The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q. OverviewAir Lease Corporation (the "Company", "ALC", "we", "our" or "us") is a leading aircraft leasing company that was founded by aircraft leasing industry pioneer, Steven F. Udvar-Házy. We are principally engaged in purchasing new commercial jet transport aircraft directly from aircraft manufacturers, such as The Boeing Company ("Boeing") and Airbus S.A.S. ("Airbus"), and leasing those aircraft to airlines throughout the world with the intention to generate attractive returns on equity. In addition to our leasing activities, we sell aircraft from our operating lease portfolio to third-parties, including other leasing companies, financial services companies, airlines and other investors. We also provide fleet management services to investors and owners of aircraft portfolios for a management fee. Our operating performance is driven by the growth of our owned fleet, the terms of our leases, the interest rates on our debt, and the aggregate amount of our indebtedness, supplemented by the gains from our aircraft sales, trading and other activities and our management fees. Impact of COVID-19 Pandemic OnJanuary 30, 2020 , the spread of the COVID-19 outbreak was declared a Public Health Emergency of International Concern by theWorld Health Organization ("WHO"). OnMarch 11, 2020 ,WHO characterized the COVID-19 outbreak as a pandemic. The COVID-19 pandemic has resulted in governmental authorities around the world implementing numerous measures to try to contain the virus, such as travel bans and restrictions, border closures, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns (subject to exceptions for certain essential operations and businesses). Although some of these measures have since been lifted or scaled back, a recent resurgence of COVID-19 in certain parts of the world, includingthe United States , has resulted in the re-imposition of certain restrictions and may lead to other restrictions being implemented again in response to efforts to reduce the spread of COVID-19. It is unclear how long these restrictions will remain in place and they may remain in place in some form for an extended period of time. These measures, coupled with a decrease in consumer spending on travel as a result of COVID-19, have materially impacted airline traffic and operations throughout the world, including for our airline customers. Aircraft manufacturers and suppliers also have been impacted, including causing the temporary closure of Boeing and Airbus' final assembly facilities and also closures of various facilities across their supply chain. In the second quarter of 2020, Boeing and Airbus resumed production in these facilities. As the virus spread globally during the second quarter of 2020, its impact on the global economy increased significantly, resulting in a rapid decline in global air travel that accelerated through the second quarter of 2020. While domestic and regional airline traffic have improved over the last several months, international and business air travel demand remain challenged. The impact of COVID-19 on airlines, including our airline customers, accelerated in the second quarter of 2020. Since the pandemic began in the first quarter of 2020, we have received requests from our customers for accommodations such as deferral of lease payments or other lease concessions. As ofAugust 6, 2020 , most of our lessees have requested some form of rental relief. We evaluate such requests on a case-by-case basis and have worked out accommodation arrangements with approximately 59% of our lessees, generally in the form of partial lease deferrals for payments due in the first and second quarter of 2020, typically with a short-term repayment period, with the majority of the deferrals repaid over the next 12 months. In many cases, lease extensions were also negotiated as part of the deferral accommodations. ThroughAugust 6, 2020 , we have agreed to defer approximately$189.9 million in lease payments, which represents approximately 3% of our total available liquidity, as ofJune 30, 2020 . These lease deferrals resulted in a decrease in our cash flow provided by operating activities for the second quarter. We remain in active discussions with our airline customers and expect to continue to provide accommodation arrangements on a case-by-case basis.
Our collection rate during the second quarter of 2020 and the month ofJuly 2020 was 91% and 89%, respectively, compared to 90% during the first quarter of 2020. Collection rate is defined as the sum of cash collected from lease 18 rentals and maintenance reserves, and includes cash recovered from outstanding receivables from previous periods, as a percentage of the total contracted receivables due for the period. The collection rate is calculated after giving effect to lease deferral arrangements made as ofAugust 6, 2020 . Our lease utilization rate for the second quarter of 2020 and for the month ofJuly 2020 was 99.6% compared to 99.7% for the first quarter of 2020. The lease utilization rate is calculated based on the number of days each aircraft was subject to a lease or letter of intent during the period, weighted by the net book value of the aircraft. It is possible that our collection rate or lease utilization rate could further decline in the near future as a result of accommodation arrangements we have made or could make in the future, including providing additional lease concessions to airline customers already receiving a concession or if our airline customers do not make their lease payments even absent lease concessions. Depending on the severity and longevity of the COVID-19 pandemic and the related efforts taken to reduce its spread, some of our lessees have, and may in the future continue to, return aircraft to us before the return date in their lease agreement or experience insolvency or initiate bankruptcy or similar proceedings that result in aircraft being returned to us. If this occurs, we may not be able to reposition the aircraft with other airlines as quickly as we have historically been able to do or we may incur increased costs in repositioning such aircraft. As a result, our revenues and collection rates would decline. In addition, as ofJune 30, 2020 , we had commitments to purchase 393 aircraft from Airbus and Boeing for delivery through 2026, and we had placed approximately 90% of our committed order book on long-term leases for aircraft delivering through 2022. The impact of the COVID-19 pandemic on airlines could result in the cancellation of leases that we have in place for our committed orderbook or a decline in the number of aircraft in our order book that we can place into leases prior to their delivery. If we are not able to place aircraft from our orderbook into leases prior to delivery, it may cause downward pressure on our lease rates or require us to sell aircraft in our fleet sooner than anticipated. During the second quarter, our employees continue to work remotely, and due to travel restrictions and business limitations and shutdowns, some transitions of our aircraft from one lessee to another lessee have been delayed. As a result of travel restrictions, we expect some challenges when transitioning, acquiring or selling aircraft. Some planned aircraft sales have also been delayed or terminated as a result of business limitations and shutdowns. We expect these disruptions to continue and they could worsen. We also expect that demand for used aircraft will decline in the near-term and that we will sell fewer used aircraft in 2020 than we initially planned to sell, and it is unclear what demand for used aircraft will be in 2021. The decline in demand for used aircraft may also result in impairment charges to the aircraft in our fleet. We have also experienced aircraft delivery delays related to COVID-19. While the commitment table in Note 4, "Commitments and Contingencies" above and the discussion of "Our Fleet" below reflects our current delivery expectations, we are in ongoing discussions with Boeing and Airbus to determine the extent and duration of delivery delays. The delays could result in a cancellation of leases for those aircraft. Pursuant to contractual provisions, a small number of our customers canceled a total of five 737 MAX leases with us and we have subsequently exercised our right to cancel our purchase of such aircraft with Boeing. Given the dynamic nature of the ongoing COVID-19 pandemic, we are not yet able to determine the full impact of the delivery delays, and we expect such delivery dates could materially change, and as a result, our future growth
will be negatively impacted. COVID-19 has also continued to cause disruption in the financial markets and has caused volatility and uncertainty in the bond market. We finance the purchase of aircraft and our business with available cash balances, internally generated funds, including through aircraft sales and trading activity, and debt financings. As ofJune 30, 2020 , we had an undrawn balance of$6.0 billion under our Revolving Credit Facility (as defined below). We have continued to have access to the unsecured debt capital markets issuing$850.0 million in aggregate principal amount of Medium-Term Notes inJune 2020 and we believe we will continue to have access to such markets. We could also seek to enter into more secured debt financings, including financings supported through theExport-Import Bank of the United States or other export credit agencies ("ECAs") to fund future aircraft deliveries from our orderbook. Our liquidity is discussed below in more detail under "Liquidity and Capital Resources." While we cannot currently reasonably estimate the extent to which the COVID-19 pandemic and measures taken to contain its spread will ultimately impact our business, we believe the airline industry will eventually recover and aircraft travel will return to historical levels over the long term. We believe we are well positioned to offer solutions for airlines, 19
because we can offer the ability to lease younger, more fuel-efficient aircraft at a time when airlines will be focused on managing costs.
