Avation PLC (AVAP) Earnings Call Transcript & Summary

Thank you. This conference call is being webcast and recorded and the webcast will be available for replay on our website. As you may be aware, Avation is currently conducting a strategic review and formal sales process and is in an offer period that's defined by the City Code on Takeovers and Mergers. We are, therefore, limited in what information we can provide or questions we can't regarding this process. Further information will be disclosed by a public announcement and on our website as and when appropriate. Please note that certain statements in this conference call, including answers to your questions, are forward-looking statements, including, without limitation, statements regarding our future operations and performance, revenues, operating expenses, and other income expense items. These statements and any projections as to the company's future performance represent management's estimates of future results and speak only as of today, 12th of May 2020. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information on the factors and risks that may affect Avation's business are included in Avation's regulatory announcements from time to time, including its Annual Report and half-year results announcements. Avation assumes no obligation to update any forward-looking statements or information in light of new information or future events. Please also note that as a matter of policy, Avation does not provide guidance on future profits of the company, and therefore, the answer to some questions may need to be limited accordingly. Unauthorized recording or reproduction of this conference call and webcast is not permitted. I will now hand over to our Executive Chairman, Jeff Chatfield.

Good afternoon, good evening and good morning. I know that this call has been well supported by investors. Thank you very much for joining the Avation PLC COVID-19 update call. The purpose of this call is an ad hoc update for investors to understand what our strategy and what we're doing with the company during the crisis period. I'd like to thank our team. Our management team is on the call, and we welcome questions at the end of this presentation. Normally, these presentations are tightly scripted. This one is briefer and shorter. And therefore, there may be questions that we don't cover, and you are more than welcome to ask them at the end. So I will outline -- and my name is Jeff Chatfield. I will outline the strategy of the company during this crisis and what we've done and our view of it and our opinions and our perspective on things. So we'll begin. I hope you can see the presentation. I'm starting on Page 3. So we -- our strategy may be different to some of the aircraft lessors that you would have seen present in the last week. We have looked at their various presentations and the rest. Our strategy was probably more longer-term than some of the others. So we had no firm opinion on how long this crisis would take to resolve itself and for there to be the new airline industry or post-COVID-19 environment. So our strategy was about doing the utmost and absolutely ensuring not only the survival, but the positioning of the company so that it can prosper in a post pandemic environment. And so we thought about this very deeply and early, and there was an advantage to being a first mover in this thing. So what we did is we believe that the crisis could go on for potentially a long time. So in order to survive and prosper, we needed to have agreements in place with our airline clients so that there was sufficient liquidity, sufficient actual cash coming in to ensure that the operating costs of the company, the interest cost to the banks, the interest cost to the bondholders and so on was covered. So we reached out to those clients very early and said, well, you're in an unprecedented crisis. We are important partners with you. We'd like to help you. And so we established agreements with the majority of our clients very early. And the reason for that -- that gave us a couple of advantages. Firstly, it meant that we had them agreeing to something now in a crisis environment that categorized them paying us cash. And we got in early, so they didn't have anything else to manage it with -- to measure it against. So there's some lessors out there giving them holidays and giving them fixed-term holiday, very short-term to extended holidays and all the rest of it. And they're not particularly smart deals because if the crisis goes on a very long time, then there won't be a catch-up. So we absolutely termed the same business and prospects. So ultimately a business requires good cash flow. So what we've done is we've designed ourselves and the agreements with the airlines to maximize our cash flow. What we also did is we were very transparent and open and shared a very concrete strategy with all the banks with senior lenders of the company. And all we asked them for is we said, well, if we've got a 7-year loan with you, we're going to adjust the principal repayments on that this year with your agreement in the short term, and then we'll pay you an increased amount in -- for the duration -- for the remainder. And most of the banks looked at that and they asked questions and they thought it was a brilliant strategy because, obviously, they're money lenders. And they'll be lending money and getting their interest service. And some of the banks said -- one of the European banks, for example, said to us, this is the best strategy we've seen in any lessor. And we've had -- when we were giving the presentation to one of the banks, they even said, stop talking now. We're happy. We will -- we'll actually exceed what you're asking for. So we've been well supported with the banks and the strategies being well supported and adopted. So what we did is we reduced the amortization. We have reduced our own cash expenses by certain measures that I outlined in the announcement about a month ago. So we cut out our costs down, and we're not buying any aircraft or buying any new aircraft. We're not having any CapEx. And then our CapEx means purchasing aircraft. So until this is over, until we clearly see the future, we shouldn't, and we won't buy any aircraft. And the reason -- there's a couple of reasons for that. The first reason is, we don't know how long this crisis will go for. The second reason is aircraft costs a lot of money. The third reason is we have a view that some of the people in our industry, there'll be bargains out there. So when it recovers, we want to be in business and enjoy some of the opportunities that flow. So that was our strategy. It seems to be well supported, and we're executing on it. And so far, at this point, it's been going very well. But we have a sort of a very prudent cash flow discipline, which enables us to come out and enjoy prosperity on the other side. The next slide is Slide 4. Now you would have seen this 100 times, and we debated whether to put this in. So global air travel is resilient, and it really is resilient. We already see -- and especially in Asia, we see recovery. We -- Vietnam, where we have a very big customer called Vietjet, who we have -- which in dollar terms is actually one of our 2 biggest now is -- there was no COVID deaths in Vietnam. They're already at 80% load factor. They're restarting lots of