Item 7. Management’s Discussion and Analysis
ITEM 7. 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 Annual 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 Item 1A. — “Risk Factors” and elsewhere in this Annual Report. Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with U.S. GAAP and, unless otherwise indicated, the other financial information contained in this Annual Report has also been prepared in accordance with U.S. GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this Annual Report are to, and all monetary amounts in this Annual Report are presented in, U.S. dollars.
OVERVIEW
Aircastle acquires, leases, and sells commercial jet aircraft to airlines throughout the world. As of February 28, 2023, we owned and managed on behalf of our joint venture 248 aircraft leased to 73 lessees located in 44 countries. Our aircraft are managed by an experienced team based in the United States, Ireland and Singapore. Our aircraft are subject to net leases whereby the lessee is generally 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 February 28, 2023, the Net Book Value of our flight equipment was $6.6 billion. The weighted average age of our fleet was 9.7 years and the weighted average remaining lease term was 5.3 years. Our revenues, net income (loss) and Adjusted EBITDA were $796.0 million, $62.8 million, and $732.3 million for the year ended February 28, 2023, and $769.8 million, $(278.2) million and $752.3 million for the year ended February 28, 2022.
Acquisitions and Sales
During the year ended February 28, 2023, we acquired 22 aircraft for $914.2 million. As of February 28, 2023, we had commitments to acquire 20 aircraft for $763.7 million, with delivery between the first quarter of 2023 and the fourth quarter of 2025, which include estimated amounts for pre-delivery deposits, contractual price escalations and other adjustments. As of April 18, 2023, we have acquired 6 additional aircraft and have commitments to acquire 14 aircraft for $491.2 million.
During the year ended February 28, 2023, we sold 25 aircraft and other flight equipment for net proceeds of $426.5 million and recognized a net gain on sale of $70.9 million. As of April 18, 2023, we have sold 3 additional aircraft.
Update on Russian Invasion of Ukraine
At the onset of the Russian Federation’s invasion of Ukraine on February 24, 2022, we had 13 aircraft on lease with Russian or Russian-affiliated airlines and have since terminated the leasing activities for all of these aircraft.
As of February 28, 2023, 9 of our aircraft that were previously leased to Russian airlines remain in Russia. Most of the operators of these aircraft have continued to fly the aircraft notwithstanding the sanctions imposed on Russia and leasing terminations. While we will continue to pursue repossession, it is unlikely we will regain possession of any of these 9 aircraft. As a result, the Company wrote off the remaining book value of these 9 aircraft, resulting in impairment
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charges totaling $31.9 million during the year ended February 28, 2023. These 9 aircraft have been removed from the Company’s owned fleet count. The Company is vigorously pursuing insurance claims to recover its losses relating to these aircraft and has initiated legal proceedings against its contingent and possessed insurers. The collection, timing and amounts of any insurance recoveries is uncertain.
We have also successfully recovered 4 aircraft that were previously leased to Russian or Russian-affiliated airlines as of February 28, 2023, comprised of 1 narrow-body, 1 wide-body, and 2 freighter aircraft. During the year ended February 28, 2023, we sold the 2 freighter aircraft and 1 wide-body aircraft that we recovered for gains totaling $53.5 million.
We received $48.9 million of maintenance and general security letters of credit for our former Russian lessees during the year ended February 28, 2023, which we have recognized in maintenance and other revenue. We collected the remaining letters of credit totaling $0.6 million subsequent to February 28, 2023.
Finance
We operate in a capital-intensive industry and have a demonstrated track record of raising substantial amounts of capital from debt and equity investors. Since our inception in late 2004, we raised $2.1 billion in equity capital from private and public investors. We also obtained $19.4 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, unsecured bond offerings, secured borrowings secured by our aircraft, draws under 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” below.
