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| AYR > SEC Filings for AYR > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
OVERVIEW
We are a global company that acquires, leases, and sells high-utility commercial
jet aircraft to passenger and cargo airlines throughout the world. High-utility
aircraft are generally modern, operationally efficient jets with a large
operator base and long useful lives. As of December 31, 2012, our aircraft
portfolio consisted of 159 aircraft that were leased to 69 lessees located in 36
countries, and managed through our offices in the United States, Ireland and
Singapore. Typically, our aircraft are subject to net operating leases whereby
the lessee is generally responsible for maintaining the aircraft and paying
operational, maintenance and insurance costs, although in a majority of cases we
are obligated to pay a portion of specified maintenance or modification costs.
From time to time, we also make investments in other aviation assets, including
debt investments secured by commercial jet aircraft. Our revenues and net income
for the year ended December 31, 2012 were $686.6 million and $32.9 million
respectively, and for the fourth quarter 2012 were $176.6 million and $29.8
million, respectively.
Revenues
Our revenues are comprised primarily of operating lease rentals on flight
equipment held for lease, revenue from retained maintenance payments related to
lease expirations, lease termination payments, lease incentive amortization and
interest recognized from finance leases.
Typically, our aircraft are subject to net operating leases whereby the lessee
pays lease rentals and is generally responsible for maintaining the aircraft and
paying operational, maintenance and insurance costs, although in a majority of
cases we are obligated to pay a portion of specified maintenance or modification
costs. Our aircraft lease agreements generally provide for the periodic payment
of a fixed amount of rent over the life of the lease and the amount of the
contracted rent will depend upon the type, age, specification and condition of
the aircraft and market conditions at the time the lease is committed. The
amount of rent we receive will depend on a number of factors, including the
credit-worthiness of our lessees and the occurrence of delinquencies,
restructurings and defaults. Our lease rental revenues are also affected by the
extent to which aircraft are off-lease and our ability to remarket aircraft that
are nearing the end of their leases in order to minimize their off-lease time.
Our success in re-leasing aircraft is affected by market conditions relating to
our aircraft and by general industry conditions and trends. An increase in the
percentage of off-lease aircraft or a reduction in lease rates upon remarketing
would negatively impact our revenues.
Under an operating lease, the lessee will be responsible for performing
maintenance on the relevant aircraft and will typically be required to make
payments to us for heavy maintenance, overhaul or replacement of certain
high-value components of the aircraft. These maintenance payments are based on
hours or cycles of utilization or on calendar time, depending upon the
component, and would be made either monthly in arrears or at the end of the
lease term. For maintenance payments made monthly in arrears during a lease
term, we will typically be required to reimburse all or a portion of these
payments to the lessee upon their completion of the relevant heavy maintenance,
overhaul or parts replacement. We record maintenance payments paid by the lessee
during a lease as accrued maintenance liabilities in recognition of our
obligation in the lease to refund such payments, and therefore we do not
recognize maintenance revenue during the lease. Maintenance revenue recognition
would occur at the end of a lease, when we are able to determine the amount, if
any, by which reserve payments received exceed the amount we are required under
the lease to reimburse to the lessee for heavy maintenance, overhaul or parts
replacement. The amount of maintenance revenue we recognize in any reporting
period is inherently
volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee. Many of our leases contain provisions which may require us to pay a portion of the lessee's costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for
lease, interest expense, selling, general and administrative expenses, aircraft
impairment charges and maintenance and other costs. Because our operating lease
terms generally require the lessee to pay for operating, maintenance and
insurance costs, our portion of maintenance and other costs relating to aircraft
reflected in our statement of income primarily relates to expenses for
unscheduled lease terminations.
Income Tax Provision
We have obtained an assurance from the Minister of Finance of Bermuda under the
Exempted Undertakings Tax Protection Act 1966 that, in the event that any
legislation is enacted in Bermuda imposing any tax computed on profits or
income, or computed on any capital asset, gain or appreciation or any tax in the
nature of estate duty or inheritance tax, such tax shall not, until March 2035,
be applicable to us or to any of our operations or to our shares, debentures or
other obligations except insofar as such tax applies to persons ordinarily
resident in Bermuda or to any taxes payable by us in respect of real property
owned or leased by us in Bermuda. Consequently, the provision for income taxes
recorded relates to income earned by certain subsidiaries of the Company which
are located in, or earn income in, jurisdictions that impose income taxes,
primarily Ireland and the United States.
