sv1za
As
filed with the Securities and Exchange Commission on
September 2, 2011
Registration
No. 333-173817
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment
No. 5
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AIR LEASE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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7359
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27-1840403 |
(State or other jurisdiction
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(Primary Standard Industrial
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(I.R.S. Employer |
of incorporation or organization)
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Classification Code Number)
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Identification Number) |
2000
Avenue of the Stars, Suite 1000N
Los Angeles, CA 90067
(310) 553-0555
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
John L. Plueger
President & Chief Operating Officer
Air Lease Corporation
2000 Avenue of the
Stars, Suite 1000N
Los Angeles, CA 90067
(310) 553-0555
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
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Grant A. Levy
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Robert B. Knauss, Esq.
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Executive Vice President,
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Mark H. Kim, Esq.
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General Counsel & Secretary
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Munger, Tolles & Olson LLP
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Air Lease Corporation
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355 South Grand Avenue, 35th Floor
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2000 Avenue of the Stars,
Suite 1000N
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Los Angeles, CA 90071
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Los Angeles, CA 90067
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(213) 683-9100 |
(310) 553-0555 |
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Approximate date of commencement of proposed sale to the public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box. þ
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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CALCULATION
OF REGISTRATION FEE
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Proposed Maximum |
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Proposed Maximum |
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Title of Each Class of |
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Amount to be |
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Offering Price Per |
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Aggregate Offering |
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Amount of |
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Securities to be Registered |
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Registered |
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Share(1) |
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Price(1) |
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Registration Fee |
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Class A
Common Stock, par value $0.01 per share |
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59,981,528 |
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28.16 |
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1,689,079,829 |
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$ |
196,103 |
(2) |
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Class B Non-Voting Common
Stock,
par value $0.01 per share |
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1,829,339 |
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$ |
28.16 |
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51,514,187 |
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5,981 |
(3) |
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(1) |
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Estimated solely for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and based on the average of
the high and low prices of the Registrants Class A
Common Stock on April 28, 2011 as reported on the New York Stock Exchange. The Registrants
Class B Non-Voting
Common Stock is not currently listed on any national securities exchange or market system. The
Registrant treats the Class A Common Stock and the Class B Non-Voting Common Stock equally and
identically, except with respect to
voting rights and conversion rights. Accordingly, for both classes of common stock, the
Registrant is using the offering
price per share of the Class A Common Stock calculated in the manner described above. |
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(2) |
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$215,296 previously paid. |
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(3) |
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$5,981 previously paid. |
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed.
The selling stockholders may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and the Company is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
Subject
to Completion, dated September 2, 2011.
Prospectus
59,981,528 shares of Class A Common Stock
1,829,339
shares of Class B Non-Voting Common Stock
This prospectus relates to the following shares of Class A Common
Stock and Class B Non-Voting Common Stock of Air Lease Corporation (together, the Common
Stock), all of
which may be offered for sale by the selling stockholders named in
this prospectus: (i) 59,981,528
shares of Class A Common Stock, including up to 482,625 shares of Class A Common Stock issuable
upon exercise of outstanding warrants, and (ii) 1,829,339 shares of Class B Non-Voting
Common Stock.
The selling stockholders acquired the shares of Common Stock offered by this prospectus in a private placement. We
are registering the offer and sale of the shares of Common Stock to satisfy registration
rights we granted to the selling stockholders.
We are not selling any shares of Common Stock under this prospectus and we will not receive
any proceeds from the sale of Common Stock by the selling stockholders. The shares of
Common Stock to which this prospectus relates may be offered and sold from time to time
directly by the selling stockholders or alternatively through underwriters or broker-dealers or
agents on terms to be determined at the time of sale.
The shares of Common Stock may be sold in one or more transactions, at fixed prices, at prevailing
market prices at the time of sale or at negotiated prices. Because all of the shares being offered
under this prospectus are being offered by selling stockholders, we cannot determine the price or
prices at which the shares of Common Stock may be sold under this prospectus.
To the extent required, the names of any
agent or broker-dealer and the applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in a prospectus supplement that
will accompany this prospectus. A prospectus supplement also may add, update or change information
contained in this prospectus.
We recently
completed our initial public offering of 34,825,470 shares of our
Class A Common Stock. Our Class A Common Stock is listed on the New York Stock Exchange, or the NYSE, under the symbol
AL. On September 1, 2011, the last reported sale price of our Class A Common Stock on the NYSE
was $22.37 per share.
Our Class B Non-Voting Common Stock is not currently listed on any national securities exchange or
market system.
Investing in our Common Stock involves a high degree of risk. See Risk factors beginning
on page 14.
Neither the Securities and Exchange Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
The date of this prospectus is , 2011.
Table of contents
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F-1 |
We and the selling stockholders have not authorized anyone to provide any information other than
that contained or incorporated by reference in this prospectus or in any free writing prospectus
prepared by or on behalf of us or the selling stockholders or to which we or the selling
stockholders have referred you. We and the selling stockholders take no responsibility for, and can
provide no assurance as to the reliability of, any other information that others may give you. The
selling stockholders are offering to sell, and seeking offers to buy, Common Stock only in
jurisdictions where offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our Common Stock.
No action is being taken in any jurisdiction outside the United States to permit a public offering
of our Common Stock or possession or distribution of this prospectus in that jurisdiction.
Persons who come into possession of this prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.
Dealer prospectus
delivery obligation
Until , 2011, all dealers that buy, sell or trade in our Common Stock,
whether or not participating in this offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Industry and
market data
Market data and forecasts used in this prospectus have been
obtained from independent industry sources and publications as
well as from research reports, including, without limitation,
data relating to the airline industry provided by AVITAS, Inc.
(AVITAS), a full-service aviation consulting firm
retained by us to provide aviation market and industry data for
inclusion in this prospectus. Although we believe that these
sources are credible, we have not independently verified the
accuracy or completeness of the data obtained from these
sources. Forecasts and other forward-looking information
obtained from these sources are subject to the same
qualifications and the additional uncertainties regarding the
other forward-looking statements in this prospectus.
i
Prospectus
summary
This summary highlights information contained elsewhere in
this prospectus. This summary sets forth the material terms of
this offering but does not contain all of the information that
you should consider before deciding to invest in our
Common Stock. You should read the entire prospectus
carefully before making an investment decision, especially the
risks of investing in our Common Stock discussed in
the section titled Risk factors and our financial
statements and related notes appearing elsewhere in this
prospectus. Unless the context otherwise requires, the terms
Company, ALC, we,
our and us refer to Air Lease
Corporation and its subsidiaries.
Our
company
Air Lease Corporation is an aircraft leasing company that was
launched in February 2010 by aviation industry pioneer Steven F.
Udvar-Házy. We are principally engaged in purchasing
commercial aircraft which we, in turn, lease to airlines around
the world to generate attractive returns on equity. We lease our
aircraft to airlines pursuant to net operating leases that
require the lessee to pay for maintenance, insurance, taxes and
all other aircraft operating expenses during the lease term.
As of June 30, 2011, we owned 65 aircraft of which 13
were new aircraft and 52 were used aircraft. Our fleet is
comprised of
fuel-efficient
and newer technology aircraft, consisting of narrowbody
(single-aisle) aircraft, such as the Airbus
A319/320/321
and the Boeing 737-700/800, and select widebody (twin-aisle)
aircraft, such as the Airbus A330-200 and the Boeing
777-300ER.
We manage lease revenues and take advantage of changes in market
conditions by acquiring a balanced mix of aircraft types, both
new and used. Our used aircraft are generally less than five
years old. All of the aircraft we own were leased as of
June 30, 2011. Additionally, as of June 30, 2011, we
had entered into binding and non-binding purchase commitments to acquire an additional
234 new aircraft through 2020 and nine used aircraft in 2011.
Through careful management and diversification of our leases and
lessees by geography, lease term, and aircraft age and type, we
mitigate the risks of owning and leasing aircraft. We believe
that diversification of our leases and lessees reduces the risks
associated with individual lessee defaults and adverse
geopolitical and regional economic events. We manage lease
expirations in our fleet portfolio over varying time periods in
order to minimize periods of concentrated lease expirations and
mitigate the risks associated with cyclical variations in the
airline industry. We target to place new aircraft under leases
with a minimum term of six years for narrowbody aircraft and
nine years for widebody aircraft. As of June 30, 2011, the
weighted average lease term remaining on our current leases was
6.1 years, and we leased the aircraft in our portfolio to
43 airlines in 26 countries.
We operate our business on a global basis, providing aircraft to
airline customers in every major geographical region, including
emerging and high-growth markets such as Asia, the Pacific Rim,
Latin America, the Middle East and Eastern Europe. According to
AVITAS, many of these emerging markets are experiencing
increased demand for passenger airline travel and have lower
market saturation than more mature markets such as North America
and Western Europe. In addition, airlines in some of these
emerging markets have fewer financing alternatives, enabling us
to command relatively higher lease rates compared to more mature
markets. With our
well-established
industry contacts and access to capital, we believe we will be
able to continue successfully implementing our business strategy
worldwide. As of June 30, 2011, we
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have entered into leases and future lease commitments with
airlines in Australia, Brazil, Bulgaria, Canada, China, Columbia,
the Czech
Republic, Ethiopia, France,
Germany, India, Indonesia, Ireland, Italy, Japan, Kazakhstan,
Kenya, Malaysia, Mexico, Mongolia, the Netherlands, New Zealand,
Norway, the Republic of Seychelles, Russia, South Africa, South
Korea, Spain, Sri Lanka, Thailand,
Trinidad & Tobago, Turkey, United Arab Emirates, the
United Kingdom,
the United States and Vietnam.
While our primary business is to own and lease aircraft, we also
plan to provide fleet management and remarketing services to
third parties for a fee. These services are similar to those we
perform with respect to our fleet, including leasing,
re-leasing, lease management and sales services.
Air Lease Corporation is led by a highly experienced management
team that includes
Mr. Udvar-Házy,
our Chairman and Chief Executive Officer, John L. Plueger, our
President and Chief Operating Officer, Grant A. Levy, our
Executive Vice President, General Counsel and Secretary, Marc H.
Baer, our Executive Vice President, Marketing, Alex A. Khatibi,
our Executive Vice President, Jie Chen, our Executive Vice
President and Managing Director of Asia, James C. Clarke, our
Senior Vice President and Chief Financial Officer, Gregory B.
Willis, our Vice President, Finance, and Chief Accounting
Officer, and John D. Poerschke, our Senior Vice President of
Aircraft Procurement and Specifications. On average, our senior
management team has over 23 years of experience in the
aviation industry.
Operations to
date
Current
fleet
As of June 30, 2011, our aircraft fleet consisted of 55
narrowbody aircraft and ten widebody aircraft, and the weighted
average age of our aircraft fleet was 3.6 years.
Aircraft purchase
commitments
As of June 30, 2011, we had commitments to acquire a total
of 234 new aircraft and nine used aircraft at an estimated
aggregate purchase price (including adjustment for anticipated
inflation) of approximately $11.9 billion for delivery as
shown below.
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Aircraft Type |
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2011 |
(1) |
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2012 |
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2013 |
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2014 |
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2015 |
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Thereafter |
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Total |
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Airbus A319-100 |
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1 |
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1 |
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Airbus A320/321-200 |
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5 |
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10 |
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13 |
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12 |
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7 |
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47 |
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Airbus A320/321 NEO(2)(3) |
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50 |
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50 |
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Airbus A330-200/300 |
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6 |
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6 |
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12 |
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Boeing 737-700 |
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2 |
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2 |
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Boeing 737-800(2) |
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2 |
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3 |
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12 |
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12 |
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14 |
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37 |
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80 |
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Boeing 767-300ER |
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2 |
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2 |
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Boeing 777-300ER(3) |
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2 |
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3 |
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5 |
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Boeing 787-9(3) |
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4 |
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4 |
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Embraer E175/190 |
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11 |
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19 |
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30 |
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ATR 72-600 |
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2 |
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8 |
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10 |
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Total |
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31 |
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46 |
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25 |
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26 |
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24 |
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91 |
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243 |
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(1) |
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Of the 31 aircraft that we will acquire in the remainder of 2011, the
following nine aircraft will be used aircraft: the Airbus A319-100, one Airbus A320-200, one Airbus A330-200,
both Boeing 737-700s, both Boeing 737-800s and both Boeing 767-300ERs. |
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We have cancellation rights with respect to 14 of the Airbus A320/321 NEO
aircraft and four of the Boeing 737-800 aircraft. |
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As of June 30, 2011, all of the Airbus A320/321 NEO aircraft,
the Boeing 777-300ER aircraft
and the Boeing 787-9 aircraft were subject to non-binding memoranda of understanding for the
purchase of these aircraft. |
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Our new aircraft are being purchased pursuant to binding
purchase agreements with each of Airbus S.A.S.
(Airbus), The Boeing Company (Boeing),
Embraer S.A. (Embraer) and Avions de Transport
Régional (ATR), or through sale-leaseback
transactions with other airline customers,
other than, as of June 30, 2011, the Airbus A320/A321 NEO aircraft,
the Boeing 777-300ER aircraft and the Boeing 789-9 aircraft,
the purchase of which were subject to non-binding memoranda of understanding. Under certain
circumstances, we have the right to alter the mix of aircraft
types that
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we ultimately acquire. We also have cancellation rights with
respect to 14 of the Airbus A320/321 NEO aircraft and four of the Boeing 737-800 aircraft.
As of June 30, 2011, we had future lease commitments for
all of the aircraft to be delivered in 2011, for 37 out of 46
aircraft to be delivered in 2012, for 14 out of 25 aircraft to
be delivered in 2013, and for six out of 26 aircraft to be
delivered in 2014. Our future lease commitments for all of the
aircraft to be delivered in 2011 are comprised of
23 binding leases and eight non-binding letters of intent.
Our future lease commitments for the 37 out of 46 aircraft to be
delivered in 2012 are comprised of 33 binding leases and four
non-binding letters of intent. Our future lease commitments for
the 14 out of 25 aircraft to be delivered in 2013 are comprised of
11 binding leases and three non-binding letters of intent.
Our future lease commitments for the six out of 26 aircraft to be delivered in 2014 are comprised of
five binding leases and one non-binding letter of intent.
While we actively seek lease
placements for the aircraft that are scheduled to be delivered
through 2020, in making our lease placement decisions, we also
take into consideration the anticipated growth in the aircraft
leasing market and anticipated improvements in lease rates,
which could lead us to determine that entering into particular
lease arrangements at a later date would be more beneficial
to us.
We had 65 aircraft in our fleet as of June 30, 2011
and anticipate growing our fleet to approximately
100 aircraft by the end of 2011. We intend to grow our
fleet by purchasing the 31 aircraft for which we have
purchase commitments in 2011 as well as acquiring additional
aircraft through purchases from aircraft
manufacturers, other lessors and airlines.
Our business and
growth strategies
We believe that we entered the aircraft leasing industry at an
opportune time, as both airlines use of net operating
leases and the demand for air travel are expected to grow in the
near future, consistent with a trend of growth in air travel
over the last 40 years, as forecasted by AVITAS.
Accordingly, we are pursuing the following business and growth
strategies:
Capitalize on attractive market opportunities to grow our
modern fleet of aircraft. We plan to continue
acquiring aircraft and expect that a significant portion of
these acquisitions will be subject to existing or new leases
that produce immediate positive cash flows. We seek aircraft
that produce attractive returns on equity while maintaining
diversified lease portfolio characteristics in terms of aircraft
type, aircraft age, lease term and geographic location of our
lessees. We intend to continue to take advantage of the current
economic environment to make opportunistic purchases of aircraft
and aircraft portfolios. We plan to expand our fleet with a mix
of narrowbody and widebody commercial aircraft that we expect to
have long useful lives and that are currently in widespread use
by airlines, with a greater focus on acquiring narrowbody
aircraft. Based on our ongoing discussions with airlines, we
believe narrowbody and certain widebody aircraft will continue
to experience strong global airline demand. We have also entered
into commitments to purchase select fuel-efficient regional jets
and turboprop aircraft, such as the Embraer E175/E190 and ATR
72-600
aircraft types. We believe market demand for these types of
aircraft will grow as they are well suited for direct service
between smaller and medium-sized cities and between such cities
and major hub cities.
Continue to develop and grow our long-standing
relationships and cultivate new relationships. We
believe our management teams experience in the aircraft
leasing industry provides us immediate access to key decision
makers at airframe and engine manufacturers and major airlines
around the world, thereby enabling us to make prompt
acquisitions of new aircraft, enter into new leases, and
anticipate airlines longer-term needs so as to tailor our
fleet and leases to their specific needs. Additionally, we
believe our relationships with airframe and
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engine manufacturers allow us to influence their airframe and
engine designs to better meet the needs of our airline
customers. In our view, the aircraft leasing industry continues
to be relationship-driven, and airframe and engine manufacturers
and our airline customers will place a high value on the
expertise and experience of our management team. This will help
us develop new relationships, while we use our long-standing
contacts to grow our business. We believe these relationships
will help to establish us as a leader in the aircraft leasing
industry over time.
Emphasize marketing in high-growth areas of the
world. As our portfolio grows, we anticipate that a
growing percentage of our aircraft will be located in Asia, the
Pacific Rim, Latin America, the Middle East and Eastern Europe,
although we will continue to enter into select leasing
transactions in North America and Western Europe. We expect
aircraft demand to increase in emerging markets over the next
several years, as forecasted by AVITAS. We believe a developing
infrastructure supporting direct air travel to more destinations
within emerging market regions, combined with economic and
population growth, an expected increase in the number of
low-cost carriers, expansion of existing low-cost carriers,
deregulation in air travel, and a significant increase in such
areas middle-class populations, will lead to growth in
passenger air travel in these regions.
Enter into strategic ventures. We may, on
occasion, enter into strategic ventures with third parties in
order to take advantage of favorable financing or other
opportunities, to share capital
and/or
operating risk,
and/or to
earn fleet management fees. Given our broad experience in
acquiring, leasing, financing and managing aircraft, we believe
that third parties seeking to invest in the aircraft leasing
industry will view us as an attractive partner. Other than one
arrangement whereby we manage one aircraft owned by a third
party that is leased to one of our customers, we currently do
not participate in, or have any binding commitments to enter
into, any strategic ventures with any third parties.
Actively manage our lease portfolio to optimize returns
and minimize risk through diversification. In
actively managing our aircraft portfolio, we seek to optimize
returns and minimize risks by appropriately and prudently
diversifying the types of aircraft we acquire, maintaining a low
average fleet age, spreading out over a number of years the
termination dates for our leases, achieving geographic
diversification, and minimizing our exposure to customer
concentration. Our acquisition of desirable aircraft types with
a low average fleet age helps to maximize the mobility of our
assets across global markets, which allows us to achieve a high
rate of lease placements on attractive lease terms. Through the
implementation of our diversification strategies, we believe
that we are in a position to reduce our exposure to industry
fluctuations over a particular period of time, economic
fluctuations in a particular regional market, changes in
customer preferences for particular aircraft, and the credit
risk posed by a particular customer.
Our financing
strategies
In addition to our business and growth strategies described
above, the successful implementation of our financing strategies
is critical to the success and growth of our business.
As we grow our business, we envision funding our aircraft
purchases through multiple sources, including the
$1.3 billion of gross cash proceeds we raised in our prior private
placement of Common Stock, the $922.9 million of gross cash
proceeds we
raised in our initial public offering, expected proceeds from any exercise of outstanding
warrants,
4
future earnings and cash flow from
operations, existing debt facilities, potential future debt
financing and government-sponsored export guaranty and lending
programs. We intend to employ multiple debt and equity
strategies to provide us with financial flexibility to fund our
aircraft purchases on the best terms available.
In May 2010, we entered into a non-recourse, revolving credit
facility to finance the acquisition of aircraft that was
subsequently modified by an amendment that became effective on
April 21, 2011 (the Warehouse Facility). This credit
facility, as amended, provides us with secured financing of up
to $1.25 billion, modified from the original facility size
of $1.5 billion. We are able to draw on this facility, as
amended, during an availability period that ends in June 2013.
In addition, the credit facility, as amended, reduces the
original interest rate during the availability period from LIBOR
plus 3.25% to LIBOR plus 2.50% on drawn balances and from 1.00%
to 0.75% on undrawn balances. The outstanding drawn balance at
the end of the availability period may be converted at our
option to an amortizing, four-year term loan. As of
June 30, 2011, we had borrowed $709.3 million
under the Warehouse Facility. This facility provides us with
ample liquidity to make opportunistic acquisitions of aircraft
on short notice.
In addition, we fund some aircraft purchases through secured
term financings and unsecured term and revolving
credit facilities. As of June 30, 2011, we had
outstanding loan balances, excluding drawings under the
Warehouse Facility, of $503.4 million in secured term debt
and $170.9 million in unsecured term financing, and had
$313.0 million in available but undrawn revolving unsecured
credit facilities. We will also use cash on hand to purchase
aircraft and may use such acquired aircraft to secure new debt
financing. Over time, we expect to access the public debt
capital markets, subject to market conditions.
Furthermore, we may pursue financing
from government-sponsored export guaranty and lending programs
offered by agencies such as the European Export Credit Agencies
(ECAs), the Export-Import Bank of the United States
(Ex-Im Bank) and Seguradora Brasileira
Crédito à Exportação S.A.
(SBCE) in conjunction with the Brazilian
Development Bank (BNDES).
In an effort to sustain our long-term financial health and limit
our exposure to unforeseen dislocations in the capital markets,
we intend to maintain a
debt-to-equity
ratio (excluding deferred tax liabilities for calculation
purposes) generally within a range of 2-to-1 to 3-to-1. Due to
the seasonality of aircraft deliveries, we expect this ratio to
fluctuate within that range during the course of a typical
fiscal year, although on occasion we may fall outside this
range. In addition, we may from time to time enter into interest
rate hedging arrangements to limit our exposure to increases in
interest rates on our floating-rate debt.
We believe that the implementation of our financing strategies
will help us maintain a prudent amount of leverage, while also
maintaining financial flexibility to seize attractive market
opportunities.
Our competitive
strengths
We believe that the following strengths assist us in executing
our business and growth strategies and provide us with an
advantage over many of our competitors:
Highly experienced management team with diversified
aviation and technical experience. Our senior
management team, with an average of over 23 years of
experience in the aviation industry, has significant experience
in all aspects of the aviation and aircraft leasing industries,
including the implementation of innovative lease structures,
strategic planning, risk
5
diversification, fleet restructuring, aircraft purchasing and
financing strategies, and general transactional capabilities. We
have separate Sales, Marketing and Commercial Affairs; Finance
and Accounting; Legal; Commercial Contracts; Aircraft
Procurement and Specifications; and Technical Asset Management
departments that are involved in our leasing, sales and
purchasing business. Our Technical Asset Management department
has in-depth knowledge of aircraft, engines, avionics and the
various regulations governing the maintenance of aircraft. This
department monitors the fleet while on lease to our airline
customers, handles the transfer of the aircraft from one
operator to the next and monitors operator compliance with its
technical and maintenance obligations under our leases.
Available deployable capital to capture attractive market
opportunities. With the net proceeds from our
initial public
offering, cash on hand, the financing available under the
Warehouse Facility and multiple unsecured lines of credit, we
have significant purchasing power that we can quickly deploy to
acquire additional aircraft. In addition, we may
supplement our access to capital with debt guaranteed by
government agencies such as Ex-Im Bank and the ECAs and loans
from BNDES for qualifying aircraft purchases and other debt
financing arrangements. Our access to capital provides us with
the flexibility to complete attractive aircraft purchases.
Strong aircraft delivery pipeline. Through
our strategic and opportunistic approaches to acquiring aircraft
and our strong relationship with airframe manufacturers, as of
June 30, 2011, we have entered into binding and non-binding purchase commitments to acquire 234
new aircraft over the next ten years. We believe that our
access to this strong aircraft delivery pipeline over this
period gives us the ability to provide airline customers with a
comprehensive multi-year solution to their aircraft leasing and
fleet needs. This ability represents a significant competitive
advantage in developing, renewing and expanding customer
relationships as we have new aircraft available for delivery
during periods far earlier than most of our airline customers
can obtain new aircraft directly from airframe and engine
manufacturers.
Young, modern and efficient aircraft
fleet. Our aircraft portfolio primarily consists of
modern, fuel-efficient, narrowbody aircraft. As of
June 30, 2011, the weighted average age of the aircraft in
our current portfolio was 3.6 years. We believe we have one
of the worlds youngest operating lease portfolios. Younger
aircraft are more desirable than older aircraft because of their
fuel efficiency, lower maintenance costs, and longer remaining
useful lives. Furthermore, younger aircraft are more likely to
be in compliance with newer environmental standards or are more
easily brought up to environmental compliance without costly
modifications. We believe our aircraft, and the additional
aircraft that we will acquire, are in high demand among our
airline customers and are readily deployable to various markets
throughout the world. We expect that our fleet of young,
high-demand aircraft will enable us to provide stable and
growing cash flows to our stockholders over the long term.
Long-standing relationships with a global, diversified
customer base. Our management team is well-known in
the aviation industry and we are able to benefit from the
long-standing relationships that Messrs. Udvar-Házy
and Plueger and other key members of management have with more
than 200 airlines in over 70 countries.
Strong manufacturer relationships. The supply
of commercial passenger aircraft is dominated by a few airframe
manufacturers, including Boeing, Airbus, ATR, Embraer and
Bombardier Inc. (Bombardier). Through our management
teams active and long-standing participation in the
aviation industry, we have developed strategic relationships
with many of the manufacturers and suppliers of aircraft and
aircraft parts, which enables us to leverage competitive
acquisition and delivery terms and to influence new aircraft
design.
6
Our management teams and our board of
directors significant investment in us aligns the
interests of management and our board with those of our other
stockholders. Members of our management team (and
their families or affiliates) and members of our board of
directors have invested an aggregate of approximately
$91 million in shares of our Class A Common Stock.
We believe that our management teams and our board of
directors significant combined ownership stake in our
Class A Common Stock, along with additional equity
incentive grants, closely aligns our management teams and
our board of directors interests with those of our other
stockholders.
Overview of the
aircraft leasing industry
Over the last 40 years, demand for air travel has
consistently grown both in terms of the number of aircraft and
passenger traffic. Today, air travel has penetrated most world
regions, and the highest growth is now coming from emerging
markets and economies such as Asia, Latin America and the Middle
East. The long-term outlook for growth in the airline industry
remains robust primarily due to increased passenger traffic,
driven by growth in demand from these emerging markets. After
suffering a decrease in air traffic during the financial crisis
of 2008/2009, air traffic has been recovering since
October 2009, according to AVITAS. AVITAS reported that
year-over-year passenger traffic grew 7% and cargo traffic grew 16%
in April 2011. Moreover, AVITAS
forecasts that there will be more than 24,000 aircraft in
service by 2015, which represents an increase of approximately
5,000 aircraft (or over 25%) compared with todays number
of aircraft.
Due to the cost of aircraft acquisitions, aircraft financing
complexities and the airlines need for fleet flexibility,
the role of operating lessors as suppliers of aircraft has
expanded significantly over the last 20 years. In the late
1960s and early 1970s, airlines generally owned all of their
aircraft, which were financed through loans that were
collateralized by the aircraft themselves. At that time, airline
fleets were typically small in size and limited to a few
aircraft types. As airline fleets expanded and fixed costs for
maintenance and ownership rapidly increased, airlines began to
outsource the ownership of many of their airplanes through the
adoption of aircraft leases. According to AVITAS, aircraft
leasing has grown steadily since the 1970s and, as of December
2010, aircraft operating leases comprised approximately 35% of
the more than 19,000 commercial jet aircraft fleet in service.
Leasing is attractive to nearly all airlines and is particularly
attractive to
start-up and
low-cost carriers. Airlines have turned to operating leases for
an increasing share of their financing requirements as operating
leases provide fleet planning flexibility, relatively low
capital investment and the avoidance of balance sheet residual
value risk. An operating lease allows an airline to preserve
capital that can be invested in other aspects of its operations.
Furthermore, since operating lessors can provide airlines with
different aircraft types to leverage their operating
capabilities, operating leases assist airlines in diversifying
their fleets, which provides economic and product flexibility
and helps to promote growth in new markets in different
geographic regions.
The growth of commercial aircraft operating leases is expected
to continue. AVITAS forecasts for aircraft deliveries over the
next five years suggest that leased aircraft may grow by
approximately 25%. Leasing companies will play an increasingly larger
role in providing aircraft capacity as airlines grow their
fleets and replace their existing fleets with newer, more
fuel-efficient aircraft. Lessors who are adequately capitalized
and are both nimble and flexible in their approach will be able
to take advantage of both current and long-term aircraft leasing
market opportunities.
7
Risks affecting
us
Investing in our Common Stock involves a high
degree of risk. You should carefully consider all of the
information set forth in this prospectus and, in particular, the
information in the section titled Risk factors,
before deciding to invest in our Common Stock.
These risks include, among others:
|
|
|
We are a recently organized corporation with a brief operating
history and, therefore, we have limited historical operating
data from which you can evaluate our future prospects.
|
|
|
The success of our business will depend on our ability to
identify high-quality commercial aircraft to acquire at
reasonable prices.
|
|
|
Failure to close our aircraft acquisition commitments could
negatively impact our share price and financial results.
|
|
|
Our business model depends on the continual leasing and
re-leasing of our aircraft, and we may not be able to do so on
favorable terms, if at all.
|
|
|
Our credit facilities may limit our operational flexibility, our
ability to effectively compete and our ability to grow our
business as currently planned.
|
|
|
We will need additional capital to finance our growth, and we
may not be able to obtain it on terms acceptable to us, or at
all, which may limit our ability to satisfy our commitments to
acquire additional aircraft and to compete effectively in the
commercial aircraft leasing market.
|
|
|
Changes in interest rates may adversely affect our financial
results.
|
|
|
We have a high airline customer concentration, which makes us
more vulnerable to the potential that defaults by one or more of
our major airline customers would have a material adverse effect
on our cash flow and earnings and our ability to meet our debt
obligations.
|
|
|
We may be indirectly subject to many of the economic and
political risks associated with emerging markets, which could
adversely affect our financial results and growth prospects.
|
|
|
From time to time, the aircraft industry has experienced periods
of oversupply during which lease rates and aircraft values have
declined, and any future oversupply could materially adversely
affect our financial results and growth prospects.
|
|
|
Increases in fuel costs could materially adversely affect our
lessees and by extension the demand for our aircraft.
|
|
|
A deterioration in the financial condition of the airline
industry would have an adverse impact on our ability to lease
our aircraft and sustain our revenues.
|
Initial Public Offering
In April 2011, we completed an initial public offering of our Class A Common Stock in
which we sold an aggregate of 34,825,470 shares of Class A Common Stock, including
4,542,450 shares of Class A Common Stock sold to the underwriters pursuant to an over-allotment option. J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC
acted as joint book-running managers of the initial public offering and as representatives
of the other book-runners and co-managers. The shares in the initial public offering were
sold at the initial public offering price of $26.50, less underwriting discounts and
commissions of $1.4575 per share. After deducting the underwriting discounts and
commissions and offering expenses payable by us, we received net proceeds of
approximately $868.6 million. We intend to use the net proceeds of our initial public offering to
fund the acquisition of commercial aircraft and for general corporate purposes.
Corporate
information
Air Lease Corporation incorporated in Delaware and launched in
February 2010. Our principal executive office is located at 2000
Avenue of the Stars, Suite 1000N, Los Angeles, California
90067. Our telephone number is
(310) 553-0555
and our website is www.airleasecorp.com. Information
included or referred to on, or otherwise accessible through, our
website is not intended to form a part of or be incorporated by
reference into this prospectus.
8
The offering
|
|
|
|
Class A Common Stock offered by
the selling stockholders
|
|
59,981,528 shares |
|
|
|
|
Class B Non-Voting Common Stock
offered by the selling stockholders
|
|
1,829,339 shares |
|
|
|
Total Common Stock outstanding prior to and
after this offering
|
|
100,714,470 shares |
|
|
|
Use of proceeds
|
|
We will not receive any proceeds
from the sale of Common
Stock by the selling stockholders.
See Use of proceeds. |
|
|
|
Dividend policy
|
|
We have no current plans to declare
or pay any dividends on our Common
Stock. See Dividend policy. |
|
|
|
Voting rights
|
|
The holders of Class A Common Stock
possess all voting power for the
election of our directors and all
other matters requiring stockholder
action, except with respect to
amendments to our restated
certificate of incorporation that
alter or change the powers,
preferences, rights or other terms
of any outstanding preferred stock
if the holders of such affected
series of preferred stock are
entitled to vote on such an
amendment. Holders of our Class A
Common Stock are entitled to one
vote for each share held and will
not have cumulative voting rights in
connection with the election of
directors. Holders of Class B
Non-Voting Common Stock are not
entitled to any vote, other than
with respect to amendments to the
terms of the Class B Non-Voting
Common Stock that would
significantly and adversely affect
the rights or preferences of the
Class B Non-Voting Common Stock,
including, without limitation, with
respect to the convertibility
thereof. See Description of capital
stock. |
|
|
|
Risk factors
|
|
See Risk factors for a discussion
of certain factors you should
consider before deciding to invest
in our Common Stock. |
The number of shares of our Common Stock outstanding prior to and after this offering excludes:
|
|
|
1,829,339 shares of Class A Common Stock issuable upon
conversion of the outstanding shares of Class B Non-Voting Common
Stock, except that each share of Class B Non-Voting Common Stock will
only become convertible at the time it is transferred to a third
party unaffiliated with Société Générale S.A., which wholly owns
Genefinance S.A., the selling stockholder of the shares of the Class B
Non-Voting Common Stock included in this offering; |
|
|
|
482,625 shares of Common Stock issuable upon the exercise of warrants outstanding as of
June 30, 2011 at an exercise price of $20.00 per share; |
|
|
|
3,225,908 shares of Class A Common Stock issuable upon the exercise of options outstanding
as of June 30, 2011 at an exercise price of $20.00 per share; |
|
|
|
|
|
150,000 shares of Class A Common Stock issuable upon the
exercise of options outstanding as of June 30, 2011 at an exercise
price of $28.80 per share; and |
|
|
|
|
|
2,613,989 shares of Class A Common Stock issuable upon the vesting of restricted stock
units outstanding as of June 30, 2011. |
|
9
Summary financial
information and data
The following table sets forth summary consolidated financial
data for Air Lease Corporation. The historical results presented
are not necessarily indicative of future results. The summary
consolidated financial data set forth below should be read in
conjunction with Managements discussion and analysis
of financial condition and results of operations and the
financial statements and related notes appearing elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands, except share data) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals of flight equipment |
|
$ |
74,004 |
|
|
$ |
1,235 |
|
|
$ |
128,616 |
|
|
$ |
1,235 |
|
|
$ |
57,075 |
|
Interest and other |
|
|
340 |
|
|
|
474 |
|
|
|
943 |
|
|
|
474 |
|
|
|
1,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
74,344 |
|
|
|
1,709 |
|
|
|
129,559 |
|
|
|
1,709 |
|
|
|
58,366 |
|
Expenses |
|
|
63,456 |
|
|
|
46,852 |
|
|
|
113,746 |
|
|
|
47,329 |
|
|
|
119,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
10,888 |
|
|
|
(45,143 |
) |
|
|
15,813 |
|
|
|
(45,620 |
) |
|
|
(60,915 |
) |
Income tax (expense) benefit |
|
|
(3,865 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.08 |
|
|
$ |
(2.37 |
) |
|
$ |
0.13 |
|
|
$ |
(4.17 |
) |
|
$ |
(1.32 |
) |
Diluted |
|
$ |
0.08 |
|
|
$ |
(2.37 |
) |
|
$ |
0.13 |
|
|
$ |
(4.17 |
) |
|
$ |
(1.32 |
) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
91,039,329 |
|
|
|
17,394,121 |
|
|
|
78,287,085 |
|
|
|
9,981,375 |
|
|
|
39,511,045 |
|
Diluted |
|
|
91,163,657 |
|
|
|
17,394,121 |
|
|
|
78,408,463 |
|
|
|
9,981,375 |
|
|
|
39,511,045 |
|
Other financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)(1) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
Adjusted EBITDA(2) |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment subject to operating
leases (net of accumulated depreciation) |
|
$ |
2,814,926 |
|
|
$ |
319,258 |
|
|
$ |
2,814,926 |
|
|
$ |
319,258 |
|
|
$ |
1,629,809 |
|
Total assets |
|
|
3,753,499 |
|
|
|
1,159,859 |
|
|
|
3,753,499 |
|
|
|
1,159,859 |
|
|
|
2,276,282 |
|
Total debt |
|
|
1,383,570 |
|
|
|
25,000 |
|
|
|
1,383,570 |
|
|
|
25,000 |
|
|
|
911,981 |
|
Total liabilities |
|
|
1,627,151 |
|
|
|
43,719 |
|
|
|
1,627,151 |
|
|
|
43,719 |
|
|
|
1,051,347 |
|
Shareholders equity |
|
|
2,126,348 |
|
|
|
1,116,140 |
|
|
|
2,126,348 |
|
|
|
1,116,140 |
|
|
|
1,224,935 |
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Investing activities |
|
|
(759,446 |
) |
|
|
(331,351 |
) |
|
|
(1,371,323 |
) |
|
|
(335,601 |
) |
|
|
(1,854,710 |
) |
Financing activities |
|
|
925,688 |
|
|
|
1,087,752 |
|
|
|
1,400,508 |
|
|
|
1,090,443 |
|
|
|
2,138,407 |
|
Other operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft lease portfolio at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned(3) |
|
|
65 |
|
|
|
8 |
|
|
|
65 |
|
|
|
8 |
|
|
|
40 |
|
|
| | |
(1)
| |
Adjusted net income (loss) (defined as net
income before stock-based compensation expense and non-cash
interest expense, which includes the amortization of debt
issuance costs and convertible debt discounts) is a measure of
both operating performance and liquidity that is not defined by
United States generally accepted accounting principles
(GAAP) and should not be considered as an
alternative to net income, income from operations or any other
performance measures derived in accordance with GAAP. Adjusted
net income is presented as a supplemental disclosure because
management believes that it may be a useful performance measure
that is used within our industry. We believe adjusted net income
provides useful information on our earnings from ongoing
operations, our ability to service our long-term debt and other
fixed obligations, and our ability to fund our expected growth
with internally generated funds. Set forth below is additional
detail as to how
|
10
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|
|
we use adjusted net income as a
measure of both operating performance and liquidity, as well as
a discussion of the limitations of adjusted net income as an
analytical tool and a reconciliation of adjusted net income to
our GAAP net loss and cash flow from operating activities.