flights. They're planning for the future. So we believe that in certain regional areas, especially in Asia, recovery will come quite quickly. And there'll be demand. So this crisis will be -- is a big one. But ultimately, at some future time, we see demands recovering. And we certainly see demand for aircraft and flights recovering quickly. If, for example, governments insist on social distancing on aircraft and where I am, so I'm in Western Australia at the moment, this calls coming from Perth. There's an airline in administration here called Virgin Australia who are still operating. Now they have to do extra flights on the weekend for their mining customers because the mining customers insist on an empty column of seats. So every second seat is empty. So they actually have to fly 1/3 more flights to deliver the miners to the mines in the charter business. So in other words, if there's social distancing on aircraft, on planes, there'll be more flights. And in the recovery, I think airline tickets will be really expensive, which is good. So the remaining airlines will do fairly well out of it. So we genuinely wholeheartedly believe that travel's resilience will come back. We'll be there. This is a fairly big notch in the graph, but it will eventually be overcome. So let's talk about our business. So Page 5. We have been lucky in the sense that the majority of our aircraft are in geographies that so far have not been terribly -- I mean it's a terrible situation, and our thoughts are with everyone affected by this terrible disease. But we've been lucky in the sense Vietnam has had no deaths. Taiwan's had it very well managed. Where I am, there hasn't been a case of COVID in over a week. I think it's now 10 or 11 days. We have -- sure, we have an aircraft with easyJet, an aircraft with Air France, two aircraft with -- in Scotland. But that's four aircraft out of 48. So most of our airlines are still operating well. I mean Fiji is going very well, and nothing is happening there and so on. airBaltic, you would have read today, got EUR 250 million from the government to keep operating and they've got support from their money lenders. So they'll -- they're a survivor and they'll prosper. And they're sort of -- there's apparently there's a Latvian, Lithuanian, Estonian travel bubble being established so that they will be flying around in that region of Scandinavia or where it is, Northern Europe, and operating successfully. So in reality, we've been fairly lucky with geography. Virgin -- in perspective, someone like airBaltic and Vietjet are each twice the size for us in unearned revenue compared with say Virgin Australia. So we've had a lot of questions about Virgin. But in reality, the business is not all Virgin. There's a lot of -- there's a lot bigger bits to it, like airBaltic and Vietjet. Mandarin is going very well. EVA is a very well-run airline and will go very well. The others, we have 1s and 2s with, and so it's all manageable. So we don't have any -- I mean Aeromar is an airline that's leased an engine from us. So it's not -- we don't have any big exposure to things in the United States or to South America. So let's go to Page 6. So we were very, very much a first mover in securing agreements with the -- amendment strategies with the airlines. So each one had to be treated differently in the sense that their circumstances are all different there. The impact of COVID on their business is all different and so on. So with some of, for example, flag carriers. Now you expect the flag -- with seven of our customers are flag carriers. So you expect them to get lots of government support, whereas others not so much. So we made deferral agreements with 15 of our 19 customers. And typically they are 3- to 6-month loans, where we lend them a proportion of the rent, charge interest on it, and then we've got to get it back subsequently 6 to 9, so potentially even 12 months. We make them -- obviously, they continue to maintain the aircraft. When they pay reserves on the aircraft, if that was appropriate or if that's in the lease, they ensure the aircraft so there's none of those problems. We have no normal lease expiries in any event before August '21. So our aircraft are well leased out to a long time. The rent deferred by the airline actually is only 7% of annual revenue. So it's not a huge proportion. I mean, clearly, our job is -- the management job is to make sure that the airlines pay the money they have agreed to pay us in cash every month, and we've got to be aggressive on ensuring that. But they've just agreed to it and, therefore, we anticipate that they will honor it. The -- by -- this is not a quarterly financial set of statements, but we've unaudited, we've consolidated the revenue to the 31st of March 2020, which was $100.1 million in 2019. The same period 2019, it was $87.2 million. So the -- our business is growing and is well positioned to recover. So moving ahead. So with the senior lenders, what we then did is we made it very easy for the senior lenders. We came to them and said -- explained our strategy, explained what we've got with the airlines. And they really -- in effect, they're not really giving us anything other than the change in the amortization profile of loans. So we've already represented -- we've already made peaceful agreements with large bank lenders, representing over $370 million of senior debt. There is a couple that are still outstanding that have indicated they will do things for us, but we're representing what we've got now. So we've rescheduled 31% of our loan amortization in 2020, which is $25 million, which is right. And that gives us a cash buffer in order to ensure that the interest cost, operating costs and bondholders are made good in this year, and we'll see the other side of the crisis. And the banks were really supportive. They liked the approach. One of them complemented, said that our strategy was the best they've seen, which was surprising. And they've been good to deal with. Moving to page 8. Unfortunately, so we have Virgin Australia, which is a big client. It was -- we had a number of aircraft there, which we'll go through. Went into voluntary administration on April 21, the administrator who we are in. So we are on the Virgin administrative's committee. So we're an appointee to that committee. We deal with the administrator frequently. We spoke with them today. We spoke with them on the weekend. So we're close to the process. They have publicly stated and privately stated that they are going to sell the airline as a going concern. They're getting indicative bids this Friday with final offers during June. It's currently flying around 64 routes. They have -- the government of Australia has suggested that they -- that all the airlines as in Qantas and Virgin should be ready to be operating around the 14th of June. On a bigger scale, we have 13 aircraft. Fortunately, they've been there 7 or 8 years. So the exposure is manageable. So we have -- the debt on them is $45 million. The book value -- the book and asset value, the CMB of those aircraft significantly exceeds this. The actual cash deposits and security deposits reserves held by us is $8.2 million. On top of that and more materially, in those aircraft, the engines and landing gear, so the expensive bits, are on power by the hour arrangements. So those -- any value in that