As the COVID-19 pandemic and efforts to mitigate its spread continue, we expect our business, results of operations and financial condition will continue to be negatively impacted, and could have a larger impact on our results of operations for the third quarter and remainder of this year than has been reflected in our first and second quarter results for 2020. Depending on the severity and longevity of the COVID-19 pandemic, the related efforts taken to reduce its spread, including the recent resurgence of COVID-19 in certain parts of the world, includingthe United States , and any future resurgences of the virus, the COVID-19 pandemic could have a material, adverse impact on our future revenue growth, liquidity and cash flow. Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our business, results of operations and financial condition for the foreseeable future. Second Quarter Overview
During the three months endedJune 30, 2020 , we purchased and took delivery of one aircraft from our new order pipeline and sold four aircraft ending the period with a total of 301 aircraft with a net book value of$19.1 billion . The weighted average lease term remaining on our operating lease portfolio was 7.0 years and the weighted average age of our fleet was 3.9 years as ofJune 30, 2020 . Our fleet grew by 2.2% based on net book value of$19.1 billion as ofJune 30, 2020 , compared to$18.7 billion as ofDecember 31, 2019 . In addition, we had a managed fleet of 81 aircraft as ofJune 30, 2020 , compared to a managed fleet of 83 aircraft as ofDecember 31, 2019 . We had a globally diversified customer base comprised of 106 airlines in 61 countries. As ofAugust 6, 2020 , all aircraft, except for two aircraft, in our operating lease portfolio, were subject to letters of intent or lease agreements. As ofJune 30, 2020 , we had commitments to purchase 393 aircraft from Airbus and Boeing for delivery through 2026, with an estimated aggregate commitment of$26.2 billion . We ended the second quarter of 2020 with$28.2 billion in committed minimum future rental payments and placed approximately 90% of our committed order book on long-term leases for aircraft delivering through 2022. This includes$13.8 billion in contracted minimum rental payments on the aircraft in our existing fleet and$14.4 billion in minimum future rental payments related to aircraft which will be delivered during the remainder of 2020 through 2024. During the three months endedJune 30, 2020 , we sold a total of four aircraft resulting in proceeds of approximately$87.0 million . As ofJune 30, 2020 , we had one remaining aircraft classified as held for sale and subsequently completed the sale of this aircraft inJuly 2020 . As ofJune 30, 2020 the aircraft was classified as held for sale and included in Other assets on our Consolidated Balance Sheets. During the three months endedJune 30, 2020 , we issued$850.0 million in Medium-Term Notes due 2025 bearing interest at a fixed rate of 3.375% and repurchased$185.2 million in aggregate principal amount of Floating Rate Medium-Term Notes due 2021. The open market debt repurchases resulted in a gain of$13.6 million and is included in aircraft sales, trading and other revenue in our Consolidated Income Statements. In addition, we ended the second quarter of 2020 with an aggregate borrowing capacity under the Revolving Credit Facility of$6.0 billion and total liquidity of$6.9 billion . We ended the second quarter of 2020 with total debt outstanding of$14.8 billion , of which 90.8% was at a fixed rate and 97.8% of which was unsecured. Our composite cost of funds decreased to 3.15% as ofJune 30, 2020 as compared to 3.34% as ofDecember 31, 2019 . Our total revenues for the quarter endedJune 30, 2020 increased by 10.6% to$521.3 million , compared to the quarter endedJune 30, 2019 . This increase was principally driven by the continued growth of our fleet. Our net income available to common stockholders for the quarter endedJune 30, 2020 was$143.8 million compared to$124.0 million for the quarter endedJune 30, 2019 . Our diluted earnings per share for the quarter endedJune 30, 2020 was$1.26 compared to$1.10 for the quarter endedJune 30, 2019 . The increase in net income available to common stockholders in the second quarter of 2020 as compared to 2019 was primarily due to the continued growth of our fleet and an increase in our aircraft sales, trading and other activity. Our adjusted net income before income taxes excludes the effects of certain non-cash items, one-time or non-recurring items, that are not expected to continue in the future and certain other items. Our adjusted net income before income taxes for the three months endedJune 30, 2020 was$194.2 million or$1.71 per diluted share, compared to$170.8 million or$1.51 per diluted share for the three months endedJune 30, 2019 . The increase in our adjusted net income before income taxes was primarily due to the continued growth of our fleet and an increase in our aircraft sales, 20 trading and other activity. Our adjusted pre-tax profit margin for the three months endedJune 30, 2020 was 37.3% compared to 36.2% for the three months endedJune 30, 2019 . Adjusted net income before income taxes, adjusted pre-tax profit margin and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined byU.S. Generally Accepted Accounting Principles ("GAAP"). See Note 1 under the "Results of Operations" table for a discussion of adjusted net income before income taxes, adjusted pre-tax profit margin and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income available to common stockholders. Our Fleet Portfolio metrics of our fleet as ofJune 30, 2020 andDecember 31, 2019 are as follows: June 30, 2020 December 31, 2019 Aggregate fleet net book value$ 19.1 billion $ 18.7
billion
Weighted-average fleet age(1) 3.9 years 3.5
years
Weighted-average remaining lease term(1) 7.0 years 7.2
years Owned fleet(2) 301 292 Managed fleet(2) 81 83 Aircraft on order 393 413 Aircraft purchase options(3) 25 70 Total 800 858 Current fleet contracted rentals$ 13.8 billion $ 14.1 billion Committed fleet rentals$ 14.4 billion $ 15.0 billion Total committed rentals$ 28.2 billion $ 29.1 billion
(1) Weighted-average fleet age and remaining lease term calculated based on net
book value.
As of
in Other assets on the Consolidated Balance Sheet. All of these aircraft are
excluded from the owned fleet count and included in our managed fleet count.
As of
aircraft, that have since expired without being exercised, and up to 25 Airbus A220 aircraft.
