Avation PLC (AVAP) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Avation Financial Year 2020 Results and Investor Update Call. My name is Stuart, and I will be the operator for your call this afternoon. [Operator Instructions] I will now hand you over to Duncan Scott. Please go ahead.

Good morning, everyone, and good afternoon to those in London. Today, on 23rd of October, Avation published its unaudited financial results for the financial year 2020. A copy of our earnings release is available on our website at www.avation.net. This conference call is being webcast and recorded, and the webcast will be available for replay on our website. 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, other income and expense items. These statements and any projection as to the company's future performance represents management's estimates of future results and speak only as of today, 23rd October 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. Unauthorized recording of this conference call is not permitted. I will now hand over to Executive Chairman, Jeff Chatfield.

Thank you, Duncan, and thank you, investors, for joining us for the report on the company for the financial year 2020. Presentation is set out in three sections, including the company overview, financial results and the COVID-19 update. I'll start with the company overview. So Avation has posted satisfactory results in a volatile environment. If you look on the presentation, you'll see the snapshot. As of June 30, 2020, the company had 48 aircraft in the fleet, serving 18 customers in 15 countries. Avation has capabilities to manage owned, leased, regional, narrow-body and twin-aisle aircraft or commercial airlines. The investment in the fleet of twin-aisle, narrow-body and turboprop aircraft is split by value at 18%, 47% and 35%, respectively. At the end of the period, the aircraft fleet had a 4.1 year weighted average age and a 6.9 year weighted average remaining lease term. The financial period saw fleet assets totaled $1.24 billion. Avation has $862 million in contracted unearned revenue from the existing leases. More than half of our customers now flying at above 50% of the pre-COVID levels. And what is a promising sign, these customers make up more than 60% of the unearned contracted lease revenues. Slide 5 is a snapshot of the historical performance and expansion of the company over the last 6 years. Avation has consistently delivered growth in the fleet, which has seen the total assets and revenue almost double every 3 years. Investment in new or young aircraft has seen the average age reduce and the average lease term increase to rates among the best in the leasing industry. With this strong diversified fleet, Avation will weather the pandemic and create the growth opportunity for the company and investors throughout the opportunistic purchases and delivery from its order book and secondary trading in the post pandemic environment. Moving on to the fleet. The aircraft portfolio, Avation's fleet is now 48 popular aircraft and is the most adverse in the company's history. During the pandemic, the company decided to retain the full complement of skill sets of commercial, legal, financial and technical skills so they can manage the lessor platform successfully in the post COVID-19 recovery phase. Since the beginning of the pandemic, Avation has successfully completed 12 aircraft transactions, including lease extensions, aircraft sales and new lease transactions. The last 2 Fokker 100 aircraft was sold off at the end of their leases. The sale of these aircraft was completed in September 2020. So as of now, the company's fleet no longer includes the Fokker 100 aircraft. In addition to 8 orders, purchase rights for 25 ATR72-600 aircraft represent a material source of future growth for Avation and value for shareholders. In recognition of this, the company recognized the purchase rights at fair value during the -- in the financial statements during the financial year. Avation believes that newer assets carry a lower risk due to lower risk of obsolescence and the long-term cash flow provided through long leases. It will be these purchase rights that, in part, drive Avation's growth in the future. Moving on to customers. As of 30th of June 2020, Avation serves 18 customers in 15 countries. Avation's customers include severe flag carriers. While flag carries are not excluded from the impact of the pandemic and associated travel restrictions, these airlines are most likely to generate some government support, where it's offered and highlight the importance of -- the national importance of these carriers. These airlines are also likely to have a higher proportion of domestic routes. Around the world, as countries pass-through the impact of the virus, it's domestic travel that is returning to service before international. It's important to note that Avation's geographical spread of customers as the pandemic is at different stages around the world, around 2/3 of Avation's customers by revenue are located in Asia and includes countries that have had only minor impacts or towards the end of the impacts of the virus, including Taiwan and Vietnam. We've also been fortunate in Europe, where our largest customer, airBaltic, has been able to operate at high levels, and we see significant government backing. Investors should note that Virgin Australia is no longer a customer of Avation following the administration of the company. Slide 8, we will now turn to summary of the financial results. During the financial period, Avation generated a total income of $136.5 million, up 14% year-on-year, with revenue of $135.3 million, also up 14%. Operating profit dropped 9% to $70 million. This was impacted positively by an unrealized gain through the recognition of purchase rights, which added $27 million in assets and negatively through the fleet impairment of $35 million, reflecting the COVID-19 industry-related customer disruption and impact on aircraft values. Avation was able to remain profitable in what has been the largest challenge to the airline and aircraft leasing industry in its history, with total profit after tax of $9.7 million. Fleet assets remained flat at $1.24 billion as fleet growth at -- pre-pandemic was offset by the impairment and normal depreciation. At the onset of the pandemic, the company elected to pull its capital expenditure to preserve liquidity, and this will continue while the crisis persists. Avation was able to lower the weighted average cost of total debt from 4.6% to 4.5% since 30th June 2019. Earnings per share were down $0.154 per share for the year. The company declared dividend and paid dividends of $0.085 in October 2019 and $0.0216 per share in January 2020. The company has placed temporary hold on dividends during pandemic. I'd like to thank the executive team and shareholders for their support, the executive team for their efforts in achieving these results. It's been an extremely challenging year. Clearly, there will be a recovery at some stage. Turning to operations. Following the liquidation of Thomas Cook on 23rd of September last year, Avation repossessed 2 Airbus A321 aircraft and successfully transitioned the aircraft to VietJet. Avation acquired 3 aircraft during the period and disposed of 3 end-of-life Fokker 100s. Avation also initiated purchase of a patent with aircraft engine, which is leased in the short term. Avation funded the acquisition of 2 fuel-efficient ATR aircraft with a green loan, which is understood the first commercial passenger aircraft green loan and was awarded the Deal of the Year for Innovation in respect to the funding. The company also transitioned 2 ATR72-500 aircraft from the sale of Virgin Australia to another Australian airline customer, delivered third Virgin Australia ATR72 to a new operator in Asia, with the final 2 Fokker 100s being sold. Therefore, at this stage, 5 of the 13 Virgin aircraft have been successfully dealt with in some way. Avation successfully implemented -- developed and implemented the COVID-19 strategy designed to preserve liquidity, which I'll be able to provide details with later in the call. Let me now hand the call to Richard, who will provide more detail on the financial results and key ratios.