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AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
The following table sets forth certain information with respect to the aircraft owned and managed on behalf of our joint ventures by us as of February 28, 2023 and 2022:
Owned Aircraft As of
February 28, 2023 (1)
As of
February 28, 2022
Net Book Value of Flight Equipment $ 6,635 $ 6,464
Net Book Value of Unencumbered Flight Equipment $ 5,469 $ 5,352
Number of Aircraft 239 251
Number of Unencumbered Aircraft 209 219
Number of Lessees 73 81
Number of Countries 44 45
Weighted Average Age (years) (2)
9.7 10.2
Weighted Average Remaining Lease Term (years) (2)
5.3 4.9
Weighted Average Fleet Utilization during the Fourth Quarter (3)
94.6 % 95.6 %
Weighted Average Fleet Utilization for the Year Ended (3)
94.8 % 94.2 %
Portfolio Yield for the Fourth Quarter (4)
9.3 % 10.4 %
Portfolio Yield for the Year Ended (4)
9.4 % 9.1 %
Managed Aircraft on behalf of Joint Venture
Flight Equipment $ 285 $ 298
Number of Aircraft 9 9
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(1) Excludes 9 aircraft that remain in Russia with zero Net Book Value – see “Update on Russian Invasion of Ukraine” above and Note 3 in the Notes to Consolidated Financial Statements.
(2) Weighted by Net Book Value.
(3) Aircraft on lease as a percentage of total days in period weighted by net book value.
(4) Lease rental revenue, interest income and cash collections on our net investment in direct financing and sales-type leases for the period as a percent of the average Net Book Value for the period; quarterly information is annualized.
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PORTFOLIO DIVERSIFICATION
Owned Aircraft as of
February 28, 2023 Owned Aircraft as of
February 28, 2022
Number of
Aircraft % of Net
Book Value Number of
Aircraft % of Net
Book Value
Aircraft Type
Passenger:
Narrow-body - new technology (1)
43 28 % 27 19 %
Narrow-body - current technology 173 56 % 198 63 %
Wide-body 19 14 % 22 16 %
Total Passenger 235 98 % 247 98 %
Freighter 4 2 % 4 2 %
Total 239 100 % 251 100 %
Manufacturer
Airbus 153 64 % 164 66 %
Boeing 69 28 % 77 30 %
Embraer 17 8 % 10 4 %
Total 239 100 % 251 100 %
Regional Diversification
Asia and Pacific 62 28 % 71 32 %
Europe 88 30 % 98 30 %
Middle East and Africa 8 3 % 10 4 %
North America 38 20 % 36 17 %
South America 29 14 % 25 13 %
Off-lease 14 (2)
5 % 11 (3)
4 %
Total 239 100 % 251 100 %
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(1) Includes Airbus A320-200neo and A321-200neo, Boeing 737-MAX8, and Embraer E2 aircraft.
(2) Of the 14 off-lease aircraft at February 28, 2023, we have 1 wide-body and 4 narrow-body aircraft that we are currently marketing for lease or sale.
(3) All 11 off-lease aircraft at February 28, 2022, have been placed for lease or sold.
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The top ten customers for our owned aircraft at February 28, 2023 are as follows:
Customer Percent of
Net Book Value Country Number of
Aircraft
IndiGo 8.9% India 13
LATAM 7.0% Chile 13
KLM 5.0% Netherlands 10
Viva Aerobus
4.2% Mexico 7
Lion Air (1)
4.0% Indonesia 9
American Airlines 3.7% United States 9
Air Canada 3.3% Canada 5
Iberia 3.2% Spain 14
Frontier Airlines
2.9% United States 4
Volaris
2.9% Mexico 5
Total top ten customers 45.1% 89
All other customers 54.9% 150
Total all customers 100.0% 239
(1) Includes 4 aircraft on lease with 3 affiliated airlines.
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COMPARATIVE RESULTS OF OPERATIONS
Results of Operations for the year ended February 28, 2023 as compared to the year ended February 28, 2022:
Year Ended February 28,
2023 2022
(Dollars in thousands)
Revenues:
Lease rental revenue $ 586,508 $ 595,236
Direct financing and sales-type lease revenue 9,030 10,733
Amortization of lease premiums, discounts and incentives (20,574) (20,190)
Maintenance revenue 138,099 152,030
Total lease revenue 713,063 737,809
Gain on sale of flight equipment 70,860 26,001
Other revenue 12,110 5,977
Total revenues 796,033 769,787
Operating expenses:
Depreciation 332,663 337,528
Interest, net 204,606 214,352
Selling, general and administrative 76,857 66,338
Provision for credit losses 1,507 930
Impairment of flight equipment 85,623 452,250
Maintenance and other costs 22,196 31,166
Total operating expenses 723,452 1,102,564
Other income (expense):
Loss on extinguishment of debt (636) (14,156)
Other 14,092 57,682
Total other income: 13,456 43,526
Income (loss) from continuing operations before income taxes 86,037 (289,251)
Income tax provision (benefit) 25,466 (7,998)
Earnings of unconsolidated equity method investment, net of tax 2,188 3,044
Net income (loss) $ 62,759 $ (278,209)
Revenues:
Total revenues increased $26.2 million, attributable to:
Lease rental revenue decreased $8.7 million as a result of:
• a $67.6 million decrease due to lease terminations, of which $59.5 million related to the termination of leasing activities with Russian or Russian-affiliated airlines as a result of sanctions;
• a $21.3 million decrease related to the sale of 21 aircraft since March 1, 2021; and
• a $6.9 million decrease due to lease extensions, amendments, transitions, and other changes.