The following table sets forth the net book value and percentage of the net book value of our flight equipment subject to operating lease in the indicated regions based on each airline's principal place of business as ofJune 30, 2020 andDecember 31, 2019 (in thousands, except percentages): June 30, 2020 December 31, 2019 Net Book Net Book Region Value % of Total Value % of Total Europe$ 5,748,878 30.1 %$ 5,438,775 29.0 % Asia (excluding China) 5,242,239 27.4 % 4,985,525 26.7 % China 2,824,687 14.8 % 2,930,752 15.7 % The Middle East and Africa 2,285,462 12.0 % 2,242,215 12.0 %
Central America, South America and Mexico 1,095,786 5.7 % 1,116,814 6.0 % Pacific, Australia and New Zealand 975,190 5.1 %
993,858 5.3 % U.S. and Canada 935,831 4.9 % 996,398 5.3 % Total$ 19,108,073 100.0 %$ 18,704,337 100.0 % 21
The following table sets forth the number of aircraft we owned by aircraft type
as of
June 30, 2020 December 31, 2019 Number of Number of Aircraft type Aircraft % of Total Aircraft % of Total Airbus A319-100 1 0.3 % 1 0.3 % Airbus A320-200 21 7.0 % 21 7.2 % Airbus A320-200neo 16 5.3 % 13 4.5 % Airbus A321-200 28 9.3 % 28 9.6 % Airbus A321-200neo 39 13.0 % 35 12.0 % Airbus A330-200 13 4.3 % 12 4.1 % Airbus A330-300 8 2.7 % 7 2.4 % Airbus A330-900neo 7 2.3 % 7 2.4 % Airbus A350-900 10 3.3 % 10 3.4 % Boeing 737-700 4 1.3 % 4 1.4 % Boeing 737-800 84 28.0 % 85 29.1 % Boeing 737-8 MAX 15 5.0 % 15 5.1 % Boeing 767-300ER - - % 1 0.3 % Boeing 777-200ER 1 0.3 % 1 0.3 % Boeing 777-300ER 24 8.0 % 24 8.2 % Boeing 787-9 23 7.6 % 23 8.0 % Boeing 787-10 6 2.0 % 4 1.4 % Embraer E190 1 0.3 % 1 0.3 % Total 301 100.0 % 292 100.0 %
As of
Estimated Delivery Years Aircraft Type 2020 2021 2022 2023 2024 Thereafter Total Airbus A220-300(1) - - 3 14 11 22 50 Airbus A320/321neo(2) 14 22 23 25 32 37 153 Airbus A330-900neo - 3 7 5 - - 15 Airbus A350-900/1000 3 4 3 4 5 1 20 Boeing 737-7/8/9 MAX 2 24 23 42 30 - 121 Boeing 787-9/10 8 6 8 10 2 - 34 Total 27 59 67 100 80 60 393
In addition to our commitments, as of
aircraft are scheduled to commence in 2023 and continue through 2028.
(2) Our Airbus A320/321neo aircraft orders include 47 long-range variants and 29
extra long-range variants. Aircraft Delivery Delays Pursuant to our purchase agreements with Boeing and Airbus for new aircraft, we and each manufacturer agree to contractual delivery dates for each aircraft ordered. These dates can change for a variety of reasons, and in the last several years manufacturing delays have significantly impacted our actual delivery dates. For several years, we have experienced delivery delays for certain of our Airbus orderbook aircraft, primarily the A321neo aircraft and, to a lesser extent, A330neo aircraft. The worldwide grounding of the Boeing 737 MAX aircraft ("737 MAX") began onMarch 10, 2019 , and remains in effect. As a result, Boeing temporarily halted production and delivery of all 737 MAX aircraft. While production of the 737 MAX has now resumed in the second quarter, deliveries remain on hold. TheFederal Aviation Administration ("FAA") has begun flight testing for recertification of the 737 MAX. Lifting of the grounding is subject to the approval of theFAA , as well as a number of other global regulatory authorities, and we are unable to speculate as to when this may occur. Even after the grounding is lifted, Boeing's ability to deliver 737 MAX aircraft may be impacted as a result of the COVID-19 pandemic. We are currently in discussions with Boeing regarding the mitigation of possible damages resulting from the grounding of, and the delivery delays associated with the 737 MAX aircraft that we own or have on order, which could result in changes to
the commitment table. 22
The ongoing COVID-19 pandemic has caused delivery delays of aircraft in our orderbook and is expected to continue to cause delays of aircraft deliveries. As discussed in further detail above in "Impact of COVID-19 Pandemic," the pandemic has resulted in numerous travel restrictions and business shutdowns or other operating limitations, including the temporary closure of final aircraft assembly facilities for each of Boeing and Airbus. In the second quarter of 2020, Boeing and Airbus resumed production in these facilities. As a result of the temporary closures of the Boeing and Airbus facilities, most of our expected aircraft deliveries were delayed during the second quarter. Given the dynamic nature of the ongoing COVID-19 pandemic, we are in ongoing discussions with Boeing and Airbus to determine the impact and duration of delivery delays. However, we are not yet able to determine the impact of the delivery delays, and as such, the delivery dates listed above could materially change.
The aircraft purchase commitments discussed above also could be impacted by lease cancellation. Our leases typically provide that we and our airline customer each have a cancellation right related to certain aircraft delivery delays. Our purchase agreements with Boeing and Airbus also generally provide that the Company and the manufacturer each have cancellation rights that typically are parallel with our cancellation rights in our leases. Our leases and our purchase agreements with Boeing and Airbus generally provide for cancellation rights starting at one year after the original contractual delivery date, regardless of cause. Pursuant to contractual provisions, a small number of our customers canceled a total of five 737 MAX leases with us and we have subsequently exercised our right to cancel our purchase of the related 737 MAX aircraft with Boeing. We believe that the majority of our 737 MAX aircraft deliveries in our orderbook will be delayed more than 12 months. The following table, which is subject to change based on Airbus and Boeing delivery delays, shows the number of new aircraft scheduled to be delivered as ofJune 30, 2020 . As noted above, we expect delivery delays for all aircraft deliveries in our orderbook, including Boeing 737 MAX delivery delays after the grounding of such aircraft is lifted. We remain in discussions with Boeing and Airbus to determine the extent and duration of delivery delays, but given the dynamic nature of the ongoing COVID-19 pandemic, we are not yet able to determine the full impact of the delivery delays. Number of Number Delivery Year Aircraft Leased % Leased 2020 27 27 100.0 % 2021 59 57 96.6 % 2022 67 53 79.1 % 2023 100 33 33.0 % 2024 80 11 13.8 % Thereafter 60 - - % Total 393 181
Aircraft Industry and Sources of Revenues
Our revenues are principally derived from operating leases with scheduled and charter airlines throughout the world. As ofJune 30, 2020 , we have a globally diversified customer base comprised of 106 airlines in 61 different countries, with over 95% of our business revenues from airlines domiciled outside of theU.S. , and we anticipate that most of our revenues in the future will be generated from foreign customers. Performance of the commercial airline industry is linked to global economic health and development, which may be negatively impacted by economic disruption, macroeconomic conditions and geopolitical and policy risks, among other factors. COVID-19 has caused significant disruption to the commercial airline industry resulting in a meaningful decline in air travel demand and subsequent flight cancellations, negatively impacting airlines, aircraft manufacturers, and other related businesses. TheInternational Air Transport Association ("IATA") reported that passenger traffic fell 58.4% year-over-year for the first six months of 2020 and 86.5% year-over-year for the month ofJune 2020 , primarily due to COVID-19. As a result, IATA expects airline passenger volumes to fall 55% in 2020 as compared to 2019, before recovering an estimated 62% from the predicted 2020 levels in 2021, albeit with 2021 passenger volumes still below peak levels achieved in 2019. While domestic and regional airline traffic have improved over the last several months, international and business air travel demand remain challenged. 23