Thanks, Jeff. The next slide provides an analysis of the profit loss. In the stock exchange release earlier today, we provided this analysis to provide investors and stakeholders with some concept of the core leasing business operating profit before tax. Excluding the unrealized gains on the ATR purchase right gains on disposal of aircraft and the impairment of aircraft, which are all large one-off items to highlight to investors, the profitability of the core leasing business. The financial results show the revenue increased by 14%, as Jeff mentioned, to $135.3 million for the year compared to $119.1 million a year ago. Depreciation increased by 14% to $46.7 million. Admin expenses increased by 9% to $11.9 million compared to the revenue increase of 14%. This resulted in the core leasing business generating an operating profit of $75.5 million versus $67.1 million in the previous year, which is a growth of 13%. Finance expenses net of finance income increased 8% to $55.7 million versus $51.6 million in the previous year, which is far lower than the growth in revenue over the respective period. This results in a profit before tax from the core leasing business of $19.8 million, which is up 28% from the previous year. This illustrates how strong the core leasing business is and the opportunities for returns to investors once we are able to navigate our way through what is the crisis, that is COVID-19. If we look beyond the core ongoing leasing business, the more nonrecurring items that impacted the financial statements, in December 9 -- 2019, the company changed its business model for purchase rights by recognizing that it holds excess purchase rights over and above the company's requirement to acquire additional aircraft to the fleet. The company will seek to dispose of excess purchase rights from time to time, only when market conditions are favorable, and in recognition of this change in business model, the company recognized the purchase rights at fair value through the P&L. Purchase rights or the 25 ATR72 aircraft at fair values were determined by the company based on independent third-party valuation of the aircraft delivery position. The recognition of this asset on the balance sheet has generated the unrealized gain in the P&L of $27.1 million. Gains on sale of aircraft totaled $3.2 million compared to the large gains made in the corresponding period last year. And Avation recognized impairments across the fleet in the value of the aircraft due to the repossession of aircraft, including the Thomas Cook aircraft in the first half of the year, and from the impact of COVID-19, primarily on the ex Virgin Australia aircraft, assets held for sale and wide-body aircraft to a total of $35.5 million. This sale created a drop in profits. The profit before tax was $14.6 million versus $25.6 million in the prior year. And at the bottom line, total profit after tax decreased year-on-year to $9.7 million from $25.7 million a year ago to deliver $0.15 EPS. Avation's ability to remain profitable during such a challenging period illustrates the opportunity for investors post the crisis. Over now on to the next slide, Slide 12. Net indebtedness remains flat at $1.04 billion from $1.02 billion in the prior year, confirming that Avation has not increased it's borrowing significantly as a result of the crisis. There was a reduction in the weighted average cost of the group's secured debt facilities to 3.6%, down from 3.7% through funding in the first half of the 3 aircraft acquisitions with a lower-cost senior debt. This resulted in the weighted average cost of debt for the company being lowered to 4.5% from 4.6%. And clearly, from here on in, over the next few years, we expect to be in a very low interest rate environment. So there will be opportunities to take this down as well in terms of senior lending. At the end of the year, 90.7% of total debt was at fixed or hedged interest rates. And the debt to assets ratio improved to 75.7%, which was reduced from the 2019 figure of 77.4%. The chart shows the evolution of the group's cost of debt over the past 7 years and shows a decline in both the cost of unsecured and secured debt. Avation advised last week in relation to the Avation Capital, a 6.5% senior notes due in 2021 issued under Avation's global medium-term note program that we've retained PJT Partners as financial adviser and DLA Piper as legal adviser to assist with a collaborative dialogue with the bondholders. This is primarily to consider the variety of alternatives to the bonds that are due in May 2021. On to Slide 13, we've provided a couple of key ratios on a comparative basis. The net asset value per share remained relatively flat to GBP 2.86 compared to GBP 2.95 on June 30, 2019. Dividends were up year-on-year to $0.106 versus $0.0925 for the previous year. Administrative expenses declined as a percentage of total income to 8.8% versus 9.2%. Avation did take proactive step to lower administrative costs at the outset of the pandemic, but given that this was in sort of February-March time, we only were able to achieve a relatively small decline in that percentage. Debt-to-EBITDA has decreased to 8.4x from 8.8x, and operating cash flow remained strong. Funds from operations to debt improved during the period, and EBITDA as a function of interest expense remained flat. I'll hand the call back to Jeff to update stakeholders on the company's COVID-19 strategy.