These decreases were partially offset by:
• a $66.2 million increase related to 40 aircraft purchased since March 1, 2021; and
• a $20.9 million increase related to the timing of payments for cash basis customers and a lower number of customers for which lease rental revenue was recognized using a cash basis of accounting rather than an accrual method – see Note 1 in the Notes to Consolidated Financial Statements regarding our lease revenue recognition policy.
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Direct financing and sales-type lease revenue decreased $1.7 million, primarily related to the sale of 3 aircraft and scheduled lease expirations of 7 aircraft since March 1, 2021, partially offset by the reclassification of 2 aircraft to sales-type leases.
Amortization of lease premiums, discounts and incentives.
Year Ended February 28,
2023 2022
(Dollars in thousands)
Amortization of lease premiums $ (11,214) $ (14,758)
Amortization of lease discounts 765 815
Amortization of lease incentives (10,125) (6,247)
Amortization of lease premiums, discounts and incentives $ (20,574) $ (20,190)
The amortization of lease premiums decreased $3.5 million, primarily related to lower write-offs of unamortized lease premiums resulting from early lease terminations, partially offset by new lease premiums for aircraft purchased since March 1, 2021.
The amortization of lease incentives increased $3.9 million, primarily related to the transition of aircraft to new lessees.
Maintenance revenue. For the year ended February 28, 2023, we recorded $138.1 million of maintenance revenue, comprised primarily of $46.4 million related to scheduled lease expirations and $49.9 million related to the early lease terminations of 5 narrow-body, 1 wide-body, and 1 freighter aircraft. We also received $41.8 million of maintenance security letters of credit for our former Russian lessees during the year ended February 28, 2023, which we have recognized in maintenance revenue – see Note 3 in the Notes to Consolidated Financial Statements.
For the year ended February 28, 2022, we recorded $152.0 million of maintenance revenue, partially comprised of $59.9 million related to the early lease terminations of 7 narrow-body and 2 wide-body aircraft and $28.6 million related to the scheduled lease expirations of 8 narrow-body aircraft. In addition, we recorded $61.6 million of maintenance revenue related to 9 narrow-body and 1 wide-body aircraft with Russian lessees, resulting from sanctions requiring the termination of leasing activities in Russia.
Gain on sale of flight equipment. During the year ended February 28, 2023, we sold 25 aircraft for gains totaling $70.9 million as compared to the sale of 15 aircraft during the year ended February 28, 2022 for gains totaling $26.0 million.
Other revenue increased $6.1 million, primarily attributable to $7.1 million of payments received on general security letters of credit for our former Russian lessees.
Operating Expenses:
Total operating expenses decreased $379.1 million attributable to:
Depreciation expense decreased $4.9 million primarily attributable to $41.2 million resulting from 26 aircraft sold since March 1, 2021 and lower depreciation related to aircraft subject to aircraft impairments, including aircraft that were previously leased to Russian airlines. This was partially offset by an increase of $30.5 million related to 40 aircraft purchased since March 1, 2021.
Interest, net decreased $9.7 million, primarily due to a lower weighted average debt outstanding of $292.1 million, partially offset by a higher average cost of borrowing.
Selling, general and administrative expense s increased $10.5 million primarily due to an increase in personnel costs, as well as Russia-related legal costs and travel expenses due to increased business travel.
Impairment of aircraft. Excluding asset write-offs related to the Russian invasion of Ukraine, during the year ended February 28, 2023, the Company recorded impairment charges totaling $53.7 million primarily related to the scheduled lease expirations of 3 narrow-body aircraft and lease terminations of 2 narrow-body aircraft, as well as 1 wide-body
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aircraft resulting from our annual fleet review. The Company recognized $58.9 million of maintenance and lease rentals received in advance into revenue for these aircraft during the year ended February 28, 2023.