|
|
|
|
Operating
Performance: Management
and our board of directors use adjusted net income in a number
of ways to assess our consolidated financial and operating
performance, and we believe this measure is helpful in
identifying trends in our performance. We use adjusted net
income as a measure of our consolidated operating performance
exclusive of income and expenses that relate to the financing,
income taxes, and capitalization of the business. Also, adjusted
net income assists us in comparing our operating performance on
a consistent basis as it removes the impact of our capital
structure (primarily one-time amortization of convertible debt
discounts) and stock-based compensation expense from our
operating results. In addition, adjusted net income helps
management identify controllable expenses and make decisions
designed to help us meet our current financial goals and
optimize our financial performance. Accordingly, we believe this
metric measures our financial performance based on operational
factors that we can influence in the short term, namely the cost
structure and expenses of the organization.
|
|
|
|
Liquidity: In
addition to the uses described above, management and our board
of directors use adjusted net income as an indicator of the
amount of cash flow we have available to service our debt
obligations, and we believe this measure can serve the same
purpose for our investors.
|
|
|
|
Limitations: Adjusted
net income has limitations as an analytical tool, and you should
not consider it in isolation, or as a substitute for analysis of
our operating results or cash flows as reported under GAAP. Some
of these limitations are as follows:
|
|
|
|
|
|
|
|
adjusted net income
does not reflect (i) our cash expenditures or future
requirements for capital expenditures or contractual
commitments, or (ii) changes in or cash requirements for
our working capital needs; and
|
|
|
|
our calculation of
adjusted net income may differ from the adjusted net income or
analogous calculations of other companies in our industry,
limiting its usefulness as a comparative measure.
|
|
|
|
|
|
|
|
The following tables show the
reconciliation of net income (loss) and cash flows from operating
activities, the most directly comparable GAAP measures of
performance and liquidity, to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Reconciliation of cash flows from operating activities to adjusted
net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Depreciation of flight equipment |
|
|
(24,644 |
) |
|
|
(327 |
) |
|
|
(42,774 |
) |
|
|
(327 |
) |
|
|
(19,262 |
) |
Stock-based compensation |
|
|
(11,753 |
) |
|
|
(2,255 |
) |
|
|
(22,660 |
) |
|
|
(2,255 |
) |
|
|
(24,044 |
) |
Deferred taxes |
|
|
(3,866 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
Amortization of deferred debt issue costs |
|
|
(2,336 |
) |
|
|
(875 |
) |
|
|
(4,664 |
) |
|
|
(875 |
) |
|
|
(4,883 |
) |
Extinguishment of debt |
|
|
(3,349 |
) |
|
|
|
|
|
|
(3,349 |
) |
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
(35,798 |
) |
|
|
|
|
|
|
(35,798 |
) |
|
|
(35,798 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and other assets |
|
|
14,042 |
|
|
|
1,094 |
|
|
|
16,327 |
|
|
|
1,199 |
|
|
|
8,040 |
|
Accrued interest and other payables |
|
|
(5,904 |
) |
|
|
(5,032 |
) |
|
|
(6,932 |
) |
|
|
(7,424 |
) |
|
|
(22,054 |
) |
Rentals received in advance |
|
|
(3,650 |
) |
|
|
(2,159 |
) |
|
|
(7,167 |
) |
|
|
(2,159 |
) |
|
|
(8,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
7,023 |
|
|
|
(41,141 |
) |
|
|
10,199 |
|
|
|
(41,618 |
) |
|
|
(52,040 |
) |
Amortization of debt issue costs |
|
|
2,336 |
|
|
|
875 |
|
|
|
4,664 |
|
|
|
875 |
|
|
|
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
Tax effect |
|
|
(5,002 |
) |
|
|
(1,102 |
) |
|
|
(9,700 |
) |
|
|
(1,102 |
) |
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Reconciliation of net income (loss) to
adjusted net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
Amortization of debt issue costs |
|
|
2,336 |
|
|
|
875 |
|
|
|
4,664 |
|
|
|
875 |
|
|
|
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
Tax effect |
|
|
(5,002 |
) |
|
|
(1,102 |
) |
|
|
(9,700 |
) |
|
|
(1,102 |
) |
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
|
11
|
|
|
(2)
|
|
Adjusted EBITDA (defined as net
loss before net interest expense, stock-based compensation
expense, income tax expense (benefit), and depreciation and
amortization expense) is a measure of both operating performance
and liquidity that is not defined by GAAP and should not be
considered as an alternative to net income, income from
operations or any other performance measures derived in
accordance with GAAP. Adjusted EBITDA is presented as a
supplemental disclosure because management believes that it may
be a useful performance measure that is used within our
industry. We believe adjusted EBITDA provides useful information
on our earnings from ongoing operations, our ability to service
our long-term debt and other fixed obligations, and our ability
to fund our expected growth with internally generated funds. Set
forth below is additional detail as to how we use adjusted
EBITDA as a measure of both operating performance and liquidity,
as well as a discussion of the limitations of adjusted EBITDA as
an analytical tool and a reconciliation of adjusted EBITDA to
our GAAP net loss and cash flow from operating activities.
|
|
|
|
Operating
Performance: Management
and our board of directors use adjusted EBITDA in a number of
ways to assess our consolidated financial and operating
performance, and we believe this measure is helpful in
identifying trends in our performance. We use adjusted EBITDA as
a measure of our consolidated operating performance exclusive of
income and expenses that relate to the financing, income taxes,
and capitalization of the business. Also, adjusted EBITDA
assists us in comparing our operating performance on a
consistent basis as it removes the impact of our capital
structure (primarily one-time amortization of convertible debt
discounts) and stock-based compensation expense from our
operating results. In addition, adjusted EBITDA helps management
identify controllable expenses and make decisions designed to
help us meet our current financial goals and optimize our
financial performance. Accordingly, we believe this metric
measures our financial performance based on operational factors
that we can influence in the short term, namely the cost
structure and expenses of the organization.
|
|
|
|
Liquidity: In
addition to the uses described above, management and our board
of directors use adjusted EBITDA as an indicator of the amount
of cash flow we have available to service our debt obligations,
and we believe this measure can serve the same purpose for our
investors.
|
|
|
|
Limitations: Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
operating results or cash flows as reported under GAAP. Some of
these limitations are as follows:
|
|
|
|
|
|
|
|
adjusted EBITDA does
not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments;
|
|
|
|
adjusted EBITDA does
not reflect changes in or cash requirements for our working
capital needs;
|
|
|
|
adjusted EBITDA does
not reflect interest expense or cash requirements necessary to
service interest or principal payments on our debt; and
|
|
|
|
other companies in our industry may calculate these measures differently from how we
calculate these measures, limiting their usefulness as
comparative measures.
|
|
|
|
|
|
|
The following tables show the
reconciliation of net income (loss) and cash flows from operating
activities, the most directly comparable GAAP measures of
performance and liquidity, to adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Reconciliation of cash flows from operating
activities to adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Depreciation of flight equipment |
|
|
(24,644 |
) |
|
|
(327 |
) |
|
|
(42,774 |
) |
|
|
(327 |
) |
|
|
(19,262 |
) |
Stock-based compensation |
|
|
(11,753 |
) |
|
|
(2,255 |
) |
|
|
(22,660 |
) |
|
|
(2,255 |
) |
|
|
(24,044 |
) |
Deferred taxes |
|
|
(3,866 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
Amortization of deferred debt issue costs |
|
|
(2,336 |
) |
|
|
(875 |
) |
|
|
(4,664 |
) |
|
|
(875 |
) |
|
|
(4,883 |
) |
Extinguishment of debt |
|
|
(3,349 |
) |
|
|
|
|
|
|
(3,349 |
) |
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
(35,798 |
) |
|
|
|
|
|
|
(35,798 |
) |
|
|
(35,798 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and other assets |
|
|
14,042 |
|
|
|
1,094 |
|
|
|
16,327 |
|
|
|
1,199 |
|
|
|
8,040 |
|
Accrued interest and other payables |
|
|
(5,904 |
) |
|
|
(5,032 |
) |
|
|
(6,932 |
) |
|
|
(7,424 |
) |
|
|
(22,054 |
) |
Rentals received in advance |
|
|
(3,650 |
) |
|
|
(2,159 |
) |
|
|
(7,167 |
) |
|
|
(2,159 |
) |
|
|
(8,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
7,023 |
|
|
|
(41,141 |
) |
|
|
10,199 |
|
|
|
(41,618 |
) |
|
|
(52,040 |
) |
Net interest expense |
|
|
15,495 |
|
|
|
38,107 |
|
|
|
26,782 |
|
|
|
38,107 |
|
|
|
50,582 |
|
Income taxes |
|
|
3,865 |
|
|
|
4,002 |
|
|
|
5,614 |
|
|
|
4,002 |
|
|
|
(8,875 |
) |
Depreciation |
|
|
24,644 |
|
|
|
327 |
|
|
|
42,774 |
|
|
|
327 |
|
|
|
19,262 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
Reconciliation of net income
(loss) to adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
Net interest expense |
|
|
15,495 |
|
|
|
38,107 |
|
|
|
26,782 |
|
|
|
38,107 |
|
|
|
50,582 |
|
Income taxes |
|
|
3,865 |
|
|
|
4,002 |
|
|
|
5,614 |
|
|
|
4,002 |
|
|
|
(8,875 |
) |
Depreciation |
|
|
24,644 |
|
|
|
327 |
|
|
|
42,774 |
|
|
|
327 |
|
|
|
19,262 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
|
|
|
|
|
(3)
|
|
As of June 30, 2011, we owned
65 aircraft (of which 13 were new aircraft and 52 were used
aircraft) and we managed one aircraft. As of December 31, 2010, we
owned 40 aircraft of which four were new aircraft and 36 were
used aircraft.
|
|
13
Risk factors
An investment in our Common Stock involves a high degree of risk. You should consider
carefully all of the risks described below, together with the other information contained in this
prospectus, before making a decision to invest in our Common Stock. If any of the following
events occur, our business, financial condition and operating results may be materially adversely
affected. As a result, the trading price of our Class A Common Stock could decline and you may lose
a part or all of your investment. Some statements in this prospectus, including statements in the
following risk factors, constitute forward-looking statements. Please refer to the section titled
Forward-looking statements.
Risks relating to
our business
We are a
recently organized corporation with a brief operating history
and, therefore, we have limited historical operating data from
which you can evaluate our future prospects.
Given our limited operating history, you have little historical
information upon which to evaluate our prospects, including our
ability to acquire aircraft on favorable terms or to
enter into profitable aircraft leases. We cannot assure you
that we will be able to implement our business objectives,
that any of our objectives will be achieved or that we will be
able to operate profitably. The results of our operations will
depend on several factors, including the availability of
opportunities for the acquisition, disposition and leasing of
aircraft, our ability to capitalize on any such opportunities,
the creditworthiness of our counterparties, the level of
volatility of interest rates and commodities, the availability
of adequate short- and long-term financing, conditions in the
financial markets and other economic conditions, particularly as
these conditions impact airlines and manufacturers of aircraft
and aircraft parts. Our limited historical operations place us
at a competitive disadvantage that our competitors may exploit.
We cannot
assure you of the quantity or types of aircraft that we will be
able to acquire in the future or that we will be able to enter into
profitable leases for any
aircraft acquired.
We cannot assure you of the quantity of aircraft that will be
available to us for future acquisitions
or the success or timing of any such proposed or potential
acquisitions. Further, we cannot assure you that we will be able
to enter into profitable leases upon the acquisition of the
aircraft we purchase in the future. If we experience
significant delays in the implementation of our business
strategies, including delays in the acquisition and leasing of
aircraft, our growth strategy and long-term results of
operations could be adversely affected.
You will not have advance information as to the types, ages,
manufacturers, model numbers or condition of the assets
purchased in connection with other future acquisitions. You must
rely upon our management teams judgment and ability to
select our investments, to evaluate the assets condition,
to evaluate the ability of lessees and other counterparties to
perform their obligations to us and to negotiate transaction
documents. We cannot assure you that our management team will be
able to perform such functions in a manner that will achieve our
investment objectives.
14
The success of
our business will depend on our ability to identify high-quality
commercial aircraft to acquire at reasonable prices. If we
experience abnormally high maintenance or obsolescence issues
with any commercial aircraft that we acquire, our financial
results and growth prospects could be materially and adversely
affected.
The success of our business depends, in part, on our ability to
identify high-quality commercial aircraft to acquire at
reasonable prices. As reported by AVITAS, there is currently
high market demand for certain narrowbody aircraft, so
competition may reduce our opportunities to complete the
acquisition of aircraft we are seeking on favorable terms. An
acquisition of one or more aircraft or other aviation assets may
not be profitable to us after the acquisition and may not
generate sufficient cash flow to justify our completion of those
acquisitions. In addition, our acquisition strategy exposes us
to risks that may harm our business, financial condition,
results of operations and cash flow, including risks that we may:
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impair our liquidity by using a significant portion of our
available cash or borrowing capacity to finance the acquisition
of aircraft;
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significantly increase our interest expense and financial
leverage to the extent we incur additional debt to finance the
acquisition of aircraft; or
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incur or assume unanticipated liabilities, losses or costs
associated with the aircraft or other aviation assets that we
acquire.
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Unlike new aircraft, used aircraft typically do not carry
warranties as to their condition. As a result, we may not be
able to claim any warranty-related expenses on used aircraft.
Although we may inspect an existing aircraft and its documented
maintenance, usage, lease and other records prior to
acquisition, we may not discover every defect during an
inspection. Repairs and maintenance costs for existing aircraft
are difficult to predict and generally increase as aircraft age,
and an aircrafts condition can be adversely affected by
prior operations. These repair costs could decrease our cash
flow and reduce our liquidity.
In addition, aircraft are long-lived assets, requiring long lead
times to develop and manufacture, with particular types and
models becoming obsolete and less in demand over time when
newer, more advanced aircraft are manufactured. By acquiring
existing aircraft, we have greater exposure to more rapid
obsolescence of our fleet, particularly if there are
unanticipated events shortening the life cycle of such aircraft,
such as government regulation or changes in our airline
customers preferences. This may result in a shorter life
cycle for our fleet and, accordingly, declining lease rates,
impairment charges, increased depreciation expense or losses
related to aircraft asset value guarantees, if we were to
provide such guarantees.
Further, variable expenses like fuel, crew size or aging
aircraft corrosion control or modification programs and related
airworthiness directives could make the operation of older
aircraft more costly to our lessees and may result in increased
lessee defaults. We may also incur some of these increased
maintenance expenses and regulatory costs upon acquisition or
re-leasing of our aircraft. Any of these expenses or costs will
have a negative impact on our financial results.
Failure to
close our aircraft acquisition commitments could negatively
impact our share price and financial results.
As of June 30, 2011, we had binding and non-binding purchase commitments to acquire a total
of 243 aircraft for delivery through 2020. If we are unable to
maintain our financing sources or find new sources of financing
or if the various conditions to our existing commitments are not
satisfied, we may be
15
unable to close the purchase of some or all of the aircraft
which we have commitments to acquire. If our aircraft
acquisition commitments are not closed for these or other
reasons, we will be subject to several risks, including the
following:
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forfeiting deposits and progress payments and having to pay and
expense certain significant costs relating to these commitments,
such as actual damages, and legal, accounting and financial
advisory expenses, and not realizing any of the benefits of
completing the transactions;
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defaulting on our lease commitments, which could result in
monetary damages and damage to our reputation and relationships
with lessees; and
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failing to capitalize on other aircraft acquisition
opportunities that were not pursued due to our managements
focus on these commitments.
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If we determine that the capital we require to satisfy these
commitments may not be available to us, either at all or on
terms we deem attractive, we may eliminate or reduce any
dividend program that may be in place at that time in order to
preserve capital to apply to these commitments. These risks
could materially adversely affect our share price and financial
results.
The death,
incapacity or departure of key officers could harm our business
and financial results.
We believe our senior managements reputations and
relationships with lessees, manufacturers, buyers and financiers
of aircraft are a critical element to the success of our
business. We depend on the diligence, skill and network of
business contacts of our management team. We believe there are
only a limited number of available qualified executives in the
aircraft industry, and we therefore have encountered, and will
likely continue to encounter, intense competition for qualified
employees from other companies in our industry. Our future
success will depend, to a significant extent, upon the continued
service of our senior management personnel, particularly:
Mr. Udvar-Házy, our founder, Chairman and Chief
Executive Officer; Mr. Plueger, our President and Chief
Operating Officer; and our other senior officers, including
Messrs. Levy, Baer, Khatibi, Chen, Clarke, Willis and
Poerschke, each of whose services are critical to the successful
implementation of our business strategies. We only have
employment agreements with Messrs. Udvar-Házy and
Plueger and have no intention at this time to enter into
employment agreements with any of our other senior officers. If
we were to lose the services of any of the members of our senior
management team, our business and financial results could be
adversely affected.
Our business
model depends on the continual leasing and re-leasing of our
aircraft, and we may not be able to do so on favorable terms, if
at all.
Our business model depends on the continual leasing and
re-leasing of our aircraft in order to generate sufficient
revenues to finance our growth and operations, pay our debt
service obligations and generate positive cash flows from
operations. Our ability to lease and re-lease our aircraft will
depend on general market and competitive conditions at the time
the initial leases are entered into and expire. If we are not
able to lease or re-lease an aircraft or to do so on favorable
terms, we may be required to attempt to sell the aircraft to
provide funds for our debt service obligations or operating
expenses. Our ability to lease, re-lease or sell the aircraft on
favorable terms or without significant off-lease time and costs
could be adversely affected by depressed conditions in the
airline and aircraft industries, airline bankruptcies, the
effects of terrorism and war, the sale of other aircraft by
financial institutions, and various other general
16
market and competitive conditions and factors which are outside
of our control, including those discussed under Risk
factorsRisks relating to the aircraft leasing
industry.
Our credit
facilities may limit our operational flexibility, our ability to
effectively compete and our ability to grow our business as
currently planned.
Our credit facilities contain financial and non-financial
covenants, such as requirements that we comply with one or more
of loan-to-value, debt service coverage, minimum net worth and
interest coverage ratios, change of control provisions, and
prohibitions against our disposing of our aircraft or other
aviation assets without a lenders prior consent. Complying
with such covenants may at times necessitate that we forego
other opportunities, such as using available cash to grow our
aircraft fleet or promptly disposing of less profitable aircraft
or other aviation assets. Moreover, our failure to comply with
any of these covenants would likely constitute a default under
such facilities and could give rise to an acceleration of some,
if not all, of our then outstanding indebtedness, which would
have a material adverse effect on our business and our ability
to continue as a going concern.
In the future, we may have ECA and Ex-Im Bank supported credit
facilities and credit facilities provided by BNDES. We expect
that, similar to commercial lenders, the ECAs, Ex-Im Bank and
BNDES will require certain structural and operational
restrictions to be included in the terms of the operating
leases, particularly with respect to subleasing, insurance and
the possession, use and location of the aircraft financed under
such facilities. The imposition of these mandatory provisions
could significantly restrict a lessees business
operations, which may cause such aircraft to be less desirable
to potential lessees and make it more difficult for us to
negotiate operating leases for such aircraft on favorable terms.
In addition, the credit facilities supported by the ECAs and
Ex-Im Bank may contain certain change of control provisions,
which would require us to prepay the loans in the event that our
ownership structure changes. Complying with such change of
control provisions may also require us to forego other
opportunities, which may adversely affect our financial
condition.
In addition, we cannot assure you that our business will
generate cash flow from operations in an amount sufficient to
enable us to service our debt and grow our operations as
planned. We cannot assure you that we will be able to refinance
any of our debt on favorable terms, if at all. Any inability to
generate sufficient cash flow or maintain our existing fleet and
facilities could have a material adverse effect on our financial
condition and results of operations.
We will need
additional capital to finance our growth, and we may not be able
to obtain it on terms acceptable to us, or at all, which may
limit our ability to satisfy our commitments to acquire
additional aircraft and to compete effectively in the commercial
aircraft leasing market.
Meeting our anticipated growth strategy to acquire approximately
100 aircraft by the end of 2011 and then further grow our fleet
will require substantial additional capital. Our Warehouse
Facility, as amended, includes a revolving period that ends in
June 2013 (subject to possible early termination of this period,
or possible extension of this period, which will require the
consent of the agent thereunder and lenders, including
replacement lenders), following which all amounts outstanding
under the facility may be converted to a term loan, and we will
no longer have access to additional loans from this facility. In
addition, the terms of the Warehouse Facility will then become
more stringent, including, but not limited to, increasing
interest rates and principal amortization. Accordingly, we will
need to obtain additional financing, which may not be available
to us on favorable terms or at all.
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Our access to additional sources of financing will depend upon a
number of factors over which we have limited control, including:
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general market conditions;
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the markets view of the quality of our assets;
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the markets perception of our growth potential;
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interest rate fluctuations;
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our current and potential future earnings and cash
distributions; and
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the market price of our Class A Common Stock.
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Weakness in the capital and credit markets could adversely
affect one or more private lenders and could cause one or more
private lenders to be unwilling or unable to provide us with
financing or to increase the costs of that financing. In
addition, if there are new regulatory capital requirements
imposed on our private lenders, they may be required to limit,
or increase the cost of, financing they provide to us. In
general, this could potentially increase our financing costs and
reduce our liquidity or require us to sell assets at an
inopportune time or price.
If we are unable to raise additional funds or obtain capital on
terms acceptable to us, we may not be able to satisfy funding
requirements should we have any aircraft acquisition commitments
then in place. If we are unable to satisfy our purchase
commitments, we may be forced to forfeit our deposits. Further,
we would be exposed to potential breach of contract claims by
our lessees and manufacturers. These risks may also be increased
by the volatility and disruption in the capital and credit
markets. Depending on market conditions at the time, we
may have to rely more heavily on additional equity issuances,
which may be dilutive to our stockholders, or on less efficient
forms of debt financing that require a larger portion of our
cash flow from operations, thereby reducing funds available for
our operations, future business opportunities and other
purposes. Moreover, if additional capital is raised through the
issuance of additional equity securities, your interests as a
stockholder could be diluted. Because our charter permits the
issuance of preferred stock, if our board of directors approves
the issuance of preferred stock in a future financing
transaction, such preferred stockholders may have rights,
preferences or privileges senior to yours, and you will not have
the ability to approve such a transaction.
We may not be
able to obtain long-term debt refinancing on attractive terms,
if at all, or qualify for guarantees, or obtain attractive terms
for such guarantees, from the ECAs, Ex-Im Bank or SBCE, any of
which may adversely affect our growth strategy and results of
operations.
Our business model contemplates our ability to enter into
attractive and economical long-term financing transactions.
Conditions in the capital markets or debt markets may prevent us
from entering into long-term debt financing arrangements, if at
all, on terms favorable to us, which, if available, could cause
such financings to be more costly or otherwise less attractive
to us. Obtaining credit support from the ECAs, Ex-Im Bank and
SBCE could facilitate our access to long-term financing, but the
ECAs, Ex-Im Bank and SBCE have in place certain pre-approval
criteria that must be met in order to qualify for, and gain
access to, the credit support from or financing from such
agencies, and we cannot assure you that we would qualify for
financing under these programs. If in the future we are unable
to meet the pre-approval criteria of these entities, whether due
to changes in our financial condition or changes in the
underlying criteria, or if the
18
entities discontinue providing credit support, or if there are
changes in the economic terms of the programs sponsored by these
agencies, then we may no longer be able to access such favorable
credit support, which may cause the terms of the debt financing
that we are able to obtain, if any, to be less favorable. A new
aircraft sector understanding (ASU) governing credit
support from the ECAs, Ex-Im Bank and SBCE went into effect on
February 1, 2011. While these government-sponsored financings
have historically provided favorable funding levels at interest
rates below those obtainable from traditional commercial
sources, under the new ASU, aircraft under firm contract after
December 31, 2010 or scheduled for delivery after
December 31, 2012 will be subject to significantly higher
guarantee fees, which may make such financings less attractive
to us than alternative sources of financing. Aircraft under firm
contract on or before December 31, 2010 and scheduled to deliver
on or before December 31, 2012 are grandfathered under the new
ASU and are not subject to the higher fee structure. While we
may pursue credit support from the ECAs, Ex-Im Bank and SBCE
for our grandfathered aircraft, it is uncertain at this time
whether we would be able to obtain attractive financing terms
from these government-sponsored programs for our
non-grandfathered aircraft. To the extent we are unable to
obtain attractive financing terms, we would be more limited in
the sources of favorable financing available to us.
Accordingly, we cannot assure you that in the future we will be
able to access long-term financing or credit support from the
ECAs, Ex-Im Bank or SBCE on favorable terms, if at all. Our
inability to access such financing or credit support could
adversely affect our growth strategy and results of operations.
An unexpected
increase in our borrowing costs may adversely affect our
earnings.
We finance many of the aircraft in our fleet through a
combination of short- and long-term debt financings. As these
debt financings mature, we may have to refinance these existing
commitments by entering into new financings, which could result
in higher borrowing costs, or repay them by using cash on hand
or cash from the sale of our assets. Moreover, an increase in
interest rates under the various debt financing facilities we
have in place would have an adverse effect on our earnings and
could make our aircraft leasing contracts unprofitable. Our
Warehouse Facility, as amended, has incremental increases in the
interest rate beginning in June 2013 (absent an earlier
termination of this period, or the extension of this period,
which will require the consent of the agent thereunder and all
of the lenders). In addition, the terms of the Warehouse
Facility will then become more stringent, including principal
amortization and increases in the interest rate, thereby
adversely affecting our cash flows and profitability.
The Warehouse Facility and some of our other debt financings
bear interest at a floating rate, such that our interest expense
would vary with changes in the applicable reference rate. As a
result, to the extent we have not sufficiently protected
ourselves from increases in the reference rate or have not
refinanced our debt to fixed rates, changes in interest rates
may increase our interest costs and may reduce the spread
between the revenues from our net operating leases and the cost
of our borrowings.
Our
substantial indebtedness incurred to acquire our aircraft
requires significant debt service payments.
As of June 30, 2011, we had $1.4 billion in debt
outstanding, and we expect this amount to grow as we acquire
more aircraft. If our cash flow and capital resources are
insufficient to fund our debt service payments, we may be forced
to reduce or delay capital
19
expenditures, dispose of assets, issue equity or incur
additional debt to obtain necessary funds, or restructure our
debt, any or all of which could have a material adverse effect
on our business, financial condition and results of operations.
In addition, we cannot assure you that we would be able to take
any of these actions on terms acceptable to us, or at all, that
these actions would enable us to continue to satisfy our capital
requirements or that these actions would be permitted under the
terms of our various debt agreements.
Changes in
interest rates may adversely affect our financial
results.
Changes, both increases and decreases, in our cost of borrowing,
as reflected in our composite interest rate, directly impact our
net income. Our lease rental stream is generally fixed over the
life of our leases, whereas we have used floating-rate debt to
finance a significant portion of our aircraft acquisitions. As
of June 30, 2011, we had $1.0 billion in
floating-rate debt. If interest rates increase, we would be
obligated to make higher interest payments to our lenders. If we
incur significant fixed-rate debt in the future, increased
interest rates prevailing in the market at the time of the
incurrence of such debt would also increase our interest
expense. If our composite interest rate were to increase by
1.0%, we would expect to incur additional interest expense on
our existing indebtedness as of June 30, 2011, of
approximately $10.2 million on an annualized basis, which
would negatively affect our operating margins.
The interest rates that we obtain on our debt financings have
several components, including credit spreads, swap spreads,
duration, and new issue premiums. These are all incremental to
the underlying risk-free rates, as applicable. Volatility in our
perceived risk of default or in a market sectors risk of
default will negatively impact our cost of funds.
We currently are not involved in any interest rate hedging
activities, but we are contemplating engaging in hedging
activities in the future. Any such hedging activities will
require us to incur additional costs, and there can be no
assurance that we will be able to successfully protect ourselves
from any or all adverse interest rate fluctuations at a
reasonable cost.
Under our
Warehouse Facility and other of our financing arrangements,
creditors of any subsidiaries we form for purposes of such
facilities will have priority over you in the event of a
distribution of such subsidiaries assets.
All of the aircraft and other assets we acquire with the
Warehouse Facility are held in subsidiaries of ALC Warehouse
Borrower, LLC, a special-purpose, bankruptcy-remote subsidiary
of our Company. Liens on those assets will be held by a
collateral agent for the benefit of the lenders under such
facility. ALC Warehouse Borrower, LLCs assets will be
primarily composed of its investment in the stock or other
equity interests of these subsidiaries, which stock or other
equity interests will also be subject to liens held by the
collateral agent for the benefit of the lenders under such
facility. In addition, funds generated from the lease of
aircraft in the Warehouse Facility generally are applied first
to amounts due to lenders thereunder, with certain exceptions.
As a result, the creditors in the Warehouse Facility will have
priority over us and you in any distribution of ALC Warehouse
Borrower, LLCs subsidiaries assets in a liquidation,
reorganization or otherwise. Similarly, creditors of other of
our special-purpose, bankruptcy-remote subsidiaries that were
established for some of our other financing arrangements will
have priority over you in the event of a distribution of such
subsidiaries assets.
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We have a high
airline customer concentration, which makes us more vulnerable
to the potential that defaults by one or more of our major
airline customers would have a material adverse effect on our
cash flow and earnings and our ability to meet our debt
obligations.
As a newly organized company with a limited operating history,
our revenues to date are principally derived from our initial
customer base of lessees. The airline industry is cyclical,
economically sensitive and highly competitive. Our lessees are
affected by fuel prices and shortages, political or economic
instability, terrorist activities, changes in national policy,
competitive pressures, labor actions, pilot shortages, insurance
costs, recessions, health concerns, and other political or
economic events adversely affecting the world or regional
trading markets. Our lessees abilities to react to and
cope with the volatile competitive environment in which they
operate, as well as our own competitive environment, will likely
affect our revenues and income. The loss of one or more of our
airline customers or their inability to make operating lease
payments due to financial difficulties, bankruptcy or otherwise
could have a material adverse effect on our cash flow and
earnings. This, in turn, could result in a breach of the
covenants contained in any of our long-term debt facilities,
possibly resulting in accelerated amortization or defaults and
materially adversely affecting our ability to meet our debt
obligations.
If we acquire
a high concentration of a particular model of aircraft, our
business and financial results could be adversely affected by
changes in market demand or problems specific to that aircraft
model.
If we acquire a high concentration of a particular model of
aircraft, our business and financial results could be adversely
affected if the market demand for that model of aircraft
declines, if it is redesigned or replaced by its manufacturer or
if this type of aircraft experiences design or technical
problems. If we acquire a high concentration of a particular
aircraft model and such model encounters technical or other
problems, the value and lease rates of such aircraft will likely
decline, and we may be unable to lease such aircraft on
favorable terms, if at all. A significant technical problem with
a specific type of aircraft could result in the grounding of the
aircraft. Any decrease in the value and lease rates of our
aircraft may have a material adverse effect on our financial
results and growth prospects.
The advent of
superior aircraft technology or the introduction of a new line
of aircraft could cause the aircraft that we acquire to become
outdated or obsolete and therefore less desirable, which could
adversely affect our financial results and growth
prospects.
As manufacturers introduce technological innovations and new
types of aircraft, some of the aircraft in our fleet could
become less desirable to potential lessees. Such technological
innovations may increase the rate of obsolescence of existing
aircraft faster than currently anticipated by our management or
accounted for in our accounting policy. New aircraft
manufacturers, such as Mitsubishi Aircraft Corporation in Japan
and Sukhoi Company (JSC) in Russia, could someday produce
aircraft that compete with current offerings from Airbus, ATR,
Boeing, Bombardier and Embraer.
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Mitsubishi Aircraft Corporation in Japan, Sukhoi Company (JSC)
in Russia and Aviation Industries of China and Commercial
Aircraft Corporation of China Ltd. in China will most likely be
producing regional jets in the future that compete with existing
equipment from Bombardier and Embraer, and it is unclear how
these offerings could adversely impact the demand and liquidity
for the current offerings.
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Additionally, manufacturers in China may develop a narrowbody
aircraft that competes with established aircraft types from
Boeing and Airbus, and the new Chinese product could put
downward price pressure on and decrease the liquidity for
aircraft from Boeing and Airbus.
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New aircraft types that are introduced into the market could be
more attractive for the target lessees of our aircraft.
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In addition, the imposition of increased regulation regarding
stringent noise or emissions restrictions may make some of our
aircraft less desirable and less valuable in the marketplace.
Any of these risks may adversely affect our ability to lease or
sell our aircraft on favorable terms, if at all, which could
have a material adverse effect on our financial results and
growth prospects. The advent of new technologies or introduction
of a new type of aircraft may materially adversely affect the
value of the aircraft in our fleet.
We may be
indirectly subject to many of the economic and political risks
associated with emerging markets, which could adversely affect
our financial results and growth prospects.
Our business strategy emphasizes leasing aircraft to lessees
outside of the United States, including to airlines in emerging
market countries. Emerging market countries have less developed
economies and infrastructure and are often more vulnerable to
economic and geopolitical challenges and may experience
significant fluctuations in gross domestic product, interest
rates and currency exchange rates, as well as civil
disturbances, government instability, nationalization and
expropriation of private assets and the imposition of taxes or
other charges by government authorities. The occurrence of any
of these events in markets served by our lessees and the
resulting economic instability that may arise, particularly if
combined with high fuel prices, could adversely affect the value
of our aircraft subject to lease in such countries, or the
ability of our lessees, which operate in these markets, to meet
their lease obligations. As a result, lessees that operate in
emerging market countries may be more likely to default than
lessees that operate in developed countries. In addition, legal
systems in emerging market countries may be less developed,
which could make it more difficult for us to enforce our legal
rights in such countries.
Further, demand for aircraft is dependent on passenger and cargo
traffic, which in turn is dependent on general business and
economic conditions. As a result, weak or negative economic
growth in emerging markets may have an indirect effect on the
value of the assets that we acquire if airlines and other
potential lessees are adversely affected. We cannot assure you
that the recent global economic downturn will not continue or
worsen or that any assets we purchase will not decline in value,
which may have an adverse effect on our results of operations or
our financial condition. For these and other reasons, our
financial results and growth prospects may be negatively
impacted by adverse economic and political developments in
emerging market countries.
Our aircraft
require routine maintenance, and if they are not properly
maintained, their value may decline and we may not be able to
lease or re-lease such aircraft at favorable rates, if at all,
which would adversely affect our financial results, asset values
and growth prospects.
We may be exposed to increased maintenance costs for our
aircraft associated with a lessees failure to properly
maintain the aircraft or pay supplemental maintenance rent. If
an aircraft is not properly maintained, its market value may
decline, which would result in lower revenues from its lease or
sale. We enter into leases pursuant to which the lessees are
primarily
22
responsible for many obligations, which include maintaining the
aircraft and complying with all governmental requirements
applicable to the lessee and the aircraft, including
operational, maintenance, government agency oversight,
registration requirements and airworthiness directives. Failure
of a lessee to perform required maintenance during the term of a
lease could result in a decrease in value of an aircraft, an
inability to re-lease an aircraft at favorable rates, if at all,
or a potential grounding of an aircraft. Maintenance failures by
a lessee would also likely require us to incur maintenance and
modification costs upon the termination of the applicable lease,
which could be substantial, to restore the aircraft to an
acceptable condition prior to re-leasing or sale. Any failure by
our lessees to meet their obligations to perform required
scheduled maintenance or our inability to maintain our aircraft
may materially adversely affect our financial results, asset
values and growth prospects.
Our aircraft
may not at all times be adequately insured either as a result of
lessees failing to maintain sufficient insurance during the
course of a lease or insurers not being willing to cover certain
risks.
We do not directly control the operation of any aircraft we
acquire. Nevertheless, because we hold title, directly or
indirectly, to such aircraft, we could be sued or held strictly
liable for losses resulting from the operation of such aircraft,
or may be held liable for those losses on other legal theories,
in certain jurisdictions around the world, or claims may be made
against us as the owner of an aircraft requiring us to expend
resources in our defense. We require our lessees to obtain
specified levels of insurance and indemnify us for, and insure
against, liabilities arising out of their use and operation of
the aircraft. Some lessees may fail to maintain adequate
insurance coverage during a lease term, which, although in
contravention of the lease terms, would necessitate our taking
some corrective action such as terminating the lease or securing
insurance for the aircraft, either of which could adversely
affect our financial results.
In addition, there are certain risks or liabilities that our
lessees may face, for which insurers may be unwilling to provide
coverage or the cost to obtain such coverage may be
prohibitively expensive. For example, following the terrorist
attacks of September 11, 2001, non-government aviation
insurers significantly reduced the amount of insurance coverage
available for claims resulting from acts of terrorism, war,
dirty bombs, bio-hazardous materials, electromagnetic pulsing or
similar events. Accordingly, we anticipate that our
lessees insurance or other coverage may not be sufficient
to cover all claims that could or will be asserted against us
arising from the operation of our aircraft by our lessees.
Inadequate insurance coverage or default by lessees in
fulfilling their indemnification or insurance obligations will
reduce the proceeds that would be received by us in the event
that we are sued and are required to make payments to claimants,
which could have a material adverse effect on our financial
results and growth prospects.
Incurring
significant costs resulting from lease defaults could adversely
affect our financial results and growth prospects.
If we are required to repossess an aircraft after a lessee
default, we may be required to incur significant costs. Those
costs likely would include legal and other expenses of court or
other governmental proceedings, including the cost of posting
surety bonds or letters of credit necessary to effect
repossession of an aircraft, particularly if the lessee is
contesting the proceedings or is in bankruptcy. In addition,
during these proceedings the relevant aircraft would likely not
be generating revenue. We could also incur substantial
maintenance,
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refurbishment or repair costs if a defaulting lessee fails to
pay such costs and where such maintenance, refurbishment or
repairs are necessary to put the aircraft in suitable condition
for re-lease or sale. We may also incur storage costs associated
with any aircraft that we repossess and are unable immediately
to place with another lessee. It may also be necessary to pay
off liens, taxes and other governmental charges on the aircraft
to obtain clear possession and to remarket the aircraft
effectively, including, in some cases, liens that the lessor
might have incurred in connection with the operation of its
other aircraft. We could also incur other costs in connection
with the physical possession of the aircraft.