either comes back in the form of cash or a very good engine at the end of the process. So we've got -- we don't -- we can't put a dollar value on that right now. Our unsecured claim, which represents unearned revenue, is $97 million. So in contexture, someone like airBaltic and Vietjet are roughly each 2x that. So this sounds like a lot, but it's not really. Given that the aircraft is 7 or 8 years old, we don't owe that much money on them. They are good aircraft, and there's a market for them. So a little bit more detail on the actual aircraft because we've had a lot of questions from investors and other people on this. So we currently have two Fokker 100s with Virgin. And they were in the process of buying them, and they have orally said to us that they will pay for them, the final in payment and buy them. If they don't, we -- our view is we'll take them back and send them somewhere else. We don't really want to take them back because they're actually about close to 30 years old. So it's hard to find a use for those two. But they -- and they are literally only they're final payments due. So I fully expect the administrator to just buy them so that they can sell them when they sell the airline. We have 5 ATR 72-600s with them. There is the administration -- administrator wants -- says they want to, if there was a lot of optionality here. But they're representing them -- they're potentially going to be used in a restructured airline because clearly in Australia, whoever buys the airline, will probably have -- if they want state government money, will have to do some regional traffic. So these aircraft are ideal for the regional services of Australia, really genuinely probably ideal for the regional services in Australia. So it's -- if the buyer of Virgin is wanting money from the state governments, it's fairly likely that they'll have to continue with those. And there's also business reasons as well because some of the routes have -- in a post-COVID environment, initially, you'll need to right-size equipment. We -- also there have -- we have six ATR72-500s with them. We owe $10 million on those planes on the 3 aircraft that are being transitioned. So we've already shifted two to another airline that is operating right now. We are in the process of shifting 1/3 to another airline who -- that's operating right now that intends to take it. Before COVID came along, we actually had signed agreements for two airlines to take four of those. So actually, we're short an aircraft. Now we've told those airlines that they can't take them until COVID finishes. So we're not representing to you today that the last three will go immediately, but it's fairly likely given that we had placed them pre-COVID anyway. So what we think will happen is we think Virgin will buy the two F100s by paying the final purchase option price. We think that there's a reasonable chance that they'll keep the 72-600s, given that there'll be free money available from one of the state governments if they do regional stuff. And we think that our ATR72-500s will quickly go to other airlines given that two already have, one is about to, and 3 we'll deal with in due course. So we've had a lot of questions on Virgin. But in reality, it's a manageable -- it's actually a manageable challenge for the company. Next slide is Page 10. You will see -- I mean you'll all be aware that Asia is sort of starting to recover. I think Vietnam has got the world's busiest route at the moment. They're at 80% domestic load factor. There will be a recovery in Asia before anywhere else. We think that the -- historically, the first thing that recover are short-haul regional stuff, domestic and very short distance travel because government choose aircraft for their own purposes. There's government travel. There's health. There's the proper domestic business travel. I think long-haul will take longer. And airBaltic today received EUR 250 million equity investment from the Latvian government, which is great, given that they're a material part of our customer base. We have an agreement with them. We have support from the relevant bank for them as well. So we're well placed. There's the Latvia, Lithuania and Estonia travel bubble recommencing -- or commencing. There's Australia and New Zealand are talking about a trans-Tasman travel bubble. We believe that interstate traveling Australia will recommence in probably in the middle of June. There's intrastate travel. So within a state travel right now in certain places like in the mining companies for Virgin, for example, are flying right now. That other airline I talked about flying right now. So Page 11, you see this is just some data points of some data that there is activity out there, that it's not all over for travel. On the company itself, Page 12. So we always, by policy, maintain quite a big cash balance. So as of 30th of April, we had $130 million of cash. We have finance lease receivables of $1.3 million, which are those two Fokker 100s that are in the Virgin fleet that we assume they'll pay for those. We also own a number of unencumbered aircraft, which is useful in the sense that if we want to trade and buy and sell things, we can. Not that we are currently planning to buy anything, but we may sell them, sell some of them, we could. We have zero senior loan maturities until August 2021. We currently comply with all our senior bank covenants. We have an unsecured bond that expires in May '21. But we're always going to consider our -- all parts of the capital structure at all times. So post results or in June or something like that, we will consider all parts of the capital structure. We also have lots of letters of credits for deposits from the fleet. We've got lots of maintenance reserves from aircraft. We have maintenance LCs. If you want to get into detail, you can ask the Chief Financial Officer as a question. So we have a huge asset base and are doing quite well, and we're determined to survive and, more importantly, prosper. And what that means is we need happy shareholders, happy bondholders and we need to be in a position to take opportunity -- take advantage of the opportunities that come out of this at the end because, clearly, this pandemic has accelerated the future in certain respects in the sense that some bad airlines have gone broke. And some of the bad or, if you like, unstable financing structures have blown up. So there will be a lot of opportunity that comes out of it at the end. So in conclusion, Page 13, we are doing what we need to preserve our liquidity and then make sure our cash is flowing. So when -- we haven't just given them all holidays like some of our peers have. We've supported the customer. So the relationships are good, and this business will come out of that. We're delivering for all the stakeholders. So we've got our management team. We've got our technical team. We've got our bondholders, our shareholders, our airline clients. So we're maintaining the franchise to prosper in the long-term because there is a long term. We come out of this, we'll be probably one of the best-performing lessors, I think. I mean there's some good lessors out there, but we will have done okay, we hope. So now we'd like to open up for questions and answers. I will direct the questions to the correct executives. So please -- if you have any questions, please proceed.