The Company wrote off the remaining book values of 8 narrow-body and 1 freighter aircraft in Russia which have not been returned to us. As a result, the Company recorded impairment charges totaling $31.9 million during the year ended February 28, 2023 – see Note 3 in the Notes to Consolidated Financial Statements. During the year ended February 28, 2023, the Company recognized $20.3 million of maintenance and other revenue for these aircraft related to payments received on maintenance and general security letters of credit.
During the year ended February 28, 2022, we recorded impairment charges of $452.3 million, of which $449.0 million were transactional impairments, primarily related to 16 narrow-body, 2 wide-body and 2 freighter aircraft. The Company recognized $147.8 million of maintenance, security deposits and lease rentals received in advance into revenue for these 20 aircraft during the year ended February 28, 2022. The impairment charges, in part, resulted from lease terminations, scheduled lease expirations and lessee defaults. Of the total impairment charges, $341.3 million related to 13 aircraft that were with Russian and Ukrainian lessees, resulting from the Russian invasion of Ukraine and related sanctions placed on Russia. The Company recognized $89.4 million of maintenance, security deposits and lease rentals received in advance into revenue for these 13 aircraft.
Maintenance and other costs were $22.2 million and $31.2 million for the years ended February 28, 2023 and 2022, respectively, which related to aircraft that have transitioned or will transition to new lessees as a result of lease terminations or scheduled lease expirations. The Company incurred higher maintenance costs during the year ended February 28, 2022 and continues to incur higher costs compared to historical levels, resulting from extended transition periods driven by supply chain issues and manpower shortages.
Other Income (Expense) :
Total other income decreased by $30.1 million. During the year ended February 28, 2023, the Company recognized $14.1 million of other income related to claims settlements received in the form of cash, notes, or equity securities from various airline customers that had entered into bankruptcy proceedings or similar-type restructurings. During the year ended February 28, 2022, the Company recognized $55.2 million of proceeds from the sales of unsecured claims related to LATAM Airlines Group S.A. and certain of its subsidiaries’ Chapter 11 filing (the “LATAM Bankruptcy”). This was partially offset by a $14.2 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 (Benefit) :
Our income tax expense was $25.5 million for the year ended February 28, 2023 as compared to an income tax benefit of $8.0 million for the year ended February 28, 2022. Our effective tax rate was 29.6% and 2.8% for the years ended February 28, 2023 and 2022, respectively. The increase in our tax provision was primarily due to $8.9 million of additional income tax expense resulting from the tax effects of the transfer of certain assets between tax jurisdictions. The increase is also partly attributable to changes in the mix of pre-tax book income in Bermuda, Ireland, and the United States. The year ended February 28, 2022 included the tax effect of certain net non-cash impairment charges of $19.8 million and income from the sale of unsecured claims related to the LATAM Bankruptcy.
Results of Operations for the year ended February 28, 2022 as compared to the year ended February 28, 2021:
We have omitted discussion of the above two periods covered by our consolidated financial statements presented in this Annual Report because that disclosure was already included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, filed with the SEC on April 28, 2022. You are encouraged to reference Part II, Item 7, within that report, for a discussion of our financial condition and result of operations for the year ended February 28, 2022 to the year ended February 28, 2021.
Aircraft Valuation
Annual Recoverability Assessment
We performed our annual recoverability assessment of all our aircraft during the third quarter of 2022. We recorded an impairment charge of $6.3 million related to 1 wide-body aircraft during the year ended February 28, 2023 as
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a result of our annual recoverability assessment – see “Impairment of Aircraft” above and Note 2 in the Notes to Consolidated Financial Statements for further detail regarding impairment of our flight equipment.
We continue to closely monitor the impact of recent crises, such as the Russian invasion of Ukraine and the COVID-19 pandemic, on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed 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 focused and will continue to focus on aircraft with near-term lease expirations, customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, and certain other customers or aircraft variants that are more susceptible to the impact of the above crises and value deterioration.
The recoverability assessment is a comparison of the carrying value of each aircraft to its estimated undiscounted future cash flows. We develop the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third-party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in projected lease rental and maintenance payments, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors, such as the location of the aircraft and accessibility to records and technical documentation.
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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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Our estimates and assumptions are based on historical experiences and currently available information. Actual results may differ from such estimates under different conditions, sometimes materially. A summary of our significant accounting policies is presented in the notes to our consolidated financial statements included elsewhere in this Annual Report. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require our most subjective judgments, estimates and assumptions. Our most critical accounting policies and estimates are described below.