Thank you, Richard. So our strategy was about maintaining liquidity cash flow during the pandemic. So we took a pragmatic approach to focusing on preserving cash flow as airlines suffered a major disruption. So we were the first mover with our airline customers to help them through the difficult period. So that involves supporting airlines to effectively loan them a proportion of their rents. So it wasn't a rent decrease or a holiday, it was a loan. And they typically need to repay the deferred rent from the end of this year onwards. The balance of this reduction is cash -- of this cash flow, Avation's implemented 3 key strategies. The first is being the assistance of the key banks adjusting the amortization of senior debt. The second has been to reduce expenses through the lowering of SG&A as well as eliminating employee cash bonuses and the like. And the third step has been to reduce capital outgo. This includes moratorium on new deliveries, and unfortunately, for this year, no dividend -- no further dividend for the financial year ended 30th of June 2020. By managing cash flows, Avation will navigate through the COVID-19 to position itself post pandemic. The next slide provides a summary of the outcome. So we have implemented and made agreements with 14 of the 18 customers. So some airlines haven't needed support. Typically, we provided 3 to 6-month deferrals of a proportion of the rent with 6 to 9-month repayment periods. We are continuing the dialogue with the airlines constantly, which are recovering at different rates, depending on the rates of the infection, government support. Airlines are required to continue to pay maintenance reserves as part of the rental deferral arrangements. The total rent deferred by airlines is $13.1 million, which represents just over 9% of the Avation's revenue. Avation is successfully mitigating the impact of lower rents on cash flow by agreeing to reschedule $24 million worth of loan amortization. Stakeholders should note that while the impact of the virus continues around the world, there will be further work and cooperation needed before we come out of this pandemic. The next slide, some information on our customers. Some only -- have only had a minor impact, like Vietnam, Taiwan and Latvia. 4 of the 18 customers didn't require any assistance. We've seen return to flying with airlines to represent over 60% of Avation's $862 million future contracted revenues, now flying at over 50% of pre-COVID levels. So that's about half of our customers by number, and it's very positive. We've been successful in dealing with the 2 airline customer, total failures. And as a result of the pandemic, we had 2 customers, Virgin Australia and Braathens entry administration. Avation had 13 aircraft with Virgin, and we've already dealt with 5 aircraft to new homes. We were very fortunate with the leases to Virgin in the sense they only had 1 to 3 years remaining. So the debt associated with them is small. The unearned contracted revenue associated with the Virgin Australia represented less than 6% of Avation's total unearned contracted lease revenues as of the date of administration. The relatively low levels of debt associated with the returned aircraft will be further reduced by the expected payments of Virgin Australia's creditors, which should be received before the end of this financial year. Avation had 2 ATR72-600 aircraft on lease to Braathens when it entered administration. The airline has now successfully exited administration and is now in operations. Avation's agreed to new lease terms to the airline, including extensions in lease duration from 10 years to 12 years. The company has also negotiated adjustments to the amortization profile of the related financings with the senior lender to reflect the revised lease terms. Avation is optimistic in maintaining profitable customer relationship with Braathens in the event the airline is able to maintain its current terms. So Slide 18. We've delivered profitability in the most challenging period in the history of aircraft leasing. The fundamentals of business and underlying profits, obviously, are very strong. The business model remains intact. And we expect positive outcomes, assuming the world is able to navigate a way through the pandemic. The underlying profitability of the company remains strong in the entire industry from airlines to lessors to lenders have had to and will be required to continue to work together through this event. Avation's taken a pragmatic approach to preserve cash flow and liquidity, and we will continue to work tirelessly to preserve the business and deal with the numerous issues that have risen. Avation shown that it can transition aircraft in these tough times and will work to replace -- to place or sell or deal with, in some way, the remaining 8 ex Virgin Australia aircraft into the market. We believe that regional travel will recover fastest, hence, that's the useful aircraft for that. The company believes that airlines will require significant number of leased aircraft in the post pandemic phase due to vast number of older aircraft that have been retired and the impact of the pandemic on airline balance sheets reducing their ability to purchase aircraft. So this supports the company's strategy of being focused on new and popular aircraft types. Avation is optimistic about long-term opportunity for airline travel, particularly in the turboprop and narrow-body sectors. Company will position itself to return to growth through purchases and delivery from its order book in the post pandemic environment. That concludes our remarks for the question-and-answer session. Each participant is welcome to ask a question and a follow-up. I'd like to hand the call back to the operator.

[Operator Instructions] The first telephone question from today is from the line of Ross Harvey from Davy.

Can you talk to us about the rent deferral trend since June. I'm just wondering, does the $13 million you mentioned in the statement capture everything up to today? And if not, how has that figure changed and how many customers resumed their regular payment as per the original schedule?

I'll drag that question to Iain, the Chief Financial Officer.

Yes. Ross, so I think as we mentioned earlier in the call, we entered into agreements with 14 out of 18 airlines. We're now down to 6 airlines that are still on a sort of deferral plan. And the other airlines are either repaying or have repaid the deferred rents to us.

Great. And just a follow-up. Can you break out the $540 million of current debt maturities by debt type? Obviously, there's $350 million as the May bond. I'm just wondering is there asset made up of secure lend and portion from this year. And what can be done to ease that particular figure?

Yes, I'll take that question. So obviously, you've got the $350 million notes issued that matures in May. Now there is an adjustment in the accounts where we put $120 million of loans into current liabilities because there is a breach of a technical covenant with 1 lender. That lender has subsequently weighed the breach. So those loans will go back into long-term liabilities. So you can take the $120 million back into long-term derivative liabilities.

Okay. And just wondering as well, can you remind us what other maintenance and/or current covenants there are across either the debt types and just whether the secured debt has a guarantee or recourse to the parent?

Yes. All of our secured loans are guaranteed by Avation PLC.

In terms of the covenants earning, you can give us in terms of metrics to watch out for into the December statements?

I mean, we have a variety of covenants and we have minimum cash covenants, a minimum net worth covenants and a covenant that provides for a minimum ratio of tangible net worth to net debt.

