maintenance payments and $143.3 million in letters of credit from our lessees.
We believe we have sufficient liquidity to meet our contractual obligations over the next twelve months and as of October 1, 2021, total liquidity of $2.4 billion includes $1.4 billion of undrawn credit facilities, $0.3 billion of unrestricted cash, $0.3 billion of contracted asset sales and $0.4 billion of projected operating cash flows through September 30, 2022. In addition, we believe payments received from lessees and other funds generated from operations, unsecured bond offerings, borrowings secured by our aircraft, borrowings under our revolving credit facilities and other borrowings and proceeds from future aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our aircraft purchase obligations, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment reimbursements and lease incentive payments.
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Cash Flows
Six Months Ended August 31,
2021 2020
(Dollars in thousands)
Net cash flow provided by operating activities $ 179,714 $ 25,592
Net cash flow (used in) provided by investing activities (282,348) 15,529
Net cash flow (used in) provided by financing activities (137,769) 307,712
Operating Activities:
The COVID-19 pandemic has severely impacted the demand for air travel, which has negatively impacted our customers’ financial performance. Over the past eighteen months, lease concessions have been given to many of our customers in the form of lease rental deferrals or broader lease restructurings. Our cash flow from operating activities for the six months ended August 31, 2021 includes the repayment of certain lease deferrals granted during the first half of 2020 at the inception of the pandemic. We expect that our collections will remain under pressure due to the impact of COVID-19.
Cash flow provided by operating activities was $179.7 million and $25.6 million for the six months ended August 31, 2021 and 2020, respectively. The increase of $154.1 million was primarily attributable to:
• an $82.3 million decrease in accounts receivable and other assets, primarily due to an increase in customer collections, including the repayment of existing lease deferrals as noted above, as well as a reduction in requests for new deferrals as compared to the six months ended August 31, 2020;
• a $55.2 million increase in cash resulting from the sale of unsecured claims related to the LATAM Bankruptcy – see Note 1;
• a $41.6 million increase as the six months ended August 31, 2020, included advance lease rentals recognized into revenue primarily due to lease terminations; and
• a $32.1 million increase in cash as the six months ended August 31, 2020, included banking and legal costs resulting from the Merger.
These inflows were offset by a $46.2 million decrease in cash due to lower lease rental revenue resulting from early lease terminations and the recognition of lease rental revenue for certain customers using a cash basis of accounting rather than an accrual method.
Investing Activities:
Cash flow used in investing activities was $282.3 million for the six months ended August 31, 2021 as compared to cash flow provided by investing activities of $15.5 million for the six months ended August 31, 2020. The net decrease of $297.9 million resulted from a $336.5 million increase in the acquisition and improvement of flight equipment.
These outflows were partially offset by a $24.7 million increase in proceeds from the sale of flight equipment.
Financing Activities:
Cash flow used in financing activities was $137.8 million for the six months ended August 31, 2021 as compared to cash flow provided by financing activities of $307.7 million for the six months ended August 31, 2020. The net decrease of $445.5 million was primarily attributable to an $889.4 million decrease in proceeds from secured and unsecured debt financings, net of repayments.
These outflows were partially offset by a $393.4 million increase in net proceeds from the issuance of preference shares, a $39.0 million decrease in maintenance and security deposits returned, net of deposits received, and a $24.0 million decrease in dividends paid on common shares as a result of the Merger.
Debt Obligations
For complete information on our debt obligations, please refer to Note 6 – “Secured and Unsecured Debt Financings” in the Notes to Unaudited Consolidated Financial Statements above.
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Contractual Obligations
Our contractual obligations consist of principal and interest payments on debt financings, aircraft acquisitions and rent payments related to our office leases. Total contractual obligations decreased to $6.13 billion at August 31, 2021 from $6.82 billion at February 28, 2021, primarily due to the redemption of all of the $500.0 million outstanding aggregate principal amount of our Senior Notes Due 2022.
Capital Expenditures
From time to time, we make capital expenditures to maintain or improve our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the six months ended August 31, 2021 and 2020, we incurred a total of $17.6 million and $11.7 million, respectively, of capital expenditures (including lease incentives) related to the improvement of aircraft.