Lease Revenue Recognition
We lease flight equipment under net operating leases with lease terms typically ranging from three to seven years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals.
Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease, and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the creditworthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
In certain instances, we may provide lease concessions to customers, generally in the form of lease rental deferrals. While these deferral arrangements affect the timing of lease rental payments, the total amount of lease rental payments required over the lease term is generally the same as that which was required under the original lease agreement. We account for the deferrals as if no modifications to the lease agreements were made and record the deferred rentals as a receivable within other assets.
Should we determine that the collectability of rental payments is no longer probable, including any deferral thereof, we will recognize lease rental revenue using a cash basis of accounting rather than an accrual method. In the period we conclude that collection of lease payments is no longer probable, we recognize any difference between revenue amounts recognized to date under the accrual method and payments that have been collected from the lessee, including security deposit amounts held, as a current period adjustment to lease rental revenue.
Maintenance Payments and Maintenance Revenue
Under our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges; certain taxes, licenses, consents and approvals; aircraft registration; and insurance premiums. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at or near the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we typically do not recognize
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maintenance revenue during the lease. Maintenance revenue recognition would occur at or near the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. If a lease requires end of lease term maintenance payments, typically the lessee would be required to pay us for its utilization of the aircraft during the lease; however, in some cases, we may owe a net payment to the lessee in the event heavy maintenance is performed and paid for by the lessee during the lease term and the aircraft is returned to us in better condition than at lease inception. End of lease term maintenance payments made to us are recognized as maintenance revenue and end of lease term maintenance payments we make to a lessee are recorded as contra maintenance revenue.
The amount of maintenance revenue or contra maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled expiries and early lease terminations, the timing of maintenance events and the utilization of the aircraft by the lessee.
Lease Incentives and Amortization
Many of our leases contain provisions that may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. The assumptions supporting these estimates are reevaluated annually.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability, which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.
Flight Equipment Held for Lease and Depreciation
Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25-year life from the date of manufacture for passenger aircraft and over a 30 to 35-year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% to 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to:
• flight equipment where estimates of the manufacturers’ realized sales prices are not relevant (e.g., freighter conversions);
• flight equipment where estimates of the manufacturers’ realized sales prices are not readily available; and
• flight equipment which may have a shorter useful life due to obsolescence.
In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance assets or liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. As part of our due diligence review of each aircraft we purchase, we prepare an estimate of the expected maintenance payments and any excess costs which may become payable by us, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease.
For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are typically depreciated on a straight-line basis over the period until the next maintenance event is required.
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For purchase and lease back transactions, we account for the transaction as a single arrangement. We allocate the consideration paid based on the fair value of the aircraft and lease. The fair value of the lease may include a maintenance premium and a lease premium or discount.
When we acquire an aircraft with a lease, determining the fair value of the attached lease requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease.
Impairment of Flight Equipment
We perform an annual recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis. A recoverability assessment is also performed whenever events or changes in circumstances, or indicators, suggest that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant change in an aircraft type’s storage levels, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted lease rental and maintenance payments, future projected lease rates and maintenance payments, transition costs, estimated down time, and estimated residual or scrap values for an aircraft. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2 in the Notes to Consolidated Financial Statements.
We continue to closely monitor the impact of recent crises, such as the Russian invasion of Ukraine and the COVID-19 pandemic, on our customers, air traffic, lease rental rates, and aircraft valuations, and have performed 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 focused and will continue to focus on aircraft with near-term lease expirations, customers that have entered judicial insolvency proceedings and any additional customers that may become subject to similar-type proceedings, and certain other customers or aircraft variants that are more susceptible to the impact of the above crises and value deterioration.
Net Investment in Direct Financing and Sales-Type Leases
If a lease meets specific criteria at lease commencement or at the effective date of a lease modification, we recognize the lease as a direct financing or sales-type lease. The net investment in direct financing and sales-type leases consists of the lease receivable, estimated unguaranteed residual value of the leased flight equipment at lease-end and, for direct financing leases, deferred selling profit. For sales-type leases, we recognize the difference between the net book value of the aircraft and the net investment in the lease as a gain or loss on sale of fight equipment. Selling profit on a direct financing lease is deferred and amortized over the lease term, and a selling loss is recognized at lease commencement. Interest income on our net investment in leases is recognized as Direct financing and sales-type lease revenue over the lease term in a manner that produces a constant rate of return on the net investment in the lease.