All of our aircraft-owning subsidiaries that are recognized as corporations for
U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries
generally earn income from sources outside the United States and typically are
not subject to U.S. federal, state or local income taxes unless they operate
within the U.S., in which case they may be subject to federal, state and local
income taxes. We also have a U.S. based subsidiary which provides management
services to our non-U.S. subsidiaries and is subject to U.S. federal, state and
local income taxes. In addition, those subsidiaries that are resident in Ireland
are subject to Irish tax.
Segments
We operate in one segment.
History
Aircastle Limited, formerly Aircastle Investment Limited, is a Bermuda exempted
company that was incorporated on October 29, 2004.
Acquisitions and Disposals
In 2012, we invested $798.8 million in 23 aircraft acquisitions as follows:
• High quality midbody aircraft for $291.2 million with a weighted average
age by net book value of 1.4 years;
• E-Jet aircraft for $131.8 million with a weighted average age by net book value of less than one year;
• Mid-aged aircraft for $318.6 million with a weighted average age by net book value of 13.6 years; and
• Freighter aircraft for $57.2 million with a weighted average age by net book value of 13.3 years.
During 2012, we sold eight aircraft with a weighted average age by net book
value of 17.4 years for an aggregate sales price of $65.3 million.
The following table sets forth certain information with respect to the aircraft
owned by us as of December 31, 2010, 2011 and 2012:
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
Owned Owned Owned
Aircraft as of Aircraft as of Aircraft as of
December 31, 2010(1) December 31, 2011(1) December 31, 2012(1)
Flight Equipment Held for Lease $ 4,066 $ 4,388 $ 4,783
Unencumbered Flight Equipment included in Flight
Equipment Held for Lease $ 595 $ 677 $ 2,092
Number of Aircraft 136 144 159
Number of Unencumbered Aircraft 18 27 72
Number of Lessees 64 65 69
Number of Countries 36 36 36
Weighted Average Age - Passenger (years)(2) 11.9 11.2 10.5
Weighted Average Age - Freighter (years)(2) 9.4 10.0 11.1
Weighted Average Age - Combined (years)(2) 11.0 10.9 10.7
Weighted Average Remaining Passenger Lease Term
(years)(3) 3.4 4.1 4.8
Weighted Average Remaining Cargo Lease Term
(years)(3) 7.4 6.4 5.3
Weighted Average Remaining Combined Lease Term
(years)(3) 4.7 4.9 5.0
Weighted Average Fleet Utilization during the Fourth
Quarter(4) 99 % 99 % 99 %
Weighted Average Fleet Utilization for the year
ended(4) 99 % 99 % 99 %
Portfolio Yield for the Fourth Quarter(5) 14 % 14 % 14 %
Portfolio Yield for the year ended(5) 14 % 14 % 14 %
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(1) Calculated using net book value of flight equipment held for lease and net investment in finance leases as at period end.
(2) Weighted average age (years) by net book value.
(3) Weighted average remaining lease term (years) by net book value.
(4) Aircraft on-lease days as a percent of total days in period weighted by net book value.
(5) Lease rental revenue for the period as a percent of the average net book value of flight equipment held for lease for the period; quarterly information is annualized.
Our owned aircraft portfolio as of December 31, 2012 is listed in Exhibit 99.1 to this report.
PORTFOLIO DIVERSIFICATION
Owned Aircraft as of
December 31, 2012
Number of % of Net
Aircraft Book Value
Aircraft Type
Passenger:
Narrowbody 94 37 %
Midbody 37 30 %
Widebody 2 4 %
Total Passenger 133 71 %
Freighter 26 29 %
Total 159 100 %
Manufacturer
Boeing 101 55 %
Airbus 54 43 %
Embraer 4 2 %
Total 159 100 %
Regional Diversification
Europe 68 35 %
Asia and Pacific 50 34 %
North America 17 10 %
Latin America 14 8 %
Middle East and Africa 8 12 %
Off-lease(1) 2 1 %
Total 159 100 %
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(1) Includes one Boeing Model 767-300ER aircraft and one Boeing Model 747-400BDSF aircraft that we are marketing for lease or sale.
