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AerCap Holdings (NYSE:AER)
Q3 2018 Earnings Conference Call
Oct. 30, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the AerCap third-quarter 2018 financial results call. [Operator instructions] Today's conference is being recorded. And a copy of the presentation will be available on the company's website following the call. At this time, I'd like to turn the conference over to Mr. Joseph McGinley, head of investor relations. Please go ahead, sir.

Joseph McGinley -- Head of Investor Relations

Thank you, operator, and hello, everyone. Welcome to our third-quarter 2018 conference call. With me today is our chief executive officer, Aengus Kelly, and our chief financial officer, Pete Juhas. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation, other than that imposed by law, to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that could materially affect performance can be found in AerCap's earnings release dated October 30, 2018. A copy of the earnings release and conference call presentations are available on our website at aercap.com.

This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation, and we'll allow time at the end for Q&A. As a reminder, I'd ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Aengus Kelly.

Aengus Kelly -- Chief Executive Officer

Thank you, Joe. Good morning, everyone, and thank you for joining us for our third-quarter 2018 earnings call. I'm pleased to report another quarter of strong earnings and profitability. During the quarter, we generated earnings per share of $1.79 and net income of $263 million.

Both of which were driven by a strong underlying performance of the business. I'd like to remind everyone what the underlying business is. AerCap is the world's largest owner of commercial aircraft. This provides us with tremendous scale and insight to the entire aviation industry.

We place our aircraft in long-term leases to 200 customers in 80 countries. This diversification, coupled with our proactive approach to risk management, has contained credit cost to 1% of revenue throughout the last decade. The relentless focus of the AerCap platform on a consistent strategy and operating excellence has resulted in double-digit earnings growth and 12 years of uninterrupted GAAP profitability. This has been achieved despite a $147 oil, the financial crisis, the Eurozone crisis, etc.

Furthermore, this unrivaled value-creation has been achieved without any large financial or industrial parent. This is the AerCap business. The AerCap platform remained very active in Q3, executing 87 aircraft transactions, including 20 widebodies. Our utilization rate improved 99.4%, reflective of the strong broad-based demand for our aircraft.

Passenger traffic continues to grow strongly, the reporting a 6.4% growth in for the month of August. Load factors reached record levels of 85.3%, edging closer to what we see as a natural ceiling. We took delivery of 12 new aircrafts in Q3, comprised of six A320neos, two A350s, two 787s and our first two 737 MAX 8s. These aircraft types are the most in-demand variants of today's new technology aircraft family.

This demand is reflected in our strong placement activity with a 95% of our lease rents to 2021 already contracted. Our average remaining lease term is one of the highest in the industry at 7.1 years, up from 6.6 at the end of Q3 of 17. Given the production delays in Airbus and Boeing, we now expect to take delivery of 33 aircraft in the fourth quarter, as a small number of units have shifted into 2019. Our training team remained active during the quarter as we continue to optimize our portfolio.

We sold 13 aircraft in Q3. These included two A330s, two 767s, two 777s and one A340 as well as six narrow-body aircrafts. Sales of midlife and older aircraft, coupled with the delivery of new technology aircraft, has decreased our average fleet age to 6.6 years, down from 7.1 in September of 2017. This will move toward to the low 6s by the end of 2019 because our order book delivered.

I would like to highlight, however, that we do not believe that newer aircraft are always better. It is far more nuanced than that. You have to make sure that you have the new aircraft that your customers want for the next 20 to 25 years, not just the next eight to 10. We've been very careful with our portfolio management strategy to ensure that we only have the most in-demand aircraft and that age is a secondary consideration.

There are plenty of excellent older aircraft, just like there were new aircraft that we would not purchase today. The average age of our current technology aircraft is over 10 years, and we are very confident that these aircraft will be in demand for the next 12 years, thereby consuming the remaining economic value and reducing any impairment risks. In contrast, we believe that young variants of current technology assets will face residual value risk because in 12 years, these aircraft will be replaced in large numbers by new technology assets such as the Neo and the 787. We will continue to manage the fleet to maximize value rather than purely age.

At a macro level, we see generally healthy environment for airlines, notwithstanding the recent increase in oil prices. We continue to see solid demand for good aircrafts. We've now placed over 90% of our order book through 2020. The three major markets of Europe, North America and China continue to perform well.