The net investment in leases is recorded in the consolidated financial statements net of an allowance for credit losses. The allowance for credit losses is recorded upon the initial recognition of the net investment in the lease based on the Company’s estimate of expected credit losses over the lease term. The allowance reflects the Company’s estimate of lessee default probabilities and loss given default percentages. When determining the credit loss allowance, we consider relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the net investment in the lease. The allowance also considers potential losses due to non-credit risk related to unguaranteed residual values. A provision for credit losses is recorded as a component of operating expenses in our Consolidated Statements of Income (Loss) to adjust the allowance for changes to management’s estimate of expected credit losses.
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Fair Value Measurements
We measure the fair value of certain assets and liabilities on a non-recurring basis, when U.S. GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include our aircraft and investment in unconsolidated joint ventures. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on the average of the market approach that uses Level 2 inputs, which include third party appraisal data and an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft discounted using the Company’s weighted average cost of capital.
We account for our investments in unconsolidated joint ventures under the equity method of accounting. Investments are reviewed for impairment whenever events or changes in circumstances indicate the fair value is less than its carrying value and the decline is other-than-temporary
Income Taxes
The Company records an income tax provision in accordance with the various tax laws for those jurisdictions within which our transactions occur. Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities. We did not have any unrecognized tax benefits.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Notes to Consolidated Financial Statements below.
RECENTLY PROPOSED ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Notes to Consolidated Financial Statements below.
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 term facilities, term financings and limited recourse securitization 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 year ended February 28, 2023, we met our liquidity and capital resource needs with $437.7 million of cash flow from operations and $426.5 million of proceeds from the sale of aircraft and other flight equipment.
As of February 28, 2023, the weighted average maturity of our secured and unsecured debt financings was 2.5 years and we were in compliance with all applicable covenants. We have also determined that as of February 28, 2023, our consolidated subsidiaries’ restricted net assets, as defined by Rule 4-08(e)(3) of Regulation S-X, are less than 25% of our consolidated net assets.
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While the industry continues to recover from the impact of COVID-19, according to IATA, air travel approximated 85% of pre-pandemic levels as of February 28, 2023, compared to 55% as of February 28, 2022. 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 lease concessions to certain customers in the form of deferrals or broader lease restructurings. We may ultimately be unable to collect some or all amounts that we have deferred or may defer in future periods. As of February 28, 2023, we hold $61.7 million in security deposits, $465.6 million in maintenance payments and $81.4 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 April 3, 2023, total liquidity of $2.0 billion included $1.4 billion of undrawn credit facilities, $0.5 billion of projected adjusted operating cash flows through April 1, 2024, and $0.1 billion of unrestricted cash. 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.
Cash Flows
Year Ended February 28,
2023 2022
(Dollars in thousands)
Net cash flow provided by operating activities $ 437,737 $ 372,865
Net cash flow used in investing activities (537,874) (586,500)
Net cash flow provided by (used in) financing activities 161,316 (196,281)
Operating Activities:
Cash flow provided by operating activities was $437.7 million and $372.9 million for the years ended February 28, 2023 and 2022, respectively. The increase of $64.9 million was primarily attributable to:
• $48.9 million of payments received on maintenance and general security letters of credit for our former Russian lessees;
• a $70.8 million increase in cash related to accounts receivable, other assets and lease rentals received in advance, primarily due to an increase in customer collections, including the repayment of lease deferrals, as global air traffic recovers from the COVID-19 pandemic; and
• a $20.9 million increase in lease rental revenue related to the timing of payments for cash basis customers and a lower number of customers for which lease rental revenue was recognized using a cash basis of accounting rather than an accrual method for the year ended February 28, 2023.
The year ended February 28, 2022 included an additional $47.4 million of lease payments related to our former Russian and Russian-affiliated airline customers.
Investing Activities :
Cash flow used in investing activities was $537.9 million and $586.5 million for the years ended February 28, 2023 and 2022, respectively. The decrease of $48.6 million was primarily attributable to a $215.7 million increase in proceeds from the sale of flight equipment, partially offset by a $198.6 million increase in the acquisition and improvement of flight equipment. Aircraft sales deposits and purchase deposits returned, net of aircraft purchase deposits paid and progress payments increased $28.6 million.