We expect a significant increase in financial difficulties for our airline customers through the remainder of 2020 and potentially longer, including the need for lease deferrals or other lease concessions, requests to return aircraft early or defaults. We expect increased airline reorganizations, liquidations, or other forms of bankruptcies, which may include our aircraft customers and result in the early return of aircraft or changes in our lease terms. As of the date of this filing, we had 11 aircraft across three airlines which were subject to various forms of insolvency proceedings. Approximately 75% of the net book value of our fleet are leased to flag carriers or airlines that have some form of governmental ownership; however, this does not guarantee our ability to collect contractual rent payments. We believe that having a large portion of the net book value of our fleet on lease with flag carriers or airlines with some form of governmental ownership, coupled with the overall quality of our aircraft and security deposits and maintenance reserves under our leases will help mitigate our customer risk. We expect the aviation industry to recover over time from the impact of COVID-19, and in the long-term we remain optimistic. While we believe some aircraft lessors may consolidate or cease operations as a result of the pandemic, we believe the aircraft leasing industry has remained resilient over time across a variety of global economic conditions and remain optimistic about the long-term fundamentals of our business. As a result of the COVID-19 pandemic, some airlines have accelerated their plans to retire older, less fuel-efficient aircraft that have higher maintenance costs in the current environment, and we anticipate that airlines will continue to accelerate the retirement of this type of aircraft, ultimately increasing demand for newer aircraft over time. We also anticipate that when airlines need to add new aircraft to their fleet, they will increasingly elect to lease aircraft instead of purchasing aircraft to reduce capital requirements and manage other operating expenses, and that we will benefit from that trend. A number of these trends have already begun during the last several months and we continue to closely monitor market impact from the pandemic. We and airlines around the world have continued to experience delivery delays from Boeing and Airbus, from which we have 393 aircraft on order as ofJune 30, 2020 , as discussed above in "Our Fleet." The Airbus delays and the 737 MAX grounding have impacted the growth of our company as well as the growth of our airline customers, passenger growth and airline profitability and we expect this to continue. As a result of continued production delays and the impact of COVID-19, we expect aircraft deliveries to be lower than previously anticipated for 2020 and delivery delays could potentially extend well into 2021 and beyond. The worldwide grounding of the 737 MAX began onMarch 10, 2019 , and remains in effect. As a result, Boeing temporarily halted production and delivery of all 737 MAX aircraft. While production of the 737 MAX has now resumed, deliveries remain on hold. Since March of 2019, airlines affected by this grounding have had to adjust flight schedules or cancel flights, back fill aircraft with other aircraft types or keep older aircraft in service longer. These operational changes and the uncertainty of when the 737 MAX aircraft will return to service and when Boeing will resume deliveries have impacted the profitability of certain airlines. TheFAA has begun flight testing for recertification of the 737 MAX. Lifting of the grounding is subject to the approval of theFAA , as well as a number of other global regulatory authorities, and we are unable to speculate as to when this may occur. Even after the grounding is lifted, Boeing's ability to deliver 737 MAX aircraft may be impacted as a result of
the COVID-19 pandemic.
As ofJune 30, 2020 , we owned and leased 15 737 MAX aircraft and we had 121 737 MAX aircraft on order. Because of the uncertainty on the duration of the grounding, we have curtailed our leasing of our MAX orderbook aircraft. With respect to the 15 737 MAX aircraft we own and lease, our airline customers are obligated to continue to make payments under the lease, irrespective of any difficulties in which the lessees may encounter, including an aircraft fleet grounding. Some of our airline customers for these 15 737 MAX aircraft lease payments are in arrears.
We expect that if the grounding continues for an extended time, or if there are significant 737 MAX delivery delays even after the grounding is lifted as a result of the impact of the COVID-19 pandemic, more of our customers may seek to cancel their lease contracts with us. As ofJune 30, 2020 , a small number of our customers canceled a total of five 737 MAX leases with us and we have subsequently exercised our right to cancel our purchase of the related 737 MAX aircraft with Boeing. It is unclear at this point if we will cancel more of our 737 MAX delivery positions with Boeing or attempt to find replacement lessees. We are currently in discussions with Boeing regarding the mitigation of possible damages resulting from the grounding of and the delivery delays associated with the 737 MAX aircraft that we own and have on order. 24 For several years, Airbus has also had delivery delays for certain of its aircraft, primarily the A321neo aircraft and, to a lesser extent, A330neo aircraft. Those delays are continuing and have worsened. Airbus has told us to continue to expect several months of delivery delays relating to such aircraft scheduled to deliver through 2022. These delays also have impacted airline operations and the profitably of certain airlines. Further as it relates to Airbus aircraft, inOctober 2019 , theOffice of the U.S. Trade Representative announced a 10% tariff on new aircraft imported fromEurope , including Airbus aircraft. TheU.S. government has recently made statements and taken certain actions that have led to, and may lead to, further changes toU.S. and international trade policies, including recently imposed tariffs affecting certain products exported by a number ofU.S. trading partners, such asEurope andChina . In response, manyU.S. trading partners, includingEurope andChina , have imposed or proposed new or higher tariffs onU.S. products. We are currently monitoring the impact of this announcement on our future Airbus deliveries toU.S. customers. We cannot predict what further actions may ultimately be taken with respect to tariffs or trade relations between theU.S. andU.S. trading partners. Accordingly, it is difficult to predict exactly how, and to what extent, such actions may impact our business, or the business of our lessees or aircraft manufacturers. Any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for aircraft, increase the cost of aircraft components, further delay production, impact the competitive position of certain aircraft manufacturers or prevent aircraft manufacturers from being able to sell aircraft in certain countries. Our leases are primarily structured as triple net leases, whereby the lessee is responsible for all operating costs including taxes, insurance, and aircraft maintenance. Given the impact of COVID-19 on our industry, it is unclear at this time how competition within the aircraft leasing industry will evolve or change in the coming months and what the corresponding impact on lease rates will be as a result of the change in the competitive landscape, COVID-19, trade matters, the aircraft delays from Airbus and Boeing or other items.