We may also suffer other adverse consequences as a result of a
lessee default, the related termination of the lease and the
repossession of the related aircraft. It is likely that our
rights upon a lessee default will vary significantly depending
upon the jurisdiction and the applicable law, including the need
to obtain a court order for repossession of the aircraft
and/or
consents for deregistration or re-export of the aircraft. We
anticipate that when a defaulting lessee is in bankruptcy,
protective administration, insolvency or similar proceedings,
additional limitations may apply. Certain jurisdictions give
rights to the trustee in bankruptcy or a similar officer to
assume or reject the lease or to assign it to a third party, or
entitle the lessee or another third party to retain possession
of the aircraft without paying lease rentals or performing all
or some of the obligations under the relevant lease. In
addition, certain of our lessees are owned in whole, or in part,
by government-related entities, which could complicate our
efforts to repossess our aircraft in that lessees
domicile. Accordingly, we may be delayed in, or prevented from,
enforcing certain of our rights under a lease and in re-leasing
the affected aircraft.
If we repossess an aircraft, we may not necessarily be able to
export or deregister and profitably redeploy the aircraft. For
instance, where a lessee or other operator flies only domestic
routes in the jurisdiction in which the aircraft is registered,
repossession may be more difficult, especially if the
jurisdiction permits the lessee or the other operator to resist
deregistration. We may also incur significant costs in
retrieving or recreating aircraft records required for
registration of the aircraft, and in obtaining the Certificate
of Airworthiness for an aircraft. If, upon a lessee default, we
incur significant costs in connection with repossessing our
aircraft, are delayed in repossessing our aircraft or are unable
to obtain possession of our aircraft as a result of lessee
defaults, our financial results and growth prospects may be
materially adversely affected.
If our lessees
fail to discharge aircraft liens, we may be obligated to pay the
aircraft liens, which could adversely affect our financial
results and growth prospects.
In the normal course of their business, our lessees are likely
to incur aircraft liens that secure the payment of airport fees
and taxes, customs duties, air navigation charges, including
charges imposed by Eurocontrol, the European Organization for
the Safety of Air Navigation, landing charges, salvage or other
liens that may attach to our aircraft. These liens may secure
substantial sums that may, in certain jurisdictions or for
certain types of liens, particularly liens on entire fleets of
aircraft, exceed the value of the particular aircraft to which
the liens have attached. Aircraft may also be subject to
mechanics liens as a result of routine maintenance
performed by third parties on behalf of our lessees. Although we
anticipate that the financial obligations relating to these
liens will be the responsibility of our lessees, if they fail to
fulfill such obligations, the liens may attach to our aircraft
and ultimately become our responsibility. In some jurisdictions,
aircraft liens may give the holder thereof the right to detain
or, in limited cases, sell or cause the forfeiture of the
aircraft.
24
Until they are discharged, these liens could impair our ability
to repossess, re-lease or sell our aircraft. Our lessees may not
comply with the anticipated obligations under their leases to
discharge aircraft liens arising during the terms of the leases.
If they do not, we may find it necessary to pay the claims
secured by such aircraft liens in order to repossess the
aircraft. Such payments could materially adversely affect our
financial results and growth prospects.
If our lessees
fail to perform as expected and we decide to restructure or
reschedule our leases, the restructuring and rescheduling would
likely result in less favorable leases, which could have an
adverse effect on our financial results and growth
prospects.
A lessees ability to perform its obligations under its
lease will depend primarily on the lessees financial
condition and cash flow, which may be affected by factors
outside our control, including:
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competition;
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fare levels;
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passenger and air cargo rates;
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passenger and air cargo demand;
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geopolitical and other events, including war, acts of terrorism,
outbreaks of epidemic diseases and natural disasters;
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increases in operating costs, including the price and
availability of jet fuel and labor costs;
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labor difficulties;
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economic conditions and currency fluctuations in the countries
and regions in which the lessee operates; and
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governmental regulation and associated fees affecting the air
transportation business.
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We anticipate that some lessees may experience a weakened
financial condition or suffer liquidity problems, which may lead
to lease payment difficulties or breaches of our operating
leases. We expect that some of these lessees encountering
financial difficulties may seek a reduction in their lease rates
or other concessions, such as a decrease in their contribution
toward maintenance obligations. Any future downturns in the
airline industry could greatly exacerbate the weakened financial
condition and liquidity problems of some of these lessees and
further increase the risk of delayed, missed or reduced rental
payments. We may not correctly assess the credit risk of a
lessee, or may not charge lease rates which correctly reflect
the related risks, and as a result, lessees may not be able to
satisfy their financial and other obligations under their
leases. A delayed, missed or reduced rental payment from a
lessee would decrease our revenues and cash flow. If we, in the
exercise of our remedies under a lease, repossess an aircraft,
we may not be able to re-lease the aircraft promptly or at
favorable rates.
You should expect that restructurings
and/or
repossessions with some of our lessees will occur in the future.
The terms and conditions of possible lease restructurings or
reschedulings may result in a significant reduction of lease
revenue, which may adversely affect our financial results and
growth prospects. If any request for payment restructuring or
rescheduling is made and granted, reduced or deferred rental
payments may be payable over all or some part of the remaining
term of the lease, although the terms of any revised payment
schedules may be
25
unfavorable and such payments may not be made. Our default
levels would likely increase over time if economic conditions
deteriorate. If lessees of a significant number of our aircraft
defaulted on their leases, our financial results and growth
prospects would be adversely affected.
Conflicts of
interest may arise between us and clients who will utilize our
fleet management services, which may adversely affect our
business interests.
Conflicts of interest may arise between us and third-party
aircraft owners, financiers and operating lessors who hire us to
perform fleet management services such as leasing, re-leasing,
lease management and sales services. These conflicts may arise
because services we anticipate providing for these clients are
also services we will provide for our own fleet, including the
placement of aircraft with lessees. We expect our fleet
management services agreements will provide that we will use our
reasonable best efforts, but, to the extent that we are in
competition with the client for leasing opportunities, we will
give priority to our own fleet. Nevertheless, despite these
contractual waivers, competing with our fleet management clients
in practice may result in strained relationships with them,
which may adversely affect our business interests.
We may on
occasion enter into strategic ventures with the intent that we
would serve as the manager of such strategic ventures; however,
entering into strategic relationships poses risks in that we
most likely would not have complete control over the enterprise,
and our financial results and growth prospects could be
adversely affected if we encounter disputes, deadlock or other
conflicts of interest with our strategic partners.
We may on occasion enter into strategic ventures with third
parties to take advantage of favorable financing opportunities
or tax benefits, to share capital
and/or
operating risk,
and/or to
earn fleet management fees. Although we anticipate that we would
serve as the manager of any such strategic ventures, it has been
our managements experience that most strategic venture
agreements will provide the non-managing strategic partner
certain veto rights over various significant actions, including
the right to remove us as the manager under certain
circumstances. If we were to be removed as the manager from a
strategic venture that generates significant management fees,
our financial results and growth prospects could be materially
and adversely affected. In addition, if we were unable to
resolve a dispute with a significant strategic partner that
retains material managerial veto rights, we might reach an
impasse that could require us to dissolve the strategic venture
at a time and in a manner that could result in our losing some
or all of our original investment in the strategic venture,
which could have a material adverse effect on our financial
results and growth prospects.
After a period
of strong fleet growth, if the rate at which we add aircraft to
our fleet decreases, we may be required to recognize deferred
tax liabilities accumulated during the growth period, which
could have a negative impact on our cash flow.
It is typical in the aircraft leasing industry for companies
that are continuously acquiring additional aircraft to incur
significant tax depreciation, which offsets taxable income but
creates a deferred tax liability on the aircraft leasing
companys balance sheet. This deferred tax liability is
attributable to the excess of the depreciation claimed for tax
purposes over the depreciation claimed for financial statement
purposes. While we are currently in a deferred tax asset
position, if future growth results in a net deferred tax
liability and we are unable to continue to
26
acquire additional aircraft at a sufficient pace, then we will
begin to recognize some or all of our deferred tax liability,
which could have a negative impact on our cash flow.
Our business
and earnings are affected by general business, financial market
and economic conditions throughout the world, which could have a
material adverse effect on our cash flow and results of
operations.
Our business and earnings are affected by general business,
financial market and economic conditions throughout the world.
As an aircraft leasing business focused on emerging markets, we
are particularly exposed to downturns in these emerging markets.
A recession or worsening of economic conditions, particularly if
combined with high fuel prices, may have a material adverse
effect on the ability of our lessees to meet their financial and
other obligations under our operating leases, which, if our
lessees default on their obligations to us, could have a
material adverse effect on our cash flow and results of
operations. General business and economic conditions that could
affect us include the level and volatility of short-term and
long-term interest rates, inflation, employment levels,
bankruptcies, demand for passenger and cargo air travel,
volatility in both debt and equity capital markets, liquidity of
the global financial markets, the availability and cost of
credit, investor confidence and the strength of the global
economy and the local economies in which we operate.
To a large extent, our success also depends upon our
ability to access financing on favorable terms, including
accessing the public debt and equity markets and bank loans, to
finance the purchase of aircraft and repay outstanding debt
obligations as they mature. If disruptions in credit markets
occur, we may not be able to obtain financing from third parties
on favorable terms, if at all.
During the recent financial crisis, many companies experienced
downward pressure on share prices and had limited or no access
to the credit markets, often without regard to their underlying
financial strength. If financial market disruption and
volatility were to occur again, we cannot assure you that we
will not experience an adverse effect, which may be material, on
our ability to access capital, on our cost of capital or on our
business, financial condition or results of operations.
We will be exposed to risk from volatility and disruption in the
financial markets in various ways, including:
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difficulty or inability to finance obligations for, or to
finance a portion of, the acquisition of aircraft;
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increased risk of default by our lessees resulting from
financial market distress, lack of available credit or
continuing effects of the global economic recession;
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exposure to increased bank or counterparty risk in the current
environment, including the risk that our counterparties will not
be able to perform their obligations under contracts effectively
locking in interest rates for our debt that has a floating
interest rate feature and the risk that, if banks issue letters
of credit to us in lieu of cash security deposits from our
lessees, such banks may fail to pay when we seek to draw on
these letters of credit; and
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the risk that we will not be able to re-finance any of our debt
financings, as they come due, on favorable terms or at all.
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27
Failure to
obtain certain required licenses and approvals could negatively
affect our ability to re-lease or sell aircraft, which would
negatively affect our financial condition and results of
operations.
Lessees are subject to extensive regulation under the laws of
the jurisdictions in which they are registered and in which they
operate. As a result, we expect that certain aspects of our
leases will require licenses, consents or approvals, including
consents from governmental or regulatory authorities for certain
payments under our leases and for the import, export or
deregistration of the aircraft. Subsequent changes in applicable
law or administrative practice may increase such requirements
and governmental consent, once given, could be withdrawn.
Furthermore, consents needed in connection with the future
re-leasing or sale of an aircraft may not be forthcoming. Any of
these events could adversely affect our ability to re-lease or
sell aircraft, which would negatively affect our financial
condition and results of operations.
We may not be
able to protect our intellectual property, which may adversely
affect our business and operations.
On May 20, 2010, we filed a service mark application for
our corporate logo with the United States Patent and
Trademark Office (the USPTO). On March 30, 2011, the USPTO issued a non-substantive Office Action following
examination of our service mark application after we timely
responded to the requests in the initial Office Action. The new
Office Action requires minor amendments to the recitation of
services. It is our
expectation that once we respond to the inquiries, the mark will be approved by the examining
attorney and proceed to the next step in the prosecution of the
application. We have not otherwise sought registration of, and
do not own or possess licenses or other rights to use, any
patents, trade secrets or other proprietary know-how related to
our intended business and operations. We have not sought
registration of copyrights that may be necessary for us to
conduct our business as described in this prospectus. There can
be no assurances that our service mark application will be
approved, or that infringement or other claims will not be
asserted or prosecuted against us in the future, or that
prosecutions will not materially and adversely affect our
business, results of operations and financial condition. Any
such claims, with or without merit, could be time consuming to
management, resulting in costly litigation and diversion of
resources and personnel. Moreover, it is not clear that we will
be able to protect the use of our name by others because the
name may be deemed generic and not subject to protection under
applicable laws.
Certain of our
subsidiaries may be restricted in their ability to make
distributions to us.
The subsidiaries that hold our aircraft are legally distinct
from us, and some of these subsidiaries are restricted from
paying dividends or otherwise making funds available to us
pursuant to agreements governing our indebtedness. All of our
principal debt facilities have financial covenants. If we are
unable to comply with these covenants, then the amounts
outstanding under these facilities may become immediately due
and payable, cash generated by our subsidiaries affected by
these facilities may be unavailable to us
and/or we
may be unable to draw additional amounts under these facilities.
The events that could cause some of our subsidiaries not to be
in compliance with their loan agreements, such as a lessee
default, may be beyond our control, but they nevertheless could
have a substantial adverse impact on the amount of our cash flow
available to fund working capital, make capital expenditures and
satisfy other cash needs. For a description of the operating and
financial restrictions in our debt facilities, see the section
titled Managements discussion and analysis of
financial condition and results of operationsLiquidity and
capital resources.
28
Risks relating to
the aircraft leasing industry
A significant
discounting of prices on new aircraft by manufacturers or
increase in the rate of new aircraft production may indirectly
affect demand for used aircraft we purchase for leasing and our
financial results and growth prospects.
The recent financial crisis has had a significant impact on the
values of new aircraft as some buyers lost some or all of the
funding for orders they had placed. As a result, some orders for
new aircraft were cancelled or deferred. Ex-Im Bank and the ECAs
supported debt financing for many new deliveries during the
recent financial crisis but equity was still needed for these
financings, which limited buyers access to these agencies.
Consequently, to secure sales of new aircraft and maintain
revenues, manufacturers sold many of these aircraft at
significant discounts. If there is another downturn in the
financial markets or economy and manufacturers again drive down
the price of new aircraft, this may have an adverse effect on
the value of any aircraft we own and our ability to lease them
at attractive rates. We intend for used aircraft to make up a
part of our target assets and our ability to extend leases or
create new leases may be adversely affected by a surplus in the
availability of new aircraft. Further, if manufacturers discount
the prices of new aircraft, it may require us to mark down the
value of aircraft we carry on our balance sheet or depreciate
our aircraft portfolio at a faster rate. Thus, a significant
decrease in the prices of new aircraft could adversely affect
our results of operations and financial condition.
Airbus has
announced that it will have two new engine variants available
for its A319/A320/A321 family of aircraft, which could decrease
the value and lease rates of aircraft we acquire.
On December 1, 2010, Airbus announced the launch of the NEO
program, which involves the offering of two new engine
typesone from Pratt & Whitney, a division of
United Technologies Corporation, and the other from CFM
International, Inc.on certain Airbus A319/A320/A321. The
aircraft are scheduled to commence delivery in 2015 and thereafter. Airbus proposes to
charge a price premium for
A319/A320/A321
aircraft equipped with these new engines. The availability of
A319/A320/A321 aircraft with these new engine types may have an
adverse effect on residual value and future lease rates on
current A319/A320/A321 aircraft. The development of these new
engine options could decrease the desirability of the current
A319/A320/A321 aircraft that are not equipped with these new
engines and thereby increase the supply of this type of aircraft
in the marketplace. This increase in supply could, in turn,
reduce both future residual values and lease rates for this type
of aircraft. It is also possible that other airframe
manufacturers could embark on similar programs, which could have
similar effects on residual values and lease rates of the
aircraft manufactured by these manufacturers.
From time to
time, the aircraft industry has experienced periods of
oversupply during which lease rates and aircraft values have
declined, and any future oversupply could materially adversely
affect our financial results and growth prospects.
Historically, the aircraft leasing business has experienced
periods of aircraft oversupply. The oversupply of a specific
type of aircraft is likely to depress the lease rates for and
the value of that type of aircraft. The supply and demand for
aircraft is affected by various cyclical and
non-cyclical
factors that are outside of our control, including:
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passenger and air cargo demand;
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fuel costs and general economic conditions;
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29
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geopolitical events, including war, prolonged armed conflict and
acts of terrorism;
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outbreaks of communicable diseases and natural disasters;
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governmental regulation;
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interest rates;
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the availability of credit;
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airline restructurings and bankruptcies;
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manufacturer production levels and technological innovation;
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manufacturers merging or exiting the industry or ceasing to
produce aircraft types;
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retirement and obsolescence of aircraft models;
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reintroduction into service of aircraft previously in
storage; and
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airport and air traffic control infrastructure constraints.
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In addition, due to the recent economic downturn and increased
financial pressures, a number of operating lessors may be sold
or merged with other operating lessors. The sale of any of these
operating lessors (which may include a reduction in their
aircraft fleets) and, in particular, their aircraft portfolios,
could increase supply levels of used and older aircraft in the
market.
These factors may produce sharp and prolonged decreases in
aircraft lease rates and values and have a material adverse
effect on our ability to lease or re-lease the commercial
aircraft that we ultimately acquire and on our ability to sell
such aircraft and parts at acceptable prices. Any of these
factors could materially and adversely affect our financial
results and growth prospects.
The value of
the aircraft we acquire and the market rates for leases could
decline and this could have a material adverse effect on
financial results and growth prospects of aircraft
lessors.
Aircraft values and market rates for leases have from time to
time experienced sharp decreases due to a number of factors
including, but not limited to, decreases in passenger and air
cargo demand, increases in fuel costs, government regulation and
increases in interest rates. Operating leases place the risk of
realization of residual values on aircraft lessors because only
a portion of the equipments value is covered by
contractual cash flows at lease inception. In addition to
factors linked to the aviation industry generally, many other
factors may affect the value of the aircraft that we acquire and
market rates for leases, including:
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the particular maintenance, operating history and documentary
records of the aircraft;
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the number of operators using that type of aircraft;
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aircraft age;
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the regulatory authority under which the aircraft is operated;
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any renegotiation of an existing lease on less favorable terms;
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the negotiability of clear title free from mechanics liens
and encumbrances;
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30
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any regulatory and legal requirements that must be satisfied
before the aircraft can be purchased, sold or re-leased;
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compatibility of aircraft configurations or specifications with
other aircraft owned by operators of that type;
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comparative value based on newly manufactured competitive
aircraft; and
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the availability of spare parts.
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Any decrease in the value of aircraft that we acquire and market
rates for leases, which may result from the above factors or
other unanticipated factors, may have a material adverse effect
on our financial results and growth prospects.
Competition
from other aircraft lessors with greater resources or a lower
cost of capital than ours could adversely affect our financial
results and growth prospects.
The aircraft leasing industry is highly competitive, and
although it is comprised of over 100 aircraft lessors, the top
five lessors in terms of the number of aircraft owned control
more than 50% of the total number of aircraft that are currently
on lease. Initially, we believe most of our primary
competitorsthose top five aircraft lessorswill be
significantly larger, have a longer operating history and may
have greater resources or lower cost of capital than ours;
accordingly, they may be able to compete more effectively in one
or more of the markets we attempt to enter.
In addition, we may encounter competition from other entities in
the acquisition of aircraft such as:
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airlines;
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financial institutions;
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aircraft brokers;
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public and private partnerships, investors and funds with more
capital to invest in aircraft; and
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other aircraft leasing companies that we do not currently
consider our major competitors.
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Competition for a leasing transaction is based principally upon
lease rates, delivery dates, lease terms, reputation, management
expertise, aircraft condition, specifications and configuration
and the availability of the types of aircraft necessary to meet
the needs of the customer. Some of our potential competitors may
have significantly greater operating and financial resources and
access to lower capital costs than we have. In addition, some
competing aircraft lessors may have a lower overall cost of
capital and may provide inducements to potential lessees that we
cannot match. Competition in the purchase and sale of used
aircraft is based principally on the availability of used
aircraft, price, the terms of the lease to which an aircraft is
subject and the creditworthiness of the lessee, if any. We
likely will not always be able to compete successfully with our
competitors and other entities, which could materially adversely
affect our financial results and growth prospects.
Given the financial condition of the airline industry, many
airlines have reduced their capacity by eliminating select types
of aircraft from their fleets, affecting the prices both of the
aircraft types they eliminate and the types they continue to
use. This elimination of certain aircraft from
31
their fleets has resulted in an increase in the availability of
such aircraft in the market, a decrease in rental rates for such
aircraft and a decrease in market values of such aircraft. We
cannot assure you that airlines will continue to acquire the
same types of aircraft, or that we will not acquire aircraft
that cease to be in use by our potential lessees.
There are a
limited number of airframe and engine manufacturers and the
failure of any manufacturer to meet its delivery obligations to
us could adversely affect our financial results and growth
prospects.
The supply of commercial aircraft is dominated by a few airframe
manufacturers, including Boeing, Airbus, Embraer, ATR and
Bombardier, and a limited number of engine manufacturers, such
as GE Aircraft Engines, Rolls-Royce plc, Pratt &
Whitney, a division of United Technologies Corporation, IAE
International Aero Engines AG and CFM International, Inc. As a
result, we will be dependent on the success of these
manufacturers in remaining financially stable, producing
products and related components which meet the airlines
demands and fulfilling any contractual obligations they may have
to us.
Should the manufacturers fail to respond appropriately to
changes in the market environment or fail to fulfill any
contractual obligations they might have to us, we may experience:
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missed or late delivery of aircraft and a potential inability to
meet our contractual obligations owed to any of our then
lessees, resulting in potential lost or delayed revenues, lower
growth rates and strained customer relationships;
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an inability to acquire aircraft and related components on terms
which will allow us to lease those aircraft to airline customers
at a profit, resulting in lower growth rates or a contraction in
our aircraft fleet;
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a market environment with too many aircraft available,
potentially creating downward pressure on demand for the
anticipated aircraft in our fleet and reduced market lease rates
and sale prices; or
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a reduction in our competitiveness due to deep discounting by
the manufacturers, which may lead to reduced market lease rates
and aircraft values and may affect our ability to remarket or
sell at a profit, or at all, some of the aircraft in our fleet.
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There have been recent well-publicized delays by Boeing and
Airbus in meeting stated deadlines in bringing new aircraft to
market. If there are manufacturing delays for aircraft for which
we have made future lease commitments, some or all of our
affected lessees could elect to terminate their lease
arrangements with respect to such delayed aircraft. Any such
termination could strain our relations with those lessees going
forward and adversely affect our financial results and growth
prospects.
Additional
terrorist attacks or the fear of such attacks, even if not made
directly on the airline industry, could negatively affect
lessees and the airline industry.
As a result of the September 11, 2001 terrorist attacks in
the United States and subsequent terrorist attacks abroad,
notably in the Middle East, Southeast Asia and Europe, increased
security restrictions were implemented on air travel, costs for
aircraft insurance and security measures increased, passenger
and cargo demand for air travel decreased, and operators faced,
and, to a certain extent, continue to face, increased
difficulties in acquiring war risk and other
32
insurance at reasonable costs. The September 11, 2001
terrorist attacks resulted in substantial flight disruption
costs caused by the temporary grounding of the U.S. airline
industrys fleet and prohibition of all flights in and out
of the U.S. by the U.S. Federal Aviation Administration,
significantly increased security costs and associated passenger
inconvenience, increased insurance costs, substantially higher
ticket refunds and significantly decreased traffic.
Additional terrorist attacks, even if not made directly on the
airline industry, or the fear of or any precautions taken in
anticipation of such attacks (including elevated national threat
warnings or selective cancellation or reduction of flights),
could materially adversely affect lessees and the airline
industry. The wars in Iraq and Afghanistan and additional
international hostilities, including heightened terrorist
activity, could also have a material adverse impact on our
lessees financial condition, liquidity and results of
operations. Lessees financial resources might not be
sufficient to absorb the adverse effects of any further
terrorist attacks or other international hostilities involving
the United States or U.S. interests, which could result in
significant decreases in aircraft leasing transactions and
thereby materially adversely affect our results of operations.
Increases in
fuel costs could materially adversely affect our lessees and by
extension the demand for our aircraft.
Fuel costs represent a major expense to airlines, and fuel
prices fluctuate widely depending primarily on international
market conditions, geopolitical and environmental events,
regulatory changes (including those related to greenhouse gas
emissions) and currency exchange rates. If airlines are unable
to increase ticket prices to offset fuel price increases, their
cash flows will suffer. The ongoing unrest in Libya and other
nations in the Middle East and North Africa has generated uncertainty regarding
the predictability of the worlds future oil supply, which
recently led to significant near-term increases in fuel costs. If
this unrest continues, fuel costs may continue to rise in the
future. Other
events can also significantly affect fuel availability and
prices, including natural disasters, decisions by the
Organization of the Petroleum Exporting Countries regarding
their members oil output, and the increase in global
demand for fuel from countries such as China.
High fuel costs, such as the increases that have recently occurred and fuel cost increases that could occur in the future, would likely have a material
adverse impact on airline profitability. Due to the competitive nature
of the airline industry, airlines may not be able to pass on
increases in fuel prices to their passengers by increasing
fares. If airlines are successful in increasing fares, demand
for air travel may be adversely affected. In addition, airlines
may not be able to manage fuel cost risk by appropriately
hedging their exposure to fuel price fluctuations. If fuel
price increases continue to occur, they are likely to cause our lessees to
incur higher costs or experience reduced revenues. Consequently,
these conditions may:
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affect our lessees ability to make rental and other lease
payments;
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result in lease restructurings and aircraft and engine
repossessions;
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increase our costs of maintaining and marketing aircraft;
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impair our ability to re-lease aircraft and other aviation
assets or re-lease or otherwise sell our assets on a timely
basis at favorable rates; or
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reduce the sale proceeds received for aircraft or other aviation
assets upon any disposition.
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Such effects could materially adversely affect demand for our
aircraft.
33
A
deterioration in the financial condition of the airline industry
would have an adverse impact on our ability to lease our
aircraft and sustain our revenues.
The financial condition of the airline industry is of particular
importance to us because we plan to lease our aircraft to
passenger airlines. Our ability to achieve our primary business
objectives will depend on the financial condition and growth of
the airline industry. The risks affecting airlines are generally
out of our control, but because these risks have a significant
impact on our intended airline customers, they will affect us as
well. We may experience:
|
|
|
downward pressure on demand for our aircraft and reduced market
lease rates and lease margins;
|
|
|
a higher incidence of lessee defaults, lease restructurings,
repossessions and airline bankruptcies and restructurings,
resulting in lower lease margins due to maintenance and legal
costs associated with repossession, as well as lost revenue for
the time our aircraft are off lease and possibly lower lease
rates from our new lessees; and
|
|
|
an inability to lease aircraft on commercially acceptable terms,
resulting in lower lease margins due to aircraft not earning
revenue and resulting in storage, insurance and maintenance
costs.
|
SARS, H1N1 and
other epidemic diseases may hinder airline travel and reduce the
demand for aircraft.
The outbreak of severe acute respiratory syndrome
(SARS) materially adversely affected passenger
demand for air travel in 2003. In addition, since 2003, there
have been several outbreaks of avian influenza, or the bird flu,
beginning in Asia and, eventually, spreading to certain parts of
Africa and Europe. More recently, there was a global outbreak of
the H1N1 virus, or the swine flu, which depressed travel due to
fears of a global pandemic. Additional outbreaks of SARS, bird
flu, swine flu or other pandemic diseases, or the fear of such
events, could provoke responses, including government-imposed
travel restrictions, which could negatively affect passenger
demand for air travel and the financial condition of the
aviation industry. The consequences of these events may reduce
the demand for aircraft and/or impair our lessees ability
to satisfy their lease payment obligations to us, which in turn
would adversely affect our financial results and growth
prospects.
Natural
disasters and other natural phenomena may disrupt air travel and
reduce the demand for aircraft.
Air travel can be disrupted, sometimes severely, by the
occurrence of natural disasters and other natural phenomena. For
example, in April 2010, the Eyjafjallajökull volcano in
Iceland erupted, releasing a massive amount of ash and glass
particles into the air. The volcanic ash traveled across Europe,
causing the closure of airports and grounding of air traffic in,
and canceling of flights through, affected areas.
The May 2011 eruption of the Grimsvötn volcano, also in Iceland, caused similar
disruptions to air travel in Europe, and the June 2011 eruption of the Puyehue-Cordón
Caulle volcano in Chile interfered with flights in Australia, New Zealand, South Africa and South America.
The airline
industry incurred substantial losses from the disruption to air
travel caused by these volcanic eruptions, negatively affecting
the financial condition of certain major airlines and the
aviation industry as a whole. A future natural disaster could
cause similar disruption to air travel and could result in a
reduced demand for aircraft
and/or
impair our lessees ability to satisfy their lease payment
obligations to us, which in turn would adversely affect our
financial results and growth prospects.
34
The effects of
various environmental regulations may negatively affect the
airline industry. This may cause lessees to default on their
lease payment obligations to us.
Governmental regulations regarding aircraft and engine noise and
emissions levels apply based on where the relevant aircraft is
registered and operated. For example, jurisdictions throughout
the world have adopted noise regulations which require all
aircraft to comply with noise level standards. In addition to
the current requirements, the United States and the
International Civil Aviation Organization (the
ICAO), have adopted a new, more stringent set of
standards for noise levels which applies to engines manufactured
or certified on or after January 1, 2006. Currently,
U.S. regulations would not require any phase-out of
aircraft that qualify with the older standards applicable to
engines manufactured or certified prior to January 1, 2006,
but the European Union has established a framework for the
imposition of operating limitations on aircraft that do not
comply with the new standards and incorporated aviation-related
emissions into the European Unions Emission Trading Scheme
beginning in 2012. These regulations could limit the economic
life of the aircraft and engines, reduce their value, limit our
ability to lease or sell the non-compliant aircraft and engines
or, if engine modifications are permitted, require us to make
significant additional investments in the aircraft and engines
to make them compliant.
In addition to more stringent noise restrictions, the United
States and other jurisdictions are beginning to impose more
stringent limits on nitrogen oxide, carbon monoxide and carbon
dioxide emissions from engines, consistent with current ICAO
standards. These limits generally apply only to engines
manufactured after 1999. Because aircraft engines are replaced
from time to time in the normal course, it is likely that the
number of such engines would increase over time. Concerns over
global warming could result in more stringent limitations on the
operation of aircraft powered by older, noncompliant engines, as
well as newer engines.
European countries generally have relatively strict
environmental regulations that can restrict operational
flexibility and decrease aircraft productivity. The European
Parliament has confirmed that aviation is to be included in the
European Unions Emissions Trading Scheme starting in 2012.
This inclusion could possibly distort the European air transport
market, leading to higher ticket prices and ultimately a
reduction in the number of airline passengers. In response to
these concerns, European airlines have established the Committee
for Environmentally Friendly Aviation to promote the positive
environmental performance of airlines. The United Kingdom
doubled its air passenger duties, effective February 1,
2007, in recognition of the environmental costs of air travel.
Similar measures may be implemented in other jurisdictions as a
result of environmental concerns.
Compliance with current or future regulations, taxes or duties
imposed to deal with environmental concerns could cause lessees
to incur higher costs and to generate lower net revenues,
resulting in an adverse impact on their financial conditions.
Consequently, such compliance may affect lessees ability
to make rental and other lease payments and reduce the value we
receive for the aircraft upon any disposition, which could have
an adverse effect on our financial results and growth prospects.
Aircraft have
limited economically useful lives and depreciate over time,
which could adversely affect our financial condition and growth
prospects.
As commercial aircraft age, they will depreciate and generally
the aircraft will generate lower revenues and cash flows. We
must be able to replace such older depreciated aircraft with
newer
35
aircraft, or our ability to maintain or increase our revenues
and cash flow will decline. In addition, since we depreciate our
aircraft for accounting purposes on a straight-line basis to the
aircrafts residual value over its estimated useful life,
if we dispose of an aircraft for a price that is less than the
depreciated book value of the aircraft on our balance sheet, we
will recognize a loss on the sale.
A new standard
for lease accounting is expected to be announced in the future,
but we are unable to predict the impact of such a standard at
this time.
In August 2010, the Financial Accounting Standards Board (FASB) issued an Exposure Draft that
proposed substantial changes to existing lease accounting that would affect all lease arrangements.
The FASBs proposal required that all leases be recorded on the statement of financial position of
both lessees and lessors.
Under the August 2010 lease accounting model, lessees would be required to record an asset
representing the right-to-use the leased item for the lease term (the Right-of-Use Asset) and a
liability to make lease payments. The Right-of-Use Asset and liability incorporate the rights,
including renewal options, and obligations, including contingent payments and termination payments,
arising under the lease and would be based on the lessees assessment of expected payments to be
made over the lease term. The proposed model required measuring these amounts at the present value
of the future expected payments.
Under the August 2010 lease accounting model, lessors would apply one of two approaches to each
lease based on whether the lessor retained exposure to significant risks or benefits associated
with the underlying asset, as defined. The performance obligation approach would apply when the
lessor had retained exposure to significant risks or benefits associated with the underlying lease,
and the de-recognition approach would apply when the lessor did not retain significant risks or
benefits associated with the underlying asset.
The comment period for this proposal ended in December 2010. In meetings in January and February
2011, the FASB discussed and agreed to make substantial revisions to the proposed accounting in the
Exposure Draft. In July 2011, the FASB announced that it intends to complete its deliberations
during the third quarter of 2011 and to release a revised Exposure Draft shortly afterwards. At
present, management is unable to assess the impact of a potential new lease accounting standard.
36
Risks relating to this offering
We cannot assure that an active trading market for our Class A Common Stock will be sustained.
Prior to our initial public offering in April 2011, there was no public market for our Class A
Common Stock, and our Class B Non-Voting Common Stock is not currently listed on any national securities exchange or
market system. Our Class A Common Stock is now listed on the NYSE under the symbol AL. While
there has been trading in our Class A Common Stock since our initial public offering, we cannot
assure you that an active trading market for the shares offered by the selling stockholders named
in this prospectus will be sustained. In the absence of an active public trading market, you may not
be able to resell your shares of Class A Common Stock at a price that is attractive to you, or at
all. We cannot assure you that the price at which the shares of Class A Common Stock are selling
in the public market will not decline.
The market price and trading volume of our Class A Common Stock may be volatile, which could result
in rapid and substantial losses for our stockholders.
The market price of our Class A Common Stock may be highly volatile and could be subject to wide
fluctuations. In addition, the trading volume of our Class A Common Stock may fluctuate and cause
significant price variations to occur. If the market price of our Class A Common Stock declines
significantly, you may be unable to resell your shares at or above the purchase price, if at all.
We cannot assure you that the market price of shares of our Class A Common Stock will not fluctuate
or decline significantly in the future. Some of the factors that could negatively affect our share
price or result in fluctuations in the price or trading volume of our Class A Common Stock include:
|
|
announcements concerning our competitors, the airline industry or the economy in general; |
|
|
|
announcements concerning the availability of the type of aircraft we own; |
|
|
|
general and industry-specific economic conditions; |
|
|
|
changes in the price of aircraft fuel; |
|
|
|
changes in financial estimates or recommendations by securities analysts or failure to meet
analysts performance expectations; |
|
|
|
additions or departures of key members of management; |
|
|
|
any increased indebtedness we may incur in the future; |
|
|
|
speculation or reports by the press or investment community with respect to us or our
industry in general; |
37
|
|
announcements by us or our competitors of significant contracts, acquisitions, dispositions,
strategic partnerships, joint ventures or capital commitments; |
|
|
|
changes or proposed changes in laws or regulations affecting the airline industry or
enforcement of these laws and regulations, or announcements relating to these matters; and |
|
|
|
general market, political and economic conditions, including any such conditions and local
conditions in the markets in which our lessees are located. |
These broad market and industry factors may decrease the market price of our Class A Common Stock,
regardless of our actual operating performance. The stock market in general has from time to time
experienced extreme price and volume fluctuations, including periods of sharp decline, as in late
2008, early 2009 and in August of this year. In addition, in the past, following periods of volatility in the overall
market and the market price of a companys securities, securities class action litigation has often
been instituted against these companies. Such litigation, if instituted against us, could result in
substantial costs and a diversion of our managements attention and resources.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable
research about our business, our stock price and trading volume could decline.
The trading market for our Class A Common Stock depends in part on the research and reports that
securities or industry analysts publish about us, our business and our industry. Prior to our
initial public offering, we did not have research coverage by securities and industry analysts.
Currently, we are the subject of research coverage by securities and industry
analysts. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate
or unfavorable research about our business, our stock price would likely decline. If one or more of
these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our
stock could decrease, which could cause our stock price and trading volume to decline.
Future offerings of debt or equity securities by us may adversely affect the market price of our
Class A Common Stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by
issuing additional shares of Class A Common Stock or offering debt or additional equity securities,
including commercial paper, medium-term notes, senior or subordinated notes or preferred shares.
Issuing additional shares of Class A Common Stock or other additional equity offerings may dilute
the economic and voting rights of our existing stockholders or reduce the market price of our Class
A Common Stock, or both. Upon liquidation, holders of such debt securities and preferred shares, if
issued, and lenders with respect to other borrowings, would receive a distribution of our available
assets prior to the holders of our Class A Common Stock. Preferred shares, if issued, could have a
preference with respect to liquidating distributions or a preference with respect to dividend
payments that could limit our ability to pay dividends to the holders of our Class A Common Stock.
Because our decision to issue securities in any future offering will depend on market conditions
and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of
our future offerings. Thus, holders of our Class A Common Stock bear the risk of our future
offerings reducing the market price of our Class A Common Stock and diluting their share holdings
in us. See Description of capital stock.
38
Since we have no current plans to declare or pay cash dividends on our Common Stock, you may not
receive any return on investment unless you sell your Common Stock for a price greater than that
which you paid for it.
We have no current plans to declare or pay any dividends to our stockholders. Any determination to
pay dividends in the future will be made at the discretion of our board of directors and will
depend on various factors, including our results of operations, our financial condition, our
earnings, our cash requirements, legal restrictions, regulatory restrictions, contractual
restrictions and other factors deemed relevant by our board of directors. Accordingly, you may have
to sell some or all of your shares of our Common Stock in order to generate cash flow from your
investment. You may not receive a gain on your investment when you sell our Common Stock and may
lose some or all of the amount of your investment. Investors seeking cash dividends in the
foreseeable future should not purchase our Common Stock.
The requirements of being a public company may strain our resources, divert managements attention
and affect our ability to attract and retain qualified board members.
As a public company, we expect to incur significant legal, accounting and other expenses that we
did not incur as a private company, including costs associated with public company reporting
requirements. We expect to incur costs associated with the Sarbanes-Oxley Act of 2002, the
Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be
implemented by the Securities and Exchange Commission (the SEC) and the requirements of the
NYSE. The expenses incurred by public companies generally for reporting and corporate governance
purposes have been increasing. We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and costly, although we
are currently unable to estimate these costs with any degree of certainty. These laws and
regulations could also make it more difficult or costly for us to obtain certain types of
insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. These laws and regulations could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors, on our board committees or as our
executive officers and may divert managements attention. Furthermore, if we are unable to satisfy
our obligations as a public company, we could be subject to delisting
of our Class A Common Stock, fines,
sanctions and other regulatory action and potentially civil litigation.
If we do not timely satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the
trading price of our Class A Common Stock could be adversely affected.