[Operator Instructions] And the first question comes from the line of John Cummins of WH Ireland.

A couple of questions, if I may. Firstly, just in relation to the 31% loan amortization for 2020. Do you believe that that's presently the optimal number? And I mean given what you said about the flexibility of discussions with banks, I'm assuming that could be altered if you so chose?

We want to delever a little bit. So we do want to amortize some senior debt. But there are a couple of banks that are in the process of giving us some proposals to change things to -- so that to potentially increase that number. So there's still a couple of banks that are work in process. So we've got agreements with all the airlines that we need, but the banks we're still working on. But having -- we don't want 0 amortization because clearly we want to delever a little bit. So as long as the cash is flowing, we're in a good position. I hope that answers your question.

And just as a follow up. You obviously took action just in terms of costs and you previously announced that. I mean roughly as far as the administration costs, can you give me an idea just roughly what sort of percentage reduction on a month-by-month basis you've got on a run rate you're now at versus pre-crisis?

Well, I'll direct that question to Iain Cawte, who's the Chief Financial Officer, who is hopefully on the line.

Yes. John, thanks for your question. So last year, our total admin expenses were about $11 million. And we're targeting a reduction of just under 25%, maybe 20% to 25%. So if we can got it off then I annualize, admin will come down to about $8.5 million.

That -- but remember that this COVID crisis, we kicked off this strategy in reality, I think it was February 12. You may correct me if I'm wrong, Duncan, but I think it was around. So it's not -- doesn't go back into July 2019. The crisis wasn't there then.

The next question is from Gert Zonneveld of Canaccord Genuity.

I had three questions, if that's okay. The first one is to do with any lease contracts that you have expiring in 2021 and 2022. And if you could give us an indication of either how many are expiring or the proportion of, say, the run rate revenues that, that would represent? Do you want me to ask the other two as well? Or do you want to answer the questions one by one?

Well, Iain Cawte can answer that because he'll have the statistics in front of him.

Yes. Gert, so we've got a number of leases expiring in 2021. And I think it's actually seven aircraft which have their leases expiring in 2021, mostly ATRs. And that the total value or the rental value of those leases on a monthly basis is to about $2.25 million. Does that answer your question?

And the subsequent year, maybe that's looking ahead too far, but just wondered if you had any more sort of expiring in 2022. And if that was included to non, say, regional aircraft as well as regional aircraft.

I'll just jump in briefly. For clarity, what Iain was speaking at were Virgin Australia aircraft. So in August '21, they were scheduled expiries anyway. So it's not the end of the world. So sorry, Iain continue.

Yes. I was just going to say, 2022, we've also got 7 aircraft with lease expiries with a similar monthly rental value. Again, most of those are ATRs.

Okay. And you mentioned earlier in the presentation, or Jeff did, that you're not buying any new aircraft at this point in time. Does that include any ATRs that you might have on order? Am I mistaken? I was under the impression that you had some on order, but possibly you either deferred or canceled those orders?

Well, given that this is a pandemic and we don't know how long it's going to take. It is a crisis by any definition. So it's irresponsible to take anything right now. So we have canceled everything. No lessor or airline, in our view, should be taking new aircraft right now because they do not know how long this crisis is going to continue. The thing -- everything will start up again, people will be flying. But clearly -- so to talk about growth is -- it's too risky.

Okay. And the final one, if that's okay. You mentioned Air Berlin, which is obviously very -- it's a very welcome development that they've managed to receive support from the Latvian government. What are your thoughts on Philippine Airlines? I think from memory, these account for or you have one aircraft with them a wide-body, which accounts for close to 10% of your revenue. I think that this airline, together with a couple of other Philippine airlines, was seeking financial support from the government. But I haven't seen anything recently. Do you know what the latest developments are? And do you feel that there's a significant sort of risk of default?

It's airBaltic we talked about. Air Berlin went broke. So airBaltic, Baltic. So the Philippine Airlines, it's a flag carrier that's had a shareholder rejection from their shareholder already, which I think some -- was $100 million. It's a matter of public record. I understand that they're recommencing flying -- proper flying shortly. They have their aircraft in weekly maintenance. So in other words, they can turn them on fairly quickly. I assume there are various news and initiatives and talks around government support in that region, but we would wait and see. I mean they're a flag carrier. They should be okay, we think. We have one aircraft with them. I wouldn't -- but it's a very new aircraft, and that should be okay, we think.

The next question is from Brian Charles of R.W. Pressprich.

Okay. Great. I just had a couple of housekeeping questions. You had said with the five ATR72s on lease to Virgin Australia that could be retained and restructured. You said there was about $45 million of debt associated with those on $78.5 million to book value? Is that correct?

Iain, you can go -- you may as well answer his question.

Yes. Brian, the $45 million of debt is across 11 ATRs. So it includes the five ATR72-600s and the six ATR72-500s.

Okay. That's across all 6.

Exactly.

No, it's across 11.

Across all 11. Across all 11.

I'm sorry, across the five and the six. Yes. I appreciate that. And also, you were talking about Vietjet Air. That is -- they're up and running, still about 80% domestic load capacity. And I think last I calculated they were about 17%, 18% maybe of revenue. But that is like current revenue. I'm sorry if I missed this. Did you go over what expected revenue going forward for Vietjet Air or like for committed revenue?

Do you mean the airline revenue or direct to us?

To -- leasing revenue, like committed leasing revenue under your current contracts.

Well, Iain can answer that.