Next question is from the line of Sandy Burns from Stifel, Nicolaus.

A very good quarter in very difficult circumstances. Maybe just following up on the previous question about rent deferrals. It sounds like the trend is very positive. You're down to only 6 customers. Could you give a little more color, like have those customers had to go through a second round of deferrals, your expectations on their ability to pay? Do you expect any other customers maybe will now come back with a request for deferrals that maybe did not originally or originally paid and may have to ask again given their business situation?

This is Jeff. I'll deal with that one. I think -- I mean, we can't get too granular on a customer-by-customer basis. So we've got to talk in aggregate. But we can advise that the airlines, with this pandemic is going on for a while and the airlines that are, if you like, serious determined to survive and have a strategy, have, in the main path, established that strategy to survive by now. So in other words, they -- it's not a sort of a round 1, round 2 thing. It's a -- there was the immediate actions that were taken at the beginning of the year, especially in March, that are now playing out, will be adjusted as necessary. But we don't -- we believe the majority of our clients that still need assistance have a clear pathway or are establishing a pathway to survive. And consequently, we anticipate that they will -- we hope they'll honor their agreements, and we're not pushing too hard, we're managing, and we're making sure that we get enough cash flow from them to stay or to -- our objective is to be operational and cash flow positive and profitable so that we can meet our obligations and continue on. And we believe that clients that have survived this long, likely will have to have a strategy and are likely to survive. And therefore, we won't go back to where we were in March, if that answers your question.

Yes. No, that's very helpful. So maybe to follow on to that. Would it be fair to say that, like I mentioned, your June quarter look fairly stable to the March quarter. Given the positive trends you're mentioning in customers, would it be fair to say that those -- these trends should conceivably continue for the next few quarters or so absent a second wave or other significant macro shock to the business?

We believe so. I mean, hopefully, there's an end of this pandemic at some stage and things will gradually, over a period of time, come back to normal, and they'll -- they'll catch up. I mean we've been surprised to the upside on a couple of the airlines, one of the airlines paid us in full recently. And one of the traditionally slow airlines to pay, paid us a very significant amount of money today. So they -- one way or another, they're getting there. It's a tough time for the whole industry. But a lot -- and a lot of them have government support. So they, one way or another, will find a way to get enough money to carry on.

Great. And maybe a last 1 for me. In terms of your relationships with the banks, you mentioned the ones that you had a covenant issue that's been amended. When you've had the discussions about pushing out the amortization, have there been any material banks or lenders who have been less flexible or unwilling? Or have you pretty much been able to have good relationships and get what you need from the banks in this environment?

No, we've done -- we've had constructive dialogue with the banks. I think at the very start of the pandemic, we had a very clear strategy that we articulated to the banks, bit like day 1. And we had some of the banks say to us that our strategy of that -- at that time, going back in March, they said, well, this is the best strategy we've seen from a lessor and it's very clear, and they've been very supportive, and we actually haven't had any -- we haven't had any real problems with them because they sort of view us as a survivor and have been supportive. I think the -- where -- the only place we've had difficulty is when the airlines haven't known themselves what they're doing. So a few -- a couple of the airlines, clearly, were the ones that have failed, didn't have a plan. So that's hard to deal with. But the airlines that have had a strategy we've worked within that strategy. Obviously, some of them are still playing out and have a distance to go. But the banks have been extremely supportive, and we haven't really had any issues with them, given that we've been clear about what we've needed. We've been current on everything, and we've met our obligations as we've needed to.

Next question is from the line of John Cummins from WH Ireland.

A couple of questions from me. Just firstly, from a point of diversification. Can I just check how many of the 46 aircraft or how many customers of the 46 aircraft are now placed with? And then secondly, if you could just provide a comment on the timing of the 8 additional ATR aircraft that are on order and your ability to push that back?

I'll let Rod. Rod likes answering those guess questions. So I'll let Rod jump in. We have 19 customers. So they're all spread out all over the place. But Rod, do you want to jump in there?

Yes. Hello, everybody. I believe that our diversification has gradually over the years improved significantly. And we now, even after the loss of Virgin Australia, we -- with the gain of the new Asian airline that's re-leased to this month, we are back to 19 customers. As far as the future deliveries of ATR are concerns, we are in discussions with ATR about deferring those deliveries out of the COVID window.

Okay.

Yes. I mean we have the ability to reschedule those deliveries as we need to. The regional travel will recover before anything else. Like regional travel is often necessary travel. It's related to government or health or whatever it is important to public service stuff. So it does recover very -- it does actually recover very quickly. So for example, Virgin Australia, they've gone broken down into administration, their regional business is still operating. This is -- their core regional business is still operating well. The only issue is they made a decision to, if you like, abandon the ATR operation very early, which is, in airline -- in an airline sense, it wasn't a very smart decision given the environment they open -- and country that they're operating in. So the regional stuff is very important and will recover quickest. What's next?

Your next question is from the line of Gert Zonneveld from CGF.

Just a couple of things for me. I mean can you clarify the comment on the ATRs on order. So there are 8 of them. And obviously, what you're saying is you're negotiating deferrals for those orders. Does that also include the 3 Braathens aircraft, which originally were meant to be delivered in Q1 of 2020. So that -- those were fairly imminent. And do you consider about that contract that you have or those contracts you have with Braathens, is that contract still live? Or should we just assume that that's not going to happen given the...

No, Braathens is upgrading. So good, Braathens is flying. They went into administration and have emerged. They paid us money and they're flying.

Yes, but I thought you...

And they had 2 of their aircraft.

Yes. It wasn't -- didn't you have agreements for the delivery of 5 ATRs on the finance leases, and 2 of those 5 have been delivered, but the other 3 haven't been delivered yet.