As a company with publicly-traded securities, we are subject to Section 404 of the Sarbanes-Oxley
Act of 2002. This law requires us to document and test the effectiveness of our internal controls
over financial reporting in accordance with an established internal control framework and to report
on our conclusion as to the effectiveness of our internal controls over financial reporting. The
cost to comply with this law affects our net income adversely. Any delays or difficulty in
satisfying the requirements of Section 404 could, among other things, cause investors to lose
confidence in, or otherwise be unable to rely on, the accuracy of our reported financial
information, which could adversely affect the trading price of our Class A Common Stock. In
addition, if we fail to comply with Section 404, we could be subject to regulatory scrutiny and
sanctions, which could include the delisting of our Class A Common Stock.
Provisions in Delaware law and our restated certificate of incorporation and amended and restated
bylaws may inhibit a takeover of us, which could limit the price investors might be willing to pay
in the future for our Common Stock and could entrench management.
Our restated certificate of incorporation and amended and restated bylaws contain provisions that
may discourage unsolicited takeover proposals that stockholders may consider to be in their best
interests, including the ability of our board of directors to designate the terms of and issue new
series of preferred stock, a prohibition on our stockholders from calling special meetings of the
stockholders, and advance notice requirements for stockholder proposals and director nominations.
In addition, Section 203 of the Delaware General Corporation Law, which we have not opted out of,
prohibits a public Delaware corporation from engaging in certain business combinations with an
interested stockholder (as defined in such section) for a period of three years following the
time that such stockholder became an interested stockholder without the prior consent of our board
of directors. The effect of Section 203 of the Delaware General Corporation Law, as well as these
charter and bylaws provisions, may make the removal of management more difficult and may discourage
transactions that otherwise could involve payment of a premium over prevailing market prices for
our securities. See Description of capital stockCertain anti-takeover provisions of Delaware law
and our restated certificate of incorporation and amended and restated bylaws.
39
Forward-looking
statements
Statements in this prospectus that are not historical facts are
hereby identified as
forward-looking
statements, including any statements about our
expectations, beliefs, plans, predictions, forecasts,
objectives, assumptions or future events or performance that are
not historical facts and may be forward-looking. These
statements are often, but not always, made through the use of
words or phrases such as anticipate,
believes, can, could,
may, predicts, potential,
should, will, estimate,
plans, projects, continuing,
ongoing, expects, intends
and similar words or phrases. Accordingly, these statements are
only predictions and involve estimates, known and unknown risks,
assumptions and uncertainties that could cause actual results to
differ materially from those expressed in them. Our actual
results could differ materially from those anticipated in such
forward-looking statements as a result of several factors more
fully described in the section titled Risk factors
and elsewhere in this prospectus, including the exhibits hereto,
including the following factors, among others:
|
|
|
our status as a recently organized corporation with a limited
operating history;
|
|
|
our inability to make acquisitions of, or to lease, aircraft on
favorable terms;
|
|
|
our inability to obtain additional financing on favorable terms,
if required, to complete the acquisition of sufficient aircraft
as currently contemplated or to fund the operations and growth
of our business;
|
|
|
our inability to obtain refinancing prior to the time our debt
matures;
|
|
|
impaired financial condition and liquidity of our lessees;
|
|
|
deterioration of economic conditions in the commercial aviation
industry generally;
|
|
|
increased maintenance, operating or other expenses or changes in
the timing thereof;
|
|
|
changes in the regulatory environment;
|
|
|
potential natural disasters and terrorist attacks and the amount
of our insurance coverage, if any, relating thereto; and
|
|
|
|
the other risks identified in this
prospectus including, without limitation, those under the sections titled
Risk factors, Business and Certain
relationships and related party transactions.
|
|
All forward-looking statements are necessarily only estimates of
future results, and there can be no assurance that actual
results will not differ materially from expectations, and,
therefore, you are cautioned not to place undue reliance on such
statements. Any forward-looking statements are qualified in
their entirety by reference to the factors discussed throughout
this prospectus. Further, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is
made or to reflect the occurrence of unanticipated events.
40
Use of proceeds
We will not receive any proceeds from the sale of Common Stock by the selling
stockholders. Any proceeds from the sale of the shares of Common Stock offered by this
prospectus will be received by the selling stockholders. We have agreed to pay certain expenses
in connection with the registration of the shares of Common Stock offered by this prospectus.
41
Dividend
policy
We have no current plans to declare or pay any cash or other
dividends on our Common Stock. We intend to reinvest cash flow
generated by operations to finance the future development and
expansion of our business. In addition, we have entered into and
may continue to enter into credit agreements or other borrowing arrangements
that impose restrictions on the declaration or payment of
dividends. Our board of directors may consider the payment of a
cash dividend in the future. Any determination to pay cash
dividends in the future will be at the discretion of our board
of directors and will depend on various factors, including our
results of operations, our financial condition, our earnings,
our cash requirements, legal restrictions, regulatory
restrictions, contractual restrictions and other factors deemed
relevant by our board of directors. Accordingly, you may need to
sell your shares of our Common Stock to generate cash flow from
your investment or to realize a return on your investment, and
you may not be able to sell your shares at or above the purchase price, or at all. See Risk
factorsSince we have no current plans to declare or pay
cash dividends on our Common Stock, you may not receive any
return on investment unless you sell your Common Stock for a
price greater than that which you paid for it.
42
Public market for our Class A Common Stock
As of
June 30, 2011, there were 98,885,131 shares of Class A Common Stock outstanding held by
approximately 139 holders of record, and 1,829,339 shares of Class B
Non-Voting Common Stock outstanding held by approximately one stockholder of record.
Our Class A Common Stock started trading on April 19, 2011 on the NYSE
under the symbol AL. On September 1, 2011, the closing price of our Class A
Common Stock, as reported on the NYSE, was $22.37 per share. The
table below sets forth the reported high and low sale prices for our Class A Common Stock, as
reported on the NYSE, for the period indicated below.
Our Class B Non-Voting Common Stock is not currently listed on any national securities exchange or market system.
|
|
|
|
|
|
|
|
|
2011 |
|
High |
|
|
Low |
|
April 19,
2011 through June 30, 2011
|
|
$ |
29.94 |
|
|
$ |
23.02 |
|
July 1,
2011 through September 1, 2011
|
|
$ |
25.36 |
|
|
$ |
19.87 |
|
43
Capitalization
The following table sets forth our capitalization as of
June 30, 2011.
You should read the information set forth below in conjunction with
Managements discussion and analysis of financial
condition and results of operations and our financial
statements and related notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
June 30, 2011
|
|
(in thousands, except
share data)
|
|
Unaudited
|
|
Cash and cash equivalents
|
|
$
|
445,038 |
|
Restricted cash
|
|
|
68,862 |
|
|
|
|
|
|
|
|
|
Debt financing
|
|
|
1,383,570 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
Preferred Stock, $0.01 par value; 50,000,000 shares
authorized, no shares issued or outstanding, actual and as
adjusted
|
|
|
|
|
Class A Common Stock, $0.01 par value; 500,000,000
shares authorized, 98,885,131 shares issued and
outstanding
|
|
|
984 |
|
Class B Non-Voting Common Stock, $0.01 par value;
10,000,000 shares authorized, 1,829,339 shares issued and
outstanding
|
|
|
18 |
|
Paid-in capital
|
|
|
2,167,187 |
|
Accumulated deficit
|
|
|
(41,841 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,126,348 |
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,509,918 |
|
|
|
|
|
|
44
Selected
financial data
The following table sets forth selected financial data for
Air Lease Corporation. The historical results presented are not
necessarily indicative of future results. You should read this
information in conjunction with Managements
discussion and analysis of financial condition and results of
operations and our financial statements and related notes
appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands, except share data) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentals of flight equipment |
|
$ |
74,004 |
|
|
$ |
1,235 |
|
|
$ |
128,616 |
|
|
$ |
1,235 |
|
|
$ |
57,075 |
|
Interest and other |
|
|
340 |
|
|
|
474 |
|
|
|
943 |
|
|
|
474 |
|
|
|
1,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
74,344 |
|
|
|
1,709 |
|
|
|
129,559 |
|
|
|
1,709 |
|
|
|
58,366 |
|
Expenses |
|
|
63,456 |
|
|
|
46,852 |
|
|
|
113,746 |
|
|
|
47,329 |
|
|
|
119,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
10,888 |
|
|
|
(45,143 |
) |
|
|
15,813 |
|
|
|
(45,620 |
) |
|
|
(60,915 |
) |
Income tax (expense) benefit |
|
|
(3,865 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.08 |
|
|
$ |
(2.37 |
) |
|
$ |
0.13 |
|
|
$ |
(4.17 |
) |
|
$ |
(1.32 |
) |
Diluted |
|
$ |
0.08 |
|
|
$ |
(2.37 |
) |
|
$ |
0.13 |
|
|
$ |
(4.17 |
) |
|
$ |
(1.32 |
) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
91,039,329 |
|
|
|
17,394,121 |
|
|
|
78,287,085 |
|
|
|
9,981,375 |
|
|
|
39,511,045 |
|
Diluted |
|
|
91,163,657 |
|
|
|
17,394,121 |
|
|
|
78,408,463 |
|
|
|
9,981,375 |
|
|
|
39,511,045 |
|
Other financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)(1) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
Adjusted EBITDA(2) |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment subject to operating
leases (net of accumulated depreciation) |
|
$ |
2,814,926 |
|
|
$ |
319,258 |
|
|
$ |
2,814,926 |
|
|
$ |
319,258 |
|
|
$ |
1,629,809 |
|
Total assets |
|
|
3,753,499 |
|
|
|
1,159,859 |
|
|
|
3,753,499 |
|
|
|
1,159,859 |
|
|
|
2,276,282 |
|
Total debt |
|
|
1,383,570 |
|
|
|
25,000 |
|
|
|
1,383,570 |
|
|
|
25,000 |
|
|
|
911,981 |
|
Total liabilities |
|
|
1,627,151 |
|
|
|
43,719 |
|
|
|
1,627,151 |
|
|
|
43,719 |
|
|
|
1,051,347 |
|
Shareholders equity |
|
|
2,126,348 |
|
|
|
1,116,140 |
|
|
|
2,126,348 |
|
|
|
1,116,140 |
|
|
|
1,224,935 |
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Investing activities |
|
|
(759,446 |
) |
|
|
(331,351 |
) |
|
|
(1,371,323 |
) |
|
|
(335,601 |
) |
|
|
(1,854,710 |
) |
Financing activities |
|
|
925,688 |
|
|
|
1,087,752 |
|
|
|
1,400,508 |
|
|
|
1,090,443 |
|
|
|
2,138,407 |
|
Other operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft lease portfolio at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned(3) |
|
|
65 |
|
|
|
8 |
|
|
|
65 |
|
|
|
8 |
|
|
|
40 |
|
|
|
|
|
(1)
|
|
Adjusted net income (loss) (defined as net
income before stock-based compensation expense and non-cash
interest expense, which includes the amortization of debt
issuance costs and convertible debt discounts) is a measure of
both operating performance and liquidity that is not defined by
United States generally accepted accounting principles
(GAAP) and should not be considered as an
alternative to net income, income from operations or any other
performance measures derived in accordance with GAAP. Adjusted
net income is presented as a supplemental disclosure because
management believes that it may be a useful performance measure
that is used within our industry. We believe adjusted net income
provides useful information on our earnings from ongoing
operations, our ability to service our long-term debt and other
fixed obligations, and our ability to fund our expected growth
with internally generated funds. Set forth below is additional
detail as to how
|
45
|
|
|
|
|
we use adjusted net income as a
measure of both operating performance and liquidity, as well as
a discussion of the limitations of adjusted net income as an
analytical tool and a reconciliation of adjusted net income to
our GAAP net loss and cash flow from operating activities.
|
|
|
|
Operating
Performance: Management
and our board of directors adjusted use net income in a number
of ways to assess our consolidated financial and operating
performance, and we believe this measure is helpful in
identifying trends in our performance. We use adjusted net
income as a measure of our consolidated operating performance
exclusive of income and expenses that relate to the financing,
income taxes, and capitalization of the business. Also, adjusted
net income assists us in comparing our operating performance on
a consistent basis as it removes the impact of our capital
structure (primarily one-time amortization of convertible debt
discounts) and stock-based compensation expense from our
operating results. In addition, adjusted net income helps
management identify controllable expenses and make decisions
designed to help us meet our current financial goals and
optimize our financial performance. Accordingly, we believe this
metric measures our financial performance based on operational
factors that we can influence in the short term, namely the cost
structure and expenses of the organization.
|
|
|
|
Liquidity: In
addition to the uses described above, management and our board
of directors use adjusted net income as an indicator of the
amount of cash flow we have available to service our debt
obligations, and we believe this measure can serve the same
purpose for our investors.
|
|
|
|
Limitations: Adjusted
net income has limitations as an analytical tool, and you should
not consider it in isolation, or as a substitute for analysis of
our operating results or cash flows as reported under GAAP. Some
of these limitations are as follows:
|
|
|
|
adjusted net income
does not reflect (i) our cash expenditures or future
requirements for capital expenditures or contractual
commitments, or (ii) changes in or cash requirements for
our working capital needs; and
|
|
|
|
our calculation of
adjusted net income may differ from the adjusted net income or
analogous calculations of other companies in our industry,
limiting its usefulness as a comparative measure.
|
|
|
|
The following tables show the
reconciliation of net income (loss) and cash flows from operating
activities, the most directly comparable GAAP measures of
performance and liquidity, to adjusted net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Reconciliation of cash flows from operating activities to adjusted
net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Depreciation of flight equipment |
|
|
(24,644 |
) |
|
|
(327 |
) |
|
|
(42,774 |
) |
|
|
(327 |
) |
|
|
(19,262 |
) |
Stock-based compensation |
|
|
(11,753 |
) |
|
|
(2,255 |
) |
|
|
(22,660 |
) |
|
|
(2,255 |
) |
|
|
(24,044 |
) |
Deferred taxes |
|
|
(3,866 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
Amortization of deferred debt issue costs |
|
|
(2,336 |
) |
|
|
(875 |
) |
|
|
(4,664 |
) |
|
|
(875 |
) |
|
|
(4,883 |
) |
Extinguishment of debt |
|
|
(3,349 |
) |
|
|
|
|
|
|
(3,349 |
) |
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
(35,798 |
) |
|
|
|
|
|
|
(35,798 |
) |
|
|
(35,798 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and other assets |
|
|
14,042 |
|
|
|
1,094 |
|
|
|
16,327 |
|
|
|
1,199 |
|
|
|
8,040 |
|
Accrued interest and other payables |
|
|
(5,904 |
) |
|
|
(5,032 |
) |
|
|
(6,932 |
) |
|
|
(7,424 |
) |
|
|
(22,054 |
) |
Rentals received in advance |
|
|
(3,650 |
) |
|
|
(2,159 |
) |
|
|
(7,167 |
) |
|
|
(2,159 |
) |
|
|
(8,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
7,023 |
|
|
|
(41,141 |
) |
|
|
10,199 |
|
|
|
(41,618 |
) |
|
|
(52,040 |
) |
Amortization of debt issue costs |
|
|
2,336 |
|
|
|
875 |
|
|
|
4,664 |
|
|
|
875 |
|
|
|
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
Tax effect |
|
|
(5,002 |
) |
|
|
(1,102 |
) |
|
|
(9,700 |
) |
|
|
(1,102 |
) |
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in
thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
1,6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to
adjusted net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
Amortization of debt issue costs |
|
|
2,336 |
|
|
|
875 |
|
|
|
4,664 |
|
|
|
875 |
|
|
|
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
Tax effect |
|
|
(5,002 |
) |
|
|
(1,102 |
) |
|
|
(9,700 |
) |
|
|
(1,102 |
) |
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
|
46
|
|
|
(2)
|
|
Adjusted EBITDA (defined as net
loss before net interest expense, stock-based compensation
expense, income tax expense (benefit), and depreciation and
amortization expense) is a measure of both operating performance
and liquidity that is not defined by GAAP and should not be
considered as an alternative to net income, income from
operations or any other performance measures derived in
accordance with GAAP. Adjusted EBITDA is presented as a
supplemental disclosure because management believes that it may
be a useful performance measure that is used within our
industry. We believe adjusted EBITDA provides useful information
on our earnings from ongoing operations, our ability to service
our long-term debt and other fixed obligations, and our ability
to fund our expected growth with internally generated funds. Set
forth below is additional detail as to how we use adjusted
EBITDA as a measure of both operating performance and liquidity,
as well as a discussion of the limitations of adjusted EBITDA as
an analytical tool and a reconciliation of adjusted EBITDA to
our GAAP net loss and cash flow from operating activities.
|
|
|
|
Operating
Performance: Management
and our board of directors use adjusted EBITDA in a number of
ways to assess our consolidated financial and operating
performance, and we believe this measure is helpful in
identifying trends in our performance. We use adjusted EBITDA as
a measure of our consolidated operating performance exclusive of
income and expenses that relate to the financing, income taxes,
and capitalization of the business. Also, adjusted EBITDA
assists us in comparing our operating performance on a
consistent basis as it removes the impact of our capital
structure (primarily one-time amortization of convertible debt
discounts) and stock-based compensation expense from our
operating results. In addition, adjusted EBITDA helps management
identify controllable expenses and make decisions designed to
help us meet our current financial goals and optimize our
financial performance. Accordingly, we believe this metric
measures our financial performance based on operational factors
that we can influence in the short term, namely the cost
structure and expenses of the organization.
|
|
|
|
Liquidity: In
addition to the uses described above, management and our board
of directors use adjusted EBITDA as an indicator of the amount
of cash flow we have available to service our debt obligations,
and we believe this measure can serve the same purpose for our
investors.
|
|
|
|
Limitations: Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
operating results or cash flows as reported under GAAP. Some of
these limitations are as follows:
|
|
|
|
adjusted EBITDA does
not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments;
|
|
|
|
adjusted EBITDA does
not reflect changes in or cash requirements for our working
capital needs;
|
|
|
|
adjusted EBITDA does
not reflect interest expense or cash requirements necessary to
service interest or principal payments on our debt; and
|
|
|
|
other companies in our
industry may calculate these measures differently from how we
calculate these measures, limiting their usefulness as
comparative measures.
|
|
|
|
The following tables show the
reconciliation of net income (loss) and cash flows from operating
activities, the most directly comparable GAAP measures of
performance and liquidity, to adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
Reconciliation of cash flows from operating
activities to adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
48,483 |
|
|
$ |
209 |
|
|
$ |
87,032 |
|
|
$ |
2,019 |
|
|
$ |
45,124 |
|
Depreciation of flight equipment |
|
|
(24,644 |
) |
|
|
(327 |
) |
|
|
(42,774 |
) |
|
|
(327 |
) |
|
|
(19,262 |
) |
Stock-based compensation |
|
|
(11,753 |
) |
|
|
(2,255 |
) |
|
|
(22,660 |
) |
|
|
(2,255 |
) |
|
|
(24,044 |
) |
Deferred taxes |
|
|
(3,866 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
Amortization of deferred debt issue costs |
|
|
(2,336 |
) |
|
|
(875 |
) |
|
|
(4,664 |
) |
|
|
(875 |
) |
|
|
(4,883 |
) |
Extinguishment of debt |
|
|
(3,349 |
) |
|
|
|
|
|
|
(3,349 |
) |
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
(35,798 |
) |
|
|
|
|
|
|
(35,798 |
) |
|
|
(35,798 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease receivables and other assets |
|
|
14,042 |
|
|
|
1,094 |
|
|
|
16,327 |
|
|
|
1,199 |
|
|
|
8,040 |
|
Accrued interest and other payables |
|
|
(5,904 |
) |
|
|
(5,032 |
) |
|
|
(6,932 |
) |
|
|
(7,424 |
) |
|
|
(22,054 |
) |
Rentals received in advance |
|
|
(3,650 |
) |
|
|
(2,159 |
) |
|
|
(7,167 |
) |
|
|
(2,159 |
) |
|
|
(8,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
7,023 |
|
|
|
(41,141 |
) |
|
|
10,199 |
|
|
|
(41,618 |
) |
|
|
(52,040 |
) |
Net interest expense |
|
|
15,495 |
|
|
|
38,107 |
|
|
|
26,782 |
|
|
|
38,107 |
|
|
|
50,582 |
|
Income taxes |
|
|
3,865 |
|
|
|
4,002 |
|
|
|
5,614 |
|
|
|
4,002 |
|
|
|
(8,875 |
) |
Depreciation |
|
|
24,644 |
|
|
|
327 |
|
|
|
42,774 |
|
|
|
327 |
|
|
|
19,262 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in thousands) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
|
1,6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income
(loss) to adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
Net interest expense |
|
|
15,495 |
|
|
|
38,107 |
|
|
|
26,782 |
|
|
|
38,107 |
|
|
|
50,582 |
|
Income taxes |
|
|
3,865 |
|
|
|
4,002 |
|
|
|
5,614 |
|
|
|
4,002 |
|
|
|
(8,875 |
) |
Depreciation |
|
|
24,644 |
|
|
|
327 |
|
|
|
42,774 |
|
|
|
327 |
|
|
|
19,262 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
62,780 |
|
|
$ |
3,550 |
|
|
$ |
108,029 |
|
|
$ |
3,073 |
|
|
$ |
32,973 |
|
|
|
|
|
(3)
|
|
As of June 30, 2011, we owned 65 aircraft
(of which 13 were new aircraft and 52 were used aircraft) and we managed
one aircraft. As of December 31, 2010, we
owned 40 aircraft of which four were new aircraft and 36 were
used aircraft.
|
48
Managements
discussion and analysis of
financial condition and results of operations
Overview
Our primary business is to acquire new and used popular and
fuel-efficient commercial aircraft from aircraft manufacturers
and other parties and to lease those aircraft to airlines around
the world. We plan to supplement our leasing revenues by
providing management services to investors
and/or
owners of aircraft portfolios, for which we will receive
fee-based revenue. These services are expected to include
leasing, re-leasing, and lease management and sales services,
with the goal of helping our clients maximize lease and sale
revenues. In addition to our leasing activities, and depending
on market conditions, we expect to sell aircraft from our fleet
to other leasing companies, financial services companies and
airlines.
On April 25, 2011, we completed an initial public offering of our Class A Common Stock and listing
of our shares on the New York Stock Exchange under the symbol AL. The offering was upsized by 20%
and the underwriters exercised their over-allotment option in full, resulting in the sale of an
aggregate of 34,825,470 shares of Class A Common Stock. We received gross proceeds of
$922.9 million.
On April 1, 2011, the Company executed an amendment to the Warehouse Facility that took effect on
April 21, 2011. This facility, as amended, provides us with financing of up to $1.25 billion, modified
from the original facility size of $1.5 billion. We are able to draw on this facility, as amended,
during an availability period that ends in June 2013. Prior to the amendment of the Warehouse
Facility, the Warehouse Facility accrued interest during the availability period based on LIBOR
plus 3.25% on drawn balances and at a rate of 1.00% on undrawn balances. Following the amendment,
the Warehouse Facility accrues interest during the availability period based on LIBOR plus 2.50% on
drawn balances and 0.75% on undrawn balances. Pursuant to the amendment, the advance level under
the facility was increased from 65.0% of the appraised value of the pledged aircraft and 50.0% of
the pledged cash to 70.0% of the appraised value of the pledged aircraft and 50.0% of the pledged
cash. The outstanding drawn balance at the end of the availability period may be converted at our
option to an amortizing, four-year term loan with an interest rate of LIBOR plus 3.25% for the
initial three years of the term and margin step-ups during the remaining year that increase the
interest to LIBOR plus 4.75%. As a result of amending the Warehouse Facility, we recorded an
extinguishment of debt charge of $3.3 million from the write-off of deferred debt issue
costs when the amendment became effective on April 21, 2011.
During the second quarter of 2011, we entered into binding and
non-binding commitments to acquire up to 83 additional
aircraft from Airbus, Boeing and Embraer for an estimated aggregate purchase price (including
adjustment for anticipated inflation) of approximately $5.0 billion. Deliveries of the additional
aircraft are scheduled to commence in 2012 and to continue through 2020. From Airbus, we agreed to
purchase one additional Airbus A321 aircraft and entered into a non-binding memorandum of
understanding for the purchase of 50 Airbus A320/321 NEO aircraft and we have cancellation rights
with respect to 14 of the 50 Airbus A320/321 NEO aircraft. From Boeing, we agreed to purchase an
additional 18 Boeing 737-800 aircraft, and entered into non-binding memoranda of understanding for the purchase
of five Boeing 777-300ER aircraft and four Boeing 787-9 aircraft and have cancellation rights with
respect to four of the additional 18 Boeing 737-800 aircraft. From Embraer, we agreed to purchase
an additional five Embraer E190 aircraft.
Our
fleet
We believe we have one of the worlds youngest, most fuel-efficient operating lease portfolios. Our
weighted average fleet age as of December 31, 2010 was 3.8 years and as of June 30, 2011 was 3.6 years.
As of December 31, 2010, we had acquired 40 aircraft (of which four were new aircraft and 36 were used aircraft).
As of June 30, 2011, our fleet had
grown to 65 aircraft (of which 13 were new aircraft and 52 were used aircraft) and we managed one
aircraft. As of June 30, 2011, we had contracted to buy 234 new and nine used aircraft for
delivery through 2020, with an estimated aggregate purchase price of $11.9 billion for delivery as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
|
2011 |
(1) |
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Airbus A319-100 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Airbus A320/321-200 |
|
|
5 |
|
|
|
10 |
|
|
|
13 |
|
|
|
12 |
|
|
|
7 |
|
|
|
|
|
|
|
47 |
|
Airbus A320/321 NEO(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
Airbus A330-200/300 |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Boeing 737-700 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Boeing 737-800(2) |
|
|
2 |
|
|
|
3 |
|
|
|
12 |
|
|
|
12 |
|
|
|
14 |
|
|
|
37 |
|
|
|
80 |
|
Boeing 767-300ER |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Boeing 777-300ER(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
5 |
|
Boeing 787-9(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Embraer E175/190 |
|
|
11 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
ATR 72-600 |
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
Total |
|
|
31 |
|
|
|
46 |
|
|
|
25 |
|
|
|
26 |
|
|
|
24 |
|
|
|
91 |
|
|
|
243 |
|
|
|
|
|
|
(1) |
|
Of the 31 aircraft that we will acquire in the remainder of 2011, the
following nine aircraft will be used aircraft: the Airbus A319-100, one Airbus A320-200, one Airbus A330-200,
both Boeing 737-700s, both Boeing 737-800s and both Boeing 767-300ERs. |
|
|
|
(2) |
|
We have cancellation rights with respect to 14 of the Airbus A320/321 NEO
aircraft and four of the Boeing 737-800 aircraft. |
|
|
|
(3) |
|
As of June 30, 2011, all of the Airbus A320/321 NEO aircraft,
the Boeing 777-300ER aircraft
and the Boeing 787-9 aircraft were subject to non-binding memoranda of understanding for the
purchase of these aircraft. |
|
|
As we move forward, we continue to evaluate opportunities to
acquire attractive aircraft from other leasing companies and our
airline customers, as well as opportunistic transactions with
the airframe manufacturers, to achieve our target of owning
approximately 100 aircraft by the end of 2011.
We acquired our existing fleet of 65 aircraft from 14 separate owners and operators of aircraft, 43
of which were subject to existing operating leases originated by nine different aircraft lessors.
The individual transactions ranged in size from one to eight aircraft, and from $10.1 million to
$330.2 million, respectively. The 43 existing operating leases were with 34 different airline
customers. Of the 43 aircraft that we acquired from other aircraft lessors, none of the aircraft
represented an entire portfolio (i.e., a group of aircraft characterized by risk, geography or other common features) of the respective seller
lessor, and none of the seller lessors sold their aircraft as part of a plan to exit their
respective aircraft leasing businesses. With respect to these transactions, we did not acquire any
information technology systems, infrastructure, employees, other assets, services, financing or any
other activities indicative of a business.
Debt
financing
We fund our aircraft purchases with our existing cash balances, our Warehouse Facility,
secured term financings and unsecured term and revolving credit facilities. As of
December 31, 2010, we borrowed $554.9 million under our Warehouse Facility, $224.0 million in
secured term debt and $133.1 million in unsecured financing, and we had $945.1 million available
but undrawn under our Warehouse Facility and $120.0 million in available but undrawn revolving
unsecured credit facilities. As of June 30, 2011, we borrowed $709.3 million under our Warehouse
Facility, $503.4 million in secured term debt and
$170.9 million in unsecured term financing. As of June
30, 2011, we had $445.0 million in unrestricted cash, $540.7 million available but undrawn under
our Warehouse
Facility and $313.0 million in available but undrawn revolving unsecured credit facilities. As of
June 30, 2011, we had built a diverse lending group consisting of 16 banks across four general
types of lending facilities with a composite interest rate of 3.29%. This rate does not include the
effect of upfront fees, undrawn fees or issuance cost amortization. See Liquidity and capital
resources below.
49
Aircraft industry
and sources of revenues
Our revenues are principally derived from operating leases with
scheduled and charter airlines. As of June 30, 2011 and December 31, 2010, we
derived more than 90% of our revenues from airlines domiciled
outside of the United States, and we anticipate that most of our
revenues in the future will be generated from foreign lessees.
The airline industry is cyclical, economically sensitive, and
highly competitive. Airlines and related companies are affected
by fuel price volatility and fuel shortages, political and
economic instability, natural disasters, terrorist activities,
changes in national policy, competitive pressures, labor
actions, pilot shortages, insurance costs, recessions, health
concerns and other political or economic events adversely
affecting world or regional trading markets. Our airline
customers ability to react to and cope with the volatile
competitive environment in which they operate, as well as our
own competitive environment, will affect our revenues and income.
Throughout 2010, we saw a marked improvement in the outlook for
the profitability of the airline industry. On December 14,
2010, the International Air Transport Association
(IATA) issued its fourth upward revision of the
forecast profitability for the world airline industry for 2010
to a forecasted profit of $15.1 billion as of December
2010. As of June 2011, IATA expected world airline industry
profitability to be $4.0 billion in 2011 compared to the $18.0
billion net profit recorded in 2010. The expected decrease is a
result of a sharp rise in oil prices, the natural disaster in Japan and political unrest in
the Middle East and North Africa.
Liquidity and
capital resources
Overview
As we grow our business, we envision funding our aircraft purchases through multiple sources,
including cash raised in our prior equity offerings, cash flow from
operations, the Warehouse Facility, additional unsecured debt
financing through banks and the capital markets, bilateral credit
facilities, and possibly government-sponsored export
guaranty and lending programs.
50
We have substantial cash requirements as we continue to expand
our fleet through our purchase commitments. However, we believe
that we have sufficient liquidity to satisfy the operating requirements of our business through the next twelve months.
Our liquidity plans are subject to a number of risks and
uncertainties, including those described in the section of this
prospectus titled Risk factors, some of which are
outside of our control. Macro-economic conditions could hinder
our business plans, which could, in turn, adversely affect our
financing strategy.
Warehouse
Facility
On May 26, 2010, ALC Warehouse Borrower, LLC, one of our
wholly-owned subsidiaries, entered into the Warehouse Facility,
which is a non-recourse, revolving credit facility to finance
the acquisition of aircraft. On April 1, 2011, the Company
executed an amendment to the Warehouse Facility that took
effect on April 21, 2011. This facility,
as amended, provides us with financing of up to
$1.25 billion, modified from the original facility size of
$1.5 billion. We are able to draw on this facility, as
amended, during an availability period that ends in June 2013.
Prior to the amendment of the Warehouse Facility, the Warehouse
Facility accrued interest during the availability period based
on LIBOR plus 3.25% on drawn balances and at a fixed rate of
1.00% on undrawn balances. Following the amendment, the
Warehouse Facility accrues interest during the availability
period based on LIBOR plus 2.50% on drawn balances and at a
fixed rate of 0.75% on undrawn balances. Pursuant to the
amendment, the advance level under the facility was increased
from 65% of the appraised value of the aircraft pledged and 50%
of the cash pledged to the Warehouse Facility to 70% of the
appraised value of the aircraft pledged and 50% of the cash
pledged to the Warehouse Facility. The outstanding drawn balance
at the end of the availability period may be converted at our
option to an amortizing, four-year term loan with an interest
rate of LIBOR plus 3.25% for the initial three years of the term
and margin step-ups during the remaining year that increase the
interest to LIBOR plus 4.75%. As a result of amending the
Warehouse Facility, we recorded an extinguishment of debt
charge of $3.3 million from the write-off of deferred
debt issue costs when the amendment became effective on
April 21, 2011.
During the second quarter of 2011, the Company drew $104.9 million under the Warehouse Facility
and incrementally pledged $163.1 million in aircraft collateral.
As of June 30, 2011, the Company
had borrowed $709.3 million under the Warehouse Facility compared to $554.9 million as of December
31, 2010. As of June 30, 2011, the Company had pledged 28 aircraft as collateral with a net book
value of $1.2 billion. As of December 31, 2010, the Company had pledged 23 aircraft as collateral
with a net book value of $930.0 million. The Company had pledged cash collateral and lessee
deposits of $67.5 million and $48.3 million at June 30, 2011 and December 31, 2010, respectively. We intend to continue to utilize the
Warehouse Facility to finance aircraft acquisitions through
2011, as this facility provides us with ample liquidity to make
opportunistic acquisitions of aircraft on short notice.
51
Secured term financing
During the second quarter of 2011, two of our wholly-owned subsidiaries entered into two separate
secured term facilities aggregating $82.8 million. The two facilities consisted of a three-year
$20.3 million facility at a floating rate of LIBOR plus 2.75%
and a $62.5 million facility with an
eight-year $56.0 million tranche at a rate of LIBOR plus 2.99% and a two-year $6.5 million tranche
at a rate of LIBOR plus 2.10%. In connection with these facilities, the Company pledged $129.0
million in aircraft collateral.
The
outstanding balances on our secured term facilities were $503.4 million and $224.0 million at June 30,
2011 and December 31, 2010, respectively.
Unsecured financing
During the second quarter of 2011, the Company issued $120.0 million in senior unsecured notes in a
private placement to institutional investors. The notes have a five-year term and a coupon of 5.0%.
In addition, we entered into two five-year and one three-year unsecured term facilities totaling
$17.0 million with interest rates ranging from 3.0% to 4.0%.
We ended the second quarter of 2011 with a total of nine unsecured term facilities. The total
amount outstanding under our unsecured term facilities was $170.9 million and $13.1 million as of
June 30, 2011 and December 31, 2010, respectively.
In addition, we increased the capacity of one of our existing three-year revolving unsecured credit
facilities from $25.0 million to $30.0 million. The Company ended the second quarter of 2011 with a
total of 12 bilateral revolving unsecured credit facilities aggregating $313.0 million, each with a
borrowing rate of LIBOR plus 2.00%. We did not have any amounts outstanding under our bilateral
revolving unsecured credit facilities as of June 30, 2011 compared to $120.0 million outstanding as
of December 31, 2010.
Available
liquidity
Available liquidity includes cash balances and undrawn balances under our Warehouse
Facility and unsecured revolving credit facilities. At June 30, 2011, available liquidity
was $1.3 billion compared to available liquidity of $1.4 billion at December 31, 2010.
Our debt financing was comprised of the following:
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
June 30, 2011
|
|
December 31, 2010
|
|
|
|
Secured debt
|
|
$
|
1,212,671
|
|
$
|
778,896
|
|
Unsecured debt
|
|
|
170,899 |
|
|
133,085
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,383,570 |
|
$
|
911,981
|
|
|
|
|
|
|
|
|
|
Composite interest rate(1)
|
|
|
3.29 |
%
|
|
3.32
|
%
|
|
|
|
|
(1)
|
|
This rate does not include the
effect of upfront fees, undrawn fees or issuance cost
amortization.
|
At June 30, 2011 and December 31, 2010, we were in compliance in all material
respects with the covenants in our debt agreements, including
our financial covenants concerning debt-to-equity, tangible net
equity and interest coverage ratios.
52
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
For the period |
|
|
|
For the three months ended |
|
|
months ended |
|
|
from Inception to |
|
|
from Inception to |
|
(in
thousands, except share data) |
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
June 30, 2011 |
|
|
June 30, 2010 |
|
|
December 31, 2010 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental of flight equipment |
|
$ |
74,004 |
|
|
$ |
1,235 |
|
|
$ |
128,616 |
|
|
$ |
1,235 |
|
|
$ |
57,075 |
|
Interest and other |
|
|
340 |
|
|
|
474 |
|
|
|
943 |
|
|
|
474 |
|
|
|
1,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
74,344 |
|
|
|
1,709 |
|
|
|
129,559 |
|
|
|
1,709 |
|
|
|
58,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
10,090 |
|
|
|
1,838 |
|
|
|
19,150 |
|
|
|
1,838 |
|
|
|
11,062 |
|
Amortization of deferred debt issue costs |
|
|
2,336 |
|
|
|
875 |
|
|
|
4,664 |
|
|
|
875 |
|
|
|
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
15,775 |
|
|
|
38,511 |
|
|
|
27,163 |
|
|
|
38,511 |
|
|
|
51,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of flight equipment |
|
|
24,644 |
|
|
|
327 |
|
|
|
42,774 |
|
|
|
327 |
|
|
|
19,262 |
|
Selling, general and administrative |
|
|
11,284 |
|
|
|
5,759 |
|
|
|
21,149 |
|
|
|
6,236 |
|
|
|
24,232 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
63,456 |
|
|
|
46,852 |
|
|
|
113,746 |
|
|
|
47,329 |
|
|
|
119,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
10,888 |
|
|
|
(45,143 |
) |
|
|
15,813 |
|
|
|
(45,620 |
) |
|
|
(60,915 |
) |
Income tax (expense) benefit |
|
|
(3,865 |
) |
|
|
4,002 |
|
|
|
(5,614 |
) |
|
|
4,002 |
|
|
|
8,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
7,023 |
|
|
$ |
(41,141 |
) |
|
$ |
10,199 |
|
|
$ |
(41,618 |
) |
|
$ |
(52,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issue costs |
|
$ |
2,336 |
|
|
$ |
875 |
|
|
$ |
4,664 |
|
|
$ |
875 |
|
|
$ |
4,883 |
|
Extinguishment of debt |
|
|
3,349 |
|
|
|
|
|
|
|
3,349 |
|
|
|
|
|
|
|
|
|
Amortization of convertible debt discounts |
|
|
|
|
|
|
35,798 |
|
|
|
|
|
|
|
35,798 |
|
|
|
35,798 |
|
Stock-based compensation |
|
|
11,753 |
|
|
|
2,255 |
|
|
|
22,660 |
|
|
|
2,255 |
|
|
|
24,044 |
|
Tax effect |
|
|
(5,002 |
) |
|
|
(1,102 |
) |
|
|
(9,700 |
) |
|
|
(1,102 |
) |
|
|
(10,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss) |
|
$ |
19,459 |
|
|
$ |
(3,315 |
) |
|
$ |
31,172 |
|
|
$ |
(3,792 |
) |
|
$ |
2,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following
commentary should be read in conjunction with our financial
statements and related notes appearing elsewhere in this
prospectus.