Liquidity and Capital Resources
Overview We finance the purchase of aircraft and our business with available cash balances, internally generated funds, including through aircraft sales and trading activity, and an array of debt financing products. We have structured ourselves with the goal to maintain investment-grade credit metrics and our debt financing strategy has focused on funding our business on an unsecured basis with primarily fixed-rate debt. Unsecured financing provides us with operational flexibility when selling or transitioning aircraft from one airline to another and also reduces structural subordination in our capital structure. We also have the ability to seek debt financing secured by our assets, as well as financings supported through theExport-Import Bank of the United States and other export credit agencies for future aircraft deliveries. Our access to a variety of financing alternatives including unsecured public bonds, private capital, bank debt and secured markets serves as a key advantage in managing our liquidity. Additionally, we only have approximately$295.8 million in debt maturities for the remainder of 2020, which serves to limit our near-term financing needs. Aircraft delivery delays as a product of the COVID-19 pandemic and the 737 MAX grounding are expected to further reduce our debt financing needs this year and potentially beyond. We continue to monitor COVID-19 and its impact on our overall liquidity position and outlook. We ended the second quarter of 2020 with total debt outstanding, net of discounts and issuance costs, of$14.6 billion compared to$13.6 billion as ofDecember 31, 2019 . Our unsecured debt increased to$14.5 billion as ofJune 30, 2020 from$13.3 billion as ofDecember 31, 2019 . Our unsecured debt as a percentage of total debt increased to 97.8% as ofJune 30, 2020 from 96.6%
as ofDecember 31, 2019 . Our cash flows provided by operating activities decreased by 28.6% or$187.9 million , to$468.3 million for the six months endedJune 30, 2020 as compared to$656.2 million for the six months endedJune 30, 2019 . The decrease in our cash flow provided by operating activities is primarily due to an increase in deferred lease payments during the quarter as a result of the COVID-19 pandemic. Our cash flow used in investing activities was$902.6 million for the six months endedJune 30, 2020 , which resulted primarily from the purchase of aircraft, partially offset by proceeds from our sales and trading activity. Our cash flow provided by financing activities was$1.0 billion for the six months endedJune 30, 2020 , which resulted primarily from the issuance of unsecured notes partially offset by the repayment of outstanding debt. We expect the impact of COVID-19, including as a result of rent deferrals and other lease concessions made or that 25
we may make in the future to our customers, will continue to have negative impact on cash flow from operating activities.
We ended the second quarter of 2020 with available liquidity of$6.9 billion which is comprised of unrestricted cash of$926.4 million and an available borrowing capacity under our Revolving Credit Facility of$6.0 billion . Our Revolving Credit Facility does not condition our ability to borrow on the lack of a material adverse effect to us or the general economy. We believe that we have sufficient liquidity to satisfy the operating requirements of our business through at least next 12 months. A key component of the ongoing liquidity available to us is our Revolving Credit Facility, for which the substantial majority of the commitments mature in 2023. Our Revolving Credit Facility is syndicated across 49 financial institutions from around various regions of the world, diversifying our reliance on any individual lending institution. We continue to utilize our Revolving Credit Facility in the normal course of business. The ultimate impact the COVID-19 pandemic may have on our business, results of operations and financial condition over the next 12 months is currently uncertain and will depend on certain developments, including, among others, the impact of the COVID-19 pandemic on our airline customers and the magnitude and duration of the pandemic. We currently believe that our cash on hand, current debt arrangements and general ability to access the capital markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures, including aircraft acquisition over the next 12 months. We also have the ability to seek debt financing secured by our assets, as well as financings supported through theExport-Import Bank of the United States and other export credit agencies, or ECAs for future aircraft deliveries. As ofJune 30, 2020 , we were in compliance in all material respects with the covenants contained in our debt agreements. A ratings downgrade will not result in a default under any of our debt agreements, but it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the costs of certain financings. Our liquidity plans are subject to a number of risks and uncertainties, including those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , and in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Debt
Our debt financing was comprised of the following at
June 30, 2020 December 31, 2019 Unsecured Senior notes$ 13,509,411 $ 12,357,811 Term financings 972,625 883,050 Revolving credit facility - 20,000
Total unsecured debt financing 14,482,036
13,260,861 Secured Term financings 298,552 428,824 Export credit financing 28,283 31,610 Total secured debt financing 326,835 460,434 Total debt financing 14,808,871 13,721,295
Less: Debt discounts and issuance costs (169,826) (142,429) Debt financing, net of discounts and issuance costs$ 14,639,045 $ 13,578,866 Selected interest rates and ratios: Composite interest rate(1) 3.15 % 3.34 % Composite interest rate on fixed-rate debt(1) 3.31 % 3.39 % Percentage of total debt at fixed-rate 90.84 % 88.40 %
(1) This rate does not include the effect of upfront fees, facility fees, undrawn
fees or amortization of debt discounts and issuance costs. 26
Senior unsecured notes (including Medium-Term Note Program)
As of
During the six months endedJune 30, 2020 , we issued$2.3 billion in aggregate principal amount of Medium-Term Notes comprised of (i)$750.0 million due 2025 at a fixed rate of 2.30%, (ii)$650.0 million due 2030 at a fixed rate of 3.00% and (iii)$850.0 million due 2025 at a fixed rate of 3.375%. During the quarter endedJune 30, 2020 , we repurchased$185.2 million in aggregate principal amount of Floating Rate Medium-Term Notes due 2021. The open market debt repurchases resulted in a gain of$13.6 million and is included in Aircraft sales, trading and other revenue in our Consolidated Income Statements.
Unsecured revolving credit facility
As of
We have an unsecured revolving credit facility withJPMorgan Chase Bank, N.A ., as agent (the "Revolving Credit Facility"). During the six months endedJune 30, 2020 , we increased the aggregate capacity of our unsecured revolving credit facility by$250.0 million . OnMay 5, 2020 , commitments totaling$92.7 million of our committed unsecured revolving credit facility matured. As ofJune 30, 2020 , the aggregate capacity of our committed unsecured revolving credit facility was approximately$6.0 billion . Lenders hold revolving commitments totaling approximately$5.5 billion that mature onMay 5, 2023 , commitments totaling$245.0 million that mature onMay 5, 2022 and commitments totaling$5.0 million that mature onMay 5, 2021 . As ofJune 30, 2020 , borrowings under our committed unsecured revolving credit facility will generally bear interest at either (a) LIBOR plus a margin of 1.05% per year or (b) an alternative base rate plus a margin of 0.05% per year, subject, in each case, to increases or decreases based on declines in the credit ratings for our debt. We are required to pay a facility fee of 0.20% per year (also subject to increases or decreases based on declines in the credit ratings for our debt) in respect of total commitments under our unsecured revolving credit facility. Borrowings under our committed unsecured revolving credit facility are used to finance our working capital needs in the ordinary course of business and for other general corporate purposes. Secured debt financing InJune 2020 , we entered into an amendment to our secured warehouse facility to extend the final maturity toJune 2021 . The facility will continue to bear a floating interest rate of LIBOR plus 2.00%. As part of the amendment, the credit facility was converted to full recourse against us and excess cash collateral was released. The outstanding balance on our secured warehouse facility was$103.1 million and$128.5 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. As ofJune 30, 2020 , the outstanding balance on our secured debt financings, including our secured warehouse facility and our export credit financing, was$326.8 million and we had pledged 12 aircraft as collateral with a net book value of$644.5 million . As ofDecember 31, 2019 , the outstanding balance on our secured debt financings, including our secured warehouse facility and our export credit financing, was$460.4 million and we had pledged 15 aircraft as collateral with a net book value of$890.7 million . Preferred equity OnMarch 5, 2019 , we issued 10,000,000 shares of 6.150% Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock"),$0.01 par value, with a liquidation preference of$25.00 per share. We will pay dividends on the Series A Preferred Stock only when, as and if declared by the board of directors. Dividends will accrue, on a non-cumulative basis, on the stated amount of$25.00 per share at a rate per annum equal to: (i) 6.150% during the first five years and payable quarterly in arrears beginning onJune 15, 2019 , and (ii) three-month LIBOR plus a spread of 3.650% per annum fromMarch 15, 2024 , reset quarterly and payable quarterly in arrears beginning
onJune 15, 2024 . 27 We may redeem shares of the Series A Preferred Stock at our option, in whole or in part, from time to time, on or afterMarch 15, 2024 , for cash at a redemption price equal to$25.00 per share, plus any declared and unpaid dividends to, but excluding, the redemption date, without accumulation of any undeclared dividends. We may also redeem shares of the Series A Preferred Stock at our option under certain other limited conditions. OnMay 6, 2020 , our board of directors also approved a cash dividend of$0.384375 per share on our outstanding Series A Preferred Stock, which was paid onJune 15, 2020 to holders of record of our Series A Preferred Stock as of
May 31, 2020 .