Financing Activities :
Cash flow provided by financing activities was $161.3 million for the year ended February 28, 2023 as compared to cash flow used in financing activities of $196.3 million for the year ended February 28, 2022. The net cash increase of $357.6 million was primarily attributable to proceeds of $473.8 million from borrowings under secured and unsecured financings, as well as a $226.6 million decrease in repayments of secured and unsecured debt financings.
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These inflows were partially offset by a $393.0 million decrease in net proceeds from the issuance of preference shares.
Debt Obligations
For complete information on our debt obligations, please refer to Note 8 in the Notes to Consolidated Financial Statements below.
Contractual Obligations
Our contractual obligations consist of principal and interest payments on debt financings, aircraft acquisitions and rent payments pursuant to our office leases. Total contractual obligations were $6.0 billion at both February 28, 2023 and 2022.
The following table presents our actual contractual obligations and their payment due dates as of February 28, 2023.
Payments Due by Period as of February 28, 2023
Contractual Obligations Total 1 year
or less 2-3 years 4-5 years More than
5 years
(Dollars in thousands)
Principal payments:
Senior Notes due 2023-2028 $ 3,700,000 $ 1,150,000 $ 1,150,000 $ 1,400,000 $ —
DBJ Term Loan
155,000 155,000 — — —
Revolving Credit Facilities
20,000 — 20,000 — —
Bank Financings
761,283 67,409 411,200 43,387 239,287
Total principal payments 4,636,283 1,372,409 1,581,200 1,443,387 239,287
Interest payments on debt obligations (1)
561,810 200,928 219,637 100,738 40,507
Office leases (2)
30,523 2,259 5,666 5,419 17,179
Purchase obligations (3)
763,711 495,330 268,381 — —
Total $ 5,992,327 $ 2,070,926 $ 2,074,884 $ 1,549,544 $ 296,973
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(1) Future interest payments on variable rate, SOFR and LIBOR-based debt obligations are estimated using the interest rate in effect at February 28, 2023.
(2) Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore.
(3) At February 28, 2023, we had signed purchase agreements to acquire 20 aircraft for $763.7 million. These amounts include estimates for pre-delivery deposits, contractual price escalation and other adjustments. As of April 18, 2023, we have commitments to acquire 14 aircraft for $491.2 million.
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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 years ended February 28, 2023, 2022 and 2021, we incurred a total of $90.8 million, $46.6 million and $26.6 million, respectively, of capital expenditures, including lease incentives, related to the acquisition and improvement of flight equipment.
As of February 28, 2023, the weighted average age (by Net Book Value) of our aircraft was 9.7 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. Maintenance reserves are generally 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. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft or a lessee fails to meet its maintenance obligations under the lease agreement.
Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of 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.”
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 6 in the Notes to Consolidated Financial Statements.
We hold a 25% equity interest in our joint venture with Mizuho Leasing and as of February 28, 2023, the net book value of its 9 aircraft was $285.2 million.
Foreign Currency Risk and Foreign Operations
At February 28, 2023, more than 99% of 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 year ended February 28, 2023, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar totaled $20.2 million in U.S. dollar equivalents and represented approximately 26% 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, it is likely that our international operations and our exposure to foreign currency risk will 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 years ended February 28, 2023, 2022 and 2021, we incurred insignificant net gains and losses on foreign currency transactions.
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.
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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 for the years ended February 28, 2023, 2022 and 2021, respectively.
Year Ended February 28,
2023 2022 2021
(Dollars in thousands)
Net income (loss) $ 62,759 $ (278,209) $ (333,168)
Depreciation 332,663 337,528 347,517
Amortization of lease premiums, discounts and incentives 20,574 20,190 22,842
Interest, net 204,606 214,352 235,338
Income tax provision (benefit) 25,466 (7,998) 10,236
EBITDA $ 646,068 $ 285,863 $ 282,765
Adjustments:
Impairment of flight equipment 85,623 452,250 425,579
Loss on extinguishment of debt 636 14,156 2,640
Non-cash share-based payment expense — — 28,049
Merger related expenses (1)
— — 35,165
Loss on mark-to-market of interest rate derivative contracts — — 19
Contract termination expense — — 172
Adjusted EBITDA $ 732,327 $ 752,269 $ 774,389
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(1) Includes $32.6 million in Other income (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 income (loss). Material limitations in making the adjustments to our income (loss) to calculate EBITDA and Adjusted EBITDA, and using these non-U.S. GAAP measures as compared to 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;
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• the cash portion of income tax provision (benefit) generally represents charges (gains), which may significantly affect our financial results; 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.