Our largest customer represents less than 8% of the net book value of flight
equipment held for lease (includes net book value of flight equipment held for
lease and net investment in finance leases) at December 31, 2012. Our top 15
customers for aircraft we owned at December 31, 2012, representing 69 aircraft
and 57% of the net book value of flight
equipment held for lease, are as follows:
Number of
Percent of Net Book Value Customer Country Aircraft
Greater than 6% per customer South African Airways South Africa 4
Hainan Airlines Company China 9
3% to 6% per customer Emirates United Arab Emirates 2
US Airways USA 11
SriLankan Airlines Sri Lanka 5
Airbridge Cargo(1) Russia 2
Martinair(2) Netherlands 4
Jet Airways India 6
GOL(3) Brazil 7
Less than 3% per customer Garuda Indonesia 3
Asiana Airlines South Korea 2
Iberia Spain 6
Cathay Pacific Hong Kong 1
KLM(2) Netherlands 1
China Eastern Airlines(4) China 6
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(1) Guaranteed by Volga-Dnepr.
(2) Martinair is a wholly owned subsidiary of KLM. If combined with KLM and two other affiliated customers, the four customers represent 7% of flight equipment held for lease.
(3) GOL has guaranteed the obligations of an affiliate, VRG Linhas Aereas.
(4) Does not include the aircraft leased by Shanghai Airlines and China Cargo Airlines which are wholly owned subsidiaries of China Eastern Airlines. Although China Eastern Airlines does not guarantee the obligations of these subsidiaries under their relevant leases, if combined, the three customers represent 5% of flight equipment held for lease.
Finance
Historically, our debt financing arrangements typically have been secured by
aircraft and related operating leases, and in the case of our securitizations,
the financing parties have limited recourse to Aircastle Limited. While we have
continued to access the bank market for debt secured by aircraft, since mid-2010
the bulk of our debt financing has been raised in the unsecured bond market.
U.S. capital markets conditions have generally been strong during that period of
time, though market volatility could in the future affect the cost or
availability of debt we may seek to raise in the U.S. capital markets. In April
2012, we closed an offering of $500.0 million aggregate principal amount of
6.75% Senior Notes due 2017 (the "Senior Notes due 2017") and $300.0 million
aggregate principal amount of 7.625% Senior Notes due 2020 (the "Senior Notes
due 2020"). We used the net proceeds of the private placement to repay
outstanding indebtedness under our Term Financing No. 1, to terminate the
associated interest rate derivatives, and to fund general corporate purposes,
including the purchase of aviation assets. In November 2012, we closed an
offering of $500.0 million aggregate principal amount of 6.25% Senior Notes due
2019 (the "Senior Notes due 2019"). We used the net proceeds of the private
placement for general corporate purposes, including the purchase of aviation
assets. During the near-term, we intend to focus our efforts on investment
opportunities that are attractive on an unleveraged basis, that tap commercial
financial capacity where it is accessible on reasonable terms or for which debt
financing that benefits from government guarantees either from the ECAs or from
EXIM is available.
We intend to fund new investments through cash on hand, cash flows from
operations and potentially through medium- to longer-term financings on a
secured or unsecured basis. We may repay all or a portion of such borrowings
from time to time with the net proceeds from subsequent long-term debt
financings, additional equity offerings or cash generated from
operations and asset sales. Therefore, our ability to execute our business
strategy, particularly the acquisition of additional commercial jet aircraft or
other aviation assets, depends to a significant degree on our ability to obtain
additional debt and equity capital on terms we deem attractive.
See "Liquidity and Capital Resources - Secured Debt Financings" and "Liquidity
and Capital Resources - Unsecured Debt Financings" below.