OnAugust 5, 2020 , our board of directors also approved a cash dividend of$0.384375 per share on our outstanding Series A Preferred Stock, which will be paid onSeptember 15, 2020 to holders of record of our Series A Preferred Stock as ofAugust 31, 2020 .
Potential Impact of LIBOR Transition
As ofJune 30, 2020 , we had approximately$1.4 billion of floating rate debt outstanding that used LIBOR as the applicable reference rate to calculate the interest on such debt. Additionally, our Series A Preferred Stock will in the future accrue dividends at a floating rate determined by reference to LIBOR, if available. The Chief Executive of theU.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, has announced that theFCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. That announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Moreover, it is possible that LIBOR will be discontinued or modified prior to 2021. TheU.S. Federal Reserve and theBank of England have begun publishing a Secured Overnight Funding Rate and a reformed Sterling Overnight Index Average, respectively, which are currently intended to serve as alternative reference rates to LIBOR. At this time, however, it is not possible to predict the establishment of any market-accepted alternative reference rates or any other reforms to LIBOR and the effect of any such changes. Furthermore, due to the uncertainty surrounding the discontinuation of LIBOR and the effects resulting therefrom, financial market participants have yet to establish standard fallback provisions governing the calculation of floating rate interest and dividends in the event LIBOR is unavailable. The lack of a market practice and inconsistency in fallback provisions is reflected across our floating rate debt and Series A Preferred Stock and the discontinuation of LIBOR could lead to unexpected outcomes that may vary between our various debt and equity securities that reference LIBOR to determine the rate in which interest or dividends, as applicable, accrue. For example, if LIBOR is discontinued, the various fallback provisions contained in our floating rate debt agreements could lead to such debt bearing interest at, among other things, a rate of interest equal to the interest rate last in effect for which LIBOR was determinable, a floating rate determined in reference to a predetermined fallback reference rate or an alternative reference rate to be agreed upon by the parties to such agreement, and a rate of interest representative of the cost to applicable lenders of funding their participation in the debt. If the rate used to calculate interest on our outstanding floating rate debt that currently uses LIBOR and our Series A Preferred Stock were to increase by 1.0% either as a result of an increase in LIBOR or the result of the use of an alternative reference rate determined under the fallback provisions in the applicable debt if LIBOR is discontinued, we would expect to incur additional interest expense on such indebtedness as ofJune 30, 2020 of approximately$13.6 million on an annualized basis. Further, if LIBOR is discontinued and there is no acceptable alternative reference rate, some of our floating rate debt, including certain senior unsecured notes issued under our Medium-Term Note Program, may effectively become fixed rate debt. As a result, the cost of this debt would increase to us if and as interest rates decreased. While we do not expect the potential impact of any LIBOR transition to have a material effect on our financial results based on our currently outstanding debt, uncertainty as to the nature of potential changes to LIBOR, fallback provisions, alternative reference rates or other reforms could adversely impact our interest expense on our floating rate debt that currently uses LIBOR as the applicable reference rate and our Series A Preferred Stock. In addition, any alternative reference rates to LIBOR may result in interest or dividend payments that do not correlate over time with the payments that would have been made on our indebtedness or Series A Preferred Stock, respectively, if LIBOR was available in its current form. Further, the discontinuance or modification of LIBOR and uncertainty of an alternative reference rate may result in the increase in the cost of future indebtedness, which could have a material adverse effect on 28
our financial condition, cash flow and results of operations. We intend to closely monitor the financial markets and the use of fallback provisions and alternative reference rates in 2020 in anticipation of the discontinuance or modification of LIBOR by the end of 2021. Credit ratings
The following table summarizes our current credit ratings:
Corporate Date of Last Rating Agency Long-term Debt Rating Outlook Ratings Action Kroll Bond Ratings A- A- Negative March 26, 2020 Standard and Poor's BBB BBB Negative April 10, 2020 Fitch Ratings BBB BBB Negative July 9, 2020 While a ratings downgrade would not result in a default under any of our debt agreements, it could adversely affect our ability to issue debt and obtain new financings, or renew existing financings, and it would increase the cost of
our financings. Results of Operations
The following table presents our historical operating results for the three and six month periods endedJune 30, 2020 and 2019 (in thousands, except per share amounts and percentages): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (unaudited) Revenues Rental of flight equipment$ 497,869 $ 463,870 $ 994,556 $ 919,609 Aircraft sales, trading and other 23,480 7,525 38,180 17,837 Total revenues 521,349 471,395 1,032,736 937,446 Expenses Interest 102,693 96,824 210,234 186,044 Amortization of debt discounts and issuance costs 10,233 8,712 20,761 17,252 Interest expense 112,926 105,536 230,995 203,296 Depreciation of flight equipment 194,020 171,689 382,915 331,160 Selling, general and administrative 26,581 27,771 54,903 57,473 Stock-based compensation 3,892 5,863 8,321 10,037 Total expenses 337,419 310,859 677,134 601,966 Income before taxes 183,930 160,536 355,602 335,480 Income tax expense (36,305) (32,231) (70,826) (69,081) Net income$ 147,625 $ 128,305 $ 284,776 $ 266,399 Preferred stock dividends (3,844) (4,271) (7,688) (4,271) Net income available to common stockholders$ 143,781 $
124,034
Earnings per share of common stock Basic $ 1.26 $ 1.11 $ 2.44$ 2.36 Diluted $ 1.26 $ 1.10 $ 2.43$ 2.33 Other financial data Pre-tax profit margin 35.3 % 34.1 % 34.4 % 35.8 % Adjusted net income before income taxes(1)$ 194,211 $ 170,840 $ 376,996 $ 358,498 Adjusted pre-tax profit margin(1) 37.3 % 36.2 % 36.5 % 38.2 % Adjusted diluted earnings per share before income taxes(1) $ 1.71 $ 1.51 $ 3.31$ 3.18 Pre-tax return on common equity (trailing twelve months) 13.9 % 14.6 % 13.9 % 14.6 % Adjusted pre-tax return on common equity (trailing twelve months)(1) 15.0 % 15.7 % 15.0 % 15.7 % 29
Adjusted net income before income taxes (defined as net income available to
common stockholders excluding the effects of certain non-cash items, one-time
or non-recurring items, that are not expected to continue in the future and
certain other items), adjusted pre-tax profit margin (defined as adjusted net
income before income taxes divided by total revenues), adjusted diluted
earnings per share before income taxes (defined as adjusted net income before
income taxes divided by the weighted average diluted common shares
outstanding) and adjusted pre-tax return on common equity (defined as (1) adjusted net income before income taxes divided by average common
shareholders' equity) are measures of operating performance that are not
defined by GAAP and should not be considered as an alternative to net income
available to common stockholders, pre-tax profit margin, earnings per share,
diluted earnings per share and pre-tax return on common equity, or any other
performance measures derived in accordance with GAAP. Adjusted net income
before income taxes, adjusted pre-tax profit margin, adjusted diluted
earnings per share before income taxes and adjusted pre-tax return on common
equity are presented as supplemental disclosure because management believes
they provide useful information on our earnings from ongoing operations.