Domestic travel in the U.S. and China grew 5.2% and 14.9%, respectively, in August, significantly ahead of GDP growth. Once the happening of smaller bankruptcy events in the last couple of months such as and these cases have been small in nature and reflecting individual issues. We believe the airline industry is in a stronger structural position that it was a decade ago, which provides a better scope for carriers to manage capacity and cash flows.

Nonetheless, we will likely see some weaker airlines continue to struggle through the winter as they face higher fuel prices and in some cases, a decrease in the value of their local currency relative to the U.S. dollar. It should be remembered that we protect work ourselves in these events by collecting security deposits and maintenance reserves and having an active approach to risk management. The culmination of these factors means that credit cost of average 1% of lease revenue in the last 10 years.

This shows the power of the AerCap platform. On the liability side of our business, we closed on $750 million of debt facilities in the third quarter at attractive pricing. We continue to carry strong levels of liquidity, ending the quarter with $11 billion. We also ended the quarter with the leverage of 2.7-time, which is the lower end of our 2.7- to 3-time target range.

Our share-repurchase program continued during the quarter. In Q3, we spent $87 million buying back 1.5 million shares. This brought the total number of shares repurchased so far this year to 10.2 million shares for $540 million. Since June 2015, we've repurchased 35% of the company.

As we highlighted on our Q2 earnings call, we continually evaluate our options for capital deployment. And today, we're announcing a new share repurchase program of $200 million effective through March 31, 2019. In closing, our third-quarter results demonstrated once again the consistency of the AerCap business. We will continue to run AerCap to optimize shareholder value and generate long-term consistent returns for our shareholders.

With that, I'll hand the call over to Pete for a detailed review of our financial performance.

Pete Juhas -- Chief Financial Officer

Thanks, Gus. Good morning, everyone. I'll start on Slide 5 of the presentation. Our net income was $253 million for the third quarter and our diluted earnings per share was $1.79.

Our net income is roughly flat year over year, while our EPS was up 10%, primarily driven by the repurchase of 20 million shares from July 2017 through September 2018. On Slide 6, over the past year, our book value per share has increased 11% from 55 06 to 61 24. In the third quarter, we repurchased $87 million worth of stock and this year to date through last Friday, we repurchased 10.2 million shares, as Gus said, for a total $540 million. As Gus mentioned since 2015, we repurchased 35% of the company's outstanding shares.

On Slide 7, our total revenue for the third quarter was $1,167,000,000. Our basic lease rents were $1,039,000,000, roughly flat year over year. Our maintenance revenues for the third quarter were $94 million. This is a decrease from the third quarter of last year when we had very high maintenance revenues as a result of the bankruptcy.

This quarter, our maintenance revenues were somewhat higher than normal as a result of the Shaheen lease terminations. We're seeing higher maintenance revenues coming through now, but these will be offset by additional leasing expenses in 2019. Overall, we expect that net effect will be a timing shift of about $0.10 of EPS forward from 2019 into 2018. Last year, we provided EPS guidance for 2018 of $5.30 to $5.50, which does not include any gains on sale, but we now expect to be at the top end of that range for the full year.

For 2019, we had previously provided guidance of $6 to $6.20 of EPS, again with no gains on sale. And at this point, we are reaffirming our guidance for next year and continue to expect to be in this range. However, as a result of the timing shift I mentioned, at this point, we probably more likely to be in the lower half of that range. Our net gain on sales of $20 million for the third quarter, compared to $64 million a year ago.

In the third quarter, we continued to sell midlife aircraft at attractive prices. We continue to see strong demand from buyers of used aircraft. However, our sales line was lower this quarter than the third quarter of last year. Our other income was $14 million in the quarter, which was slightly higher than last year.

Turning to Slide 8. Our net interest margin was $742 million for the third quarter and our net spread was 8.4%, the same as last quarter. The primary driver of the decrease from the third quarter of 2017 was the lower age of our fleet. Our average cost of debt was 4.1% for the quarter, an increase from 4% last year.