Comparison of the year ended December 31, 2011 to the year ended December 31,
2012:
Year Ended
December 31,
2011 2012
(Dollars in thousands)
Revenues:
Lease rental revenue $ 580,209 $ 623,503
Amortization of net lease discounts and lease incentives (16,445 ) (12,844 )
Maintenance revenue 36,954 53,320
Total lease rentals 600,718 663,979
Other revenue 4,479 22,593
Total revenues 605,197 686,572
Expenses:
Depreciation 242,103 269,920
Interest, net 204,150 222,808
Selling, general and administrative 45,953 48,370
Impairment of aircraft 6,436 96,454
Maintenance and other costs 13,277 14,656
Total operating expenses 511,919 652,208
Other income:
Gain on sale of flight equipment 39,092 5,747
Other (268 ) 602
Total other income 38,824 6,349
Income from continuing operations before income taxes 132,102 40,713
Income tax provision 7,832 7,845
Net income $ 124,270 $ 32,868
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Revenues:
Total revenues increased by 13.5%, or $81.4 million, for the year ended
December 31, 2012 as compared to the year ended December 31, 2011, primarily as
a result of the following:
Lease rental revenue. The increase in lease rental revenue of $43.3 million for
the year ended December 31, 2012 as compared to the same period in 2011 was
primarily the result of:
• $106.1 million of revenue from 17 aircraft purchased in 2012, and the
full year revenue of 17 aircraft purchased in 2011.
This increase was offset partially by a decrease in revenue of:
• $28.6 million due to aircraft sales and disposals;
• $18.8 million due to lease extensions and transitions at lower rentals; and
• $15.4 million due to lease terminations and other changes.
Amortization of net lease discounts and lease incentives.
Year Ended
December 31,
2011 2012
(Dollars in thousands)
Amortization of lease discounts $ 2,401 $ 1,684
Amortization of lease premiums (1,844 ) (5,141 )
Amortization of lease incentives (17,002 ) (9,387 )
Amortization of net lease discounts and lease incentives $ (16,445 ) $ (12,844 )
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As more fully described above under "Overview - Revenues," lease incentives
represent our estimated portion of the lessee's cost for heavy maintenance,
overhaul or replacement of certain high-value components, which is amortized
over the life of the related lease. As we enter into new leases, the
amortization of lease incentives generally increases, and conversely, if a
related lease terminates, the related unused lease incentive liability is
reversed and will reduce the amortization of lease incentives. The decrease in
amortization of lease incentives of $7.6 million for the year ended December 31,
2012 as compared to the same period in 2011 primarily resulted from eight
unscheduled lease terminations, three scheduled lease terminations, two
unscheduled changes in lease terms and one change in lease incentive estimate.
The increase in amortization of lease premiums of $3.3 million is primarily due
to 11 aircraft acquired in 2012 with lease rentals at premiums.
Maintenance revenue.
Year Ended December 31,
2011 2012
Dollars Number of Dollars Number of
(in thousands) Leases (in thousands) Leases
Unscheduled lease terminations $ 15,257 6 $ 34,894 10
Scheduled lease terminations 21,697 8 18,426 5
Maintenance revenue $ 36,954 14 $ 53,320 15
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Unscheduled lease terminations. For the year ended December 31, 2011, we
recorded maintenance revenue of $15.3 million from unscheduled lease
terminations primarily associated with six aircraft returned in 2011.
Comparatively, for the same period in 2012, we recorded maintenance revenue
totaling $34.9 million from unscheduled lease terminations associated with ten
aircraft returned in 2012.
Scheduled lease terminations. For the year ended December 31, 2011, we recorded
maintenance revenue from scheduled lease terminations totaling $21.7 million
associated with eight aircraft. Comparatively, for the same period in 2012, we
recorded $18.4 million, associated with maintenance revenue from five scheduled
lease terminations.
Other revenue was $4.5 million during the year ended December 31, 2011, which
was primarily due to additional fees paid by lessees in connection with early
termination or the agreement to early terminate five leases. For the year ended
December 31, 2012, other revenue was $22.6 which was primarily due to $3.8
million of interest income on our debt investments, $8.4 million of interest
income recognized from finance leases and approximately $10.4 million recognized
in additional fees paid by lessees in connection with the early termination of
11 leases.
Operating Expenses:
Total operating expenses increased by 27.4%, or $140.3 million, for the year
ended December 31, 2012 as compared to the year ended December 31, 2011
primarily as a result of the following:
Depreciation expense increased by $27.8 million for the year ended December 31,
2012 over the same period in 2011. The net increase is primarily the result of:
• a $33.5 million increase in depreciation for aircraft acquired; and
• a $3.2 million increase in depreciation for capitalized aircraft improvements.
. . .
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