Management and our board of directors use adjusted net income before income taxes, adjusted pre-tax profit margin, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on common equity to assess our consolidated financial and operating performance. Management believes these measures are helpful in evaluating the operating performance of our ongoing operations and identifying trends in our performance, because they remove the effects of certain non-cash items, one-time or non-recurring items that are not expected to continue in the future and certain other items from our operating results. Adjusted net income before income taxes, adjusted pre-tax profit margin, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on common equity, however, should not be considered in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Adjusted net income before income taxes, adjusted pre-tax profit margin, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on common equity do not reflect our cash expenditures or changes in our cash requirements for our working capital needs. In addition, our calculation of adjusted net income before income taxes, adjusted pre-tax profit margin, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on common equity may differ from the adjusted net income before income taxes, adjusted pre-tax profit margin, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on common equity, or analogous calculations of other companies in our industry, limiting their usefulness as a comparative measure. The following tables show the reconciliation of net income available to common stockholders to adjusted net income before income taxes and adjusted pre-tax profit margin (in thousands, except percentages): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (unaudited) Reconciliation of net income available to common stockholders to adjusted net income before income taxes and adjusted pre-tax profit margin: Net income available to common stockholders$ 143,781 $ 124,034 $ 277,088 $ 262,128 Amortization of debt discounts and issuance costs 10,233 8,712 20,761 17,252 Stock-based compensation 3,892 5,863 8,321 10,037 Provision for income taxes 36,305 32,231 70,826 69,081 Adjusted net income before income taxes$ 194,211 $ 170,840 $ 376,996 $ 358,498 Total revenues$ 521,349 $ 471,395 $ 1,032,736 $ 937,446 Adjusted pre-tax profit margin(1) 37.3 % 36.2 %
36.5 % 38.2 %
(1) Adjusted pre-tax profit margin is adjusted net income before income taxes
divided by total revenues 30
The following table shows the reconciliation of net income available to common stockholders to adjusted diluted earnings per share before income taxes (in thousands, except share and per share amounts):
Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (unaudited) Reconciliation of net income available to common stockholders to adjusted diluted earnings per share before income taxes: Net income available to common stockholders$ 143,781 $ 124,034 $ 277,088 $ 262,128 Amortization of debt discounts and issuance costs 10,233 8,712 20,761 17,252 Stock-based compensation 3,892 5,863 8,321 10,037 Provision for income taxes 36,305 32,231 70,826 69,081 Adjusted net income before income taxes$ 194,211 $ 170,840 $ 376,996 $ 358,498 Weighted-average diluted common shares outstanding 113,773,127 112,807,023 113,840,929 112,598,623 Adjusted diluted earnings per share before income taxes $ 1.71$ 1.51 $ 3.31 $ 3.18 The following table shows the reconciliation of net income available to common stockholders to adjusted pre-tax return on common equity (in thousands, except percentages): Trailing Twelve Months June 30, 2020 2019 (unaudited)
Reconciliation of net income available to common stockholders to adjusted pre-tax return on common equity: Net income available to common stockholders
$ 590,123 $ 547,101 Amortization of debt discounts and issuance costs 40,200 33,926 Stock-based compensation 19,029 19,198 Provision for income taxes 150,309 135,518 Adjusted net income before income taxes $
799,661
Common shareholders' equity as of beginning of the period$ 5,049,884 $ 4,337,842 Common shareholders' equity as of end of the period$ 5,619,801 $ 5,049,884 Average common shareholders' equity $
5,334,843
Adjusted pre-tax return on common equity 15.0 % 15.7 %
Three months ended
Rental revenue As ofJune 30, 2020 , we owned 301 aircraft with a net book value of$19.1 billion and recorded$497.9 million in rental revenue for the quarter then ended, which included$8.1 million in amortization expense related to initial direct costs, which is net of overhaul revenue. In the prior year, as ofJune 30, 2019 , we owned 297 aircraft with a net book value of$17.8 billion and recorded$463.9 million in rental revenue for the quarter endedJune 30, 2019 , which included$2.1 million in amortization expense related to initial direct costs, which is net of overhaul revenue. This increase was principally driven by the continued growth of our fleet as compared to prior year.
Aircraft sales, trading and other revenue
Aircraft sales, trading and other revenue totaled$23.5 million for the three months endedJune 30, 2020 compared to$7.5 million for the three months endedJune 30, 2019 . During the quarter endedJune 30, 2020 , we recorded$4.9 million in gains from the sale of four aircraft and$13.6 million in other revenue related to the repurchase of$185.2 million in aggregate principal of our Floating Rate Medium-Term Notes due 2021. During the quarter endedJune 30 , 31 2019, we did not sell any aircraft from our operating lease portfolio. As noted above, we expect the COVID-19 pandemic to have an adverse impact on demand for used aircraft and that we will sell fewer used aircraft in 2020 than we initially planned to sell and it is unclear what demand for used aircraft will be in 2021. Interest expense
Interest expense totaled$112.9 million for the three months endedJune 30, 2020 compared to$105.5 million for the three months endedJune 30, 2019 . The increase was primarily due to an increase in our aggregate debt balance partially offset by a decrease in our composite interest rate. We expect that our interest expense will increase as our average debt balance outstanding continues to increase. Interest expense will also be impacted by changes in
our composite cost of funds. Depreciation expense
We recorded$194.0 million in depreciation expense of flight equipment for the three months endedJune 30, 2020 compared to$171.7 million for the three months endedJune 30, 2019 . The increase in depreciation expense for the three months endedJune 30, 2020 , compared to the three months endedJune 30, 2019 , is primarily attributable to the acquisition of additional aircraft in our operating fleet during the last twelve months.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of$26.6 million for the three months endedJune 30, 2020 compared to$27.8 million for the three months endedJune 30, 2019 . Selling, general and administrative expense as a percentage of total revenue decreased to 5.1% for the three months endedJune 30, 2020 compared to 5.9% for the three months endedJune 30, 2019 . As we continue to add new aircraft to our portfolio, we expect over the long-term, selling, general and administrative expense to decrease as a percentage of
our revenue. Taxes
The effective tax rate was 19.7% and 20.1% for the three months endedJune 30, 2020 and 2019, respectively. Changes in the tax rate were primarily driven by variances in permanent items.