Three months ended June 30, 2011, compared to the three months ended June 30, 2010
Rental revenue
Building on our base of 49 aircraft at March 31, 2011, we acquired sixteen aircraft during the
three months ended June 30, 2011. As of June 30, 2011, we had acquired 65 aircraft at a total cost
of $2.9 billion and recorded $74.0 million in rental revenue for the three months then ended, which
includes overhaul revenue of $2.6 million. As of June 30, 2010, we had acquired eight aircraft at a
total cost of $319.6 million and recorded $1.2 million in rental revenue for the three months ended
June 30, 2010, which includes overhaul revenue of $0.2 million. The increase in rental revenue for
the three months ended June 30, 2011, compared to 2010, was attributable to the acquisition and
lease of additional aircraft. The full impact on rental revenue for aircraft acquired during the
quarter will be reflected in subsequent periods.
53
All of the aircraft in our fleet were leased as of June 30, 2011 and 2010.
Interest expense
Interest expense totaled $15.8 million and $38.5 million for the three months ended June 30, 2011
and 2010, respectively. The change was primarily due to an increase in our outstanding debt
balances resulting in an $8.3 million increase in interest, an increase of $1.5 million in
amortization of our deferred debt issue costs and a $3.3 million charge for the extinguishment of
debt associated with the modification of the Warehouse Facility, offset by a one-time $35.8 million
charge for the amortization of convertible debt discounts recorded during the second quarter of
2010. The amortization of convertible debt discounts was a one-time, equity-neutral charge. This
charge was a result of our issuance of $60.0 million of convertible notes at 6.0%, on May 7, 2010,
to funds managed by Ares Management LLC and Leonard Green & Partners, L.P. and members of our
management and board of directors (and their family members or affiliates) and simultaneously
entering into a forward purchase arrangement with such funds managed by Ares Management LLC and
Leonard Green & Partners, L.P. to purchase shares at a discounted price of $18.00 per share. We
used the proceeds of the convertible notes to finance the acquisition of an aircraft and for
general corporate purposes prior to the initial closing of our private placement of Common Stock in
June 2010. The convertible notes all converted to equity at $18.00 per share on June 4, 2010, upon
the initial closing of our private placement of Common Stock in June 2010.
We expect that our interest expense will increase as our average debt balance outstanding continues
to increase.
Our overall composite interest rate has continued to improve since our inception. This is a result
of our credit spreads on new debt issuances continuing to tighten, combined with the effects of an
extended low short-term interest rate environment.
Depreciation expense
We recorded $24.6 million in depreciation expense of flight equipment for the three months ended
June 30, 2011 compared to $0.3 million for the three months ended June 30, 2010. The increase in
depreciation expense for 2011, compared to 2010, was attributable to the acquisition of additional
aircraft. The full impact on depreciation expense for aircraft added during the quarter will be
reflected in subsequent periods.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of $11.3 million and $5.8 million for the
three months ended June 30, 2011 and 2010, respectively. Selling, general and administrative
expense represents a disproportionately higher percentage of revenues during our initial years of
operation. As we continue to add new aircraft to our portfolio, we expect selling, general and
administrative expense to continue decreasing as a percentage of our revenue.
54
Stock-based compensation expense
Stock-based compensation expense totaled $11.8 million and $2.3 million for the three months ended
June 30, 2011 and 2010, respectively. This increase is primarily a result of timing as the full
impact on stock-based compensation expense of grants made during the second quarter of 2010, which
were not reflected until subsequent periods. We determine the fair value of our grants on the grant
date and will recognize the value of the grants as expense over the vesting period, with an
offsetting increase to equity. As a result, the stock-based compensation expense recorded to date
is equity-neutral.
Taxes
The effective tax rate for the three months ended June 30, 2011 was 35.5% compared to 8.8% for the
three months ended June 30, 2010. The change in effective tax rate for the respective periods
is due to the effect of the one-time charge of $35.8 million relating to the amortization of
convertible debt discounts in the prior period which is not deductible for tax purposes.
Net income (loss)
For the three months ended June 30, 2011, the Company reported consolidated net income of $7.0
million, or $0.08 per diluted share, compared to a consolidated net loss of $41.1 million, or $2.37
per diluted share, for the three months ended June 30, 2010. The increase in net income for 2011,
compared to 2010, was primarily attributable to the acquisition and lease of additional aircraft
and the effect of a one-time $35.8 million charge for the amortization of convertible debt
discounts recorded during the second quarter of 2010.
Adjusted net income (loss)
We recorded adjusted net income of $19.5 million for the three-month period ended June 30, 2011
compared to an adjusted net loss of $3.3 million for the three-month period ended June 30, 2010.
The change in adjusted net income (loss) for 2011, compared to 2010, was primarily attributable to
the acquisition and lease of additional aircraft.
Adjusted net income is a measure of financial and operational performance that is not defined by
GAAP. See note 1 in the Summary financial information and data and in the Selected financial
data for a discussion of adjusted net income as a non-GAAP measure and a reconciliation of this
measure to net income (loss) included elsewhere in this prospectus.
55
Six months ended June 30, 2011, compared to the period from inception to June 30, 2010
Rental revenue
Building
on our base of 40 aircraft at December 31, 2010, we acquired 25 aircraft during
the six months ended June 30, 2011. As of June 30, 2011, we had acquired 65 aircraft at a total
cost of $2.9 billion and recorded $128.6 million in rental revenue for the six months then ended,
which includes overhaul revenue of $4.3 million. As of June 30, 2010, we had acquired eight
aircraft at a total cost of $319.6 million and recorded $1.2 million in rental revenue for the
period from inception to June 30, 2010, which includes overhaul revenue of $0.2 million. The
increase in rental revenue for 2011, compared to 2010, was attributable to the acquisition and
lease of additional aircraft. The full impact on rental revenue for aircraft acquired during the
quarter will be reflected in subsequent periods.
All of the aircraft in our fleet were leased as of June 30, 2011 and 2010.
Interest expense
Interest expense totaled $27.2 million and $38.5 million for the six months ended June 30, 2011 and
the period from inception to June 30, 2010, respectively. The change was primarily due to an
increase in our outstanding debt balances resulting in a $17.3 million increase in interest, an
increase of $3.8 million in amortization of our deferred debt issue costs and a $3.3 million charge
for the extinguishment of debt associated with the modification of the Warehouse Facility, offset
by a one-time $35.8 million charge for the amortization of convertible debt discounts recorded
during the second quarter of 2010. The amortization of convertible debt discounts was a one-time,
equity-neutral charge. This charge was a result of our issuance of $60.0 million of convertible
notes at 6.0%, on May 7, 2010, to funds managed by Ares Management LLC and Leonard Green &
Partners, L.P. and members of our management and board of directors (and their family members or
affiliates) and simultaneously entering into a forward purchase arrangement with such funds managed
by Ares Management LLC and Leonard Green & Partners, L.P. to purchase shares at a discounted price
of $18.00 per share. We used the proceeds of the convertible notes to finance the acquisition of an
aircraft and for general corporate purposes prior to the initial closing of our private placement
of Common Stock in June 2010. The convertible notes all converted to equity at $18.00 per share on
June 4, 2010, upon the initial closing of our private placement of Common Stock in June 2010.
We expect that our interest expense will increase as our average debt balance outstanding continues
to increase.
Our overall composite interest rate has continued to improve since our inception. This is a result
of our credit spreads on new debt issuances continuing to tighten, combined with a low short-term
interest rate environment.
Depreciation expense
We recorded $42.8 million in depreciation expense of flight equipment for the six months ended June
30, 2011 compared to $0.3 million for the period from inception to June 30, 2010. The increase in
depreciation expense for 2011, compared to 2010, was attributable to the acquisition and lease of
additional aircraft. The full impact on depreciation expense for aircraft added during the quarter
will be reflected in subsequent periods.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of $21.1 million and $6.2 million for the
six months ended June 30, 2011 and the period from inception to June 30, 2010, respectively.
Selling, general and administrative expense represents a disproportionately higher percentage of
revenues during our initial years of operation. As we continue to add new aircraft to our
portfolio, we expect selling, general and administrative expense to continue decreasing as a
percentage of our revenue.
Stock-based compensation expense
Stock-based compensation expense totaled $22.7 million and $2.3 million for the six months ended
June 30, 2011 and the period from inception to June 30, 2010, respectively. This increase is
primarily a result of timing as the full impact on stock-based compensation expense for grants made
during the second quarter of 2010, which were not reflected until subsequent periods. We determine
the fair value of our grants on the grant date and will recognize the value of the grants as
expense over the vesting period, with an offsetting increase to equity. As a result, the
stock-based compensation expense recorded to date is equity-neutral.
Taxes
The effective tax rate for the six months ended June 30, 2011 was 35.5% compared to 8.8% for the
period from inception to June 30, 2010. The change in effective tax rate for the respective periods
is due to the effect of the one-time charge of $35.8 million relating to the amortization of
convertible debt discounts in the prior period which is not deductible for tax purposes.
Net income (loss)
For the six months ended June 30, 2011, the Company reported consolidated net income of $10.2
million, or $0.13 per diluted share, compared to a consolidated net loss of $41.6 million, or $4.17
per diluted share, for the period
56
from inception to June 30, 2010. The increase in net income for 2011, compared to 2010, was
primarily attributable to the acquisition and lease of additional aircraft and the effect of a
one-time $35.8 million charge for the amortization of convertible debt discounts recorded during
the second quarter of 2010.
Adjusted net income (loss)
We recorded adjusted net income of $31.2 million for the six-month period ended June 30, 2011
compared to an adjusted net loss of $3.8 million for the period from inception to June 30, 2010.
The change in adjusted net income (loss) for 2011, compared to 2010, was primarily attributable to
the acquisition and lease of additional aircraft.
Adjusted net income is a measure of financial and operational performance that is not defined by
GAAP. See note 1 in the Summary financial information and data and in the Selected financial
data for a discussion of adjusted net income as a non-GAAP measure and a reconciliation of this
measure to net income (loss) included elsewhere in this prospectus.
For the period from Inception to December 31, 2010
Rental revenue
As of December 31, 2010, we had acquired 40 aircraft at a total cost of $1.6 billion. We recorded
$57.1 million in rental revenue for the period from inception through December 31, 2010. All of the
aircraft in our fleet were leased as of December 31, 2010, except for one aircraft with respect to
which we had entered into a binding lease commitment but for which delivery occurred during
February 2011.
The full impact on rental revenue of aircraft added during the period from inception through
December 31, 2010, will be reflected in subsequent periods.
Interest expense
Interest expense of $51.7 million for the period from inception to December 31, 2010 principally
consisted of $35.8 million of amortization of convertible debt discounts, $11.0 million in
unutilized fees on our debt facilities and cash interest and an additional $4.9 million in
amortization of our deferred debt issue costs. The amortization of convertible debt discounts is a
one-time equity-neutral charge. This charge was a result of our issuance of $60.0 million of
convertible notes at 6.0%, on May 7, 2010, to funds managed by Ares Management LLC and Leonard
Green & Partners, L.P. and members of our management and board of directors (and their family
members or affiliates) and simultaneously entering into a forward purchase arrangement with such
funds managed by Ares Management LLC and Leonard Green & Partners, L.P. to purchase shares at a
discounted price of $18.00 per share. We used the proceeds of the convertible notes to finance the
acquisition of an aircraft and for general corporate purposes prior to the initial closing of our
private placement of Common Stock in June 2010. The convertible notes all converted to equity at
$18.00 per share on June 4, 2010, upon the initial closing of our private placement of Common
Stock.
Our overall composite interest rate has continued to improve since our inception. This is a result
of our credit spreads on new debt issuances continuing to tighten, combined with a low short-term
interest rate environment.
Depreciation expense
We recorded depreciation expense of flight equipment for the period from inception to December 31,
2010 of $19.3 million. The full impact of depreciation expense of flight equipment acquired during
the period from inception to December 31, 2010, will be reflected in subsequent periods.
Selling, general and administrative expenses
We recorded $24.2 million of selling, general and administrative expenses for the period from
inception to December 31, 2010.
Selling, general and administrative expense represented a disproportionate share of revenues during
our launch phase. As we add new aircraft to our portfolio, we expect selling, general and
administrative expense to decrease as a share of our revenue.
Stock-based compensation expense
We recorded $24.0 million of stock-based compensation expense for the period from inception to
December 31, 2010.
We granted restricted stock units and stock options during the second and third quarters of 2010.
We determined the fair value of our grants on the grant date and will recognize the value of the
grants as expense over the vesting period, with an offsetting increase to equity. As a result, the
stock-based compensation expense recorded for the period from inception to December 31, 2010, is
equity-neutral.
Taxes
The effective tax rate for the period from inception to December 31, 2010 was 14.6%. Our effective
tax rate was reduced from the statutory rate of 35.0% primarily due to the tax treatment of the
amortization of the convertible debt discounts, which is non-deductible for tax purposes.
Net loss
We recorded a net loss of $52.0 million for the period from inception to December 31, 2010. The net
loss for this period is primarily attributable to the one-time amortization of convertible debt
discounts and stock-based compensation expense, which as discussed above are both equity-neutral
items.
Adjusted net income
We recorded adjusted net income of $2.5 million for the period from inception to December 31, 2010.
Adjusted net income is a measure of financial and operational performance that is not defined by
GAAP. See note 1 in the Summary financial information and data and in the Selected financial
data for a discussion of adjusted net income as a non-GAAP measure and a reconciliation of this
measure to net loss included elsewhere in this prospectus.
57
Contractual
Obligations
Our contractual obligations as of June 30, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Long-term debt obligations |
|
$ |
35,063 |
|
|
$ |
71,637 |
|
|
$ |
204,764 |
|
|
$ |
220,973 |
|
|
$ |
228,611 |
|
|
$ |
622,522 |
|
|
$ |
1,383,570 |
|
Interest
payments on debt outstanding (1) |
|
|
25,465 |
|
|
|
48,773 |
|
|
|
43,497 |
|
|
|
33,913 |
|
|
|
27,212 |
|
|
|
20,391 |
|
|
|
199,251 |
|
Purchase commitments |
|
|
1,289,930 |
|
|
|
1,817,592 |
|
|
|
1,210,000 |
|
|
|
1,408,662 |
|
|
|
1,381,692 |
|
|
|
4,756,915 |
|
|
|
11,864,791 |
|
Operating leases |
|
|
|
|
|
|
1,441 |
|
|
|
2,325 |
|
|
|
2,395 |
|
|
|
2,467 |
|
|
|
23,241 |
|
|
|
31,869 |
|
|
|
|
Total |
|
$ |
1,350,458 |
|
|
$ |
1,939,443 |
|
|
$ |
1,460,586 |
|
|
$ |
1,665,943 |
|
|
$ |
1,639,982 |
|
|
$ |
5,423,069 |
|
|
$ |
13,479,481 |
|
|
|
|
|
|
(1) |
|
As of June 30, 2011, the Company had $709.3 million of debt outstanding under the
Warehouse Facility which will come due beginning in June 2013. The outstanding drawn balance
at the end of the availability period may be converted at the Companys option to an
amortizing, four-year term loan with an increasing interest rate and has been presented as if
such option were exercised in the contractual obligation schedule above. |
|
|
|
(2) |
|
Future interest payments on floating rate debt are estimated using floating rates in effect
at June 30, 2011. |
|
Off-balance sheet
arrangements
We have not established any unconsolidated entities for the
purpose of facilitating off-balance sheet arrangements or for
other contractually narrow or limited purposes. We have,
however, from time to time established subsidiaries and created
partnership arrangements or trusts for the purpose of leasing
aircraft or facilitating borrowing arrangements.
Quantitative and
qualitative disclosures about market risk
Market risk represents the risk of changes in value of a
financial instrument, caused by fluctuations in interest rates
and foreign exchange rates. Changes in these factors could cause
fluctuations in our results of operations and cash flows. We are
exposed to the market risks described below.
Interest Rate Risk. The nature of our business
exposes us to market risk arising from changes in interest
rates. Changes, both increases and decreases, in our cost of
borrowing, as reflected in our composite interest rate, directly
impact our net income. Our lease rental stream is generally
fixed over the life of our leases, whereas we have used
floating-rate debt to finance a significant portion of our
aircraft acquisitions.
As of June 30, 2011, we had $1.0 billion in floating-rate debt.
As of December 31, 2010, we had
$898.9 million
58
in floating-rate debt. If interest rates increase, we would be
obligated to make higher interest payments to our lenders. If we
incur significant fixed-rate debt in the future, increased
interest rates prevailing in the market at the time of the
incurrence of such debt would also increase our interest
expense. If our composite rate were to increase by 1.0%, we
would expect to incur additional interest expense on our
existing indebtedness as of June 30, 2011 and December 31, 2010, of
approximately $10.2 million and $9.0 million, each on an annualized basis, which
would put downward pressure on our operating margins.
Foreign Exchange Rate Risk. The Company attempts to
minimize currency and exchange risks by entering into aircraft
purchase agreements and a majority of lease agreements and debt
agreements with U.S. dollars as the designated payment
currency. Thus, most of our revenue and expenses are denominated
in U.S. dollars. As of June 30, 2011 and
December 31, 2010, 4.7% and 3.7%, respectively, of our
lease revenues were denominated in Euros. As our principal
currency is the U.S. dollar, a continuing weakness in the
U.S. dollar as compared to other major currencies should
not have a significant impact on our future operating results.
Recent accounting
pronouncements
In July 2010, the FASB issued an accounting standard that
requires enhanced disclosures about (i) the nature of
credit risk inherent in a portfolio of financing receivables,
(ii) how risk is analyzed and assessed in arriving at the
allowance for credit losses, and (iii) the changes and
reasons for those changes in the allowance for credit losses.
These increased disclosures are required to be included in our
December 31, 2010 financial statements. As this new
standard only requires additional disclosures about receivables,
it will not affect our consolidated financial position, results
of operations or cash flows.
Critical
accounting policies
We believe the following critical accounting policies can have a
significant impact on our results of operations, financial
position and financial statement disclosures, and may require
subjective and complex estimates and judgments.
Lease
revenue
We lease flight equipment principally under operating leases and
report rental income ratably over the life of each lease.
Rentals received, but unearned, under the lease agreements are
recorded in Rentals received in advance on our
Consolidated Balance Sheet until earned. The difference between
the rental income recorded and the cash received under the
provisions of the lease is included in Lease
receivables, as a component of Other assets on
our Consolidated Balance Sheet. An allowance for doubtful
accounts will be recognized for past-due rentals based on
managements assessment of collectability. Our management
team monitors all lessees with past due lease payments (if any)
and discusses relevant operational and financial issues facing
those lessees with our marketing executives in order to
determine an appropriate allowance for doubtful accounts. In
addition, if collection is not reasonably assured, we will not
recognize rental income for amounts due under our lease
contracts and will recognize revenue for such lessees on a cash
basis. Should a lessees credit quality deteriorate, we may
be required to record an allowance for doubtful accounts
and/or stop
recognizing revenue until cash is received, both of which could
have a material impact on our results of operations and
financial condition.
59
Our aircraft lease agreements typically contain provisions which
require the lessee to make additional rental payments based on
either the usage of the aircraft, measured on the basis of hours
or cycles flown per month (a cycle is one take-off and landing),
or calendar-based time (Contingent Rentals). These
payments represent contributions to the cost of major future
maintenance events (Qualifying Events) associated
with the aircraft and typically cover major airframe structural
checks, engine overhauls, the replacement of life limited parts
contained in each engine, landing gear overhauls and overhauls
of the auxiliary power unit. These Contingent Rentals are
generally collected monthly based on reports of usage by the
lessee or collected as fixed monthly rates.
In accordance with our lease agreements, Contingent Rentals are
subject to reimbursement to the lessee upon the occurrence of a
Qualifying Event. The reimbursable amount is capped by the
amount of Contingent Rentals received by the Company, net of
previous reimbursements. The Company is only required to
reimburse for Qualifying Events during the lease term. The
Company is not required to reimburse for routine maintenance or
additional maintenance costs incurred during a Qualifying Event.
All amounts of Contingent Rentals unclaimed by the lessee at the
end of the lease term are retained by the Company.
We record as rental revenue the portion of Contingent Rentals
that we are virtually certain we will not reimburse to the
lessee as a component of Rental of flight equipment
in our Consolidated Statement of Operations. Contingent Rentals
which we may be required to reimburse to the lessee are
reflected in our overhaul reserve liability, as a component of
Security deposits and maintenance reserves on flight
equipment leases in our Consolidated Balance Sheet.
Estimating when we are virtually certain that Contingent Rental
payments will not be reimbursed requires judgments to be made as
to the timing and cost of future maintenance events. In order to
determine virtual certainty with respect to this contingency,
our Technical Asset Management department analyzes the terms of
the lease, utilizes available cost estimates published by the
equipment manufacturers, and thoroughly evaluates an
airlines Maintenance Planning Document (MPD).
The MPD describes the required inspections and the frequency of
those inspections. Our Technical Asset Management department
utilizes this available information, combined with their
cumulative industry experience, to determine when major
Qualifying Events are expected to occur for each relevant
component of the aircraft, and translates this information into
a determination of how much we will ultimately be required to
reimburse to the lessee. We record Contingent Rental revenue as
the aircraft is operated when we determine that a Qualifying
Event will occur outside the non-cancellable lease term or after
we have collected Contingent Rentals equal to the amount that we
expect to reimburse to the lessee as the aircraft is operated.
Should such estimates be inaccurate, we may be required to
reverse revenue previously recognized. In addition, if we can no
longer make accurate estimates with respect to a particular
lease, we will stop recognizing any Contingent Rental revenue
until the end of such lease.
All of our lease agreements are triple net leases whereby the
lessee is responsible for all taxes, insurance, and aircraft
maintenance. In the future, we may incur repair and maintenance
expenses for off-lease aircraft. We recognize overhaul expense
in our Consolidated Statement of Operations for all such
expenditures.
60
Lessee-specific modifications such as those related to
modifications of the aircraft cabin are expected to be
capitalized as initial direct costs and amortized over the term
of the lease into rental revenue in our Consolidated Statement
of Operations.
Flight
equipment
Flight equipment under operating lease is stated at cost less
accumulated depreciation. Purchases, major additions and
modifications, and interest on deposits during the construction
phase are capitalized. We generally depreciate passenger
aircraft on a straight-line basis over a
25-year life
from the date of manufacture to a 15% residual value. Changes in
the assumption of useful lives or residual values for aircraft
could have a significant impact on our results of operations and
financial condition. At the time flight equipment is retired or
sold, the cost and accumulated depreciation are removed from the
related accounts and the difference, net of proceeds, is
recorded as a gain or loss.
Our management team evaluates on a quarterly basis the need to
perform an impairment test whenever facts or circumstances
indicate a potential impairment has occurred. An assessment is
performed whenever events or changes in circumstances indicate
that the carrying amount of an aircraft may not be recoverable.
Recoverability of an aircrafts carrying amount is measured
by comparing the carrying amount of the aircraft to future
undiscounted net cash flows expected to be generated by the
aircraft. The undiscounted cash flows consist of cash flows from
currently contracted leases, future projected lease rates and
estimated residual or scrap values for each aircraft. We develop
assumptions used in the recoverability analysis based on our
knowledge of active lease contracts, 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 affected by changes
in future periods due to changes in contracted lease rates,
economic conditions, technology and airline demand for a
particular aircraft type. In the event that an aircraft does not
meet the recoverability test, the aircraft will be recorded at
fair value in accordance with our Fair Value Policy, resulting
in an impairment charge. Deterioration of future lease rates and
the residual values of our aircraft could result in impairment
charges which could have a significant impact on our results of
operations and financial condition. To date we have not recorded
any impairment charges.
We record flight equipment at fair value if we determine the
carrying value may not be recoverable. We principally use the
income approach to measure the fair value of aircraft. The
income approach is based on the present value of cash flows from
contractual lease agreements and projected future lease
payments, including contingent rentals, net of expenses, which
extend to the end of the aircrafts economic life in its
highest and best use configuration, as well as a disposition
value based on expectations of market participants. These
valuations are considered Level 3 valuations, as the
valuations contain significant non-observable inputs.
Share-based
payments
To compensate and incentivize our employees and directors, we
grant share-based compensation awards. To date, we have granted
stock options and restricted stock units. All share-based
payment awards granted have been equity classified awards. We
account for such awards by estimating the grant date fair value
of the award and amortizing that value on a straight-line basis
over the relevant service period less any anticipated
forfeitures. The estimation of the fair value of share-based
awards requires considerable judgment, particularly
61
since, we were a private company until April 2011, with a short
history of operations. Key estimates we make in determining the
fair value of an award include the fair value of our Common
Stock, the expected term of the award and the volatility of our
Common Stock. To date we have principally used transaction
prices from sales of our Common Stock to determine the fair
value of our Common Stock. As we have a limited history, we have
used the simplified averaging approach to estimating the
expected term of the award. We have estimated the volatility of
our Common Stock by using the average historic volatility of a
peer group of companies. For future awards, we will be required
to continue to make such subjective judgments, and while we
intend to continue to use the approach discussed above to make
key estimates, there can be no assurance that changes in such
estimates will not have a significant impact to our results of
operations in the future.
Income
taxes
We use the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in the
tax rates is recognized in income in the period that includes
the enactment date. We record a valuation allowance for deferred
tax assets when the probability of realization of the full value
of the asset is less than 50%. We are currently in a net
deferred tax asset position. Based on the timing of reversal of
deferred tax liabilities, future anticipated taxable income
based on lease and debt arrangements in place at the balance
sheet date and tax planning strategies available to us, our
management considers the deferred tax asset recoverable. Should
events occur in the future that make the likelihood of recovery
of the net deferred tax asset less than 50%, a deferred tax
valuation allowance will be required that could have a
significant impact on our results of operations and financial
condition.
We recognize the impact of a tax position, if that position has
a probability of greater than 50% that it would be sustained on
audit, based on the technical merits of the position. Recognized
income tax positions are measured at the largest amount that has
a probability of more than 50% of being realized. Changes in
recognition or measurement are reflected in the period in which
the change in judgment occurs. As our business develops and we
file tax returns, we may take tax positions that have a
probability of less than 50% of being sustained on audit which
will require us to reserve for such positions. If these tax
positions are audited by a taxing authority, there can be no
assurance that the ultimate resolution of such tax positions
will not result in further losses. Such losses could have a
significant impact on our results of operations and financial
condition.
62
Overview of the
aircraft leasing industry
We obtained the market and industry information, data and
forecasts in this section from a report prepared for us by
AVITAS, a full-service aviation consulting firm retained by us
to provide such information, data and forecasts for inclusion in
this prospectus. AVITAS has consented to being named as an
expert with respect to such information, data and forecasts.
Nature of airline
industry
Demand for air travel has consistently grown in terms of both
the number of aircraft and passenger traffic over the last
40 years. The industry has remained resilient over time,
while enduring the effects of both business cycle downturns and
external events. Today, air travel has penetrated most world
regions, with the highest growth now coming from emerging
markets and economies. The long-term outlook for an increasing
number of aircraft remains robust due primarily to increased
passenger traffic. AVITAS forecasts that there will be more than
24,000 aircraft in service by 2015, an increase of approximately
5,000 over todays level.
The airline industry is cyclical and generally grows along with
the economy. Historically, there has been a strong positive
correlation between changes in world Gross Domestic Product
(GDP), measured in U.S. dollars, and changes in
passenger traffic (as indicated by revenue passenger kilometers
(RPK), an industry-standard measure of passengers
flown where each RPK represents one kilometer traveled by a
paying customer). Figure 1 illustrates that air travel can be
forecast by using GDP as a predictor of passenger travel and
depicts the actual levels of traffic versus the levels predicted
by an AVITAS model based on world GDP.
Figure
1
Annual World
Passenger Air Traffic,
1970-2010
Source: International Civil Aviation Organization.
63
The airline industry has demonstrated robust growth in terms of
both aircraft and passenger traffic. Figure 2 shows the growth
profile of both aircraft and passenger traffic over the last
40 years. Growth in passenger traffic has led to the need
for additional aircraft capacity. The business cycle effects are
apparent in the chart as passenger traffic (depicted by the RPK
line) declines or softens within recessionary periods. However,
aircraft inventory has trended upward consistently, regardless
of the economic cycle, as many aircraft are delivered during
downturns despite reduced passenger travel.
Figure
2
World Passenger
Traffic and Commercial Jet Aircraft
Year-End Data
1970-2010
Source: Ascend fleet database (includes all commercial
aircraft including regional jets with less than 100 seats; aircraft fleet data is actual through 2010 and passenger traffic data is estimated for 2010).
Worldwide airline
industry outlook
Figure 3 shows monthly
year-over-year
percentage changes for passenger and cargo traffic between
January 2009 and April 2011, the most recent period for which
data is available. As depicted, traffic has been recovering
since October 2009. In April 2011, year-over-year
passenger traffic grew 7% and cargo traffic grew 16%.
64
Figure
3
World Monthly
Year over Year Passenger and Cargo Traffic Growth
January 2009 - April 2011
Source: IATA.
Note: Statistics cover international scheduled air traffic;
domestic traffic is not included.
Long-term passenger traffic growth is expected to be underpinned
by projected growth in demand from emerging markets. Travel
growth remains concentrated in the emerging markets of the
Asia/Pacific region, Latin America and the Middle East while the
more mature markets in the United States and Europe have slower
growth rates overall. The percentage of world traffic
attributable to emerging markets has been continuously
increasing since the early 1990s. For example, in 1990, the
Asia/Pacific region represented about 17% of the worlds
passenger traffic, and its share was estimated to be
approximately 29% in 2010. Since 1990, Chinas passenger
traffic has grown 15% annually on average to 337 billion
RPKs in 2009. Currently, Chinas passenger traffic is the
second highest in the world.
Figure 4 illustrates AVITASs forecast of the growth
prospects for each of the major geographic regions over the next
several years. AVITAS expects to see considerably higher growth in
2011-2015 in
the Asia/Pacific region, the Middle East and Latin America, as
compared to North America and Europe. In fact, AVITAS forecasts
that by 2015 passenger traffic in the Asia/Pacific region will
surpass passenger traffic in North America.
65
Figure
4
Forecast of
Annual Average Passenger Traffic Growth by Major Regions
2011-2015
Source: AVITAS forecast.
Strengthening fundamental metrics, such as increased traffic,
load factors, yield, cargo growth, and capacity reduction, led
IATA to significantly upgrade its forecast outlook for the
worldwide airline industry throughout 2010.
Figure 5 represents the progression of IATAs forecast
estimates for 2010 worldwide airline profitability from December
2009 through March 2011 and reflects IATAs final
determination (released
in June 2011) of net profits of $18.0 billion for 2010.
66
Figure
5
IATA Forecasted
Airline Industry Profitability 2010
(in billions)
Source: IATA.
Figure 6 represents the progression of IATAs forecast
estimates for 2011 worldwide airline profitability. In March
2011, IATA downgraded its forecast for the profitability of the
airline industry for 2011 to $8.6 billion from its
estimate of
$9.1 billion in December 2010. In June 2011,
IATA downgraded its 2011 airline industry outlook again
as a result of the natural disaster in Japan, unrest in the Middle
East and North Africa, and a sharp rise in oil
prices. The latest figures indicate that IATA projects a $4.0 billion profit for the airline industry in 2011.
Figure
6
IATA Forecast
Airline Industry Profitability 2011
(in billions)
Source: IATA.
While rising oil prices
present challenges for airline profitability, aircraft lessors
with younger, more fuel-efficient aircraft have the opportunity
to become more competitive as such aircraft become increasingly
more attractive to airline customers seeking to reduce their
fuel costs.
67
Aircraft
production
Airlines order aircraft to accommodate increased passenger
demand as well as to replace older airplanes with newer, more
fuel-efficient, and technologically enhanced aircraft. AVITAS
projects that the world fleet will increase by about 25% from
approximately 19,000 aircraft in 2011 to more than 24,000
aircraft by the end of 2015. As shown in Figure 7, increased
passenger demand and aircraft replacement are projected to
account for approximately 70% and 30%, respectively, of new
aircraft deliveries from 2011 to 2015.
Figure
7
Demand for
Passenger Aircraft from 2011-2015
Source: BACK Aviation data; AVITAS forecast.
A key driver of increased passenger demand is the growth of
low-cost carriers worldwide. Most of the major regions of the
world have seen a proliferation of low-cost carriers. For
example, the Asia/Pacific region currently has more than 50
low-cost carriers, and in the Middle East and Latin America
there are at least 20 low-cost carriers. Moreover, low-cost
carriers are also expanding in other regions, such as Russia.
Many of these low-cost carriers have new aircraft on order for
future delivery and are seeking aircraft that have reduced
operational expenses and greater fuel efficiency with lower
maintenance costs.
Aircraft are replaced as a result of the economic life cycle of
the airplane. The average age of retirement varies by aircraft
type and model, but it is generally between 25 and 30 years
for most passenger aircraft. As an aircraft becomes older, it
tends to have higher maintenance costs, burns more fuel than
younger, more modern aircraft, and often fails to comply
(without costly modifications in some cases) to newer
environmental standards.
Airlines that seek to replace their aircraft are driven by
numerous factors, some of which are fuel consumption, aircraft
range performance, cabin amenities, and aircraft reliability.
Generally,
68
airlines base their decision to replace aircraft on their
specific operational economics and aircraft fleet strategies.
The lengthy production cycle of aircraft can create difficulties
for airlines as new planes need to be ordered years in advance
of delivery often five years or more. Historically,
airlines have tended to purchase aircraft when traffic is up but
since aircraft production lead times can be so long, they often
take delivery of the aircraft when the economic environment has
changed and traffic has declined. These patterns occur in
parallel with macro economic cycles.
Aircraft
values
Aircraft values are determined by market demand and market
supply. Market demand is predicted based on traffic forecasts,
which are driven in turn by economic cycles, together with
productivity, utilization assumptions and load factor analysis.
Market supply is projected by a retirement forecast based on
aircraft economic life assumptions and fluctuations in the
parked aircraft fleet, and the delivery forecast driven by the
order/delivery pattern. The change in aircraft values is the
outcome of these movements in the demand for and supply of
aircraft.
Figure 8 is a depiction of AVITASs value index for world
passenger jets. The index is derived by an econometric model
that compares average aircraft values for all aircraft types and
vintages over time to their trend line. The trend line indicates
the intrinsic value of an aircraft in a balanced market where
supply and demand are equal. The percentage scale on the chart
reflects the forecast of values as a percentage relative to the
trend line value (which is indicated as 100%). This allows for a
determination of when average aircraft values are forecast to be
above or below the trend line over the short and medium term
given forecast changes in the business cycle and the supply and
demand for aircraft.
69
Figure
8
History and
Forecast Value Index, World Passenger Jet, 2008-2015
Source: AVITAS forecast.
AVITAS forecasts that aircraft values will be depressed through
2011 as AVITAS believes that aircraft supply will continue to
exceed the market demand for aircraft. In addition, both Boeing
and Airbus are expanding production on several aircraft types in
2011 and 2012, which are expected to further dampen aircraft
values through 2011. However, after 2011, passenger traffic is
forecasted to recover, which is expected to lead to the
absorption of the new aircraft deliveries and thereby strengthen
aircraft values in the process.
There are dozens of different jet aircraft types and models in
commercial airline service today ranging from 30 to
500 seats. Each of these models generally has a production
run of 15 to 25 years. Because an aircrafts value
generally declines with age, there are numerous value profiles
for each aircraft type by its year of build.
An aircrafts value and its associated lease rates are
determined by market conditions, the overall supply and demand
for aircraft, and other factors, such as:
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aircraft type and age;
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number of aircraft in service today;
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number of airlines who operate the aircraft;
|
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production status;
|
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size, capacity, and capability;
|
70
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number of aircraft that are currently parked or in storage (a
result of either market conditions or an operator decision to
park the aircraft, either temporarily or permanently); and
|
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life cycle duration, which is the potential of the aircraft type
to be replaced by a newer model.
|
Performance against these criteria demonstrates market
liquidity of the asset and thus the ease or
difficulty in placing an aircraft with another operator.
Generally, newer in-production models with strong market
penetration, good geographic dispersion, and a broad base of
operators tend to hold their value better than older,
out-of-production
types. While all aircraft are expected to lose value during
negative market conditions, aircraft with positive
characteristics against the criteria described above should
maintain a higher value and higher lease rate over a longer
period of time and with less price volatility.
Figure 9 shows aircraft types that AVITAS expects will
perform relatively well from a value perspective over the next
five to ten years. Note that the aircraft types shown here are
based on AVITASs opinion on the desirability of having
these types in a leased aircraft portfolio that is strong on
liquidity. It is not an endorsement or a guarantee that an
investment in these aircraft will be profitable. Also, while
assets that have strong market liquidity can minimize value
volatility, they can also result in low yield returns as
compared to an investment in older aircraft, which are more
volatile in nature but may produce higher yields.
All of the aircraft listed in Figure 9 have demonstrated
significant market strength and represent a cross-section of
narrowbody, widebody, and turboprop aircraft. Many of these
aircraft are favored by operating lessors given their high
demand within the market and relative liquidity. While some
compete with one another, many of these aircraft models and
types do not have comparable replacements in terms of range and
size and no such replacements are expected over the next five
years (or longer). It is important to note that Airbus has
announced a new engine option (A320 NEO) scheduled
to enter service in 2016. The A330-200 may be replaced by a
version of the A350WXB and a version of the 787, which are
scheduled for delivery between 2013 and 2015. However, both of
those models will be heavier than the A330-200. Thus, the
A330-200 appears to have a competitive niche against aircraft of
a similar size.
The Embraer 170/190 family of aircraft has gained significant
prominence over the last decade as a result of the development
of
70-100 seat
regional jets. These popular aircraft are now used by both
regional and major airlines to provide hub flow passenger
traffic as well as
point-to-point
service between smaller and medium-sized cities. Similarly, the
ATR 72-600,
manufactured by French-Italian aircraft manufacturer ATR,
provides large turboprop service at reduced operating economics,
including low fuel burn. Deliveries of the ATR
72-600 will begin in 2011 and is a follow-on aircraft from the
popular ATR
72-200/-500
models (currently used by 87 airline operators).