As we continue to take delivery of new technology aircraft and sell older and mid-life aircraft, we're reducing the average age of our fleet, which is now 6.6 years down from 7.1 years. We're also increasing the average remaining lease term of our aircraft, which is 7.1 years, an increase from 6.6. As we take delivery of more new aircraft, we expect the average age to decrease to the low 6s by the end of 2019. In line with the guidance we provided last year, we expect our net spread in 2019 to be around 8% and we expect our net spread less depreciation to be around 3%.

On Slide 9, our net gain on sales is $20 million for the quarter, as we sold 13 of our owned aircraft with an average age of 17 years, up of our total sales so far this year to around $1.7 billion. Our higher than expect a level of sales this year has been driven by the continued strong demand from midlife and older aircraft. At this point, we expect to sell around $1 billion worth of aircraft in 2019, but, of course, the ultimate volume will depend upon the ban from mid-life and older aircraft as well as the financing environment for those buyers. Turning to aircraft purchases.

We took delivery of 12 new aircraft in the third quarter, including our first two 737 Max8s, six A320neo family aircraft, and two A350-900s and two 787-9s. Our total capex for the quarter was around $1 billion. We had a few deliveries from September into October, and we now expect to take delivery of 33 aircraft in the fourth quarter, bringing our total for this year to 72 aircraft. For the full year, we expect our total capex to be around $5.7 billion.

In 2019, we expect to take delivery of 92 aircraft for capex of just over $6 billion. As a result, we expect our lease assets to grow by around $4 billion from now until the end of 2019, which will drive an increase in our lease rents in 2019. Slide 10. Our maintenance rights expense is $34 million for the third quarter, down from $109 million in 2017.

This was primarily driven by the lower maintenance rights intangible asset balance, which has been coming down over time and is now approximately $1.2 billion. We expect quarterly maintenance rights expense to remain generally around this level through the end of 2019. Of course, along with maintenance revenue and other leasing expenses, this can vary each quarter depending on the level of maintenance activity. Our other leasing expenses were $51 million for the quarter, an increase from $29 million last year.

Our SG&A expenses were $63 million for the quarter, a decrease from $84 million last year. This is mainly due to a significant reduction in our stock-based compensation expense as I mentioned in previous calls. It's also due to some other one-time items that reduced SG&A expenses this quarter. Going forward, I would expect the run rate for total SG&A expenses to be around $75 million a quarter.

On Slide 11, we continue to maintain a very strong liquidity position. As of September 30, we had available liquidity of $11 billion. Together with our operating cash flows, that gives us total sources of $14.1 billion, which is 1.4 times our cash needs of $10.1 billion over the next 12 months. This amounts to excess coverage of around $4 billion.

We reduced our secured debt to total assets percentage from 29% in September of 2017 to around 25% at the end of this quarter. And we ended the quarter with a debt-to-equity ratio of 2.7 to 1, which is at the lower end of our target range. So to wrap up, we had a very strong third quarter. We continue to grow our EPS and book value per share at a double-digit rate.

We continue to make good progress in placing our new aircraft. We're now over 90% placed through the end of 2020. We completed the transitions of a number of aircraft and our utilization rate returned to over 99%. We ended the quarter at a very strong liquidity and capital position, and we announced a new share repurchase program for $200 million. With that, now we'll turn it over to Q&A.

Questions and Answers:

Operator

[Operator instructions] We will now take our first question from Mr. Mark DeVries from Barclays. Please go ahead, sir, your line is open.

Mark DeVries -- Barclays -- Analyst

Yeah, thanks. I was hoping to get some updated thoughts on best use of capital here, particularly in light of the discounted stock price here. Would you consider a potentially selling more planes than you've discussed or even allowing the balance sheet to relever a little bit considering you're now at the low end of your target range, kind of to get a little bit more aggressive on buybacks than implied by the current repurchase authorization? Thanks.

Aengus Kelly -- Chief Executive Officer

Sure, as you point out, we are increasing it by $200 billion, and we have not been shy about taking advantage of lower stock price over the last three years. We've bought back 35% of the company. So I think that behavior will continue. Having said that, though, we want to make sure that we stay within the targeted range of our debt equity levels.

As regards aircraft sales, we continue to sell aircraft sales -- continue to sell aircraft, and we'll continue to do that. And so I don't think you'll see any change in the behavior going forward.