Well, we have flexibility within our order book. Our inventory, we only really have 1 aircraft that we need to place. But we're not going to give that 1 to Braathens. We'll give it to someone else. We're quite happy with exposure of 2 aircraft to an aircraft -- airline that's just been in administration and emerged. I mean, Rod, do you want to add some color to that?

Yes. I mean, I think it's true that we announced that there was -- the original order was 5 aircraft for Braathens, of which 2 have been delivered. So the other 3 are part of the deferral plan with ATR effectively.

Okay. And then 1 other question...

We're not going to give them any more aircraft. I mean there's too big a credit risk to give them any more aircraft in the short term. I mean I hope they do well, and they're great people, and they paid us money, and they paid us EUR 1 million the other day. So they're good people. But from our perspective -- from a risk perspective, 2 is enough at the minute.

Yes. And we don't want to sound vague, but we're not in a position to talk about when the future deliveries might be, et cetera, et cetera, because those discussions are still ongoing with ATR.

Okay. Well, one more, if that's okay. Can you just elaborate a little bit on the impairment loss that you recorded of $35.5 million? And which assets this relates to?

Well, we audited under IFRS. So we have to deal with valuations on a plane by plane basis. So if we were a U.S. company, we were reporting under GAAP, we'd be reporting as groups of aircraft. But our issue is under IFRS, we need to deal with individual planes and the market's changed. Plane valuations have gone down, and we get independent values periodically, and this is obviously a time when you get independent valuations and the market shifted, so you've got impairments. I mean if the market recovers and we sell or deal in those planes or do stuff with them, the -- if an impairment reverses, it becomes pure profit, right? But that's just -- so if you like how -- you may have seen U.S. lessors saying, "Oh, we've got no impairments because they're under GAAP." They group everything together and net it all out, whereas we need to deal with it on a plane by plane basis. I hope that answers your question. Richard is joining in.

Yes. Gert, about half of the impairment came from the ex-Virgin aircraft, obviously, because when they went into administration, obviously, the valuation -- where the income earning potential of those aircraft obviously diminished. And you'll note from our half year accounts that we've taken some impairments in relation to the 2 Thomas aircraft that we repossessed. There were further impairments on those aircraft, which were transitioned to VietJet. But due to the nature and changing terms with VietJet, there was some further impairments on those aircraft. But there were -- there were also some impairments in widebody aircraft, but we did need to look at the entire fleet to...

On a plane by plane basis.

Yes, as a result of the COVID-19 pandemic. But most of it was the ex-Virgin aircraft.

Next question is from the line of Sam Kosters from DoubleLine Capital.

Just 2 quick ones for you. First, could you please clarify current liquidity? So including liquid cash, from the unused term loan or any other reserve. And do how you compare that to your expectation for cash burn in 2021?

Iain can answer this question.

Yes. Sam. Yes, I mean, our liquidity forecast for the remainder of the year is essentially flat. And that includes drawing down on a credit agreement that we've been credit approved for, which will provide some additional liquidity next month. And then we also intend to sell a couple of aircraft at some point over the coming months as well. So taking it all together, we have a flat cash flow forecast for the remainder of the year.

Great. And can you just kind of simplify how I should think about the fleet here? So of the 46 aircraft, can you just kind of generalize how many are current pay from existing customers? How many are at customers but payment is deferred? And then third category, how many are waiting to be re-leased to new customers of 46?

Well, we'll answer that in 2 ways. I mean, we don't have a lot of aircraft on the ground. We've been incredibly fortunate with our customer base. So we really -- we only have the Virgin ATRs that we spoke about, and one other that's on the ground. So the first part of your question is, we don't have -- we really -- we're very fortunate in the sense that most of the aircraft are operating. We really only got one that's sitting there other than the Virgin ones. In terms of the mix of aircraft with customers seeking deferrals or not seeking deferrals, Rod, do you want to take that one in general?

Well, I think it's split across the portfolio. Most of...

Well not -- 12 of them are on normal rates, right? So we know that.

So yes, that's 12 of our 18 customers.

Customers.

Yes. I mean it's difficult to avoid going into specifics when answering a question like that. So as I think Jeff said earlier, the number of customers requesting deferrals is -- or where deferrals are still in place, is going down slowly but steadily over time. So we just hope that, that will continue. But we...

With -- so I'll give you more color. Only 3 of our customers have rent arrears greater than $1 million, and half of them are complying, so exactly half are complying. So we're actually much more fortunate than many lessors probably in both our strategy, which is to get in early and get a deal with people early. And also our customer mix, we've been very fortunate in that the customers have been good customers.

Yes. And I think the other thing to say is that, as somebody said earlier, maybe, Jeff, is that although some of these deferrals have been extended, the airlines have put into place their plans to deal with the pandemic. And in turn, they -- we have reached extended agreements with those airlines. So the horizon is plotted out. We have signed agreements with the vast majority of the airlines with a payment plan in place. So it's not like it's an unknown. It's -- we can plan for the cash flow over the coming years, as Iain has just pointed out.

Next question is from the line of Michael Ronzio from Caravel Asset Management.

I just had a question surrounding the roughly $24 million of debt related to the ATRs that had been with Virgin airlines. Is that now due and payable? Has that debt tripped the technical covenant given the administration with the airline? So that's number one. Number two, has there been any additional clarity on when you think you'll recoup your recovery from Virgin airlines?