Yes, Brian, it's Iain again. I can tell you that Vietjet represented about 25% of our unexpired lease revenue at 31st of March.

Okay. Great. And airBaltic. I'm sorry, can you refresh me there of unexpired lease revenue?

Yes. They were about 22%.

Okay. So that is a substantial portion of expected lease revenue coming from airlines that I think relatively speaking, in the current environment are very well positioned.

Yes. They are really [ well positioned ] at this point.

They are very well positioned. Vietjet's position is really strong. They've got a lot of liquidity, a lot of support. We literally -- I mean this may shock you, but we had a very sophisticated U.S. investor reach out to us to this afternoon and try to buy some Vietjet aircraft. So yes, there are people trying to buy aircraft. The only -- well, we've had one other ones, but they're popular. They're liquid. They're well managed. And this, in a way, I mean it's a terrible crisis. But in a way they sort of strengthened their competitive position in that market.

Okay. Good enough. And then, finally, just going back to Virgin Australia quickly. Of the 11 aircraft, you've got $45 million of debt against them. Five of them right now could very likely be retained in a restructure. And of the remaining six, three, you're already in a good position to be repositioned, at least to another airline once the pandemic passes. And there's one more of the remaining three, I think you mentioned there was one more in the course...

No. No, no. So right now, of the six ATR72-500s, on Page 9, right? So 2 have already gone. So 2 have already -- are being operated already by another airline. A third one is in the shop being put back together to go to that other airline. And then in due course, we'll transition the last three to someone else. And pre-COVID, we had actually already placed four, although in reality, we only had three. But we could have placed four with other big airlines elsewhere. Well, actually, one with a big airline and one with a smaller airline in other countries. So there is a market for them. They'll get transitioned at some point and go. The remaining three will go somewhere else at some point.

Next question is from Ross Harvey of Davy.

Two questions remain on my side. The first is in relation to aircraft values. I know that you highlight the $54 million of unencumbered aircraft on Slide 12 based on the maintenance adjusted values as of end 2019. In your experience, how would they move -- in this type of crisis, what sort of movements would we typically see? And how quick would they correct towards more normalization for the likes of those 320s and 321s? And secondly, on the cash side, I know you mentioned that there's still cash coming in the door. On the outflow side, you have interest is pretty fixed. Some adjustments have been made on the amortization schedules and some negotiations still ongoing. What would you expect the total cash figure to fluctuate for the rest of the year given the agreements you've already made?

Well, I'll answer the first question, and Iain can get ready to answer the second question. This is a crisis that's unusual in the sense that it's global. And normally, what happens is when an airline goes broke somewhere, you get the plane and almost inevitably shift it somewhere else. In this crisis, because it's a global crisis, the whole world is suffering and, therefore, it's unusual and there's no playbook for it. So the normal get the aircraft, ship it somewhere else within a short period of time playbook isn't really there. However, we think that regionally, air travel will recover really quickly because it does. I mean in my experience -- where the last time the precursor to Virgin was Ansett, West Australian part of that when Ansett blew up was operating within five days. So because it's an essential service. And that operation and that demand creates value. The value of an aircraft comes from the cash it generates from people. And so what you're seeing is a set of unique circumstances that's very hard to model. You've had in the narrow-body sector, unfortunately for Boeing, you've had the MAX problem. So there's been a big shortage of MAXs which were planned for people to operate. Now they haven't been delivered. So there's a big shortfall there, which, from a lessor perspective and an airline perspective, in some ways, it's fantastic because they're not -- they haven't had all those MAXs on the ground that they've got to worry about right now. I mean it's a big problem for Boeing, but it's an advantage for everyone else. Also, Airbus hasn't been really delivering that many aircraft. As you would know, their production rate through the crisis has diminished. So there won't be that much supply. Probably older uneconomic aircraft or bad aircraft types may never fly again. I don't -- I mean we're obviously -- the world's -- one of the world's biggest ATR lessors. So we're heavily invested in ATR, but I'd be shocked if many Q400s that are grounded ever fly again. I don't think that type has got a big future. There are some other jet types that probably will never fly again. So I think really short term, there will be a diminution of value in aircraft if they're not leased. If they are leased, I think the values will hold up well. What my evidence of that is someone trying to buy some aircraft from us today. So good aircraft, good credits, good airlines will be valuable and that will underpin the prices and what also helps the prices has been the lack of supply. And so things will get into balance as they usually do at some point. So if you're asking me to predict the exact diminution in current market value, I can't, because there's no real model for this. However, there are some mitigants. And that is airlines are going to start flying. There is a future. Some bad types won't fly. There hasn't been any MAX supply and there's been a reduced Airbus supply. So the existing equipment that's good and new and not old and all that sort of in that situation with good airlines should do very well. We had -- literally, we have 2 airlines right now who are contemplating extensions to try and extend out the aircraft because they've said, well, we're not going to be taking any new ones for a long time. So it's hard to work out. If you're asking me how much will -- in what percentage will an A320 drop this year? I can't tell you. But in reality, next year, things may be quite good for it. That's the first part of the question. And the second part is to Iain on a financial question.

Yes, Ross. So on cash flow, I mean as we said at the start of the call, we don't give out forecast information on these calls. And you'll certainly understand that there is a fair amount of uncertainty about forecasts at the moment. But what we can say is that on the basis of the agreements we have in place with airlines today and with banks for deferring loan principal payments, on an assumption of no CapEx payments for rest of the year and also targeted reduction in admin costs and no dividend payments, our best estimate is that our cash flow will be more or less neutral over the coming 12-month period.