Mark DeVries -- Barclays -- Analyst

OK. Got it. Thank you.

Unknown speaker

Hello?

Unknown speaker

Yeah. Go ahead.

Joseph McGinley -- Head of Investor Relations

Sorry. Who is the call addressed to?

Operator

Mr. Harvey? [Operator instructions] We will now take our next question from Mr. Ross Harvey. Please go ahead, sir.

Ross Harvey

Hi. Can you hear me?

Aengus Kelly -- Chief Executive Officer

Yup, go ahead.

Ross Harvey

Great. Thanks. I've got two questions, if I can. Just in terms of the placement activity, you've mentioned that's over 90% of the aircraft deliveries through 2020 are leased.

I was just wondered in terms of looking out over kind of 26 months what would usually be your placement levels and in terms of where that might be different to history, is it led by yourselves trying to place ahead of -- ahead of any issues resolving on the OEM side, or is is market-led, is it demand there? Secondly, might be repeating one of the questions that came earlier, but maybe with more of a strategic bent. In terms of the younger fleet, the slightly lower absolute net spread relative to history, I'm just wondering would you reconsider your leverage targets given that your younger fleet, given the visibility that provides or would it be too much of a threat on the credit rating?

Aengus Kelly -- Chief Executive Officer

Sorry. If you can explain the second part of the question, you're saying the younger fleets versus...

Ross Harvey

Yes, no, I was just wondering in terms of the younger fleet, would you consider at any point your leverage target 2.7 to 3 times net to debt equity lever higher given the younger aircraft and that the people can higher visibility on that?

Aengus Kelly -- Chief Executive Officer

I'll let Pete answer that. In relation to the first part of that question. We -- as a policy, we would generally -- through any cycle, we would tend to want to place on the used side everything pretty much 12 months out and on the new side two-plus years out. So there's nothing unusual really about the where we stand at the moment in our placement activity.

Pete Juhas -- Chief Financial Officer

And Ross on the leverage question. So you're right. The fleet is obviously getting younger, and we believe when we look at the credit profile of the company, that is improving because of all the sales that we've done with older aircraft, because of the new technology aircraft that are coming in. Clearly, that's a positive for the credit profile.

But as we look at the leverage ratio, we want to continue to stay within our range as you've seen, we have tended to be around the 2.7 to 2.8 number. I'd say that's probably good estimate about where we'll continue to be.

Ross Harvey

Great. Thanks for the detail.

Pete Juhas -- Chief Financial Officer

Sure.

Operator

We will take our next question from Mr. Jamie Baker from J.P.Morgan. Please go ahead, sir.

Jamie Baker -- J.P.Morgan -- Analyst

Hey, terrific. It's working now. Gus, so Michael O'Leary was quoted saying that there would be more airline failures this winter. You touched on this topic in your prepared remarks.

Obviously, the market really plowed through Air Berlin and Monarch without missing a beat, but those failures weren't struck against sort of the current backdrop of global dislocation, however you want to describe it. To the extent that we do have other wave of shutdowns, how confident are you that the business manages through as easily as it did last round?

Aengus Kelly -- Chief Executive Officer

Well, Jamie, of course, the Air Berlin was a big airline that went down on its own is the sum total of all the different failures we had over the course of the last few months. Now during the winter, do I think there will be some more stress in this sector? I do, I think, but that's the normal cut and thrust of the industry. So I don't see any particular threat there. If you're talking about the ability to cope with the falls, I think I take you back, as I mentioned in my prepared comments, what we've gone through over the last 10 years, when we've consistently generated significant earnings, significant growth in the equity value of the company throughout.

So I think that's where the real benefits of scale, placement power, diversification show themselves versus smaller platforms that may lack that type of diversification and that placement power around the world.

Jamie Baker -- J.P.Morgan -- Analyst

I appreciate that. And as a follow-up, just on this issue of your portfolio, and, look, I don't want to exaggerate this issue, but do higher fuel prices make you think any differently about AerCap's exposure to the low-cost carrier space and whether you might want to dial down some of the exposure there? Or is it just too much to say that rising fuel is predominantly a challenge just for that particular part of the airline market?