I'll take this one. No, that's not due in [indiscernible]. We have been paying the interest on the money, so the loans are okay. And with aircraft finance, you have a period where you can redeploy the aircraft. So typically, you have 6 months or so to a remarketing period. Now we've been successfully remarketing those aircraft. And the value -- even in this market, the value of those aircraft has -- even the scrap metal far exceeds the value of the amount of debt. So there's no debt pressure on those aircraft. We're actually contemplating paying off some of them, so we're free to deal aggressively with them. So no, we're not under pressure with those ATRs. The value of the aircraft exceeds the debt significantly. We're current on them. We're not in default or anything like that. We're no in need -- there's no issues with those. In terms of the Virgin administration, the process -- so Virgin's Deed of Company Arrangement process finishes next Friday, I believe. And I may have these dates wrong. It may have changed. But my understanding is their company arrangement process will complete -- is expected to complete next Friday. Then there's a period of time where everyone proves their debt. So you show that -- how much money you're owed. In our case, it's a significant amount of money, which is mainly unpaid rent. It's the theoretical rent between now and the end of the leases and the return of the aircraft at the end. So it's of the order of USD 75 million. Then there will be a period of time where everyone does that and all the lessors do that because clearly, they've given away billions of dollars worth of equipment. And after probably around December or January 2021, they'll start to pay what they call a dividend, which is a funny word for it, but it's sort of what they pay. The trustee that's got the money pays a share of it. Their dividend's anticipated to be sort of around the $0.09 in the dollar mark, which is not very good, but it is what is. It can be higher if the business turns out to be fantastically profitable. But I mean, clearly, that would be -- that would be unlikely to occur at this stage. And that's what happens. So we anticipate getting our share of the dividend back during this financial year, if that answers your question. And feel free to ask another one, if I hadn't answered the question.

And just to clarify that $24 million -- we're owed a little bit more. That $24 million, as the slide said, was net of security deposits and so on and so forth. And after that dividend that Jeff just referred to from the administrator, if it's $75 million and we get $0.10 in the dollar, it's $7.5 million. That brings that sort of net debt down to about sort of $16 million over that whole bunch of aircraft there. So that you're really only talking $1.5 million, $2 million per aircraft. So it is relatively immaterial in the scheme of things.

Okay. That's fair. And I guess just one additional one then, if you don't mind. Just wondering if you can comment if your unrestricted cash is, at currently or thereabouts, is either higher or lower than the roughly $35.3 million as of the end of June. I'm just cognizant that cash burn in the fourth quarter was a bit over $24 million. And I realize that about half of that was due to the semiannual bond interest payment. But I'm just trying to get a sense on trend of liquidity through the COVID crisis.

Iain can answer this one.

Yes. Well, I mean, our cash flow doesn't go in a straight line. And you pointed out one of the key considerations there, which is the semiannual bond coupon payment. And as I mentioned earlier, we're also going to be drawing down on credit line next month. So right now, our cash is a little bit below the number we reported in the results announcement. And it will go back up once we've drawn down the credit.

It's not materially below the -- what was reported.

Next question is from the line of Khang Wei Tai from Muzinich.

My first question is really to clarify on one of the -- like on the planes that is currently not leased. So I understand that there are 8 ATRs with Virgin, and then there's 1 other ATR, right? Is that a correct understanding?

Correct.

And so that one other ATR, right, where was it from before?

No. There's one -- that was the exited [indiscernible]. So we have one new ATR that we're in the process of placing, that we were going to deliver to Braathens and elected not to. So we'll placed one new one with another client somewhere in the world in due course. And then we have 8 ATRs ex-Virgin, but they're split into 2 types. They're split ATR72-600s and ATR72-500s. And it's a different type of market for those aircraft. So there's some airlines who want 500, some airlines who want 600s. Virgin, for some reason, had both types. Most airlines don't want both types.

Great. And to follow-up on my question right. Like I remember in June, July, I had the impression that then or the administrator was -- they were thinking of using that 5 ATR 600s. I know that the lease was supposed to drop off in 2 years' time, but it looks like they have not taken these 5 ATR 600s. So you're having -- is my understanding correct?

Yes. We had understood that their go-forward plan, the plan for the airline was that it would have the regional aircraft because there's a lot of regional travel in Australia. There's a huge amount of regional travel. It's 30% of the entire market. And so what we see, what we're observing, which is quite extraordinary at the moment is Qantas, which is Virgin's competitor, is actually adding turboprop aircraft, very old ones to service some regional routes. So at the moment in Australia, the biggest routes, the most popular routes are actually regional routes. So the biggest Qantas route in the world at the moment, is a regional route. #1 and 2 are both regional routes. So it's actually quite an extraordinary decision of them to drop their regional flying because they're sort of -- they're not going to get any of the network effects or positives that you get from the regional network feed. They've made that decision, and they're exiting the regional market.

I see. Okay. My second question is a follow-up on what Richard said earlier about the flat cash flow for the rest of the year. Can I just clarify, like, do you mean the cash level will be flat at the end of the year? Or do we mean like cash flows will be flat at the end of the year?

I'll -- Iain, you can answer this. I'll try and answer it. So we're attempting to operate cash flow neutrally during this period of time. So we've got -- we've achieved, if you like, more -- we've increased our liquidity overall in theory because we've done, if you like, better with the banks than we have the airlines. But in reality, the cash is flat. The cash flow is flat. When Iain said it was slightly below. He means like 3% below. It wasn't -- it's not materially different. So the objective of the business at the moment is to preserve the opportunity for the future so that we've got all these systems and business and these customers, and we can grow the business because there will be a future. And so at the moment, it's just staying in business, paying the banks, paying the bondholders and making sure that the business continues in a sensible manner going forward until we understand what the future is going to look like in a post-COVID-19 pandemic environment.

Cool. And sorry, my last question is on the loan amortization, the rescheduling. Are you able to disclose like how far back can they reschedule to? Like is it a year extension or like how should we think about this?