71
Figure 9
Selected aircraft
statistics
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Aircraft |
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No. of aircraft |
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Aircraft |
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Capacity |
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in |
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No. of airline |
|
on operating |
|
Production |
Manufacturer |
|
type |
|
Model |
|
Body type |
|
(seats) |
|
service |
|
Backlog |
|
operators |
|
lease (apprx) |
|
years (to date) |
|
Boeing |
|
737NG |
|
|
-700 |
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narrow |
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126 |
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1196 |
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289 |
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155 |
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417 |
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14 |
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|
-800 |
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narrow |
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162 |
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2311 |
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1263 |
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153 |
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1106 |
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|
14 |
|
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|
777 |
|
|
300ER |
|
|
wide |
|
|
365 |
|
|
|
290 |
|
|
|
210 |
|
|
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27 |
|
|
|
137 |
|
|
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8 |
|
Airbus |
|
A320 |
|
|
A319-100 |
|
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narrow |
|
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124 |
|
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1309 |
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157 |
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146 |
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571 |
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16 |
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A320-200 |
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narrow |
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150 |
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2709 |
|
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1481 |
|
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232 |
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1334 |
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23 |
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A321-200 |
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narrow |
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185 |
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661 |
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240 |
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68 |
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262 |
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15 |
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A320 NEO |
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narrow |
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150 |
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0 |
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722 |
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11 (customers) |
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185 |
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Beginning 2015 |
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A321 NEO |
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narrow |
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185 |
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0 |
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196 |
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5 (customers) |
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25 |
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Beginning 2015 |
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A330 |
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|
-200 |
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wide |
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253 |
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434 |
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173 |
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75 |
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218 |
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13 |
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ATR |
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ATR72 |
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|
-600 |
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turboprop |
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74 |
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2 |
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87 |
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1 |
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0 |
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1 |
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Embraer |
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Ejet |
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170 |
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narrow |
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70-75 |
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185 |
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3 |
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25 |
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72 |
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8 |
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175 |
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narrow |
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80-90 |
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137 |
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18 |
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12 |
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48 |
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7 |
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190 |
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narrow |
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90-100 |
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355 |
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130 |
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35 |
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157 |
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6 |
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Source: ACAS (Flight Global).
Notes: The statistics are from
August 2011. The number of aircraft on operating lease are estimates. The A320 NEO and A321 NEO are new
aircraft that are yet to be delivered; backlog statistics are
reported as firm; ATR72-600 has eight total customers who have
ordered the aircraft but only one operator has taken delivery to date.
Role of
lessors
Due to the cost of aircraft acquisitions, aircraft financing
complexities and the airlines need for fleet flexibility,
the role of operating lessors has expanded significantly over
the last 20 years. In the late 1960s and early 1970s,
airlines generally owned all of their aircraft. Aircraft
acquisitions were financed through loans that were
collateralized by the aircraft themselves. Airline fleets at
that time were generally small in size and limited to a few
aircraft types. Further, the overall size of the airline
industry was relatively small and geographically confined. As
airline fleets expanded and fixed costs for maintenance and
ownership grew rapidly, airlines outsourced ownership of many of
their airplanes through the adoption of aircraft leases.
Growth of aircraft operating leases is expected to continue as
lessors acquire aircraft from manufacturers, as well as from
airlines (for example, sale-leaseback transactions). Airlines
have turned to the leasing structure for an increasing share of
their financing requirements as operating leases provide fleet
planning flexibility, relatively low capital investment and the
avoidance of balance sheet residual value risk. An operating
lease allows airlines to preserve capital that can be invested
in the operational costs of the airline. Airlines are
diversifying their fleets to secure growth in new markets in
different geographic regions. Hence, operating lessors can
provide airlines with diversified aircraft types and capacities,
as well as economic flexibility.
Leasing is attractive to nearly all airlines and is particularly
attractive to
start-up
carriers, especially those in the fast-growing, low-cost carrier
sectors in various geographic regions. During the recession of
2001, while many banks were reducing their involvement in
aircraft financing in the capital markets, operating lessors
continued to offer aircraft supply to the airlines.
Figure 10 illustrates the consistent upward trend of
aircraft operating leases over the past 40 years. As of
December 2010, aircraft operating leases comprised about 35% of
the more than 19,000 commercial jet aircraft fleet in service.
Of the more than 7,000 new aircraft that are on order backlog,
it is expected that operating lessors will take delivery of more
than 1,300 aircraft, which represents approximately 19% of the
total order backlog for new aircraft. This figure is consistent
with operating lessors involvement with new aircraft
orders over the last five years.
72
Of the approximately 1,300 aircraft currently on order by
operating lessors, 72% are narrowbody aircraft, 24% are
widebodies, and 4% are regional jets.
Figure 10
Aircraft
Operating Leases as a Percentage of Total Worldwide
Aircraft Fleet
Source: Ascend and AVITAS estimates; in service jet
aircraft in commercial service.
The operating leasing industry has shown steady growth as a
percentage of in-service aircraft. This is due to continued
reliance on leasing companies to fund aircraft expansion in
growing markets for both outright growth and for aircraft
replacements. Forecasts for aircraft deliveries over the next
five years suggest that the number of aircraft on lease may grow
by approximately 25% from 2010 totals. As shown in
Figure 11, extrapolating historical leasing trends
indicates that the total number of aircraft on operating lease
will increase from approximately 6,800 in 2010 to approximately 8,500 in 2015, an increase
of approximately 1,700 aircraft. This increase will be driven by both new
aircraft deliveries as well as sale-leaseback transactions.
73
Figure 11
Aircraft Lease
vs. Other Ownership - History and Extrapolation
Source: History from ACAS; AVITAS extrapolation.
Competition
The current competitive landscape for operating lessors is a
large, but fragmented industry. There are over 100 aircraft
lessors today but the top five lessors
control more than 50% of the total number of aircraft on
lease and more than 60% of current aircraft value. The two
largest aircraft leasing companies are International Lease
Finance Corporation and GE Capital Aviation Services.
The fragmented nature of the industry has created niches in the
aircraft leasing industry within which lessors focus, including:
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a focus on specific geographic regions;
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|
a focus on a diversified fleet structure (narrowbody or widebody
aircraft);
|
|
|
a focus on securitization of aircraft assets; and
|
|
|
different financial structures, that is, private or public
company funding.
|
As a result of the recent global financial market challenges,
several leasing companies have faced significant financial
difficulty. Some large lessors have shed aircraft to provide
needed funds. Moreover, the near future of the leasing market
will also depend upon the strength and structure of the recovery
of the overall airline market. Consequently, the current market
situation may alter the competitive landscape and consolidation
of existing players may be
74
inevitable. With a disrupted landscape, new leasing companies
may also arise as funding and the capital markets recover.
Despite the current issues, however, the leasing market is a
fundamental component of the airline business. Leasing companies
will play an increasingly larger role in providing aircraft
capacity as airlines grow their fleets and re-fleet with newer,
more fuel-efficient aircraft. New opportunities will arise and
lessors who are adequately capitalized and are both nimble and
flexible in their approach will be able to take advantage of
todays funding and market issues and be better equipped to
pursue both current and long-term market opportunities.
75
Business
Overview
Air Lease Corporation is an aircraft leasing company that was
launched in February 2010 by aviation industry pioneer Steven F.
Udvar-Házy. We are principally engaged in purchasing
commercial aircraft which we, in turn, lease to airlines around
the world to generate attractive returns on equity.
As of June 30, 2011, we owned 65 aircraft of which 13
were new aircraft and 52 were used aircraft. Our fleet is
comprised of
fuel-efficient
and newer technology aircraft, consisting of narrowbody
(single-aisle) aircraft, such as the Airbus
A319/320/321
and the Boeing 737-700/800, and select widebody (twin-aisle)
aircraft, such as the Airbus A330-200 and the Boeing
777-300ER.
We manage lease revenues and take advantage of changes in market
conditions by acquiring a balanced mix of aircraft types, both
new and used. Our used aircraft are generally less than five
years old. All of the aircraft we own were leased as of
June 30, 2011. Additionally, as of June 30, 2011, we
had entered into binding and non-binding purchase commitments to acquire an additional
234 new aircraft through 2020 and nine used aircraft in 2011.
Through careful management and diversification of our leases and
lessees by geography, lease term, and aircraft age and type, we
mitigate the risks of owning and leasing aircraft. We believe
that diversification of our leases and lessees reduces the risks
associated with individual lessee defaults and adverse
geopolitical and regional economic events. We manage lease
expirations in our fleet portfolio over varying time periods in
order to minimize periods of concentrated lease expirations and
mitigate the risks associated with cyclical variations in the
airline industry. We target to place new aircraft under leases
with a minimum term of six years for narrowbody aircraft and
nine years for widebody aircraft. As of June 30, 2011, the
weighted average lease term remaining on our current leases was
6.1 years, and we leased the aircraft in our portfolio to
43 airlines in 26 countries.
We lease our aircraft to airlines pursuant to net operating
leases that require the lessee to pay for maintenance,
insurance, taxes and all other aircraft operating expenses
during the lease term, which includes fuel, crews, airport and
navigation charges, and insurance. The cost of an aircraft
typically is not fully recovered over the term of the initial
lease. Therefore, upon expiration or early termination of a
lease, we retain the benefit and assume the risk of the rent at
which we can re-lease the aircraft and its equipment or the
price at which we can sell the aircraft and its equipment. We
believe net operating leases offer airlines greater fleet and
financial flexibility and ability to diversify as compared to
outright ownership because of the relatively small initial
capital outlay necessary to obtain use of the aircraft, the
airlines ability to match aircraft use with their current
and future operating requirements, financing leverage for the
airline operator and the elimination of residual value risk.
This allows the airline to preserve capital that it can invest
in other aspects of its operations.
We believe we have entered the aircraft leasing industry at an
opportune time, as we expect both airlines use of net
operating leases and the demand for air travel to grow in the
near future. We also believe that airlines desire to enjoy
the operational and financial benefits that can be derived from
net operating leases will drive growth in aircraft leasing.
During the past 20 years, the worlds airlines have
leased a growing share of their aircraft instead of owning them
outright. According to AVITAS, as of December 2010, aircraft
operating leases comprised approximately 35% of the more than
19,000 commercial jet aircraft fleet in service and are
76
forecasted to grow by more than 25% over the next five years.
Even as airlines reliance on leasing has grown, the demand
for air travel has also increased, experiencing fairly
consistent growth during the past 40 years. Air travel has
penetrated most world regions, with the highest growth expected
to take place in emerging markets and economies. AVITAS
forecasts an annual growth rate of 6.5% in air passenger demand
from 2011 to 2015 and projects the world fleet to increase by
more than 25% during this same period.
We operate our business on a global basis, providing aircraft to
airline customers in every major geographical region, including
emerging and high-growth markets such as Asia, the Pacific Rim,
Latin America, the Middle East and Eastern Europe. According to
AVITAS, many of these emerging markets are experiencing
increased demand for passenger airline travel and have lower
market saturation than more mature markets such as North America
and Western Europe. In addition, airlines in some of these
emerging markets have fewer financing alternatives, enabling us
to command relatively higher lease rates compared to lease rates
in more mature markets. With our
well-established
industry contacts and access to capital, we believe we will be
able to continue successfully implementing our business strategy
worldwide. As of June 30, 2011, we have entered into
leases and future lease commitments with airlines in Australia,
Brazil, Bulgaria, Canada, China, Columbia, the Czech Republic,
Ethiopia, France, Germany, India,
Indonesia, Ireland, Italy, Japan, Kazakhstan, Kenya, Malaysia,
Mexico, Mongolia, the Netherlands, New Zealand, Norway, the Republic of Seychelles,
Russia, South Africa, South Korea, Spain, Sri Lanka, Thailand,
Trinidad & Tobago, Turkey, United Arab Emirates, the
United Kingdom,
the United States and Vietnam.
While our primary business is to own and lease aircraft, we also
provide fleet management and remarketing services to
third parties for a fee. These services are similar to those we
perform with respect to our fleet, including leasing,
re-leasing, lease management and sales services.
We believe we have the infrastructure, expertise and resources
to execute a large number of diverse aircraft transactions under
a variety of market conditions. We are led by a highly
experienced management team that includes Steven F.
Udvar-Házy, our Chairman and Chief Executive Officer, John
L. Plueger, our President and Chief Operating Officer, Grant A.
Levy, our Executive Vice President, General Counsel and
Secretary, Marc H. Baer, our Executive Vice President,
Marketing, Alex A. Khatibi, our Executive Vice President, Jie
Chen, our Executive Vice President and Managing Director of
Asia, James C. Clarke, our Senior Vice President and Chief
Financial Officer, Gregory B. Willis, our Vice President,
Finance, and Chief Accounting Officer, and John D. Poerschke,
our Senior Vice President of Aircraft Procurement and
Specifications. On average, our senior management team has over
23 years of experience in the aviation industry.
Through their extensive industry experience, the members of our
management team have built and maintained long-standing client
relationships with more than 200 airlines in over 70 countries.
We believe that aircraft leasing is a relationship-driven
business and that our management teams relationships with
and access to key decision makers at airlines around the world,
combined with our experience, provide us with the ability to
understand the needs of various airlines and tailor our fleet
and leases to their needs. Also, we believe our relationships
with airframe and engine manufacturers allow us to procure new
aircraft on favorable terms and assist manufacturers with their
airframe and engine designs to better meet the needs of our
airline customers.
77
Operations to
date
Current
fleet
As of June 30, 2011, our aircraft fleet consisted of 55
narrowbody aircraft and ten widebody aircraft, and the weighted
average age of our aircraft fleet was 3.6 years.
The following table shows the scheduled lease terminations (for
the minimum noncancelable period, which does not include
contractual unexercised lease extension options) by aircraft
type for our operating lease portfolio as of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft type |
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Airbus A319-100 |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
7 |
|
Airbus A320-200 |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
1 |
|
|
|
9 |
|
|
|
16 |
|
Airbus A321-200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Airbus A330-200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
Boeing B737-700 |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
5 |
|
Boeing B737-800 |
|
|
|
|
|
|
1 |
|
|
|
3 |
|
|
|
6 |
|
|
|
7 |
|
|
|
7 |
|
|
|
24 |
|
Boeing B767-300ER |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Boeing B777-300ER |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
Total |
|
|
|
|
|
|
5 |
|
|
|
10 |
|
|
|
7 |
|
|
|
9 |
|
|
|
34 |
|
|
|
65 |
|
|
Aircraft purchase
commitments
As of June 30, 2011, we had commitments to acquire a total
of 234 new aircraft and nine used aircraft at an estimated
aggregate purchase price (including adjustment for anticipated
inflation) of approximately $11.9 billion for delivery as
shown below. The recorded basis of aircraft may be adjusted upon
delivery to reflect credits given by the manufacturers in
connection with the leasing of aircraft or changes in budgeted
buyer furnished equipment required by a specific airline
customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft Type |
|
2011 |
(1) |
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
|
Thereafter |
|
|
Total |
|
|
Airbus A319-100 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Airbus A320/321-200 |
|
|
5 |
|
|
|
10 |
|
|
|
13 |
|
|
|
12 |
|
|
|
7 |
|
|
|
|
|
|
|
47 |
|
Airbus A320/321 NEO(2)(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
|
|
50 |
|
Airbus A330-200/300 |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Boeing 737-700 |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Boeing 737-800(2) |
|
|
2 |
|
|
|
3 |
|
|
|
12 |
|
|
|
12 |
|
|
|
14 |
|
|
|
37 |
|
|
|
80 |
|
Boeing 767-300ER |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Boeing 777-300ER(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
5 |
|
Boeing 787-9(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
Embraer E175/190 |
|
|
11 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
ATR 72-600 |
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
Total |
|
|
31 |
|
|
|
46 |
|
|
|
25 |
|
|
|
26 |
|
|
|
24 |
|
|
|
91 |
|
|
|
243 |
|
|
|
|
|
|
(1) |
|
Of the 31 aircraft that we will acquire in the remainder of 2011, the
following nine aircraft will be used aircraft: the Airbus A319-100, one Airbus A320-200, one Airbus A330-200,
both Boeing 737-700s, both Boeing 737-800s and both Boeing 767-300ERs. |
|
|
|
(2) |
|
We have cancellation rights with respect to 14 of the Airbus A320/321 NEO
aircraft and four of the Boeing 737-800 aircraft. |
|
|
|
(3) |
|
As of June 30, 2011, all of the Airbus A320/321 NEO aircraft, Boeing 777-300ER aircraft
and the Boeing 787-9 aircraft were subject to non-binding memoranda of understanding for the
purchase of these aircraft. |
|
Our new aircraft are being purchased pursuant to binding
purchase agreements with each of Airbus, Boeing, Embraer and
ATR, or through sale-leaseback transactions with other airline
customers,
other than, as of June 30, 2011, the Airbus A320/A321 NEO aircraft, the
Boeing 777-300ER aircraft and the Boeing 789-9 aircraft, the purchase
of which were subject to non-binding memoranda of understanding.
These agreements establish the pricing formulas
(which include certain price adjustments based upon inflation
and other factors) and various other terms with respect to the
78
purchase of aircraft. Under certain circumstances, we have the
right to alter the mix of aircraft types that we ultimately
acquire. We also have cancellation rights with respect 14 of the
Airbus A320/321 NEO aircraft and four of the Boeing 737-800 aircraft.
We had 65 aircraft in our fleet as of June 30, 2011
and anticipate growing our fleet to approximately
100 aircraft by the end of 2011. We intend to grow our
fleet by purchasing the 31 aircraft for which we have
purchase commitments in 2011 as well as acquiring additional aircraft through additional purchases from aircraft
manufacturers, other lessors and airlines.
Lease
placements
As of June 30, 2011, we had arranged future lease
commitments for all of the aircraft to be delivered in 2011,
for 37 out of 46 aircraft to be delivered in 2012, for 14 out
of 25 aircraft to be delivered in 2013, and for six out of 26
aircraft to be delivered in 2014. Our future lease commitments
for all of the aircraft to be delivered in 2011 are
comprised of 23 binding leases and eight non-binding
letters of intent. Our future lease commitments for the 37 out
of 46 aircraft to be delivered in 2012 are comprised of 33
binding leases and four letters of intent. Our future lease
commitments for the 14 out of 25 aircraft to be delivered in 2013
are comprised of 11 binding leases and three non-binding letters of
intent. Our future lease commitments for the six out of 26 aircraft
to be delivered in 2014 are comprised of five binding leases and one
non-binding letter of intent. While our
managements historical experience is that non-binding
letters of intent for aircraft leases generally lead to binding
contracts, we cannot assure you that we will ultimately execute
binding agreements for all or any of the letters of intent.
While we actively seek lease placements for the aircraft that
are scheduled to be delivered through 2020, in making our lease
placement decisions, we also take into consideration the
anticipated growth in the aircraft leasing market and
anticipated improvements in lease rates, which could lead us to
determine that entering into particular lease arrangements at a
later date would be more beneficial to us.
Geographic
diversification
The following table sets forth the number of aircraft we leased
in the indicated regions as of June 30, 2011 and December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
Dcember 31, 2010 |
|
|
|
Number of |
|
|
% of |
|
|
Number of |
|
|
% of |
|
Region |
|
aircraft |
|
|
total |
|
|
aircraft |
|
|
total |
|
|
Europe |
|
|
24 |
|
|
|
36.9 |
% |
|
|
16 |
|
|
|
40.0 |
% |
Asia/Pacific |
|
|
22 |
|
|
|
33.9 |
% |
|
|
11 |
|
|
|
27.5 |
% |
Central America, South America and Mexico |
|
|
8 |
|
|
|
12.3 |
% |
|
|
5 |
|
|
|
12.5 |
% |
U.S. and Canada |
|
|
8 |
|
|
|
12.3 |
% |
|
|
5 |
|
|
|
12.5 |
% |
The Middle East and Africa |
|
|
3 |
|
|
|
4.6 |
% |
|
|
3 |
|
|
|
7.5 |
% |
|
|
|
Total |
|
|
65 |
|
|
|
100.0 |
% |
|
|
40 |
|
|
|
100.0 |
% |
|
79
The following table sets forth our existing lessees by region as
of June 30, 2011:
|
|
|
|
Region
|
|
Existing lessees
|
|
|
Europe
|
|
Aer Lingus, Air Astana, Air Austral, Air Berlin, Air France,
Alitalia, KLM, Norwegian, Sunwing,
Sun Express, Transavia, Travel Service and Vueling
|
Asia/Pacific
|
|
AirAsia, Air Macau, Air New Zealand, GoAir, Hainan, Kingfisher,
MIAT, Mihin Lanka, Shanghai, Sichuan, Skymark, SpiceJet, Spring,
SriLankan, Virgin Australia and Xiamen
|
Central America, South America and Mexico
|
|
Aeromexico, Avianca, Interjet, TAM and Volaris
|
U.S. and Canada
|
|
Air Canada, Caribbean, Continental, Southwest, Spirit and WestJet
|
The Middle East and Africa
|
|
Air Arabia, Etihad and South African Airways
|
|
|
The following table sets forth the dollar amount and percentage
of our rental of flight equipment revenues attributable to the
indicated regions based on each airlines principal place
of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
|
months ended |
|
|
from Inception to |
|
(dollars
in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount of |
|
|
% of |
|
|
Amount of |
|
|
% of |
|
Region |
|
rental revenue |
|
|
total |
|
|
rental revenue |
|
|
total |
|
|
Europe |
|
$ |
61,106 |
|
|
|
47.5 |
% |
|
$ |
31,157 |
|
|
|
54.6 |
% |
Asia/Pacific |
|
|
35,530 |
|
|
|
27.6 |
|
|
|
11,933 |
|
|
|
20.9 |
|
Central America, South
America and
Mexico |
|
|
8,947 |
|
|
|
7.0 |
|
|
|
4,953 |
|
|
|
8.7 |
|
U.S. and Canada |
|
|
17,178 |
|
|
|
13.4 |
|
|
|
6,309 |
|
|
|
11.0 |
|
The Middle East and Africa |
|
|
5,855 |
|
|
|
4.5 |
|
|
|
2,723 |
|
|
|
4.8 |
|
|
|
|
|
|
Total |
|
$ |
128,616 |
|
|
|
100.0 |
% |
|
$ |
57,075 |
|
|
|
100.0 |
% |
|
Over 90% of our aircraft are operated internationally based on
net book value. The following table sets forth the percentage of
the net book value of our aircraft portfolio operating in the
indicated regions as of June 30, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2011 |
|
December 31, 2010 |
|
|
% of net |
|
% of net |
Region |
|
book value |
|
book value |
|
Europe |
|
|
45.8 |
% |
|
|
42.3 |
% |
Asia/Pacific |
|
|
27.8 |
|
|
|
26.1 |
|
Central America, South America and Mexico |
|
|
10.7 |
|
|
|
10.0 |
|
U.S. and Canada |
|
|
12.3 |
|
|
|
15.6 |
|
The Middle East and Africa |
|
|
3.4 |
|
|
|
6.0 |
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
As our aircraft portfolio grows, we anticipate that a growing
percentage of our aircraft will be located in the Asia/Pacific,
the Central America, South America and Mexico, and the Middle
East and Africa regions.
80
The following table sets forth the revenue attributable to
individual countries representing at least 10% of our rental of
flight equipment revenue for the six months ended June 30,
2011 and the period from inception to December 31, 2010, based on each airlines principal place of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
|
months ended |
|
|
from Inception to |
|
(dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount of |
|
|
% of |
|
|
Amount of |
|
|
% of |
|
Country |
|
rental revenue |
|
|
total |
|
|
rental revenue |
|
|
total |
|
|
France |
|
$ |
28,535 |
|
|
|
22.2 |
% |
|
$ |
8,598 |
|
|
|
15.1 |
% |
Germany |
|
$ |
15,561 |
|
|
|
12.1 |
% |
|
$ |
15,153 |
|
|
|
26.5 |
% |
China |
|
$ |
15,488 |
|
|
|
12.0 |
% |
|
$ |
6,091 |
|
|
|
10.7 |
% |
|
The following table sets forth the revenue attributable to
individual airlines representing at least 10% of our rental of
flight equipment revenue for the six months ended June 30,
2011 and the period from inception to December 31, 2010, based on each airlines principal place of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six |
|
|
For the period |
|
|
|
months ended |
|
|
from Inception to |
|
(dollars in thousands) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount of |
|
|
% of |
|
|
Amount of |
|
|
% of |
|
Customer(1) |
|
rental revenue |
|
|
total |
|
|
rental revenue |
|
|
total |
|
|
Air France |
|
$ |
20,589 |
|
|
|
16.0 |
% |
|
$ |
8,598 |
|
|
|
15.1 |
% |
Air Berlin |
|
$ |
15,561 |
|
|
|
12.1 |
% |
|
$ |
15,153 |
|
|
|
26.5 |
% |
|
|
|
|
(1) |
|
A customer is an airline with its own operating certificate. |
Our business and
growth strategies
We believe that we entered the aircraft leasing industry at an
opportune time, as both airlines use of net operating
leases and the demand for air travel are expected to grow in the
near future, consistent with a trend of growth in air travel
over the last 40 years, as forecasted by AVITAS. Accordingly, we
are pursuing the following business and growth strategies:
|
|
|
Capitalize on attractive market opportunities to grow our
modern fleet of aircraft. We plan to continue
acquiring aircraft and expect that a significant portion of
these acquisitions will be subject to existing or new leases
that produce immediate positive cash flows. We seek aircraft
that produce attractive returns on equity while maintaining
diversified lease portfolio characteristics in terms of aircraft
type, aircraft age, lease term and geographic location of our
lessees. We intend to continue to take advantage of the current
economic environment to make opportunistic purchases of aircraft
and aircraft portfolios. We plan to expand our fleet with a mix
of narrowbody and widebody commercial aircraft that we expect to
have long useful lives and that are currently in widespread use
by airlines, with a greater focus on acquiring narrowbody
aircraft. Based on our ongoing discussions with airlines, we
believe narrowbody and certain widebody aircraft will continue
to experience strong global airline demand. We have also entered
into commitments to purchase select fuel-efficient regional jets
and turboprop aircraft, such as the Embraer E175/E190 and ATR
72-600
aircraft types. We believe market demand for these types of
aircraft will grow as they are well suited for direct service
between smaller and medium-sized cities and between such cities
and major hub cities.
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|
Continue to develop and grow our long-standing
relationships and cultivate new relationships. We
believe our management teams experience in the aircraft
leasing industry provides us immediate access to key decision
makers at airframe and engine manufacturers and major airlines
around the world, thereby enabling us to make prompt
acquisitions of new
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81
|
|
|
aircraft, enter into new leases, and anticipate airlines
longer-term needs so as to tailor our fleet and leases to their
specific needs. Additionally, we believe our relationships with
airframe and engine manufacturers allow us to influence their
airframe and engine designs to better meet the needs of our
airline customers. In our view, the aircraft leasing industry
continues to be relationship-driven, and airframe and engine
manufacturers and our airline customers will place a high value
on the expertise and experience of our management team. This
will help us develop new relationships, while we use our
long-standing
contacts to grow our business. We believe these relationships
will help to establish us as a leader in the aircraft leasing
industry over time.
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|
Emphasize marketing in high-growth areas of the
world. As our portfolio grows, we anticipate that a
growing percentage of our aircraft will be located in Asia, the
Pacific Rim, Latin America, the Middle East and Eastern Europe,
although we will continue to enter into select leasing
transactions in North America and Western Europe. We expect
aircraft demand to increase in emerging markets over the next
several years, as forecasted by AVITAS. We believe a
developing infrastructure supporting direct air travel to more
destinations within emerging market regions, combined with
economic and population growth, an expected increase in the
number of low-cost carriers, expansion of existing low-cost
carriers, deregulation in air travel, and a significant increase
in such areas middle class populations, will lead to
growth in passenger air travel in these regions.
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Enter into strategic ventures. We may, on
occasion, enter into strategic ventures with third parties in
order to take advantage of favorable financing or other
opportunities, to share capital
and/or
operating risk,
and/or to
earn fleet management fees. Given our broad experience in
acquiring, leasing, financing and managing aircraft, we believe
that third parties seeking to invest in the aircraft leasing
industry will view us as an attractive partner. Other than one
arrangement whereby we manage one aircraft owned by a third
party that is leased to one of our customers, we currently do
not participate in, or have any binding commitments to enter
into, any strategic ventures with any third parties.
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Actively manage our lease portfolio to optimize returns
and minimize risk through diversification. In
actively managing our aircraft portfolio, we seek to optimize
returns and minimize risks by appropriately and prudently
diversifying the types of aircraft we acquire, maintaining a low
average fleet age, spreading out over a number of years the
termination dates for our leases, achieving geographic
diversification, and minimizing our exposure to customer
concentration. Our acquisition of desirable aircraft types with
a low average fleet age helps to maximize the mobility of our
assets across global markets, which allows us to achieve a high
rate of lease placements on attractive lease terms. Through the
implementation of our diversification strategies, we believe
that we are in a position to reduce our exposure to industry
fluctuations over a particular period of time, economic
fluctuations in a particular regional market, changes in
customer preferences for particular aircraft, and the credit
risk posed by a particular customer.
|
Our financing
strategies
In addition to our business and growth strategies described
above, the successful implementation of our financing strategies
is critical to the success and growth of our business.
As we grow our business, we envision funding our aircraft
purchases through multiple sources, including the
$1.3 billion of gross cash proceeds we raised in our prior private
placement of Common Stock, the $922.9 million of gross cash
proceeds we
raised in our initial public offering,
82
expected proceeds from any exercise of outstanding warrants,
future earnings and cash flow from operations,
existing debt facilities, potential future debt financing and
government-sponsored export guaranty and lending programs. We
intend to employ multiple debt and equity strategies to attain
financial flexibility to fund our aircraft purchases on the best
terms available.
In May 2010, we entered into the Warehouse Facility to finance
the acquisition of aircraft. The Warehouse Facility was
subsequently modified by an amendment that became effective on
April 21, 2011. This credit facility, as amended, provides us with
secured financing of up to $1.25 billion, modified from the
original facility size of $1.5 billion. We are able to draw
on this facility, as amended, during an availability period that
ends in June 2013. Prior to the amendment of the Warehouse
Facility, the Warehouse Facility accrued interest during the
availability period based on LIBOR plus 3.25% on drawn balances
and at a fixed rate of 1.00% on undrawn balances. Following the
amendment, the Warehouse Facility accrues interest during the
availability period based on LIBOR plus 2.50% on drawn balances
and at a fixed rate of 0.75% on undrawn balances. The
outstanding drawn balance at the end of the availability period
may be converted at our option to an amortizing,
four-year
term loan with an increasing interest rate over the term period.
We were required to pledge $200.0 million in aircraft
collateral as a precondition to borrowing under the Warehouse
Facility. As of June 30, 2011, we had borrowed
$709.3 million under the Warehouse Facility and pledged a
total of 28 aircraft as collateral with a net book value of
$1.2 billion. As of June 30, 2011, we have also
pledged $67.5 million in cash collateral and lessee
deposits. We intend to continue to utilize the Warehouse
Facility to finance aircraft acquisitions in 2011, as this
facility provides us with ample liquidity to make opportunistic
acquisitions of aircraft on short notice.
In addition, we fund some aircraft purchases through secured
term financings and unsecured term and revolving
credit facilities. As of June 30, 2011, we had
outstanding loan balances, excluding drawings under the
Warehouse Facility, of $503.4 million in secured term debt
and $170.9 million in unsecured term financing, and had
$313.0 million in available but undrawn revolving unsecured
credit facilities. We will also use cash on hand to purchase
aircraft and may use such acquired aircraft to secure new debt
financing. Over time, we expect to access the public debt
capital markets, subject to market conditions.
83
In an effort to sustain our long-term financial health and limit
our exposure to unforeseen dislocations in the capital markets,
we intend to maintain a
debt-to-equity
ratio (excluding deferred tax liabilities for calculation
purposes) generally within a range of 2-to-1 to 3-to-1. Due to
the seasonality of aircraft deliveries, we expect this ratio to
fluctuate within that range during the course of a typical
fiscal year, although on occasion we may fall outside this
range. In addition, we may from time to time enter into interest
rate hedging arrangements to limit our exposure to increases in
interest rates on our floating-rate debt.
We believe that the implementation of our financing strategies
will help us maintain a prudent amount of leverage, while also
maintaining financial flexibility to seize attractive market
opportunities.
Our competitive
strengths
We believe that the following strengths assist us in executing
our business and growth strategies and provide us with an
advantage over many of our competitors:
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Highly experienced management team with diversified
aviation and technical experience. Our senior
management team, with an average of over 23 years of
experience in the aviation industry, has significant experience
in all aspects of the aviation and aircraft leasing industries,
including the implementation of innovative lease structures,
strategic planning, risk diversification, fleet restructuring,
aircraft purchasing and financing strategies, and general
transactional capabilities. We have separate Sales, Marketing
and Commercial Affairs; Finance and Accounting; Legal;
Commercial Contracts; Aircraft Procurement and Specifications;
and Technical Asset Management departments that are involved in
our leasing, sales and purchasing business. Our Technical Asset
Management department has in-depth knowledge of aircraft,
engines, avionics and the various regulations governing the
maintenance of aircraft. This department monitors the fleet
while on lease to our airline customers, handles the transfer of
the aircraft from one operator to the next and monitors operator
compliance with its technical and maintenance obligations under
our leases.
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|
Available deployable capital to capture attractive market
opportunities. With the net proceeds from our
initial public offering, cash on hand, the financing available under the
Warehouse Facility and multiple unsecured lines of credit, we
have significant purchasing power that we can quickly deploy to
acquire additional aircraft. In addition, we may
supplement our access to capital with debt guaranteed by
government agencies such as Ex-Im Bank and the ECAs and loans
from BNDES for qualifying aircraft purchases and other debt
financing arrangements. Our access to capital provides us with
the flexibility to complete attractive aircraft purchases.
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|
Strong aircraft delivery pipeline. Through
our strategic and opportunistic approaches to acquiring aircraft
and our strong relationship with airframe manufacturers, as of
June 30, 2011, we have entered into binding and non-binding purchase commitments to acquire
234 new aircraft over the next ten years. We
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|
84
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|
believe that our access to this strong aircraft delivery
pipeline over this period gives us the ability to provide
airline customers with a comprehensive, multi-year solution to
their aircraft leasing and fleet needs. This ability represents
a significant competitive advantage in developing, renewing and
expanding customer relationships as we have new aircraft
available for delivery during periods far earlier than most of
our airline customers can obtain new aircraft directly from
airframe and engine manufacturers.
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|
Young, modern and efficient aircraft
fleet. Our aircraft portfolio primarily consists of
modern, fuel-efficient narrowbody aircraft. As of June 30,
2011, the weighted average age of the aircraft in our current
portfolio was 3.6 years. We believe we have one of the
worlds youngest operating lease portfolios. Younger
aircraft are more desirable than older aircraft because of their
fuel efficiency, lower maintenance costs, and longer remaining
useful lives. Furthermore, younger aircraft are more likely to
be in compliance with newer environmental standards or are more
easily brought up to environmental compliance without costly
modifications. We believe our aircraft, and the additional
aircraft that we will acquire, are in high demand among our
airline customers and are readily deployable to various markets
throughout the world. We expect that our fleet of young,
high-demand aircraft will enable us to provide stable and
growing cash flows to our stockholders over the long term.
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|
Long-standing relationships with a global, diversified
customer base. Our management team is well-known in
the aviation industry and we are able to benefit from the
long-standing relationships that Messrs. Udvar-Házy
and Plueger and other key members of management have with more
than 200 airlines in over 70 countries.
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|
Strong manufacturer relationships. The supply
of commercial passenger aircraft is dominated by a few airframe
manufacturers, including Boeing, Airbus, ATR, Embraer and
Bombardier. Through our management teams active and
long-standing participation in the aviation industry, we have
developed strategic relationships with many of the manufacturers
and suppliers of aircraft and aircraft parts, which enables us
to leverage competitive acquisition and delivery terms and to
influence new aircraft design.
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|
Our management teams and our board of
directors significant investment in us aligns the
interests of management and our board with those of our other
stockholders. Members of our management team (and
their families or affiliates) and members of our board of
directors have invested an aggregate of approximately
$91 million in shares of our Class A Common Stock.
We believe that our management teams and our board of
directors significant combined ownership stake in our
Class A Common Stock, along with additional equity
incentive grants, closely aligns our management teams and
our board of directors interests with those of our other
stockholders.
|
Despite these competitive strengths, we face a high degree of
risk that could adversely affect our financial results and
growth prospects, including risks related to our liquidity
plans, our ability to purchase, finance, lease and re-lease our
aircraft profitably, interest rates, supply and demand cycles in
the aviation industry, the financial strength of our lessees,
macroeconomic conditions and emerging market conditions. See the
section titled Risk factors.
Business
model
We use our management teams extensive experience in the
aircraft leasing industry and relationships with airline
customers and manufacturers to maintain and further grow
relationships with both suppliers of aircraft and current and
potential lessees. Our Sales,
85
Marketing and Commercial Affairs; Finance and Accounting; Legal;
Commercial Contracts; Aircraft Procurement and Specifications;
and Technical Asset Management departments source and manage our
aircraft through close relationships with airline customers and
manufacturers.
Our business model emphasizes a relationship-based approach to
identify potential aircraft acquisitions, perform technical
reviews of the relevant maintenance records, carefully pair
aircraft with appropriate lessees, structure leases to address
our airline customers needs, and monitor our aircraft and
our lessees throughout the lease terms. We believe we can
execute this business model at each critical juncture along the
aircraft lifecycle of acquiring, inspecting, leasing, monitoring
and re-leasing or disposing of an aircraft in a competitively
advantageous manner that will enable us to execute our business
strategy and drive profitability.
Aircraft
acquisition strategy
After determining the needs of our lessees or prospective
airline customers, we evaluate each potential acquisition to
determine if it supports our primary objective of generating
profits while maintaining desired fleet characteristics. Our
rigorous due diligence process takes into account:
|
|
|
the needs of our airline customers at the time of acquisition
and their anticipated needs at the end of typical leasing cycles;
|
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|
an aircrafts fit within our diversified fleet based on its
type, price, age, market value, specifications and
configuration, condition and maintenance history, operating
efficiency and potential for future redeployment;
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|
an aircraft models reliability, long-term utility for
airline customers, and appeal to a large segment of the industry;
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jurisdiction of the lessee or potential lessee; and
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|
legal and tax implications.
|
For used aircraft, we perform detailed technical reviews of both
the physical aircraft and its maintenance history to minimize
our risk of acquiring an aircraft with defects or other service
issues. In the case of new aircraft, we work directly with the
manufacturers to outfit and configure the aircraft with our
airline customers needs in mind. Our inspection of new
aircraft is focused on ensuring that our customers
required specifications and modifications have been met.