Which is a remarkable position to be in, in this crisis. It's -- we're well placed to survive and prosper.

Yes. And I would say, again, there's a bit of uncertainty. So things will change as we go along.

The next question is from Michael Ronzio of Caravel Asset Management.

A few just follow-up questions on my end. So just to confirm. There hasn't been any increase in the interest rates that you're required to pay on your secured debt due to these amortization deferral agreements?

No. Let me confirm. Yes. No, they were not -- we haven't defaulted or done anything naughty. We've merely changed the amortization. So we're not going to -- certainly not pay them more money. We'd refinance them before paying them any more money.

Okay. Understood. And have any previously required principal amortization payments on the senior debt due next year, 2021 -- has there been any deferral of any of those payments? Or do the current negotiations strictly focused on this year -- this calendar year?

Iain can answer that. I mean it varies from airline to airline.

Yes. The current deals we have in place with banks stretch out over the current year basically. So they're either for 6 or 12 months duration. I mean I think we've got an understanding on the part of the banks that depending on how things go, there might be an opportunity to go back and talk about [ a relative period ] at some point.

Okay. Great. And so again, with the agreements that are now in place with your airline customers, with those in mind, have there been -- are any leases not performing currently?

So what's the question?

Well, I mean -- again, just -- are any leases not performing, excluding the deferral agreements that you've been put in place on the original lease terms?

Well, we -- some leases we have with some airlines, there's no change because the airlines don't need to support. There are some -- we have some extremely strong credits in our fleet. So some people don't need any help at all. But of the ones that do, the agreements have just been put in place. So over the next -- the time to ask that question is in probably 3 months' time. So they -- we will -- our job is to make sure that the airlines that we have agreements with do their thing. And most of them will. I mean they've got support -- I mean airBaltic has got more money today than it's probably ever had. So that's good. If Virgin Australia, for example, is bought -- it will probably be bought by someone competent. And a competent -- Australia is a duopoly. And if they keep the ATRs, they'll probably do super well. It should -- the second airline in Australia should make a fortune. So our job is to make sure that the airlines that have taken support -- not all of them has, but some of the ones that have had pay us the money, and we pay the banks and the bondholders and life goes on.

Right. No. I guess another way to rephrase that would have been maybe for the quarter ended in March, were there any material nonperforming leases?

No. No. Virgin -- I mean, Mike, the crisis, in reality, Virgin went into administration 21 April, so the end of April, and they're the most visible one, if you know that mean. I mean on this call should put it in perspective here. Someone like airBaltic, which got EUR 250 million today, is a bigger customer than Virgin, twice the size. Same with Vietjet. Vietjet, which is in a very strong position, very, very, very well-managed airline. They were -- one of our first conversations in this process was with them, and they were way ahead of anywhere else. They had thought it through, and they're doing a lot. And they're twice the size for us of, say, Virgin. So each one of those 2 -- those 2 individual customers, each of them is twice the size of the Virgin. And Virgin is what it is.

Right. Two more quickly. Any specific updates on either Golden Myanmar or US-Bangla? Those are just two geographies that weren't specifically mentioned on the call.

They are not a problem at the moment. As far as we're aware, they're paid. I mean they're -- you'll find airlines like that will get operating again as quickly as they can. I think, I mean one of them -- I mean, we have like a $5 million deposit from 1 of them. So yes, we're in good shape with those guys. The secret with -- in our business, the secret to dealing with guys like that is you have a very big deposit, and you only have a very small number of planes with them. So if you got -- for us, we have two aircraft with Air India, for example. And so we don't -- we have one -- I mean I wish we had more, but I think we have one aircraft with Fiji. And now Fiji doesn't need any help because it's going really well. There's no -- very few cases of COVID in the Pacific. We could have more with Fiji, anyway. Yes, the trick is not to have too many with -- in proportion with non-flag carriers. But when they're flag carriers, clearly they're better positioned anyway.

Right. Well, you've done a great job with diversifying the revenue base. I mean that's for sure. And sorry, just to confirm, not to belabor the point. But the two ATRs that have been transitioned, I mean those are now on committed leases with another aircraft that are being paid on, that's correct?

Yes. They are -- okay. So they -- we're in the process of -- we were already in the process of a transition plan for those aircraft with Virgin pre-COVID because the Virgin wanted to go to an all ATR72-600 fleet. So we were already -- we've already been working on that program. And we'd actually come to an arrangement where there was a pathway to transition aircraft by aircraft, all that sort of stuff. So two are with another airline that is paying money. We are in the process of sending the third one across. There will be direct leases with that airline put in place with no -- because this is sort of the tail-end on the Virgin commitment there, given there was a transition and given it was the Virgin maintenance system and the Virgin power by the hour arrangement on the engines and all that sort of stuff. So all that sort of stuff is going to be sorted out. But there will be direct leases with that. That airline is a charter airline, so it's not the strongest credit in the world. Our appetite for it will be probably three aircraft. But it's okay. It's paying money, and it's operating now. So in our world, that's pretty good.

The next question is from Sandy Burns of Stifel.

First, I just want to maybe reconcile your comments in that you say Vietjet and airBaltic are now 25% and 22% of revenues. On your first half '20 presentation, you still had Virgin Australia as 19%. So are the new numbers now that you're saying for Vietjet and airBaltic, is that just Virgin Australia being a much lower percent of revenues given the situation they're in? Or were there other changes in your business with them through this time that help increase their percent of total revenues?

Richard Wolanski would like to answer this call -- this thing.