Well, we can't disclose it line by line because the banks would kill us. But in aggregate, we've -- so the way it works is we took a very early -- we had a very clear strategy. We implemented it very early. We provided support to the airlines very early. So often, we were the first lessor in the world to sort of ring up airlines and say, what do you need. How are we going to manage this together? So we've been in basically constant, almost daily dialogue, and we literally have a daily -- it may sound crazy. But we have a daily global conference call with the whole company. We deal with every airline. And so we have a very granular approach to matching what the banks need, with what the airlines can do and very open dialogue so that we're managing those relationships successfully, so that we preserve the company and the platform and the opportunity going forward. And each airline and each bank is different. We've had to tailor the responses. It's a really complicated problem. And you've got to tailor everything to match. You've got multiple parts that you've got to match up. So it's been an incredibly complex problem. But fortunately, we're now -- we're sort of substantially complete. There's only a few loose ends left. And some of the reschedulings we've done have been entirely successful. The airlines have paid off their arrears and are current. So we are doing fairly well. But we can't go down loan by loan. We'd be here for hours, if we could do it. It varies airline by airline, loan by loan.

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

Just 4 quick ones from my end. You mentioned 6 of the 18 customers are still on deferral plan. Can you help us translate that in terms of how much rent deferral is expected for the remainder of the year or reminder of '21? And secondly -- sorry, go ahead, please.

No, we can't actually give you a number because some of those arrangements are being discussed at the moment. And like anything else, it's in negotiation with the customer.

So 9 of the 18 is complying right now, and only 3 of the rent arrears are greater than $1 million. So in aggregate, we anticipate probably accelerated collections, I would have thought.

Okay. I guess you guys mentioned how you guys have deferred $13 million. I'm just trying to conceptualize in terms of how much can we expect to be deferred up until June 2022 -- sorry, no, June '21.

That's an unknown, Geoffrey. Like it's -- we -- in reality, we're still midpandemic where we've been really lucky in terms of we've generated great results. Most of our customers are actually complying. Some of them didn't need help. But in reality, you look around the world, and we're seeing record cases. And so we can't really -- and we're not in a position and can't be in a position to give some sort of forecast in terms of what we're going to do because it does vary airline by airline. It will depend on the impacts of the second wave. It will depend on the -- when and if vaccines sort of come in as well. And there's also local government regulations regarding flying, and when and who can fly and how much they can fly. So we're just not in a position. What we're doing is our strategy was a long-term strategy to sort of try to maximize cash flow and stay sort of at least cash flow neutral. And that's a strategy that can go on as long as the pandemic goes on. And that's the comment we made earlier about airlines, lessors and governments and banks all cooperating to ride this storm out.

Understood. Okay. What about for the 3 ATRs that you guys have taken back from Virgin? Can you comment on the level of discount on the new leases relative to pre-COVID levels?

We can't disclose information in relation to specific customers. But one thing you just need to keep in mind with those aircraft, Geoffrey, is that those aircraft are 9, 10 years old now. So obviously, they're depreciated about 30%, 35% from what their cost was. And so as aircraft get older and you go into second leases, you do use that depreciated cost base. So they're clearly on lower rents than they were when they were new, but they are on a much lower cost base as well. So...

Is your question what you've seen -- are you asking our estimate of current market lease rate for that aged aircraft pre- and post-COVID or pre and during COVID? Is that the question?

Yes, Jeff.

Yes. Well, Rod, why don't you give an estimate like -- is it 70%, 80%? What do you think at the moment? Rod?

Well, it's been so angled, the question was asked about. But I mean, obviously, when you enter into a lease for a brand-new aircraft, the lease -- 1 of the reasons why we're in the leasing business is because the lease rate is fixed over 10 years, and you set that lease rate for a brand-new aircraft. Obviously, if the aircraft is 9 or 10 years old, as Richard's just said, and then comes back off lease and you lease it to somebody else, the market lease rate for a 9 or 10-year-old aircraft is going to be half of what it was when it was new. Now as far as what's happened in the pandemic is concerned, I would say that the rough estimates, lease rates have probably come off 10% or 15%, maybe 20% in some cases. It varies from aircraft type to aircraft type compared to what they would have been prepandemic for that similar age of aircraft. Does that answer your question?

Yes. Okay. That's helpful. And for the 3 airlines, VietJet, airBaltic and I guess for EVA and Mandarin, you mentioned those 4 guys account for roughly 60% of unearned contract leasing revenue. Can you just give us a sense in terms of what's the weighted average life of those remaining lease terms across those 4 airlines?

So EVA, airBaltic, VietJet, I mean they're all very good airlines. They're extremely -- airBaltic and EVA are entirely current. So...

All of these are very new. I mean...

Yes, I mean, they're new. They're big numbers.

airBaltic are all -- they were all 12-year leases. and they -- yes. Sorry, go ahead, Richard.

No, no. I said go ahead, Rod. You've got it down.

Okay. So the airBaltic aircraft were all new a couple of years ago on 12-year leases. So they obviously have quite a long time to run. EVA was on, yes, a long-term lease, and it's only -- we only -- we've only had it for a couple of years. VietJet, similarly, we bought the aircraft all brand new on long-term leases, and they're only a couple of years old. The Thomas Cook ones had been in Thomas Cook for 4 years, so they're now 5 or 6 years old, so they're midway through their lease. Who is the fourth airline? I can't remember.

Mandarin.

Yes, Mandarin, they were only delivered 12 to 18 months ago. So they're all very early on in their leases, and they were also on long-term leases.

And some of our leases have just got longer. For example, Air India is now a 16-year lease, which is -- it's great to lease 2 aircraft to someone at 16 years. And one of the other ones have extended as well with another flag carrier.