Aengus Kelly -- Chief Executive Officer

No, I think, rising fuel has an impact on all carriers, be they LCCs, full-service carriers, or charter operators. They have an impact. What I would say, though, is that the industry is in a better place than it was 10 years ago on a global basis to cope with this. And so far, it has to be stressed that we have not seen a significant wave of bankruptcies, we've seen small guys, we've not seen an inability to place our airplanes.

So the major markets of the world in North America, Europe, and domestic China are still extremely strong. And we are continuing to place airplanes. The key, Jamie, is to make sure, that you have aircraft, though, that your customers want, and that's where the consistent portfolio strategy will pay dividends as well.

Jamie Baker -- J.P.Morgan -- Analyst

Excellent. Gus, I really appreciate it. Take care.

Aengus Kelly -- Chief Executive Officer

No problem.

Operator

We will take our next question from Mr. Gary Liebowitz from Wells Fargo. Please go ahead, sir, your line is open.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

Thank you, operator. Good day, gentlemen. Pete, at the Investor Day a year ago, you said not only will your net spread margins go to low 8% in 2019, and you're affirming that today, but that should be the bottom. Given what we've seen in lease rates and borrowing costs, are you still comfortable with that low 8% being the floor for net margins post-2019?

Pete Juhas -- Chief Financial Officer

Yeah. Thanks, Gary. Yes, I think that 8% is where we see it bottoming out at this point. So that's our estimate for '19, and I think there's where we'll bottom out.

Look, there are obviously things that can affect us. For instance, significantly, more in sales and more high-yielding aircraft and we currently expect and use the proceeds to buy back stock, that's going to have effect on our yield, but it is a good -- will do that because it's a good business decision. Similarly, if we put aircraft out on very long-term leases, long-term extensions we have a straight-line rental impact, which affects net spread. But again, you're doing those type of things because it's a good deal.

So -- and we want [Inaudible], right, so we're going to do what's the right for the business. But as of now, as we look out now, we see it bottoming around 8%.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

OK, thanks. And my second question is around you mentioned Shaheen air. Can you tell us what your exposure? Is there a number of aircraft? How many are coming back early? How many are coming back for scheduled expiration? And what do you expect to do with those planes?

Aengus Kelly -- Chief Executive Officer

We took all our planes out of Shaheen some time ago, Gary, and they're already all under contract at this point. Six airplanes there at the end. We sold them a lot of our exposure already.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

Just one more quick one. On average, many months does it take for you to get your former Air Berlin and Monarch planes back into revenue-generating service and would that be a good number? Is that good proxy for your primary narrowbodies?

Aengus Kelly -- Chief Executive Officer

No. Because narrowbodies move much faster, Gary, because you're not reconfiguring the interiors. In Air Berlin, you had quite a number of A330s, so you're doing more time on reconfiguring those airplanes. But it could be a mix, so some of them move very quickly.

Some of them took a bit longer, four, five months, but one of them took over six months. But on the narrowbodies, they tend to move much faster.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

I was really just asking about the narrowbodies. OK.

Aengus Kelly -- Chief Executive Officer

And the other thing that occurred actually, last year was that a shortage of MRO capacity in the world, and because of the size of the Air Berlin and Monarch bankruptcy happening at the same time, and that probably added on 30 to 45 days extra across the board, just waiting for MRO slots.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

Has that situation improved?

Aengus Kelly -- Chief Executive Officer

Yeah. There's MRO capacity now out there. It was just, you had a lot of airplanes coming out at the same time.

Gary Liebowitz -- Wells Fargo Securities -- Analyst

Thank you.

Operator

We will now take our next question from Helane Becker from Cowen. Please go ahead.

Helane Becker -- Cowen & Company -- Analyst

Thanks very much, operator. Hi, everybody, thank you so much for the time. So two questions here. One is, I knew you guys have been raising a lot of capital, and I'm wondering if you're seeing any investor fatigue? That's my first question.

And my second question is, did you say and I just missed the Primera aircraft that you were delivering this quarter, whether been released or not? Thank you.

Aengus Kelly -- Chief Executive Officer

The Primera is in the process of being moved at the moment. We don't expect any issues with them right now. Pete, you want to go to the capital?