We pursue acquisitions of additional aircraft through our
relationships with aircraft operators, manufacturers, financial
institutions, private investors and third-party lessors. We may
also acquire aircraft for lease directly from manufacturers in
the secondary market or pursuant to sale-leaseback transactions
with aircraft operators. For new aircraft deliveries, we will
often separately source many components, including seats, safety
equipment, avionics, galleys, cabin finishes, engines and other
equipment, from the same providers used by aircraft
manufacturers at a lower cost. Manufacturers such as Boeing and
Airbus will install this buyer furnished equipment in our
aircraft during the final assembly process at their facilities.
Through this use of our purchasing strategy, we are better able
to modify the aircraft to meet our customers configuration
requirements and enhance lease and residual values.
Leasing
process
Our management team identifies all prospective lessees based
upon industry knowledge and long-standing industry
relationships. We seek to meet the specific needs of our airline
customers
86
by working closely with potential lessees and, where
appropriate, developing innovative lease structures specifically
tailored to address those needs. While we structure aircraft
leases with our airline customers needs in mind, we,
nevertheless, anticipate that most of our leases will share some
common characteristics, including the following:
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|
most of our leases will be for fixed terms, although, where
mutually beneficial, we may provide for purchase options or
termination or extension rights;
|
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|
most of our leases will require monthly payment in advance;
|
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|
most of our leases will generally provide that the lessees
payment obligations are absolute and unconditional;
|
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|
our lessees will typically be required to make payment without
deduction on account of any amounts that we may owe to the
lessee or any claims that the lessee may have against us;
|
|
|
most of our leases will also require lessees to gross up lease
payments to cover tax withholdings or other tax obligations,
other than withholdings that arise out of transfers of the
aircraft to or by us or due to our corporate structure; and
|
|
|
our leases will also generally require that our lessees
indemnify us for certain other tax liabilities relating to the
leases and the aircraft, including, in most cases, value-added
tax and stamp duties.
|
We may, in connection with the lease of used aircraft, agree to
contribute specific additional amounts to the cost of certain
first major overhauls or modifications, which usually reflect
the usage of the aircraft prior to the commencement of the
lease, and which are covered by the prior operators usage
fees. We may be obligated under the leases to make
reimbursements to lessees for expenses incurred for certain
planned major maintenance. We also, on occasion, may contribute
towards aircraft modifications (e.g., winglets and new
interiors).
The lessee is responsible for compliance with applicable laws
and regulations with respect to the aircraft. We require our
lessees to comply with the standards of either the
U.S. Federal Aviation Administration (FAA) or
its equivalent in foreign jurisdictions. Generally, we receive a
cash deposit as security for the lessees performance of
obligations under the lease and the condition of the aircraft
upon return. In addition, most leases contain extensive
provisions regarding our remedies and rights in the event of a
default by a lessee. The lessee generally is required to
continue to make lease payments under all circumstances,
including periods during which the aircraft is not in operation
due to maintenance or grounding.
Some foreign countries have currency and exchange laws
regulating the international transfer of currencies. When
necessary, we require, as a condition to any foreign
transaction, that the lessee or purchaser in a foreign country
obtains the necessary approvals of the appropriate government
agency, finance ministry or central bank for the remittance of
all funds contractually owed in U.S. dollars. We attempt to
minimize our currency and exchange risks by negotiating the
designated payment currency in our leases to be U.S. dollars, although, where
appropriate, we may agree to leases with payments denominated in other
currencies. All guarantees obtained to support various lease
agreements are denominated for payment in the same currency as
the lease.
To meet the needs of certain of our airline customers, a
relatively small number of our leases may designate the payment
currency to be
Euros. As the Euro to U.S. dollar exchange rate fluctuates,
airlines interest in entering into Euro-denominated lease
agreements will change. After we agree to the rental payment
currency with an airline, the negotiated currency typically
remains for the term of the
87
lease. We occasionally may enter into contracts to mitigate our
foreign currency risk, but we expect that the economic risk
arising from foreign currency denominated leases will be
immaterial to us.
Management obtains and reviews relevant business materials from
all prospective lessees and purchasers before entering into a
lease or extending credit. Under certain circumstances, the
lessee may be required to obtain guarantees or other financial
support from an acceptable financial institution or other third
parties. During the life of the lease, situations may lead us to
restructure leases with our lessees. When we repossess an
aircraft leased in a foreign country, we generally expect to
export the aircraft from the lessees jurisdiction. In some
very limited situations, the lessees may not fully cooperate in
returning the aircraft. In those cases, we will take legal
action in the appropriate jurisdictions, a process that we
expect would ultimately delay the return and export of the
aircraft. In addition, in connection with the repossession of an
aircraft, we may be required to pay outstanding mechanics
liens, airport charges, and navigation fees and other amounts
secured by liens on the repossessed aircraft. These charges
could relate to other aircraft that we do not own but were
operated by the lessee.
Monitoring
During the term of a lease, we monitor both the maintenance of
the aircraft and the operating performance and the financial
health of the lessee. Our net operating leases generally require
the lessee to pay for maintenance, insurance, taxes and all
other aircraft operating expenses during the lease term. We
closely monitor each leased aircraft to ensure all routine
maintenance requirements are timely performed. Where an aircraft
requires major, non-routine maintenance, we often are closely
involved in overseeing the maintenance and partnering with the
lessee while the work is performed to ensure all governmental
and/or
manufacturer standards are met.
We also closely follow the operating and financial performance
of our lessees so that we can identify early on those lessees
that may be experiencing operating and financial difficulties.
This assists us in assessing the lessees ability to
fulfill its obligations under the lease for the remainder of the
term and, where appropriate, restructure the lease prior to the
lessees insolvency or the initiation of bankruptcy or
similar proceedings, at which time we would have less control
over, and would most likely incur greater costs in connection
with, the restructuring of the lease or the repossession of the
aircraft. To accomplish this objective, we maintain a high level
of communication with the lessee and closely and frequently
evaluate the state of the market in which the lessee operates,
including the impact of changes in passenger air travel and
preferences, new government regulations, regional catastrophes
and other unforeseen shocks to the relevant market.
Re-leasing or
disposition of aircraft
Our lease agreements are generally structured to require lessees
to notify us nine to twelve months in advance of the
leases expiration if a lessee desires to renew or extend
the lease. Requiring lessees to provide us with such advance
notice provides our management team with an extended period of
time to consider a broad set of alternatives with respect to the
aircraft, including assessing general market and competitive
conditions and preparing to re-lease or sell the aircraft. If a
lessee fails to provide us with notice, the lease will
automatically expire at the end of the term, and the lessee will
be required to return the aircraft pursuant to the conditions in
the lease. Our leases contain detailed provisions regarding the
required condition of the aircraft and its components upon
redelivery at the end of the lease term.
88
Insurance
We require our lessees to carry those types of insurance that
are customary in the air transportation industry, including
comprehensive liability insurance, aircraft all-risk hull
insurance and war-risk insurance covering risks such as
hijacking, terrorism (but excluding coverage for weapons of mass
destruction and nuclear events), confiscation, expropriation,
seizure and nationalization. We generally require a certificate
of insurance from the lessees insurance broker prior to
delivery of an aircraft. Generally, all certificates of
insurance contain a breach of warranty endorsement so that our
interests are not prejudiced by any act or omission of the
lessee. Lease agreements generally require hull and liability
limits to be in U.S. dollars, which are shown on the
certificate of insurance.
Insurance premiums are to be paid by the lessee, with coverage
acknowledged by the broker or carrier. The territorial coverage,
in each case, should be suitable for the lessees area of
operations. We generally require that the certificates of
insurance contain, among other provisions, a provision
prohibiting cancellation or material change without at least
30 days advance written notice to the insurance
broker (who would be obligated to give us prompt notice), except
in the case of hull war insurance policies, which customarily
only provide seven days advance written notice for
cancellation and may be subject to shorter notice under certain
market conditions. Furthermore, the insurance is primary and not
contributory, and we require that all insurance carriers be
required to waive rights of subrogation against us.
The stipulated loss value schedule under aircraft hull insurance
policies is on an agreed-value basis acceptable to us and
usually exceeds the book value of the aircraft. In cases where
we believe that the agreed value stated in the lease is not
sufficient, we make arrangements to cover such deficiency, which
would include the purchase of additional Total Loss
Only coverage for the deficiency.
Aircraft hull policies generally contain standard clauses
covering aircraft engines. The lessee is required to pay all
deductibles. Furthermore, the hull war policies generally
contain full war risk endorsements, including, but not limited
to, confiscation (where available), seizure, hijacking and
similar forms of retention or terrorist acts.
The comprehensive liability insurance listed on certificates of
insurance generally include provisions for bodily injury,
property damage, passenger liability, cargo liability and such
other provisions reasonably necessary in commercial passenger
and cargo airline operations. We expect that such certificates
of insurance list combined comprehensive single liability limits
of not less than $500.0 million for Airbus and Boeing
aircraft and $200.0 million for Embraer, ATR and Bombardier
aircraft. As a result of the terrorist attacks on
September 11, 2001, the insurance market unilaterally
imposed a sublimit on each operators policy for
third-party war risk liability in the amount of
$50.0 million. We require each lessee to purchase higher
limits of third-party war risk liability or obtain an indemnity
from its respective government.
In late 2005, the international aviation insurance market
unilaterally introduced exclusions for physical damage to
aircraft hulls caused by dirty bombs, bio-hazardous materials
and electromagnetic pulsing. Exclusions for the same type of
perils could be introduced into liability policies.
Separately, we purchase contingent liability insurance and
contingent hull insurance on all aircraft in our fleet and
maintain other insurance covering the specific needs of our
business operations. We believe our insurance is adequate both
as to coverages and amounts.
We cannot assure stockholders that our lessees will be
adequately insured against all risks, that lessees will at all
times comply with their obligations to maintain insurance, that
any particular
89
claim will be paid, or that lessees will be able to obtain
adequate insurance coverage at commercially reasonable rates in
the future.
We maintain key man life insurance policies on
Messrs. Udvar-Házy and Plueger. Each policy is in the
amount of $2.0 million, with the proceeds payable to us and
permitted to be used for general corporate purposes.
Competition
The leasing, remarketing and sale of aircraft is highly
competitive. We face competition from aircraft manufacturers,
banks, financial institutions, other leasing companies, aircraft
brokers and airlines. Competition for leasing transactions is
based on a number of factors, including delivery dates, lease
rates, terms of lease, other lease provisions, aircraft
condition and the availability in the marketplace of the types
of aircraft required to meet the needs of airline customers. We
believe we are a strong competitor in all of these areas.
Government
regulation
The air transportation industry is highly regulated. We do not
operate aircraft, and thus may not be directly subject to many
industry laws and regulations, such as regulations of the
U.S. Department of State (the DOS), the
U.S. Department of Transportation, or their counterpart
organizations in foreign countries regarding the operation of
aircraft for public transportation of passengers and property.
As discussed below, however, we are subject to government
regulation in a number of respects. In addition, our lessees are
subject to extensive regulation under the laws of the
jurisdictions in which they are registered or operate. These
laws govern, among other things, the registration, operation,
maintenance and condition of the aircraft.
We are required to register, and have registered, the aircraft
which we acquire and lease to U.S. carriers and to a number
of foreign carriers where, by agreement, the aircraft are to be
registered in the United States, with the FAA, or in other
countries, with such countries aviation authorities as
applicable. Each aircraft registered to fly must have a
Certificate of Airworthiness, which is a certificate
demonstrating the aircrafts compliance with applicable
government rules and regulations and that the aircraft is
considered airworthy, or a ferry flight permit, which is an
authorization to operate an aircraft on a specific route. Our
lessees are obligated to maintain the Certificates of
Airworthiness for the aircraft they lease and, to our knowledge,
all of our lessees have complied with this requirement. When an
aircraft is not on lease, we maintain the certificate or obtain
a certificate in a new jurisdiction.
Our involvement with the civil aviation authorities of foreign
jurisdictions consists largely of requests to register and
deregister our aircraft on those countries registries.
We are also subject to the regulatory authority of the DOS and
the U.S. Department of Commerce (the DOC) to
the extent such authority relates to the export of aircraft for
lease and sale to foreign entities and the export of parts to be
installed on our aircraft. In some cases, we are required to
obtain export licenses for parts installed in aircraft exported
to foreign countries.
The DOC and the U.S. Department of the Treasury (through
its Office of Foreign Assets Control) impose restrictions on the
operation of
U.S.-made
goods, such as aircraft and engines, in sanctioned countries, as
well as on the ability of U.S. companies to conduct
business with entities in those countries.
90
The U.S. Patriot Act of 2001 (the Patriot Act)
prohibits financial transactions by U.S. persons, including
U.S. individuals, entities and charitable organizations,
with individuals and organizations designated as terrorists and
terrorist supporters by the U.S. Secretary of State or the
U.S. Secretary of the Treasury. We comply with the
provisions of the Patriot Act and closely monitor our activities
with foreign entities.
A bureau of the U.S. Department of Homeland Security,
U.S. Customs and Border Protection, enforces regulations
related to the import of aircraft into the United States for
maintenance or lease and the importation of parts into the
United States for installation. We monitor our imports for
compliance with U.S. Customs and Border Protection
regulations.
The U.S. Bureau of Export Enforcement enforces regulations
related to the export of aircraft to other jurisdictions and the
export of parts for installation in other jurisdictions. We
monitor our exports for compliance with the U.S. Bureau of
Export Enforcement regulations.
Jurisdictions in which aircraft are registered as well as
jurisdictions in which they operate may impose regulations
relating to noise and emission standards. In addition, most
countries aviation laws require aircraft to be maintained
under an approved maintenance program with defined procedures
and intervals for inspection, maintenance and repair. To the
extent that aircraft are not subject to a lease or a lessee is
not in compliance, we are required to comply with such
requirements, possibly at our own expense.
We believe we are in compliance in all material respects with
all applicable governmental regulations.
Employees
As of June 30, 2011, we had 41 full-time
employees. None of our employees are represented by a union or
collective bargaining agreements. We believe our relationship
with our employees to be positive, which is a key component of
our operating strategy. We strive to maintain excellent employee
relations. We provide certain employee benefits, including
retirement, health, life, disability and accident insurance
plans.
Facilities
We lease our principal executive office at 2000 Avenue of the
Stars, Suite 1000N, Los Angeles, California 90067. We do not
own any real estate.
Legal
proceedings
From time to time, we may be involved in litigation and claims
incidental to the conduct of our business in the ordinary
course. Our industry is also subject to scrutiny by government
regulators, which could result in enforcement proceedings or
litigation related to regulatory compliance matters. We are not
presently a party to any enforcement proceedings, litigation
related to regulatory compliance matters, or any other type of
litigation matters. We maintain insurance policies in amounts
and with the coverage and deductibles we believe are adequate,
based on the nature and risks of our business, historical
experience and industry standards.
Initial Public Offering
In April 2011, we completed an initial public offering of our Class A Common Stock in
which we sold an aggregate of 34,825,470 shares of Class A Common Stock, including
4,542,450 shares of Class A Common Stock sold to the underwriters pursuant to an over-allotment option. J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC
acted as joint book-running managers of the initial public offering and as representatives
of the other book-runners and co-managers. The shares in the initial public offering were
sold at the initial public offering price of $26.50, less underwriting discounts and
commissions of $1.4575 per share. After deducting the underwriting discounts and
commissions and offering expenses payable by us, we received net proceeds of
approximately $868.6 million. We intend to use the net proceeds of our initial public offering to
fund the acquisition of commercial aircraft and for general corporate purposes.
91
Management
Our executive
officers and directors
Set forth below is information concerning our current executive
officers and directors as of June 30, 2011, except for
their ages which are as of August 22, 2011. The
business address of all of our executive officers and directors
is 2000 Avenue of the Stars, Suite 1000N, Los Angeles,
California 90067.
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
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Steven F. Udvar-Házy
|
|
|
65
|
|
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Chairman and Chief Executive Officer
|
John L. Plueger
|
|
|
57
|
|
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President, Chief Operating Officer and Director
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Grant A. Levy
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|
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48
|
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Executive Vice President, General Counsel and Secretary
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Marc H. Baer
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|
|
46
|
|
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Executive Vice President, Marketing
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Alex A. Khatibi
|
|
|
50
|
|
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Executive Vice President
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Jie Chen
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|
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47
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|
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Executive Vice President and Managing Director of Asia
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James C. Clarke
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53
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|
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Senior Vice President and Chief Financial Officer
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Gregory B. Willis
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|
|
33
|
|
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Vice President, Finance, and Chief Accounting Officer
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John D. Poerschke
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|
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49
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Senior Vice President of Aircraft Procurement and Specifications
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John G. Danhakl
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55
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Director
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Matthew J. Hart
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59
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Director
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Robert A. Milton
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51
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|
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Director
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Michel M.R.G. Péretié
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|
57
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|
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Director
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Antony P. Ressler
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|
|
50
|
|
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Director
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Wilbur L. Ross, Jr.
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|
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73
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|
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Director
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Ian M. Saines
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49
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Director
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Dr. Ronald D. Sugar
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|
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63
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Director
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|
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Backgrounds of
our current executive officers and directors
Set forth below is information concerning our current executive
officers and directors identified above.
Steven F. Udvar-Házy has served as our Chairman and
Chief Executive Officer since our launch in February 2010.
Mr. Udvar-Házy brings more than 40 years of
aviation industry experience to us, the last 37 of which were
with International Lease Finance Corporation (ILFC).
In 1973, Mr. Udvar-Házy co-founded the aircraft
leasing business that became ILFC. As Chairman and Chief
Executive Officer, Mr. Udvar-Házy led ILFC from its
inception in 1973, through its initial public offering in 1983
and subsequent sale to American International Group, Inc. for
$1.3 billion in 1990, and ultimately to its becoming the
largest aircraft leasing company (by fleet value) in the world,
with a fleet of over 1,000 jet aircraft as of December 31,
2009. Under
Mr. Udvar-Házys
leadership as Chairman and Chief Executive Officer, ILFC was
able to increase its profitability. Even during the recent
challenging economic environment, ILFCs income before tax
increased from $1.1 billion in 2008 to $1.4 billion in
2009, the last year of his tenure as Chief Executive Officer.
Mr. Udvar-Házy retired from ILFC in February 2010 with
a view to exploring other opportunities in the aviation
industry. For the past 24 years, Mr. Udvar-Házy
has been a
92
member of the board of directors of Skywest, Inc. and currently
serves as that boards lead independent director.
Mr. Udvar-Házy is an FAA Airline Transport Pilot with
type ratings on multiple jet aircraft and has over 30 years
of experience flying jet aircraft. He received a Bachelor of
Arts degree in economics from the University of California, Los Angeles, and has been awarded several
honorary doctorate degrees.
John L. Plueger has served as our President and Chief
Operating Officer since March 2010 and as one of our directors
since April 2010. Mr. Plueger brings more than
23 years of aviation industry and aircraft leasing
experience to us, all of which were with us and at ILFC. Mr. Plueger
was elected to ILFCs board of directors in January 2002
and most recently served as ILFCs acting Chief Executive
Officer from February 2010 to March 2010. As ILFCs
President and Chief Operating Officer since 2002,
Mr. Plueger was responsible for organizing ILFCs
worldwide sales and marketing efforts, maintaining its
relationships with the major airframe and engine manufacturers,
and overseeing all corporate support for those activities.
Mr. Plueger also had primary responsibility for
implementation of ILFCs leasing business in Asia.
Mr. Pluegers professional experience also includes
testifying before the U.S. House of Representatives as an
aircraft leasing industry expert witness as well as responding
to European Commission formal inquiries concerning aerospace
industry related mergers and acquisitions. Mr. Plueger is a
Certified Public Accountant and is an FAA Airline Transport
Pilot with type ratings on multiple jet aircraft and
single-/multi-engine and instrument instructor ratings. He
received a Bachelor of Arts degree from the University of California, Los Angeles and is a Certified
Director from the UCLA Anderson Graduate School of
Managements Corporate Director Certification Program.
Mr. Plueger is a member of the board of directors of the
Smithsonian National Air and Space Museum, and also serves on
the board of directors of the Wings Club and several other
charitable boards.
Grant A. Levy has served as our Executive Vice President,
General Counsel and Secretary since April 2010. Mr. Levy
brings more than 18 years of aviation industry experience
to us, all of which were with us and at ILFC in various
positions in the Legal and Marketing Departments. Mr. Levy
most recently served as ILFCs Senior Vice President in the
Marketing Department from 2002 until his departure in April
2010. While in the Marketing Department at ILFC, Mr. Levy
led its sales team, handled its lease relationships with over 30
airlines in Europe, North America and New Zealand and arranged
for ILFC to provide residual value guaranties. Prior to joining
the Marketing Department, Mr. Levy was a senior member of
ILFCs Legal Department where he led the negotiation of
lease, sales, residual value guaranty, fleet management and
other transactions. Mr. Levy received his Bachelor of Arts
degree from Pomona College and his Juris Doctor (cum laude) from
Boston College Law School.
Marc H. Baer has served as our Executive Vice President,
Marketing since April 2010. Mr. Baer brings more than
13 years of aviation industry experience to us, all of
which were with us and at ILFC in the Legal and Marketing
Departments. Mr. Baer most recently served as a Senior Vice
President of ILFC from April 2007 until his departure in April
2010. While in the Legal Department at ILFC, Mr. Baer led
the legal negotiations in a wide range of transactions,
including lease agreements, sales and residual value guarantees.
Beginning in September 2002, Mr. Baer began working full
time in ILFCs Marketing Department, where he was
responsible for developing relationships and negotiating
transactions with over 25 airlines, including Virgin Atlantic
Airways Ltd., Air Seychelles and Air France, ILFCs largest
customer with over 60 aircraft. While at ILFC, Mr. Baer
managed a portfolio of more than 125 aircraft and was
responsible for closing the industrys first operating
lease for the new 787 aircraft from Boeing. Mr. Baer is
bilingual and has dual
French-American
citizenship. He holds a Bachelor of Arts degree from Stanford
University and a Juris Doctor from Loyola Law School.
93
Alex A. Khatibi has served as our Executive Vice
President since April 2010. Mr. Khatibi brings more than
23 years of aviation industry experience to us, the last 14
of which were with ILFC. Mr. Khatibi was Managing Director
of ILFCs Middle East business and managed a portfolio of
global lessees including the Middle East, Greece, Poland,
Hungary, Brazil, Italy, Netherlands, Germany, United Kingdom and
Russia/CIS. Within these regions, Mr. Khatibi was
responsible for developing and evaluating emerging markets,
leading lease negotiations and planning and executing aircraft
placement strategies. Mr. Khatibi began his employment in
ILFCs Technical Department in September 1995 and was
responsible for the technical aspects of operating/finance lease
agreements. Prior to joining ILFC, Mr. Khatibi held
Engineering and Technical management positions at Continental
Airlines. Mr. Khatibi is a graduate of Embry-Riddle
Aeronautical University where he received a Bachelor of Science
degree in Engineering and completed Technical Management
studies. Mr. Khatibi also holds an FAA Airframe &
Powerplant license, certified to approve aircraft airworthiness
and return to service.
Jie Chen has served as our Executive Vice President and
Managing Director of Asia since August 2010. Mr. Chen
brings more than 19 years of aviation industry experience
to us, the last 18 of which were with ILFC in various positions
in the Sales and Marketing Department. Mr. Chen joined ILFC
in 1992 as a Director of Marketing, Asia and he most recently
served as ILFCs Senior Vice President and Managing
Director, Asia from 2002 until his departure in July 2010. While
in the Sales and Marketing Department at ILFC, Mr. Chen
oversaw the expansion of ILFCs leasing business in Asia
from 5% to 30% of ILFCs total worldwide revenue.
Mr. Chen was also responsible for developing new leasing
markets in China, Vietnam, Malaysia, Thailand, Taiwan, Japan and
Macau. Under Mr. Chens leadership, ILFCs
leasing business in Asia grew to 30% of total profits for ILFC.
Prior to joining ILFC, Mr. Chen was a project manager in
the leasing division at China International Trust &
Investment Corporation. He holds a Bachelor of Arts degree from
the Renmin University of China and a Master Degree of Science in
management from the State University of New York.
James C. Clarke has served as our Senior Vice President
and Chief Financial Officer since April 2010. Mr. Clarke
has more than 23 years of experience in asset finance and
leasing, structured finance for the airline sector and airline
operating experience as Chief Financial Officer. From 2008 to
2010, Mr. Clarke served as founding partner of Three
Capital Partners, LLC, an aviation advisory and asset-management
firm. From September 2005 to August 2008, Mr. Clarke served
as managing director at SkyWorks Capital, LLC, a firm providing
transaction and advisory services on asset-based financings,
financial restructurings and debt and equity offerings to global
aviation clients. He held Chief Financial Officer positions at
both Aloha Airlines, Inc. and Air Wisconsin Airlines
Corporation, with broad management responsibilities for
financial accounting and external reporting and all financing
activities. Mr. Clarke was a key member of restructuring
efforts at Aloha Airlines, Inc. during its first Chapter 11
bankruptcy proceedings. He also led the structured-debt,
enhanced equipment trust certificate effort at Merrill
Lynch & Co., Inc. He was the Senior Vice President,
Risk Management for GE Capital Aviation Services, and a Vice
President at its predecessor company, GPA Group PLC, with
transactional responsibility for U.S. and Japanese
tax-structured financings. Mr. Clarke began his career in
aviation in the treasury function at both American Airlines,
Inc. and United Airlines, Inc., as a staff specialist in
corporate finance. He received his Bachelor of Arts degree from
Stanford University, Juris Doctor from IIT Chicago-Kent College
of Law and Master of Business Administration from the University
of Chicago Graduate School of Business.
Gregory B. Willis has served as our Vice President,
Finance, and Chief Accounting Officer since March 2010.
Mr. Willis brings more than three years of aviation
industry experience to us. From
94
2007 to 2010, Mr. Willis served as the Director of
Accounting Policy at ILFC. Prior to ILFC, Mr. Willis served
as the Vice President of Alternative Investments at Mellon
Financial Corporation from 2005 to 2007, where he was
responsible for administering the accounting and tax functions
for private equity and distressed debt funds. Mr. Willis
began his career as an auditor for PricewaterhouseCoopers LLP,
where he spent more than five years in various audit-related
roles in their financial services practice, including as an
audit manager. Mr. Willis is a Certified Public Accountant,
licensed in the state of California, and is a member of the
American Institute of Certified Public Accountants.
Mr. Willis received a Bachelor of Arts degree from the
University of California at Davis.
John D. Poerschke has served as our Senior Vice President
of Aircraft Procurement and Specifications since March 2010.
Mr. Poerschke brings more than 24 years of aviation
industry experience to us, the last 15 years of which were
at ILFC. While at ILFC, Mr. Poerschke managed both the
development of the technical aircraft configurations and
procurement of the buyer furnished equipment for many of
ILFCs Boeing and Airbus aircraft. Mr. Poerschke
brings an extensive network of aviation supplier relationships
with him to us. Prior to joining ILFC, Mr. Poerschke held
jobs of increasing management responsibility in the engineering,
fleet planning and procurement departments of Continental
Airlines, Inc., US Airways Group Inc. and Boeing.
Mr. Poerschke received a Bachelor of Science degree from
the University of Southern California and he is a FAA-rated pilot.
John G. Danhakl has served as one of our directors since
May 2010. He is a Managing Partner at Leonard Green &
Partners, L.P., which he joined in 1995. Prior to joining
Leonard Green & Partners, L.P., Mr. Danhakl was a
Managing Director in the Los Angeles office of Donaldson,
Lufkin & Jenrette Securities Corporation
(DLJ), which he joined in 1990, and where he worked
extensively with Leonard Green & Partners, L.P. as its
lead investment banker. Prior to joining DLJ, Mr. Danhakl
was a Vice President in corporate finance at Drexel Burnham
Lambert Incorporated from 1985 to 1990. Mr. Danhakl
presently serves on the board of directors of Arden Group, Inc.,
HITS, Inc., IMS Health, Inc., J. Crew Group, Inc.,
Leslies Poolmart, Inc., Lextron, Inc., The Neiman Marcus
Group, Inc., Petco Animal Supplies, Inc. and The Tire Rack, Inc.
He has previously served on the board of directors of AsianMedia
Group, LLC, Big 5 Sporting Goods Corporation, Communications and
Power Industries, Inc., Diamond Triumph Auto Glass, Inc.,
Liberty Group Publishing, Inc., MEMC Electronic Materials, Inc.,
Phoenix Scientific, Inc., Rite Aid Corporation, Sagittarius
Brands, Inc. and VCA Antech, Inc. Mr. Danhakl graduated
from the University of California at Berkeley in 1980 and
received a Master of Business Administration from Harvard
Business School in 1985.
Matthew J. Hart has served as one of our directors since
May 2010. Mr. Hart served as President and Chief Operating
Officer of Hilton Hotels Corporation from May 2004 until the
buyout of Hilton by the Blackstone Group in October 2007.
Mr. Hart also served as Executive Vice President and Chief
Financial Officer of Hilton from 1996 to 2004. Prior to joining
Hilton, Mr. Hart served as the Senior Vice President and
Treasurer of The Walt Disney Company, Executive Vice President
and Chief Financial Officer for Host Marriott Corp., Senior Vice
President and Treasurer for Marriott Corporation and Vice
President, Corporate Lending, for Bankers Trust Company.
Mr. Hart received his Bachelor of Arts in Economics and
Sociology from Vanderbilt University in 1974 and earned a Master
of Business Administration in Finance and Marketing from
Columbia University in 1976. Mr. Hart currently serves on
the board of directors of US Airways and Great American Group,
Inc. and is the Chairman of Heal the Bay, a non-profit
organization.
Robert A. Milton has served as one of our directors since
April 2010. Mr. Milton is our lead independent director.
Mr. Milton has been the Chairman, President and Chief
Executive Officer
95
of ACE Aviation Holdings, Inc. (ACE) since 2004. ACE
was the parent holding company under which the reorganized Air
Canada and separate legal entities such as Aeroplan LP and Air
Canada Jazz were held. Mr. Milton was also the Chairman of
Air Canada until December 2007. He held the position of
President and Chief Executive Officer of Air Canada from August
1999 until December 2004. From 2003 to 2004, Mr. Milton led
Air Canadas restructuring which has positioned the airline
to compete effectively in the new airline environment. Prior to
joining Air Canada, Mr. Milton was a founding partner in
Air Eagle Holdings Inc. and an independent commercial aviation
consultant to British Aerospace Limited. He started his career
at Air Canada in 1992 on a consulting basis and assumed
increasingly responsible positions in cargo operations,
scheduling, product design, advertising, inflight service and
marketing until his appointment as Executive Vice President and
Chief Operating Officer in 1996. Mr. Milton served as Chair
of the International Air Transport Associations Board of
Governors from 2005 to 2006. He is one of the past Chairmen of
the Georgia Tech Advisory Board and currently serves as a
Trustee of the Georgia Tech Foundation. Mr. Milton received
his Bachelor of Science degree in Industrial Management from the
Georgia Institute of Technology in 1983.
Michel M.R.G. Péretié has served as one of
our directors since June 2010. Mr. Péretié was
appointed Chief Executive Officer of Société
Générale Corporate & Investment Banking in
2008. Mr. Péretié began his career at Banque
Paribas in 1980 where he created and developed its derivatives
group (equity, fixed income, foreign exchange). In 1996, he
became Global Head of Equity Derivatives, Swaps, Credit
Derivatives and FX based in London. In 1999, he was named Global
Head of Fixed Income of the newly formed BNP-Paribas. He joined
Bear Stearns in 2000 as Senior Managing Director and Head of
Fixed Income and Derivatives for Europe and Asia. In 2004, he
was appointed Chairman of Bear Stearns International and became
CEO of Bear Stearns for Europe and Asia in 2006. He served as a
member of the Board of Bear Stearns & Co. from January
2007 to June 2008. Mr. Péretié graduated from
the Institute of Business Administration of Sorbonne University,
Paris.
Antony P. Ressler has served as one of our directors
since May 2010. Mr. Ressler co-founded Ares Management LLC
in 1997, a global investment management firm with a focus on
alternative assets (i.e., leveraged
loans, high yield bonds, distressed debt, private/mezzanine debt
and private equity) managed through a variety of funds and
investment vehicles which, as of December 31, 2010, had
approximately $39 billion of committed capital under
management. Ares Management LLC has approximately
350 employees and is based in Los Angeles with offices
across the United States, Europe and Asia. Mr. Ressler also
co-founded Apollo Management, L.P. in 1990, a private investment
firm based in New York. Prior to 1990, Mr. Ressler served
as a Senior Vice President in the High Yield Bond Department of
Drexel Burnham Lambert Incorporated, with responsibility for the
New Issue/Syndicate Desk. Mr. Ressler also serves on the
board of directors of Ares Capital Corporation, a publicly
traded business development company and on the boards of private
companies owned or controlled by Ares Management LLC or its
affiliated funds. In the non-profit sector, Mr. Ressler
serves as a member of the Board of Trustees of the Cedars-Sinai
Medical Center, the Center for Early Education and the Los
Angeles County Museum of Art and as the Chairman of the Alliance
for College-Ready Public Schools, a
high-performing
group of 16 charter high schools and middle schools based in Los
Angeles. Mr. Ressler is also one of the founding members of
the board of the Painted Turtle Camp, a southern California
based organization (affiliated with Paul Newmans Hole in
the Wall Association). Mr. Ressler received his Bachelor of
Science degree in Foreign Service from Georgetown
Universitys School of Foreign Service and received his
Master of Business Administration from Columbia
Universitys Graduate School of Business.
96
Wilbur L. Ross, Jr. has served as one of our
directors since November 2010. Mr. Ross is the Chairman and
Chief Executive Officer of WL Ross & Co. LLC, a
merchant banking firm, a position he has held since April 2000.
Mr. Ross is also the managing member of the general partner
of WL Ross Group, L.P., which in turn is the managing member of
the general partner of WLR Recovery Fund L.P., WLR Recovery
Fund II L.P., WLR Recovery Fund III L.P., WLR Recovery
Fund IV L.P., Asia Recovery Fund L.P., Asia Recovery
Co-Investment Fund L.P., Absolute Recovery Hedge
Fund L.P., India Asset Recovery Fund and Japan Real Estate
Recovery Fund, the Chairman of the Investment Committee of the
Taiyo Fund and the Chairman of Invesco Private Capital, each of
which is a private investment fund. Mr. Ross is also
Chairman of International Coal Group, Inc., International
Textile Group, Inc., a global, diversified textile provider that
produces automotive safety, apparel, government uniform,
technical and specialty textiles, Nano-Tex, Inc., a fabric
innovations company located in the United States, IPE-Ross
Management Ltd., an investment partnership investing in middle
market European buyouts, and International Auto Components Group
SL, a joint venture company with interests in automotive
interior plastics. Mr. Ross is also an executive officer of
Invesco Private Equity, American Home Mortgage Services, Inc.
and Plascar Participacoes SA. Mr. Ross is a board member of
ArcelorMittal N.V., Assured Guaranty Ltd., a provider of
financial guaranty and credit enhancement products, Compagnie
Européenne de Wagons SARL in Luxembourg, Insuratex, Ltd.,
an insurance company in Bermuda, Plascar Participacoes SA,
Phoenix International Insurance Company, The Greenbrier
Companies, a supplier of transportation equipment and services
to the railroad industry, IAC Acquisition Corporation Limited,
IAC Group SARL, and Masters Capital Nanotechnology Fund.
Mr. Ross is also a member of the Business Roundtable.
Previously, Mr. Ross served as the Executive Managing
Director at Rothschild Inc., an investment banking firm, from
October 1974 to March 2000. Mr. Ross was previously a
director of Mittal Steel Co. N.V. from April 2005 to June 2006,
a director of International Steel Group from February 2002 to
April 2005, a director of Montpelier RE Holdings Ltd. from 2006
to March 2010, and a director of Syms Corp. from 2000 through
2007. Mr. Ross was also formerly Chairman of the
Smithsonian Institution National Board and currently is a board
member of Whitney Museum of American Art, the Japan Society, and
the Yale University School of Management, the Harvard Business
School Club of New York, the Palm Beach Civic Association, the
Palm Beach Preservation Foundation and the Partnership for
New York City. He holds an A.B. from Yale University and an
M.B.A., with distinction, from Harvard University.
Ian M. Saines has served as one of our directors since
June 2010. Mr. Saines is Group Executive of the
Institutional Banking and Markets division of Commonwealth Bank,
which he joined in 2004. He is responsible for managing
Commonwealth Banks relationships with major corporate,
institutional and government clients and providing a full range
of capital raising, transactional and risk management products
and services. Prior to joining Commonwealth Bank,
Mr. Saines was a Management Committee member of Zurich
Capital Markets Asia, the investment banking arm of the Zurich
Financial Services Group. Between 1985 and 1999, Mr. Saines
held various leadership positions at Bankers
Trust Australia Limited and headed the investment
banks Global Metals and Mining Industry Group. Prior to
joining Bankers Trust Australia Limited, Mr. Saines
was employed by the Reserve Bank of Australia. Mr. Saines
was formerly a board member of Father Chris Rileys Youth
Off The Streets, a
not-for-profit
organization providing support to chronically homeless and
abused youth in Australian society. He is currently a director
of the Australian Financial Markets Association. Mr. Saines
is a Fellow of the Australian Institute of Company Directors,
and a Certified Finance and Treasury Professional.
Mr. Saines has a first class honours degree in economics
from the University of New South Wales.
Dr. Ronald D. Sugar has served as one of our
directors since April 2010. Dr. Sugar is Chairman Emeritus
of Northrop Grumman Corporation. He served as Chairman of the
Board and Chief
97
Executive Officer from 2003 until his retirement in 2010. During
Dr. Sugars tenure, Northrop Grumman grew to become
the nations second largest defense contractor with
125,000 employees and $35 billion annual revenue.
Prior to joining Northrop Grumman, Dr. Sugar held executive
positions in the aerospace, defense, and automotive industries,
including Chief Financial Officer of TRW Inc., Executive Vice
President of TRW Automotive Electronics, President and Chief
Operating Officer of TRW Aerospace, and President, Chief
Operating Officer and Director of Litton Industries. In 2001, he
became President and Chief Operating Officer of Northrop
following its acquisition of Litton. He is a director of Amgen
Inc., Apple Inc. and Chevron Corporation, a trustee of the
University of Southern California, a
Director of the Los Angeles Philharmonic, a visitor of the UCLA
Anderson School of Management, a Director of the World Affairs
Council of Los Angeles, a National Trustee of the Boys and Girls
Clubs of America, a past Chairman of the Aerospace Industries
Association, and a member of the National Academy of
Engineering. Dr. Sugar received a Bachelor of Science
degree in Engineering (summa cum laude) from the University of
California, Los Angeles, where he also
received the masters and doctorate degrees in the same
field, and was subsequently honored as UCLA Alumnus of the Year.