Geoffrey, and it obviously makes sense that if you look at the metrics that we quoted at the beginning of the presentation, the average lease length is 6.9 years. Those big customers are all going to be around that or more.

Okay. Understood. And my last question is on the sources and uses of the cash flow. I mean you guys mentioned how, from a cash flow perspective, we're going to be flat for the remainder of the year. Can you just give us a sense in terms of what are the sources and leases to get to that flat number? So you guys mentioned you get to draw down the credit line. Can you just let us know like what's the amount of interest, amorts and just operating cash that's expected to incur for the next 12 months?

Iain, do you want to do this one? Difficult question. I mean we have -- there are trading opportunities. So we are looking at dealing in aircraft, which is lumpy if we choose to do so. We've got viable bids for a number of aircraft. So there is still a market for aircraft if we need to sell stuff. But when we talk -- when we think of cash flow, we think you're matching income from the airlines with our obligations and interest, the bondholders, the banks and so on. So we're not thinking of too many big chunky transactions. And it's a fluid -- I mean, obviously, we're -- it's the middle of a pandemic. It's a fluid situation. It's difficult to put exact numbers on. It's difficult to put precise -- I mean, we have an internal plan to keep cash flow neutral operationally.

Right. Okay. I'm just like looking at some numbers. You mentioned that like the amount of current debt that's going to be due for the next 12 months is $72 million based on the number you guys disclosed earlier. And I think cash interest is close to 50 so I have to -- 122. So are you guys expecting cash from operations to be lower than 122, and that's why we need to look forward to drawing down the credit line as well as selling some assets to match the cash outflow?

I don't know how granularly -- but, Iain, we answer this.

Yes. I mean in general terms, we still think that FY '21 is -- we're not going to get back to sort of 100% rent collection from every customer. So the idea of drawing down the credit line is going to sort of even out cash flow and boost liquidity. And also, we do assume that we will sell a couple and perhaps more of the planes that have been redelivered by Virgin. We'll probably sell a couple but if the opportunity arises, there will be more asset sales. And that would be of a substantial source of liquidity for us. And then, of course...

I'm not sure you got -- expect -- round out which airlines.

I don't want to start giving people exact numbers for everything. I know you've got to make a model, but we're not really in the business of giving out forecast information. But in terms of sources at the moment, we obviously deferred a lot of rent for a number of customers. And all of those deferred agreements provide for those deferred rent to be repaid to us. So we do anticipate that we will start to turn around the rent collection, which has been less than the contractual rents over the last few months because of the COVID situation and the relief agreements we've entered into. And we should start to collect that money back over the coming months.

Yes. This is Rod, Iain. Iain, isn't part of the answer that some of the principal repayment deferrals that might be reflected in the FY 2020 results haven't been reflected yet in the 2021 results. If you understand what I mean?

Well, not sure I do. But all of our deferral agreements, whether they're with customers or with banks, it's not just we're not giving away money. We're saying the rent is deferred, and it has to be repaid back. And it's the same when the banks defer principal payments, and then those principal payments have to be paid back as well.

Next question is from the line of [ Jason Han ] from Principal Global Investors.

Just first, a clarifying question. Is any of your $75 million claim against Virgin Australia reflected on the balance sheet? And then secondly, last week, you announced a number of updates in terms of fleet activity and re-leases. I was just wondering if it will be possible for you to give any color regarding the terms and conditions on those leases as they may have compared to what was in place previously.

Yes. I'll take the second part of the question, and maybe Iain can take -- have we reflected any of the Virgin collectibles in these results, Iain?

No, we haven't. I mean in accounting language, the claim against Virgin is a contingent asset. And that means it's only a disclosure item. It's not something you can book until collection is 100% certain. So it will basically form a revenue item when collected, which is expected to be June '21.

Well, second part of the question. The fleet update was for information purposes because we kept getting asked what we've been up to. And so we worked out what we've been doing in the last -- during the COVID-19 pandemic, and we sold a couple of aircraft. We originated a new lease on current market terms. We extended to 16 years a couple of leases. We'd extended narrowbody by 6 years. So we've been fairly active. And we still are quite active, if that answers your question.

Well, I was just curious, obviously, understanding that there has been some aging of the aircraft since their initial lease. But again, I was just trying to get a color if you were looking at the fleet on a sort of an average lease rate basis. Again, is there any directionality in terms of how much that might have changed versus what was previously in place?

No. It's -- there hasn't -- I mean, leasing aircraft right now, obviously, lease rates are low. Because the -- there's very little demand. It's tough. The airlines are in recovery mode. But when they recover, they will need financing. Because what this pandemic's demonstrated is that the lessors are obviously capable of managing these crises better than the airlines. So they will all -- they'll be -- it's sort of -- it's an interesting one. Some of the bigger lessors are keeping aircraft grounded and in inventory because they believe if there's a vaccine or a treatment or a protocol to deal with COVID, then the market would rebound quickly. I guess our approach has been not to have too many aircraft grounded and to place -- pretty much place everything. Because we don't know how long this pandemic will last. So clearly, I think in a rebound, you'll see it will be a fantastic industry for the lessors because there won't be many of them -- a few of them have disappeared and some of the financing structures haven't worked out that well. So the traditional lessors like us should do -- well, the lessors with the traditional business model, such as us, should do quite well. It will be more profitable.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Chatfield for any closing remarks. Please go ahead.

Look, thank you very much. That concludes our call for today. We're very optimistic about the future, in a post-pandemic environment, we'll do super well. We're pleased to have delivered these results in what is obviously a very tough time in the travel industry. So thank you very much. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.