Pete Juhas -- Chief Financial Officer

Yes, sure, thanks, Helane, We're not seeing any investor fatigue. Our debt issuances have all been very well received. Obviously, we've been -- we've been doing more on the unsecured side, but that's been very positive, and we also did a number of new secured facilities this year. And we continue to expand our banking group.

So, no, no fatigue at all.

Helane Becker -- Cowen & Company -- Analyst

OK. Thanks very much. I appreciate your help.

Aengus Kelly -- Chief Executive Officer

Sure.

Operator

We will now take our next question from Mr. Scott Valentin from Compass Point. Please go ahead. Mr.

Valentin, can you please check if your phone is muted? Your line is now open.

Scott Valentin -- Compass Point -- Analyst

Yeah. I apologize. Thanks for taking my question. Just with regard to the aircraft sold this quarter, can you give, I guess, a dollar amount that was sold so we can determine the gain on sale margin or if you have a gain on sale margin handy?

Pete Juhas -- Chief Financial Officer

Sure. It was about $190 million sold. So gain on sale margin was about 12% for the quarter.

Scott Valentin -- Compass Point -- Analyst

Thank you. And just a follow-up question. Obviously, you guys have a pretty full order book, but there are some portfolios reportedly available in the market. Any thoughts on M&A activity.

If you guys partake in that if you saw a good opportunity?

Aengus Kelly -- Chief Executive Officer

Look, we're always looking how we deploy the capital be it through buying ourselves, buying someone else or buying airplanes in the market, sale leasebacks, albeit with the manufacturers. At the moment, we continue to see very good value in buying AerCap. If we saw a better alternatives, of course, we'll look at it.

Scott Valentin -- Compass Point -- Analyst

OK. Thanks very much.

Operator

We will now take our next question from Michael Linenberg from Deutsche Bank. Please go ahead, sir.

Krish Patel -- Deutsche Bank -- Analyst

This is Krish Patel [ph] on for Mike. Just a couple of questions here. We've seen some recent headlines in the French press that multiple airlines...

Aengus Kelly -- Chief Executive Officer

Sorry, excuse me, we can't quite hear you there.

Krish Patel -- Deutsche Bank -- Analyst

Oh, I'm sorry, we've seen some recent headlines in the French press that multiple airlines have deferred A330s. Is this more of our supply chain issue in your P&L or is there something else going on here?

Aengus Kelly -- Chief Executive Officer

Sorry, if you could speak up, we can't hear you.

Krish Patel -- Deutsche Bank -- Analyst

I'm sorry, guys. Is this is better?

Aengus Kelly -- Chief Executive Officer

Yup.

Krish Patel -- Deutsche Bank -- Analyst

OK. So we've seen some recent headlines in the French press that multiple airlines have been differing A330s. Is this supply chain issue to your knowledge or is there some -- is there something else going out there?

Aengus Kelly -- Chief Executive Officer

This is A330neos, is it?

Krish Patel -- Deutsche Bank -- Analyst

Yes.

Aengus Kelly -- Chief Executive Officer

I mean, there are some issues around the engine, all right, at the moment on that airplane type, which is giving some airlines pause, in think, on the aircraft type. We don't have any on order, so we're not that close to it.

Krish Patel -- Deutsche Bank -- Analyst

OK. And then, second one, we've heard from one major U.S. airline that they've elected to finance aircraft put them on their own balance sheet because rates have begun to move up. How does that compare to what you guys have been seeing in the marketplace?

Aengus Kelly -- Chief Executive Officer

I think the decision they put on their own balance sheet is a question of do they use of their own order book, do they use sale-leaseback financing or do they own it themselves. We haven't done a sale-leaseback since our since 2013, November 2013. So there's plenty of opportunity out there without that. Having said that, though, we do sell a lot of airplanes to airlines themselves that put them on their balance sheet, generally used aircraft, maybe big buyers of older airplanes, particularly in the U.S.

Krish Patel -- Deutsche Bank -- Analyst

OK. Great. Thanks a lot, guys.

Aengus Kelly -- Chief Executive Officer

You're welcome.

Operator

We will now take our next question from Moshe Orenbuch from Credit Suisse. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thank you. Most of my questions have actually been asked and answered. But in follow-up to the M&A thought, do you think that the increased stress on airlines would create kind of purchase opportunities where you can buy pieces of their fleet? Is that something that would be likely at this point in the cycle.