As of August 31, 2021, the weighted average age by net book value of our aircraft was approximately 10.6 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Our lease agreements call for the lessee to be primarily responsible for maintaining the aircraft. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft, such as in the event of a lessee default or a lessee fails to meet its maintenance obligations under the lease agreement. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee.
Actual maintenance payments to us by lessees in the future may be less than projected as a result of several factors, such as in the event of a lessee default. Maintenance reserves may not cover the entire amount of actual maintenance expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors - Risks Related to Our Business - Risks related to our leases - If lessees are unable to fund their maintenance obligations on our aircraft, we may incur increased costs at the conclusion of the applicable lease” in our Annual Report on Form 10-K for the year ended February 28, 2021.
Off-Balance Sheet Arrangements
We entered into a joint venture arrangement in order to help expand our base of new business opportunities. This joint venture does not qualify for consolidated accounting treatment. The assets and liabilities of this entity are not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. See Note 5 – “Unconsolidated Equity Method Investments” in the Notes to Unaudited Consolidated Financial Statements above.
We hold a 25% equity interest in our joint venture with Mizuho Leasing and as of August 31, 2021, the net book value of its nine aircraft was $305.3 million.
Foreign Currency Risk and Foreign Operations
At August 31, 2021, all our leases are payable to us in U.S. dollars. However, we incur Euro and Singapore dollar-denominated expenses in connection with our subsidiaries in Ireland and Singapore. For the six months ended August 31, 2021, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $8.6 million in U.S. dollar equivalents and represented 27.2% of total selling, general and administrative expenses. Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, our international operations and our exposure to foreign currency risk will likely increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases, we may enter into hedging transactions in the future to mitigate this risk. For the six months ended August 31, 2021 and 2020, we incurred insignificant net gains and losses on foreign currency transactions.
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Management’s Use of EBITDA and Adjusted EBITDA
We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-U.S. GAAP measure is helpful in identifying trends in our performance.
This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals, as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the Board of Directors to review the consolidated financial performance of our business.
We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants.
The table below shows the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the three and six months ended August 31, 2021 and 2020:
Three Months Ended August 31, Six Months Ended August 31,
2021 2020 2021 2020
Net income (loss) $ 9,803 $ (213,513) $ 50 $ (240,052)
Depreciation 83,391 86,749 165,782 175,961
Amortization of lease premiums, discounts and incentives 5,835 4,629 11,159 11,975
Interest, net 55,413 55,324 113,450 114,050
Income tax provision (benefit) 7,665 13,020 (627) 12,469
EBITDA 162,107 (53,791) 289,814 74,403
Adjustments:
Impairment of flight equipment 21,232 212,387 41,815 289,685
Loss on extinguishment of debt 14,132 57 14,156 65
Non-cash share-based payment expense — — — 28,049
Merger related expenses (1)
— (27) — 34,601
Loss on mark-to-market of interest rate derivative contracts — 2 — 19
Contract termination expense — 172 — 172
Adjusted EBITDA $ 197,471 $ 158,800 $ 345,785 $ 426,994
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(1) Included $32.1 million in Other expense and $2.6 million in Selling, general and administrative expenses.
Limitations of EBITDA and Adjusted EBITDA
An investor or potential investor may find EBITDA and Adjusted EBITDA important measures in evaluating our performance, results of operations and financial position. We use these non-U.S. GAAP measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be viewed in isolation or as substitutes for U.S. GAAP measures of earnings (loss). Material limitations in making the adjustments to our earnings (loss) to calculate EBITDA and Adjusted EBITDA, and using these non-U.S. GAAP measures as compared to
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U.S. GAAP net income (loss), income (loss) from continuing operations and cash flows provided by or used in operations, include:
• depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures;
• the cash portion of income tax (benefit) provision generally represents charges (gains), which may significantly affect our financial results;
• elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy; and
• adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes which may not be comparable to similarly titled measures used by other companies.
EBITDA and Adjusted EBITDA are not alternatives to net income (loss), income (loss) from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP. You should not rely on these non-U.S. GAAP measures as a substitute for any such U.S. GAAP financial measure. We strongly urge you to review the reconciliations to U.S. GAAP net income (loss), along with our consolidated financial statements included elsewhere in this report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA and Adjusted EBITDA are not measures of financial performance under U.S. GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.