Yes. Sandy, just for clarity on that. What we're talking about then is contracted unearned future revenue. So this is the leases in place running through their duration. And so what we're trying to give some color on is the -- given that the Virgin aircraft roll, those leases are coming to an end, the contracted unearned revenue wasn't that high. In fact, airBaltic is more than double and Vietjet is even larger than that. So we're not actually talking about the revenue split on a monthly basis. We're talking about contracted future revenue -- contracted unearned future revenue.

But I would say, on a monthly basis, it's huge anyway. They're huge clients. Both Vietjet and airBaltic are huge clients. And Iain can give you the current revenue number if you really -- the percentage, if you really want.

Yes. Sure.

No. No, no. I mean that's [ probably ] I guess it helps clarify that kind of your future business is not as much a bet on Virgin Australia as your historical revenue trends would have indicated. I think that's the takeaway from that.

Yes. Correct. Well, I mean as Gert's question was which aircraft are expiring in 2022, in '21? Well, they're mainly the Virgin aircraft. So they were coming to an end anyway. They're 7 or 8 years old. So it's time for us to move them on -- to start moving them on anyway. So it's not -- it's -- we've seen a lot -- we've had a lot of questions from investors about Virgin because I mean that's our history, and we get that. But we've got a lot of other aircraft, a lot of other sources of revenue. And Iain, do you want to give any more color to that?

Yes, sure. I mean in terms of unexpired future revenue, Virgin represents just under 6% compared to 25% for Vietjet and 20% for airBaltic. So that should just give you an idea of the scale that we're dealing with, with Virgin.

Right. So even before this crisis...

Right.

Guys, one more question?

Of course.

Okay. Then also just to clarify, I think, a comment you just made a few minutes earlier. So in terms of the amortization that's been pushed out, that was on average about a 6- to 12-month extension on that amortization payment and I think covered with the lease extensions that you've agreed to with your customers?

Yes. That's right. So I mean there's a range of deals that have been struck with banks but mostly either 6 or 12 months deferral of principal payments. So interest-only for that period.

No. No. So Iain, we're still paying amortization. We're just paying less amortization. So we -- there's always flexibility in the loan or there usually is flexibility in a loan to adjust the amortization profile because if you don't amortize, you just pay more interest on a higher balance. But we want to delever. So we're currently -- we're pretty aggressive in paying down principal anyway. And so what we've done is we've just slowed that process down to preserve cash so that the bondholders get paid, the banks still get all their interest and the operating costs of the business are covered. And then the reason for that is because there's two things that you may not get. Like if an airline has been fighting for cash now, in three months' time or four months' time, it doesn't immediately double its revenue. It takes a while to build up. So they can't immediately double what they're paying you. They can pay you 1.1x, 1.2x, 1.3x. So it takes a while to build up. And so that's the advantage of our strategy in the sense that the pandemic can go on for some uneven amount of time, and it will around the world of varying months. And therefore, it's not all we just give them a holiday for three months and then, well, what do we do in three months' time? It's -- we've got to have more time than that. It's got to be more flexible than that. And ultimately, in our head, 12 months was a reasonable amount of time at this point to contemplate it.

The next question is from [ Cangeri Hyde ] from Muzinich & Co.

I've got a couple of questions. The first one is more of a follow up and confirmation. So you mentioned that 15 of the 19 airline companies have made deferral agreements. So the remaining four are solid credits that have not -- that do not require this and are still paying on time. Is that right?

Correct. So there are some airlines who don't require any help at all.

Okay. And then my second question is more of I was curious around Virgin Australia. You mentioned that there is a deposit and maintenance reserves totaling $8.2 million. I'm just wondering what sort of claims do you have over that amount of money? Like how does it work? Just briefly.

Well, Iain, do you want to talk -- I mean there's also engines as well. So Iain will do well with that.

Yes. So I mean the $8.2 million is a mixture of letters of credit, which are security for airframe maintenance and cash deposits for the rental part of the contract. And then I think Jeff is going to talk about the engine element of [ security. ]

So we have -- so with power by the hour arrangements, like Pratt & Whitney will have a separate account, which has money in it, that's either used to repair the engine -- engines or not. So at the end of a lease, you either get a really good engine or you get the money in a bad engine. So you get the same value out of those arrangements. So what will happen is a third -- so in other words, in respect to the engines and landing gear, a third party has an account. And from that, you either get the money or good equipment or bad equipment and lots of money. That's how they work. And then we have our own deposits.

Okay. And then I guess my final question is about the conversations with rating agencies. Could you share a bit -- I mean, obviously, you're on rating watch narrative by both rating agencies. I'm just curious to hear how your conversations with rating agencies have gone by so far.

Iain can deal with that one.

Yes. Sure. So I think the thing that the rating agencies have taken a couple of actions recently. And the first one, I think, was just, I suppose, a general reaction to COVID. And the fact that they had downgraded, I think, all airlines as a result of the COVID pandemic and the impact on airline businesses. So there was a follow-on impact on aircraft lessors. I think all aircraft lessors were reviewed by the rating agencies and, as a result, we were downgraded. And then you will have seen that Fitch took a further action recently, which was a direct response to Virgin going into administration. And that's just really a result of them looking at, I suppose, the percentage of current revenue that we derive from Virgin and assessing that as, I suppose, a material risk to Avation. I think, personally, they've probably gone a bit early there because as we've been discussing on this call, Virgin is actually only around 6% of our future business. Other airlines are a much bigger component of the business. But I mean those are the two trigger points, I suppose, for the rating actions recently.