Aengus Kelly -- Chief Executive Officer

It may, but I think it'd be marginal. Most of -- first of all, half the fleet would be leased at any rate, so it would go back to the lessors. The other half, for the most part, be bank-financed, and the banks would be taking it over and, sure, they'd sell airplanes, but it's small fleets that we're seeing in those airlines. We haven't seen anyone significant get into trouble yet.

And the backlog would be absorbed, the Boeing and Airbus backlog, it wouldn't be available for sale into the market by the airline.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

We will now take our next question from Rajeev Lalwani from Morgan Stanley. Please go ahead.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Hi, gentlemen. Gus, I wanted to follow up on your comments earlier in response to Jamie's question. You were talking about airline weakness in the fourth quarter. Can you just provide some thoughts on where it's showing up, parts of the globe, [ph] and then what's driving it? Is it simply oil or is there something else at play? And I have a brief follow-up.

Aengus Kelly -- Chief Executive Officer

I mean, what I would say, Rajeev, it's really part of the daily cut and thrust that we see every year. You're always going to have some airlines disappear. I don't think it will be any different this winter. Generally, it's badly run businesses that got easy capital would be the ones who fall into the category of going away.

That's specific to a particular business model. I think where it does hurt a bit more, of course, is where the currency has weakened significantly. That would most -- well-run airlines are able to cope with the higher fuel where -- and are able to cope with some depreciation of their currency. Where you have a badly run airline with a significant increase in fuel and a significant weakening of the local currency, then the outlook could be fairly bleak.

But those airlines for the most part are pretty small airlines and we wouldn't see them having a material impact on the results of AerCap. And that's been the case for the last 12 years.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thanks. Pete, question for you, can you just talk a bit about the debt maturity profile over the next couple of years? And then, the strategy you're deploying or considering deploying just to manage higher interest rates as that comes due?

Pete Juhas -- Chief Financial Officer

Sure. Well, over the next year into 2019, we've got about $4 billion maturing. So I mean, as we look out, right, it's a pretty -- we are basically replacing that debt with -- we're trying to go out and replace it with debt that matches our average lease terms. So we're going out with data on average around seven years.

That's our strategy. And you've seen that during the course of this year where the debt that we're going have been longer. In terms of taking debt out and liability management, look that's something that we always look out. But at the moment, it's not something that we plan to do.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thank you.

Pete Juhas -- Chief Financial Officer

Sure.

Operator

[Operator instructions] We will now take our next question from Ms. Kristine Liwag from Bank of America Merrill Lynch. Please go ahead, ma'am.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. Gus, following up on your comments that some airlines may struggle this winter. Can you quantify how much of your business is at risk? And how many airlines and aircrafts are in your watchlist?

Aengus Kelly -- Chief Executive Officer

Kristine, nothing out of the ordinary. For the last 12 years it's averaged 1% of lease revenue and will be less than that year. It's hard to say. But nothing out of the ordinary, Kristine. I want to stress that.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. And then, for this 1%, or less than 1%, are you starting to see them make late rent payments? And then also what's your strategy to mitigate potential risk if they are unable to make payments through the winter?

Aengus Kelly -- Chief Executive Officer

We'll seize the airplanes and move them somewhere else. That's what we've always done and what we'll continue to do, and what we did with Small Planet and what we did with Primera, and what we did with Shaheen. But these are relatively small amounts in the scheme of the value of the business and the level of profitability.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great and a follow-up on fuel costs. Can you provide color on how customer behavior has changed? And what percent of your lease terminations are extended by the existing lessee, compared to what you would've expected a year ago?

Aengus Kelly -- Chief Executive Officer

In terms of fuel cost, I think, look, we're not seeing any different behavior because of the recent rise in fuel. I mean, airlines can't adjust their fleets overnight. It takes some time to do that. And we haven't seen any difference there, really.

I mean, the key for the fleet to make sure it's in demand that you have assets that the customers are going to want and you've been consistent in building a portfolio of assets that the customers want, and you've done that over many, many years in advance, which is what we have done, is how we have trimmed the portfolio, not only over the last four or five years but long before that as well. Pete, do you want to comment on the extension?