Net income available to common stockholders
For the three months endedJune 30, 2020 , we reported consolidated net income available to common stockholders of$143.8 million , or$1.26 per diluted share, compared to a consolidated net income available to common stockholders of$124.0 million , or$1.10 per diluted share, for the three months endedJune 30, 2019 . Net income available to common stockholders increased in the second quarter of 2020 as compared to 2019, primarily due to the continued growth of our fleet and an increase in our aircraft sales, trading and other activity.
Adjusted net income before income taxes
For the three months endedJune 30, 2020 , we recorded adjusted net income before income taxes of$194.2 million , or$1.71 per diluted share, compared to an adjusted net income before income taxes of$170.8 million , or$1.51 per diluted share, for the three months endedJune 30, 2019 . Our adjusted net income before income taxes increased primarily due to the continued growth of our fleet and an increase in our aircraft sales, trading and other activity. Adjusted net income before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results of Operations" table above for a discussion of adjusted net income before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income available to common stockholders. 32
Six months ended
Rental revenue As ofJune 30, 2020 , we owned 301 aircraft with a net book value of$19.1 billion and recorded$994.6 million in rental revenue for the six months then ended,$13.7 million in amortization expense related to initial direct costs, which is net of overhaul revenue. In the prior year, as ofJune 30, 2019 , we owned 297 aircraft with a net book value of$17.8 billion and recorded$919.6 million in rental revenue for the six months then ended, which included overhaul revenue, net of amortization expense related to initial direct costs, of$15.9 million . This increase was principally driven by the continued growth of our fleet as compared to prior year.
Aircraft sales, trading and other revenue
Aircraft sales, trading and other revenue totaled$38.2 million for the six months endedJune 30, 2020 compared to$17.8 million for the six months endedJune 30, 2019 . During the six months endedJune 30, 2020 , we recorded$6.5 million in gains from the sale of seven aircraft from our operating lease portfolio,$6.5 million in other revenue from the forfeiture of security deposits and$13.6 million in other revenue related to the repurchase of$185.2 million in aggregate principal of our Floating Rate Medium-Term Notes due 2021. During the six months endedJune 30, 2019 , we recorded$1.6 million in gains from the sale of six aircraft from our operating lease portfolio. Interest expense Interest expense totaled$231.0 million for the six months endedJune 30, 2020 compared to$203.3 million for the six months endedJune 30, 2019 . The increase was primarily due to an increase in our aggregate debt balance, partially offset by the decrease in our composite interest rate. We expect that our interest expense will increase as our average debt balance outstanding continues to increase. Interest expense will also be impacted by changes in our composite cost of funds. Depreciation expense
We recorded$382.9 million in depreciation expense of flight equipment for the six months endedJune 30, 2020 compared to$331.2 million for the six months endedJune 30, 2019 . The increase in depreciation expense for the six months endedJune 30, 2020 , compared to the six months endedJune 30, 2019 , is primarily attributable to the acquisition of additional aircraft during the
last twelve months.
Selling, general and administrative expenses
We recorded selling, general and administrative expenses of$54.9 million for the six months endedJune 30, 2020 compared to$57.5 million for the six months endedJune 30, 2019 . Selling, general and administrative expense as a percentage of total revenue decreased to 5.3% for the six months endedJune 30, 2020 compared to 6.1% for the six months endedJune 30, 2019 . As we continue to add new aircraft to our portfolio, we expect over the long-term, selling, general and administrative expense to decrease as a percentage of our revenue. Taxes The effective tax rate was 19.9% and 20.6% for the six months endedJune 30, 2020 and 2019, respectively. Changes in the tax rate were primarily driven by variances in permanent items.
Net income available to common stockholders
For the six months endedJune 30, 2020 , we reported consolidated net income available to common stockholders of$277.1 million , or$2.43 diluted share, compared to a consolidated net income available to common stockholders of$262.1 million , or$2.33 per diluted share, for the six months endedJune 30, 2019 . Net income available to common stockholders increased for the six months endedJune 30, 2020 as compared to 2019, primarily due to the continued growth of our fleet and an increase in our aircraft sales, trading and other activity. 33
Adjusted net income before income taxes
For the six months endedJune 30, 2020 , we recorded adjusted net income before income taxes of$377.0 million , or$3.31 per diluted share, compared to an adjusted net income before income taxes of$358.5 million , or$3.18 per diluted share, for the six months endedJune 30, 2019 . Our adjusted net income before income taxes increased for the six months endedJune 30, 2020 as compared to 2019, primarily due to the continued growth of our fleet and an increase in our aircraft sales, trading and other activity. Adjusted net income before income taxes and adjusted diluted earnings per share before income taxes are measures of financial and operational performance that are not defined by GAAP. See Note 1 under the "Results of Operations" table above for a discussion of adjusted net income before income taxes and adjusted diluted earnings per share before income taxes as non-GAAP measures and reconciliation of these measures to net income available to common stockholders. Contractual Obligations Our contractual obligations as ofJune 30, 2020 , are as follows (in thousands): 2020 2021 2022 2023 2024 Thereafter Total Long-term debt obligations$ 295,789 $ 1,948,697 $ 2,730,561 $ 2,502,123 $ 1,544,791 $ 5,786,910 $ 14,808,871 Interest payments on debt outstanding(1) 226,015 444,082 387,406 315,782 238,608 475,014 2,086,907 Purchase commitments(2) 2,025,283 4,564,159 5,712,095 6,534,093 4,508,101 2,840,517 26,184,248 Operating leases 3,461 7,062 6,509 6,391 4,548 33,058 61,029 Total$ 2,550,548 $ 6,694,000 $ 8,836,571 $ 9,358,389
(1)Future interest payments on floating rate debt are estimated using floating rates in effect atJune 30, 2020 . (2)Purchase commitments reflect our estimate of future Boeing and Airbus aircraft deliveries based on information currently available to us. The actual delivery dates of such aircraft and expected time for payment of such aircraft may differ from our estimates and could be further impacted by ongoing COVID-19 pandemic and the length of the 737 MAX grounding and the pace at which Boeing can deliver aircraft following the lifting of the 737 MAX grounding, among other factors. Purchase commitments include only the costs of aircraft in our committed order book and do not include costs of aircraft that we have the option to purchase or have the right to purchase through memorandums of understanding or letters of intent.
The above table does not include any dividends we may pay on our Series A Preferred Stock or common stock.
Off-Balance Sheet Arrangements
We have not established any unconsolidated entities for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. We have, however, from time to time established subsidiaries and created partnership arrangements or trusts for the purpose of leasing aircraft or facilitating borrowing arrangements, all of which are consolidated. We have non-controlling interests in two investment funds in which we own 9.5% of the equity of each fund. We account for our interest in these funds under the equity method of accounting due to our level of influence and involvement in the funds. Also, we manage aircraft that we have sold through our Thunderbolt platform. In connection with the sale of these aircraft portfolios through our Thunderbolt platform, we hold non-controlling interests of approximately 5.0% in two entities. These investments are accounted for under the cost method of
accounting. Critical Accounting Policies Our critical accounting policies reflecting management's estimates and judgments are described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We have reviewed recently adopted accounting pronouncements and determined that the adoption of such pronouncements is not expected to have a material impact, if 34 any, on our Consolidated Financial Statements. Accordingly, there have been no material changes to critical accounting policies in the six months endedJune 30, 2020 .
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