Yes. So like, I guess what I'm trying to get at is like your conversations with rating agencies like what is the company's, I guess, commitment towards the ratings and -- because I mean you do have your refinancing needs on your bonds on next year. So I'm just curious to understand more on that front on how you're going to tackle your ratings?

[ Well, I thought we're going to take -- ] we'll constantly have dialogue with them. Clearly, the -- right now the focus of the business is to set ourselves up to prosper going forward. And our strategy is in contrast with some other lessors and, I would argue, superior to other lessors in the sense that we have more time. So clearly, during the course of the next year, we'll have discussions with ratings agencies and review all parts of the capital structure. Obviously, there's more -- they've got lots of levers. But right now, you're in the middle of a crisis. So it is what it is. They've downgraded lots of companies. And presumably, as you -- as companies deliver and generate profits and delever and all that sort of stuff, they'll go the other way. So I think it's a dialogue. It's conversation, and it will take time.

The next question is from [ Sam Costas ] of [ Timberline. ]

Just one for me. Can you just give some commentary on plans to deal with the unsecured bonds through May 2021, which are now current and just plans on what you plan to do and any timing of when you expect to address those?

Well, we're in pretty stormy waters right now today. But obviously, the sun is starting to shine. There are -- where we are, there's no COVID cases. Vietnam is getting back on track. So the 56% of our revenue is in good places. So clearly, we're constantly looking at our capital structure. We have lots of dialogue with investment banks who can -- they were constantly trying to sell us their services. So you're in due course -- and our financial year-end is June. So in due course, at some point, we will have dialogue with banks, with investment banks, advisers, and we'll start a conversation with bondholders and look at all of the alternatives around that bond because, clearly, there's a lot of things you can do. And hopefully, bondholders will enjoy the yield that we give them and the diversification and want to support the company. And clearly, there will be an opportunity to do something at some stage with them. I mean the date of that we can't -- it's too early to predict right now, given you're in the middle of a hurricane. But on the other side of it, we can deal with people, I think, is the right answer. Unless you've got a proposal, you want to give us before time, but we'll just get through and prosper, I think, for the minute.

The next question is from Geoffrey Jou of Bank of America Merrill Lynch.

Just two from my end. First one, on the unsecured claim that you guys have filed in Virgin's administration process of $97 million, can you just walk me through how you guys got to that number? Just I'm a little surprised, given, I think, Virgin historically only accounted for like $26 million of revenue. So the $97 million seems a little high to me, but just curious how you guys got there and what your thoughts are in terms of recovery of the unsecured claim during the administration process.

I'll let Iain work out the details of the claim for you in a minute, and I'll walk you through that at a high level. But we believe that Virgin will be sold. Clearly, that's an asset to the company. There will be some recovery. We don't know what it is yet. I mean it's a bit early to tell, but I am aware that the Virgin administrator does have 82 people in the data room. The Virgin administrator has publicly stated that, that business should be able to make $1 billion a year EBITDA, I think he said publicly. Our internal estimates, we thought it should be able to make $400 million a year. So when you've got an airline that could potentially make between $400 million and $1 billion a year profit, there will be buyers for it. Therefore, there will be value there. Therefore, that claim will be worth something at some point. And that basically represents our unexpired lease duration and handback compensation. Clearly, they've got the -- they were full-life aircraft when we gave them to them. So they -- you either get the money or brand-new aircraft at the end. And clearly, a new airline would probably keep the aircraft anyway. So the numbers will change. Iain, do you want to give more -- a better comment on that to the gentleman?

Yes. Sure. So I mean, the claim -- the total claim is around $97 million. And the biggest component of that is loss of rent, which represents about, let's say, 40-odd percent of the total, just over 40%. And around 1/3 of the total is the difference between a full-life value aircraft and the current maintenance adjusted condition of those aircraft. So those are the two, I suppose, feasible components of the claim. Then there's some other estimated expenses for having to store and maintain the aircraft while we look for new lease customers. So there's an element of estimation in the initial claim, which will be -- we'll have to sort of finalize as we go through and realize what the total claim will be.

In June. So that's helpful. Actually, just one other question from me. So on Slide 6, you guys mentioned how the rent deferral is approximately 7% of annual revenue. But there's also another bullet point that says generally 3 to 6 month deferrals of monthly revenue. So if I think about 3 to 6 months and say, 4 months, that equates to roughly 25% of annual revenue. But you're saying it's actually closer to 7%. Is that because it's mainly the smaller...

No. No, we don't. We're not deferring 100% of the rent. The duration of the agreements might be 4 or 5 months. But we're making -- each month, we're making the airlines pay us some money. So even though the airlines may be struggling, they're still paying us actual cash every month, which is a difference in our strategy to other lessors. A lot of other lessors have given them holidays and getting no money for 3 or 4 months, whereas we're getting actual cash every month. And that's very, very important. It's very important that the airlines pay you money each month. And therefore, you know that they got in there, they've got support and they're staying business. So we're not saying we're giving them 3 or 4 months holiday. We're saying we're lending them some proportion of their rent, which may not be very high in some cases, for 3 or 4 months. So we're absolutely not giving them a holiday because that's -- we argue that, that strategy is wrong.

This concludes our question and answer session.

We run -- I think we've run out of questions. So that was -- there was over 100 people on that call. Thank you for your attention. It's gone on a very long time. If there are any more questions, if people have trouble getting the -- the presentation will be on the website overnight. If there are any more questions, you can contact the company. There's links on the website that help you. We're available. We're happy to deal with your questions at any time. Thank you very much for your support. And we look forward to a regular earnings call in due course. So thank you very much.