Board of
directors
Our board of directors is composed of ten members. Our directors
serve until their successors are duly elected and qualified at
the stockholders annual meeting each year. There is no
cumulative voting in the election of directors. Certain
information regarding our directors is set forth below.
There are no family relationships among any of our directors or
executive officers.
Director
independence
Pursuant to the listing standards of the NYSE, a director
employed by us cannot be deemed to be an independent
director, and each other director will qualify as
independent, only if our board of directors
affirmatively determines that he has no material relationship
with us, either directly or as a partner, stockholder or officer
of an organization that has a relationship with us. Ownership of
a significant amount of our stock, by itself, does not
constitute a material relationship. Accordingly, our board of
directors has affirmatively determined that each of Messrs.
Danhakl, Hart, Milton, Péretié, Ressler, Ross and
Saines and Dr. Sugar is independent in accordance
with the rules of the NYSE. Mr. Milton is our lead
independent director.
Committees of the
board
Our board of directors has three standing committees: an audit
committee, a compensation committee and a nominating and
corporate governance committee. Each of these committees is
comprised solely of independent directors under the NYSE listing
standards.
Audit
committee
Our audit committee consists of Messrs. Hart, Milton and
Ross. Mr. Hart is the Chairman of the audit committee.
Our audit committees duties include, but are not limited
to, monitoring (1) the integrity of the financial
statements of the Company, (2) the independent
auditors qualifications and independence, (3) the
performance of our internal audit function and independent
auditors, (4) our compliance with legal and regulatory
requirements and (5) our overall risk profile.
Our audit committee must at all times be composed exclusively of
independent directors who are financially
literate as defined under the NYSE listing standards. The
audit committee must have at least one member who has past
employment experience in finance or accounting,
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requisite professional certification in accounting or other
comparable experience or background that results in the
individuals financial sophistication, and who qualifies as
an audit committee financial expert, as defined
under the rules and regulations of the SEC.
Nominating and
corporate governance committee
Our nominating and corporate governance committee consists of
Messrs. Milton and Hart and Dr. Sugar. Mr. Milton
is the Chairman of the nominating and corporate governance
committee.
Our nominating and corporate governance committee monitors the
implementation of sound corporate governance principles and
practices and will, among other things: (1) identify
individuals believed to be qualified to become a member of our
board of directors and select or recommend candidates for all
directorships to be filled, (2) annually review and
recommend changes, as appropriate, to our corporate governance
guidelines and (3) oversee the evaluation of our board of
directors. Our nominating and corporate governance committee
also reviews and approves all related party transactions in
accordance with our policies with respect to such matters.
Compensation
committee
Our compensation committee consists of Dr. Sugar and
Messrs. Danhakl and Ressler. Dr. Sugar is the Chairman
of the compensation committee.
Our compensation committee has overall responsibility for
approving and evaluating all of our compensation plans, policies
and programs as they affect the executive officers, including
the Chief Executive Officer, as well as overseeing the
evaluation of management and succession planning for executive
officer positions.
Compensation
committee interlocks and insider participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers serves, or in the past year has served, as a
member of the board of directors or the compensation committee
of any entity that has one or more executive officers who serve
on our board of directors or compensation committee.
Corporate
governance policies and code of conduct
Code of business
conduct and ethics
Our board of directors has adopted a Code of Business Conduct
and Ethics that applies to all of our directors, employees and
officers. Among other things, the Code of Business Conduct and
Ethics is intended to ensure fair and accurate financial
reporting, to promote ethical conduct and compliance with
applicable laws and regulations, to provide guidance with
respect to the handling of ethical issues, to foster a culture
of honesty and accountability and to deter wrongdoing. It also
requires disclosure to us of any situation, transaction or
relationship that may give rise to any actual or potential
conflict of interest. Such conflicts must be avoided unless
approved by our nominating and corporate governance committee.
The Code of Business Conduct and Ethics prohibits our employees,
officers and directors from taking, or directing a third party
to take, a business opportunity that is discovered through the
use of our property. A
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copy of our Code of Business Conduct and Ethics is
available on our website at
www.airleasecorp.com.
Corporate
governance guidelines
Our board of directors has adopted Corporate Governance
Guidelines to assist the board in the exercise of its duties and
responsibilities and to serve the best interests of the Company
and its stockholders. The Guidelines are intended to serve as a
flexible framework for the conduct of the boards business
and not as a set of legally binding obligations. The Guidelines
describe the board of directors responsibilities, the
qualification criteria for serving on our board, and standards
for the conduct of board meetings and establishing and
maintaining committees of the board. The Guidelines also confirm
that the directors will have full and free access to officers
and employees of the Company and have authority to retain
independent advisors as necessary and appropriate in carrying
out their activities. In addition, the Guidelines establish
frameworks for director compensation, director orientation and
continuing education, and an annual evaluation of the board and
its committees and of the Guidelines. Finally, the Guidelines
charge the compensation committee with oversight of management
evaluation and succession and detail the Companys policies
regarding confidentiality and communications between our board
and the press and media on matters pertaining to the Company.
Our Corporate Governance Guidelines are available on our website at
www.airleasecorp.com.
Audit and
non-audit services pre-approval policy
Our audit committee has approved and adopted an Audit and
Non-Audit Services Pre-Approval Policy which sets forth the
procedures and conditions pursuant to which services to be
performed by our independent auditor are to be pre-approved. The
policy provides that the audit committee will annually consider
for approval, and approve as it deems appropriate and consistent
with the policy and applicable law, a schedule listing proposed
engagements and specified audit and
non-audit
services expected to be provided by the independent auditor
commencing during the upcoming year. As stated in the policy, in
determining whether to
pre-approve
services, the audit committee may consider, among other factors:
(i) whether the services are consistent with applicable
rules on auditor independence; (ii) whether the independent
auditor is best positioned to provide the services in an
effective and efficient manner, taking into consideration its
familiarity with our business, people, culture, accounting
systems, risk profile and other factors; and (iii) whether
the services might enhance our ability to manage or control risk
or improve audit quality. Under the policy, the audit committee
may delegate preapproval authority to one or more of its
members. The policy contemplates that our Chief Financial
Officer, or his designee, will provide a quarterly report to the
audit committee listing services performed by and fees paid to
the independent auditor during the current fiscal year and the
previous quarter, including a reconciliation of the actual fees
of the independent auditors compared to the budget for such
services as approved by the audit committee.
Insider trading
policy
Our board of directors has adopted an Insider Trading Policy
that applies to all of our directors, officers and employees.
The Insider Trading Policy prohibits a participant from buying
or selling shares of capital stock when he or she has
material nonpublic information. Material
nonpublic information generally means information that is
not generally known or available to the public
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and that a reasonable investor would consider important in
making an investment decision to buy, hold, or sell securities.
Anyone who fails to comply with the Insider Trading Policy will
be subject to appropriate disciplinary action, up to and
including termination of employment.
Whistleblower
policy
Our board of directors has adopted a Whistleblower Policy. The
Whistleblower Policy is intended to encourage our directors,
officers and employees to further our goal of fostering a
culture of legal and ethical compliance. The policy sets forth
procedures for (i) raising questions and concerns about
potential misconduct, including potential violations of law,
regulation or our policies, questionable or unethical
accounting, internal accounting controls or auditing matters and
(ii) reporting potential misconduct, unless supplanted by
other applicable law. The policy strictly prohibits anyone from
taking or threatening disciplinary or other retaliatory action,
including discharge, demotion, suspension, harassment or any
other discrimination, against an individual for, in good faith,
raising questions or concerns about, or reporting, potential
misconduct, including a potential violation of the law,
regulation, or our policies. The policy also includes procedures
for maintaining the confidentiality of information communicated
under the policy.
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Executive
compensation
Compensation
discussion and analysis
Executive
summary
Our Companys executive compensation program has been
designed to attract the most talented executives in the aircraft
leasing business to join us in our
start-up
venture, and to reward these individuals for the successful
launch of our business. The compensation committee believes that
the program has been very successful in accomplishing these
objectives. The combination of a highly competitive base salary
and bonus, equity incentive awards, and the potential for even
greater rewards as a stockholder, has helped us assemble a
formidable management team and focus them on growing the value
of our Company over the long term. We believe having an
experienced and motivated senior management team is essential to
the success of our Company and provides us and our stockholders
with an important competitive advantage.
The following section contains a discussion of the objectives
and elements of our executive compensation program in 2010, as
well as information regarding the compensation of our Named
Executive Officers, who are our principal executive officer,
Mr. Udvar-Házy,
our three other most highly compensated executive officers who
were serving as executive officers at the end of 2010,
Messrs. Plueger, Levy and Chen, and our principal financial
officer, Mr. Clarke.
Compensation
program overview and objectives
Our Company was launched in February 2010. Our executive
compensation program is designed to address some of the unique
challenges associated with being a young company that requires a
small number of extraordinary and talented individuals with
industry experience to manage and lead an asset-intensive
business. The primary objective of our executive compensation
program is to attract, retain and motivate the highest caliber
executives in the aircraft leasing industry by offering a
comprehensive compensation program that is attractive enough to
entice successful senior executives to work for a company with a
limited operating history. This compensation program includes
fixed compensation elements that are very competitive in the
marketplace, combined with performance-based elements that are
designed to reward our Named Executive Officers for achieving
results that derive value for our stockholders.
Our Company does not benchmark our compensation program against
that of other companies because we operate within an industry
with a small number of competitors and few that would be
suitable as comparative companies. Most of our competitors are
private or foreign companies or are captive subsidiaries of
public companies, and are therefore unsuitable as benchmarks for
compensation design for our Company. Rather, we utilize the
collective knowledge and experience of our board members and our
senior executives, some of whom are pioneers in our industry, as
well as the advice of an independent compensation consultant, to
make appropriate determinations regarding compensation.
Furthermore, as a young company, we believe it is important to
make compensation decisions based on our own short-term and
long-term goals. Instead of making decisions based on how our
Companys compensation practices compare to those of our
peers, we consider the amount and form of compensation that will
best enable us to attract and retain the most talented
executives and to focus them on the growth and long-term success
of our business.
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This Compensation discussion and analysis should be
read together with the compensation tables that follow, which
disclose the compensation awarded to, earned by or paid to the
Named Executive Officers in or with respect to 2010.
How we determine
compensation
Role of the Compensation Committee. The compensation
committee, which is currently comprised of Dr. Ronald D.
Sugar, who serves as Chairman of the committee, and
Messrs. John G. Danhakl and Antony P. Ressler, oversees the
design, administration and evaluation of our overall executive
compensation program. The compensation committee also approves
the total compensation for each Named Executive Officer. Each
member of the compensation committee must be an independent,
non-employee director, as those terms are defined in SEC, NYSE
and IRS rules. Among other things, the compensation committee
will at least annually:
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Review and adjust each Named Executive Officers
compensation in order to ensure an appropriate mix of cash and
equity, and an appropriate balance of fixed and at-risk
compensation, in light of, among other factors, each
individuals particular role and responsibilities, personal
motivations, stock ownership exposure and wealth accumulation.
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Approve specific performance targets and individual goals for
each Named Executive Officer with respect to the at-risk
portions of his compensation.
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Consult with the compensation committees independent
consultant to help ensure that the total compensation paid to
each Named Executive Officer is appropriate in light of our
Companys compensation objectives, tax and accounting
considerations and compensation best practices.
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Approve incentive award payouts based on performance actually
achieved.
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Approve bonus payments based on
after-the-fact
evaluations of Company and individual performance. We regard
retrospective evaluation as appropriate for our current
compensation program because, as a young company, we have a
limited ability to forecast performance, we need to consider
qualitative milestones as we grow, and for purposes of 2010
bonuses, we lacked appropriate baselines to support performance
benchmarking. Commencing with bonuses for 2011, our Company and
the compensation committee plan to apply quantitative factors as
well as qualitative milestones in the determination of bonus
payments.
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Role of Management. The compensation committee
recommends to the independent directors of the board for their
approval, and without management input, the overall compensation
of our Chairman and Chief Executive Officer. In addition, the
committee determines the overall compensation of our President
and Chief Operating Officer with input from our Chief Executive
Officer. Finally, the committee determines the overall
compensation of our other Named Executive Officers with input
from our Chief Executive Officer and Chief Operating Officer.
None of our Named Executive Officers is present when his
compensation is discussed by the compensation committee. Our
management administers all compensation and benefits programs,
subject to the oversight of the compensation committee. This
delegation to management is strictly limited to implementation
of the programs, and does not include any discretion to make
material decisions regarding the overall executive compensation
program.
Role of Independent Consultant. The compensation
committee has engaged Exequity as an independent consultant to
provide advice with respect to compensation decisions for our
Companys executive officers. The independent consultant
assists in evaluating our
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compensation objectives, obtaining market information, and
designing various aspects of our compensation program. The
independent consultant attends meetings of the compensation
committee by invitation, and compensation committee members have
direct access to the independent consultant without management
involvement. The compensation committee has the sole authority
to hire and fire the independent consultant. In order to help
ensure impartiality and objectivity, the compensation committee
requires that the independent consultant provide services only
to the committee and not to management, absent compensation
committee approval. The compensation committee has not approved
the consultants engagement in any separate work for our
management or employees.
Risk Management. We believe that the best way to
ensure personal commitment to our Companys long-term goals
is to ensure that our Named Executive Officers and other
employees financial rewards as stockholders will, over the
long term, far outweigh any cash compensation they earn as
employees. In this regard, the interests of our Named Executive
Officers and our stockholders are strongly aligned. Our Named
Executive Officers as a group beneficially own 6.23% of our
Companys Common Stock, and each Named Executive Officer
has made a meaningful personal investment in our Companys
stock.
In addition, our executive compensation program has been
designed to discourage executives from taking unnecessary risks
that could threaten the long-term interests of our young
company. As described in more detail below, a significant
portion of our Companys
incentive-based
compensation is tied to an increase in our Companys book
value, and not to metrics that may encourage risk-taking
behavior focused on short-term results. Similarly, we have
mitigated potential risk by subjecting all of our equity-based
awards to time-based vesting conditions and most of our restricted stock units
(RSUs) to performance-based vesting conditions, and by
capping incentive opportunities such as annual bonuses. We also
believe that our executives significant equity ownership
in our Company aligns their long-term interests with those of
our stockholders.
Our board of directors has adopted stock ownership guidelines
for our executive officers at the level of Executive Vice
President or higher. Our Chief Executive Officer is required to
own Class A Common Stock equivalents with an aggregate
market value equal to six times his annual rate of salary, our
Chief Operating Officer is required to own Class A Common
Stock equivalents with an aggregate market value equal to three
times his annual rate of salary, and each of our other executive
officers subject to these guidelines is required to own
Class A Common Stock equivalents with an aggregate market
value equal to at least his annual rate of salary. Class A
Common Stock equivalents are shares of Class A Common Stock
owned personally by an executive officer and shares of
Class A Common Stock underlying unvested RSUs that are
subject to time-vesting only. Each executive officer subject to
these guidelines has five years from the time he becomes subject
to the guidelines to achieve the required level of ownership.
The market value of the Class A Common Stock equivalents
will be determined in accordance with a reasonable methodology
established from time to time by our compensation committee.
Employment Agreements. Due to the importance of
their services to, and their leadership of, our Company, we have
entered into employment agreements with our Chairman and Chief
Executive Officer, Mr. Udvar-Házy, and our President
and Chief Operating Officer, Mr. Plueger, which are
described below under Employment agreements and
arrangements and potential payments upon termination or change
in control. We have no current plans to enter into
employment agreements with any of our other Named Executive
Officers.
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Elements of the
executive compensation program
Base Salary. Base salary is the main
fixed component of our executive compensation
program, and it is aimed primarily at attracting and retaining
the best possible executive talent. The relative levels of base
salary for our Named Executive Officers are based on the
particular responsibilities and expectations associated with
each executives position. The base salaries of
Messrs. Udvar-Házy and Plueger are determined in
accordance with their employment agreements, and the base
salaries of the other Named Executive Officers are determined by
the compensation committee, with the input of
Messrs. Udvar-Házy and Plueger and taking into
consideration the objectives and philosophies of our overall
executive compensation program.
Annual Bonus. Our Company provides annual bonus
opportunities in order to foster executive accountability and
reward executives for achieving business goals. The compensation
committee makes bonus determinations based primarily on several
subjective factors, including (i) the particular
executives specific roles, responsibilities and
performance, (ii) the overall business environment,
(iii) our Companys performance and
(iv) competitive considerations in the market for
comparable opportunities. In determining annual bonuses for
2010, the compensation committee considered the totality of the
mix of the foregoing subjective factors for each Named Executive
Officer, and in particular, placed a heavy emphasis on each
particular executives role in the successful launch of our
Company, our equity- and debt-raising activities, and the
purchase and leasing of our initial portfolio of aircraft. In
light of our Companys recent launch, however, the
compensation committee did not consider financial performance
targets for our Company as a factor when determining 2010 annual
bonuses. The compensation committee plans to consider
quantitative as well as qualitative milestones of Company
performance, in addition to individual performance factors, in
the determination of bonus payments commencing with 2011 bonuses.
Under his employment agreement, Mr. Udvar-Házys
target annual bonus amount is equal to 100% of his base salary
actually paid, with a maximum bonus equal to 200% of his base
salary actually paid. The amount of
Mr. Udvar-Házys annual bonus is determined on
the basis of our Companys attainment of objective
financial performance metrics, or a combination of our
Companys attainment of such financial performance metrics
and Mr. Udvar-Házys attainment of individual
objectives, in each case as determined and approved by the
compensation committee. In 2010, Mr. Udvar-Házy was
entitled to a guaranteed bonus of no less than
$1.6 million. Mr. Pluegers target annual bonus
amount under his employment agreement is equal to 80% of his
base salary actually paid, with a maximum bonus equal to 120% of
his base salary actually paid. Mr. Levy was eligible for an
annual bonus based on a target opportunity of $700,000.
Messrs. Chen and Clarke were eligible for annual bonuses
based on target and maximum opportunities of 100% and 50%,
respectively, of each executives respective base salary.
In most cases, the compensation committee retains the discretion
to reduce the amount of each executives annual bonus, even
if his maximum opportunity has been achieved.
For 2010, our compensation committee awarded
Messrs. Plueger, Levy, Chen and Clarke annual bonuses of
$1.25 million, $700,000, $750,000, and $120,000,
respectively. Our compensation committee recommended, and our
board of directors approved, an annual bonus of
$1.8 million for Mr. Udvar-Házy with respect
to 2010. The compensation committee determined the annual
bonuses for our Named Executive Officers on February 15,
2011. By that date, our compensation committee (with respect to
Mr. Udvar-Házy) and our management (with respect to all
other Named Executive Officers) had had an opportunity to review
the achievements of the Company
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for the period from our inception through December 31,
2010, and to formulate recommendations for the annual bonuses
for these Named Executive Officers.
Retention Bonuses. Most of our Named Executive
Officers are eligible for retention incentives that vest upon
completion of three years service with our Company and are
forfeited if the executives employment is terminated prior
to vesting. The purpose of these bonuses is to promote stability
among our leadership team during our critical
start-up
period. Each of Messrs. Udvar-Házy, Plueger, and Chen
is eligible for a retention bonus equal to 10% of his then
current base salary. Mr. Levy is eligible for a retention
bonus equal to $85,000.
Amended and Restated Deferred Bonus Plan. The
purpose of our Amended and Restated Deferred Bonus Plan is to
provide retention incentives that are time-vested and based on
amounts already earned, thereby providing a balance against our
retention incentives that are tied to uncertain, future
performance. Under the plan, our employees have an opportunity
to receive a cash bonus in an amount equal to a percentage of
the aggregate amount of base salary and cash bonus compensation
paid in a particular year. The deferred bonus will generally
vest upon the second anniversary of the end of the year with
respect to which the award was made, provided that the employee
is still employed by us on a full-time basis on that date, and
will be paid as soon as practicable thereafter. Once vested, the
deferred bonus is not subject to reduction by our compensation
committee. Messrs. Udvar-Házy and Plueger are each
eligible to participate in our Amended and Restated Deferred
Bonus Plan, and in accordance with their employment agreements,
will receive a bonus equal to 9.0% of the aggregate amount of
his base salary and bonus compensation paid in a particular
calendar year. Bonuses for our other Named Executive Officers
and employees will be determined annually by the Chairman and
Chief Executive Officer and the President and Chief Operating
Officer as administrators under the plan, in accordance with the
terms of the plan and a schedule approved by the compensation
committee or board of directors. Awards to the Chairman and
Chief Executive Officer and the President and Chief Operating
Officer are administered by our compensation committee or board
of directors. In accordance with their employment agreements,
Messrs. Udvar-Házy and Plueger each received a
deferred bonus of 9.0% with respect to 2010, while
Messrs. Levy, Chen and Clarke received deferred bonuses of
8.5%, 8.5% and 7.0%, respectively, for 2010.
Long-Term Incentive Awards. Consistent with our
executive compensation objectives, the compensation committee
believes that an important aspect of attracting and retaining
exceptionally talented executives and aligning their interests
with those of our stockholders is to provide equity-based
incentive compensation. In approving the initial grants of
equity incentives to our employees, our board of directors and
compensation committee considered an overall value for each
executive officer, and sought to establish a mix of
approximately 50% RSUs and 50% options to purchase shares of our
Class A Common Stock. The compensation committee believes
this mix creates a balanced incentive because the RSUs provide
the executives with additional stock ownership, which aligns the
long-term interests of our senior executives and stockholders,
while the options provide them with an incentive to achieve
performance that leads to appreciation in our stock price. All
awards have been made under our Amended and Restated Air Lease
Corporation 2010 Equity Incentive Plan (the 2010 ALC
Equity Incentive Plan).
The RSUs are subject to time vesting and performance conditions.
The RSUs generally vest in four equal installments over a
four-year period, but only if there have been specified
increases in our Companys per share book value, as
determined in accordance with GAAP. The cumulative
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required increase in value is 2.00% in the first year, 5.06% in
the second year, 9.26% in the third year and 13.63% in the
fourth year. If a specified cumulative increase is attained in
years two, three or four, any unvested installments from prior
years will also vest.
Messrs. Udvar-Házy, Plueger and Chen received equity
awards as described below under Specific Purpose
Awards. Mr. Levy received 150,000 RSUs and
150,000 options to purchase shares of our Class A Common
Stock at an exercise price of $20 per share, and Mr. Clarke received 15,000 RSUs and 15,000
options to purchase shares of our Class A Common Stock
at an exercise price of $20 per share.
Our Companys book value is considered to be an appropriate
performance metric because it relates directly to our goal of
encouraging long-term growth that benefits the
stockholders equity in our Company. In addition, other
typical performance measures like revenues and earnings were not
appropriate at the time that we made our equity incentive
grants, as it is difficult for a young company to provide
meaningful forecasts of these measures to serve as baselines for
measuring performance.
The options to purchase shares of Class A Common Stock are
generally subject to ratable time vesting over three years.
The exercise price of
the options is determined by the compensation committee, but may
never be less than the fair market value of our Class A
Common Stock on the date of grant. The compensation committee
believes that the options are inherently performance-based
because they have no intrinsic value on the date of grant and
will only deliver meaningful value when stockholders also
realize value.
Specific Purpose Awards. In June and July 2010, the Company
completed a $1.3 billion private placement of its Common
Stock. In order to provide Messrs. Udvar-Házy and
Plueger with an additional incentive to complete this
transaction, our board of directors agreed to grant them RSUs
and options to acquire additional shares of Class A Common
Stock at an exercise price of $20 per share. The number of RSUs
and the number of shares subject to the options were determined
based on an escalating scale that incentivized
Messrs. Udvar-Házy and Plueger to help raise the
largest amount of capital possible from the offering. In
accordance with the scale,
Mr. Udvar-Házy
was entitled to receive 1,812,402 RSUs and options to purchase
1,812,402 shares of Class A Common Stock, while
Mr. Plueger was entitled to receive 735,586 RSUs and
options to purchase 735,586 shares of Class A Common
Stock. Mr. Udvar-Házy instead received an aggregate of
1,750,426 RSUs and options to purchase 1,751,352 shares of
Class A Common Stock, while Mr. Plueger received an
aggregate of 710,431 RSUs and options to purchase
710,806 shares of Class A Common Stock.
Messrs. Udvar-Házy and Plueger waived the additional
RSUs and options to which they were entitled in order to permit
certain
grants
of RSUs and options
to Mr. Chen. As an additional incentive in connection with the equity
offering described above, Mr. Udvar-Házy also earned a
$500,000 success bonus.
Consistent with the philosophy of rewarding our executives for
achieving specific business objectives, each of
Messrs. Udvar-Házy, Plueger, Chen and Clarke were
eligible for and received a cash bonus equal to 10% of his then current annual
base salary, and Mr. Levy was eligible for and received a cash bonus of
$70,000, upon completion of our initial public
offering.
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We regard Mr. Chen as playing a key role in the potential
expansion of our business in the Asian market. In recognition of
the importance of the Asian market to our business and his role
relative to that market, the compensation committee approved
Mr. Chens eligibility for a cash signing bonus in the
amount of $1.3 million, half of which vested and was paid on July 15, 2011 and the other half of which will
vest and be payable on July 15, 2012, as well as a
performance bonus of $80,000, which vested and was paid in
July 2011, and additional performance bonuses of $250,000, $370,000 and $450,000,
which will vest and be payable in July 2012, July
2013 and July 2014, based upon the achievement of performance
targets to be established by our Chief Executive Officer and
approved by the compensation committee. Mr. Chens
performance target for the performance bonus paid in July
2011 required the lease placement of a specified number of
aircraft in the Asian market. This performance target is a key
component of our long-term strategic plan for the Asian market.
The specific performance target reflected a confidential
composite set of internal fleet development, revenue and profit
targets.
In addition, in August 2010 and April 2011, the Company
made grants of performance-based RSUs and options to purchase shares of Class A
Common Stock to Mr.
Chen. These grants aggregate to 300,000 RSUs and 300,000 options. Taken together, these RSUs and options are subject to the same time vesting (in the
case of the RSUs and options) and performance conditions (in the case of the RSUs) as are
applicable to the corresponding awards made to the other Named Executive Officers described above.
The 150,000 options granted in August 2010 have an exercise
price of $20 per share and vested 66-2/3%
on June 30, 2011 and vest 33-1/3% on June 30, 2012. The 150,000 options granted in April 2011 have an
exercise price of $28.80 per share and vest 33-1/3% on June 30, 2012 and 66-2/3% on June 30, 2013.
Due to the higher exercise price of the 150,000 options granted to
Mr. Chen in
April 2011 as compared with the corresponding options granted to
the other Named Executive Officers, Mr. Chen was also granted in
April 2011 an additional 45,833 RSUs that have no
performance conditions but that are subject to the same
time vesting as Mr. Chens 150,000 options granted on the
same date.
Retirement Programs. We maintain a 401(k) savings
plan for our employees and, under the terms of the plan, will
make matching contributions in amounts equal to 116% of up to 6%
of the contributions made by each of
Messrs. Udvar-Házy, Plueger, Levy and Chen and
matching contributions in amounts equal to
331/3%
of up to 6% of the contributions made by Mr. Clarke. No
matching contributions were made for the Named Executive
Officers for 2010.
Benefits and Perquisites. Our Named Executive
Officers generally receive the same healthcare benefits as our
other employees. Mr. Udvar-Házy has additional
benefits under his employment agreement, including our payment
of premiums for a $5.0 million term life insurance policy
payable to his beneficiaries. Similarly, we pay
Mr. Pluegers premiums for a $2.0 million term
life insurance policy payable to his beneficiaries. In addition,
we pay the premiums for Messrs. Udvar-Házy, Plueger,
Levy, Chen and Clarke under our group term life insurance
program, in which all of our employees participate.
Severance and
change in control provisions
Messrs. Udvar-Házy and Plueger are each entitled to
certain payments and benefits if his employment is terminated in
certain circumstances, as set forth in their employment
agreements. The details of these provisions are discussed in the
section titled Employment agreements and arrangements and
potential payments upon termination or change in control.
The compensation committee believes that providing our senior
executive officers with income protection in the event of an
involuntary termination is appropriate as it is an important
aspect
108
of attracting highly talented executives, avoids costly and
potentially protracted separation negotiations and mitigates the
risks our executives face in leaving their positions to join our
Company. Each of Messrs. Udvar-Házy and Plueger is
subject to noncompetition and nonsolicitation restrictions while
employed by our Company and nonsolicitation restrictions for one
year following his termination. Each of them is also subject to
an ongoing confidentiality obligation.
As described below under Amended and Restated Air Lease
Corporation 2010 Equity Incentive PlanChange in
control, under the terms of our plan, all outstanding
options shall become fully exercisable and vested upon the
occurrence of a change in control, as defined under the plan,
and our compensation committee may determine the level of
achievement with respect to any performance-based RSUs through
the date of the change in control.
Tax
considerations
Section 162(m) of the U.S. Internal Revenue Code of
1986, as amended (the Code), generally disallows a
federal income tax deduction for public companies for
compensation in excess of $1.0 million paid for any fiscal
year to the chief executive officer and the three other most
highly compensated executive officers (other than the chief
financial officer) unless the compensation qualifies as
performance-based. Because we are a newly public company,
however, compensation paid under the plans and agreements
described in this prospectus will generally be exempt from the
application of Section 162(m) for the period (the
162(m) Transition Period) ending with the first
meeting of stockholders to elect directors after the close of
the third calendar year following the year in which our
contemplated initial public offering occurs. To the extent
Section 162(m) does apply to any compensation paid by our
Company, depending on the relevant circumstances at the time,
the compensation committee may determine to award compensation
that may not be deductible. In making this determination, the
compensation committee balances the purposes and needs of our
executive compensation program against potential tax cost.
Section 409A of the Code imposes an excise tax on the
recipient of certain non-qualified deferred compensation. The
compensation committee attempts to structure all executive
compensation to comply with, or be exempt from,
Section 409A.
109
Executive
compensation tables
Summary
compensation table
The following table summarizes compensation paid to or earned by
our Named Executive Officers during the fiscal year ended
December 31, 2010. Our Named Executive Officers are our
principal executive officer, Mr. Udvar-Házy; our three
other most highly compensated executive officers,
Messrs. Plueger, Levy and Chen, as determined by their
total compensation set forth in the table below; and our
principal financial officer, Mr. Clarke.
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Stock
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Option
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All other
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Name and
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Salary
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Bonus
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awards*
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awards*
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compensation
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Total
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principal position
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Year
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($)
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($)(1)
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($)(2)
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($)(2)
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($)(3)
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($)
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Steven F. Udvar-Házy
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2010
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$
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1,622,727
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$
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2,300,000
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$
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35,008,520
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$
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18,807,128
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$
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29,682
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$
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57,768,057
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Chairman and Chief Executive Officer
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John L. Plueger
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2010
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$
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1,125,000
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$
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1,250,000
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$
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14,208,620
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$
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7,600,283
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$
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5,861
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$
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24,189,764
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President and Chief Operating Officer
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Grant A. Levy
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2010
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$
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506,439
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$
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700,000
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$
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3,000,000
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$
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1,236,530
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$
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3,262
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$
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5,446,231
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Executive Vice President, General Counsel and Secretary
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Jie Chen
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2010
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$
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343,750
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$
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750,000
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$
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3,000,000
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$
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1,116,204
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$
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1,817
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$
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5,211,771
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Executive Vice President and Managing Director of Asia
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James C. Clarke
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2010
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$
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149,352
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$
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120,000
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$
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300,000
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$
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123,653
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$
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62,563
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$
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755,568
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Senior Vice President and Chief Financial Officer
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*
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Stock awards consist of RSUs
relating to shares of our Class A Common Stock. Option
awards are options to purchase our Class A Common Stock.
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(1)
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Bonus: The
amount for Mr. Udvar-Házy represents his annual bonus
for 2010, and a $500,000 success bonus, described above under
Compensation discussion and analysisElements of the
executive compensation programSpecific Purpose
Awards. All other figures represent annual bonuses for
2010.
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(2)
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Stock Awards and Option
Awards: These
amounts represent the aggregate grant date fair value of awards
of RSUs and options to purchase shares of our Class A
Common Stock granted to our Named Executive Officers in 2010,
computed in accordance with GAAP. Assumptions used in the
calculations of these amounts, which do not correspond to the
actual value that may be realized by the Named Executive
Officer, are included in Note 12 Equity Based
Compensation to the financial statements included in this
prospectus.
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(3)
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All Other
Compensation: The
amounts shown in this column reflect the following items:
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Premium
Payments: In
2010, we paid premiums on term life insurance policies for
Messrs. Udvar-Házy, Plueger, Levy, Chen and Clarke, in
the aggregate amounts of $29,682, $5,861, $3,262, $1,817, and
$2,563, respectively.
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Relocation
Assistance: In
connection with Mr. Clarkes hiring and relocation
from Connecticut to Los Angeles, California, we paid
Mr. Clarke an allowance of $60,000 for certain relocation
and transitional costs.
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110
Grants of
plan-based awards
The following table sets forth information concerning grants of
plan-based awards made to our Named Executive Officers during
the fiscal year ended December 31, 2010.
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Grant date
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Estimated future
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Exercise or
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fair value
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payouts under
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base price
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of stock
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equity incentive
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of option
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and option
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Grant date(s)
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plan awards
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awards
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awards
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Name
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(1)
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Type of award
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(#)
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($/sh)(2)
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($)(3)
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Mr. Udvar-Házy
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6/4/2010
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Options
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1,750,000
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$
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20.00
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$
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18,795,960
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6/4/2010
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RSUs
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1,750,000
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$
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35,000,000
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8/11/2010
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Options
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1,352
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$
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20.00
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$
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11,168
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8/11/2010
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RSUs
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426
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$
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8,520
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Mr. Plueger
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6/4/2010
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Options
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700,000
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$
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20.00
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$
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7,518,384
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6/4/2010
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RSUs
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700,000
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$
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14,000,000
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8/11/2010
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Options
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10,806
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$
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20.00
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$
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81,899
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|
8/11/2010
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RSUs
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10,431
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$
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208,620
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Mr. Levy
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7/14/2010
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Options
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150,000
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$
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20.00
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|
$
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1,236,530
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7/14/2010
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RSUs
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150,000
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$
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3,000,000
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Mr. Chen
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8/11/2010
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Options
|
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|
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150,000
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|
$
|
20.00
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$
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1,116,204
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|
8/11/2010
|
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|
|
RSUs
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|
|
150,000
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|
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$
|
3,000,000
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|
|
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|
|
Mr. Clarke
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7/14/2010
|
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Options
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15,000
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|
|
$
|
20.00
|
|
|
$
|
123,653
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|
|
|
7/14/2010
|
|
|
|
RSUs
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|
|
15,000
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|
|
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|
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|
$
|
300,000
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|
|
|
|
|
(1)
|
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Grant
Date: The grant
date for each award is the effective date of grant approved by
the compensation committee of our board of directors.
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(2)
|
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Exercise or base price of option
awards: The
exercise price for each award is equal to the fair market value
of our Class A Common Stock as of the date of grant, as
determined by our board of directors and our compensation
committee.
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(3)
|
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Grant date fair value of stock
and option
awards: The grant
date fair value for each award is computed in accordance with
GAAP. Assumptions used in the calculations of these amounts,
which do not correspond to the actual value that may be realized
by the Named Executive Officers, are included in Note 12
Equity Based Compensation to the financial
statements included in this prospectus.
|
111
Outstanding
equity awards at fiscal year-end
The following table sets forth information concerning option
awards and stock awards for our Named Executive Officers
outstanding as of the end of the fiscal year ended
December 31, 2010.
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Option awards*
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Stock awards*
|
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|
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|
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Equity
|
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|
|
Equity incentive
|
|
|
incentive plan
|
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|
|
|
|
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Equity incentive
|
|
|
|
|
|
|
|
|
plan awards:
|
|
|
awards:
|
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|
|
|
|
|
plan awards:
|
|
|
|
|
|
|
|
|
number of
|
|
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market value
|
|
|
|
|
|
|
number of
|
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|
|
|
|
|
|
|
unearned
|
|
|
or payout value
|
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|
|
|
|
|
securities
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|
|
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|
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|
|
shares, units
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|
of unearned
|
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|
|
|
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underlying
|
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|
|
|
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|
or other
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|
shares, units or
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|
|
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unexercised
|
|
|
Option
|
|
|
|
|
|
rights that
|
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other rights
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|
|
|
|
|
|
unearned
|
|
|
exercise
|
|
|
Option
|
|
|
have not
|
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that have not
|
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|
|
|
|
|
options
|
|
|
price
|
|
|
expiration
|
|
|
vested
|
|
|
vested
|
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Name
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Grant date
|
|
|
(#)(1)
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|
|
($)
|
|
|
date
|
|
|
(#)(2)
|
|
|
($)(3)
|
|
|
|
|
Mr. Udvar-Házy
|
|
|
6/4/2010
|
|
|
|
1,750,000
|
|
|
$
|
20.00
|
|
|
|
6/4/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
6/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750,000
|
|
|
$
|
35,000,000
|
|
|
|
|
8/11/2010
|
|
|
|
1,352
|
|
|
$
|
20.00
|
|
|
|
8/11/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
8/11/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
$
|
8,520
|
|
|
|
|
|
|
|
Mr. Plueger
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|
|
6/4/2010
|
|
|
|
700,000
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|
|
$
|
20.00
|
|
|
|
6/4/2020
|
|
|
|
|
|
|
|
|
|
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|
|
6/4/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,000
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|
|
$
|
14,000,000
|
|
|
|
|
8/11/2010
|
|
|
|
10,806
|
|
|
$
|
20.00
|
|
|
|
8/11/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
8/11/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,431
|
|
|
$
|
208,620
|
|
|
|
|
|
|
|
Mr. Levy
|
|
|
7/14/2010
|
|
|
|
150,000
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|
|
$
|
20.00
|
|
|
|
7/14/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
7/14/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
Mr. Chen
|
|
|
8/11/2010
|
|
|
|
150,000
|
|
|
$
|
20.00
|
|
|
|
8/11/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
8/11/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
$
|
3,000,000
|
|
|
|
|
|
|
|
Mr. Clarke
|
|
|
7/14/2010
|
|
|
|
15,000
|
|
|
$
|
20.00
|
|
|
|
7/14/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
7/14/2010
|
|
|
|
|
|
|
|
|
|
|
|