Pete Juhas -- Chief Financial Officer

Yes, so the extensions have been -- the percentage of extension has been higher, Kristine. I think it's around 17% now as we look at it, and previously had been closer to 50%. So we have seen that going up over the last year or two.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great and lastly, for me. When you look at your lease placements through 2020, you kind of 10% less that you have to place. I was wondering what's preventing you from filling those last 10% or are you giving yourselves flexibility? Can you give a rationale as to why you're not fully placed?

Aengus Kelly -- Chief Executive Officer

Well, look, we'd like to be fully placed many years into the future, but there's only so much at any given time you can look at how far they'll go. We have airplanes placed in 2021, 2022, 2023 also. And those airplanes that we have, remaining to place, they'll definitely get moved. Some of it though particularly on the 320neos, you're holding back actually because of the demand for that airplane.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Aengus Kelly -- Chief Executive Officer

You're welcome.

Operator

We will now take our next question from Mr. Kevin Crissey of Citigroup. Please go ahead, sir.

Kevin Crissey -- Citi -- Analyst

Thank you very much. Do you expect further consolidation in Europe? And if so, what are the implications of that and how are you positioned for that?

Aengus Kelly -- Chief Executive Officer

You're referring to airline consolidation, Kevin, are you?

Kevin Crissey -- Citi -- Analyst

Yes, yes, I'm sorry, airline consolidation, yes.

Aengus Kelly -- Chief Executive Officer

You know I think we'll -- I think there's a good chance we'll see some consolidation arise. It's a slow process, of course, consolidation. But I do think we'll see some of us over the next year or two. From our perspective, what are the impacts? I mean, if it's a voluntary consolidation where two airlines agree to come together, it doesn't really have a huge impact.

Whatever airplanes we have on lease with them stay on lease with them, it doesn't change any of the terms. I think, look, we've seen the benefits of the strength, the huge benefits of consolidation in the North American market, and where it's been well-executed in Europe as well, you see the benefits, particularly if you take the example of and Lufthansa. There's particularly been some excellent work on the consolidation side. And I do think that that is a role model for others to follow, and it would be a positive for the -- for us often for the industry overall if you continue to see that. But they are -- they take time. That's not easy to do, as you know yourself. So it will be slow, I would say, Kevin.

Kevin Crissey -- Citi -- Analyst

Thank you. And any improvement yet? And I'm guessing kind of not yet, but in the tourist-competitive lessor supply environment?

Aengus Kelly -- Chief Executive Officer

You're referring to my prior comments of the tourist capital?

Kevin Crissey -- Citi -- Analyst

Yes.

Aengus Kelly -- Chief Executive Officer

Look, I think what we're seeing definitely is that there's a couple of guys who had invested in us and they realized that start of aligning Pakistan is as not as the same as U.S. treasuries. And that's the mistake some of them had made, that this is a risk-free business. It isn't.

And in order to manage it, you do need your big platform. It is not the case of just showing with capital. You have to be able to move assets around the world. As we think one or two gauge pulled back a bit for sure, but there is still a lot of people find it a very investable asset class, and I think those that pair with big platform an advantage may cost a bit more, but it definitely has an advantage trying to do it on the cheap yourself.

Kevin Crissey -- Citi -- Analyst

Thank you very much.

Operator

[Operator instructions] We will now take our next question from Mr. Vincent Caintic from Stephens.

Vincent Caintic -- Stephens -- Analyst

Hey, thank you. First, two questions. So first, appreciate you reaffirming the guidance for next year x gain from the sale. So I had a question on the gains on sell, understanding that it's more volatile than lease revenues.

But would you expect the same trends that you saw in 2018 to continue in terms of the gain on sale margin? And just roughly speaking with you expect volumes to be above the same or less or more?

Pete Juhas -- Chief Financial Officer

Yes, so Vincent on the volumes, I mentioned that we expect -- at this point, we would project to sell probably $1 billion worth in 2019. So that would be lower obviously than this year. We'll see what the environment is. But at this point, I think, when $1 billion is the most likely.

And then, in terms of the margins, look, as we've said in the past, those will move around this quarter, it was higher-margin some quarters, it will be lower. So I wouldn't -- I don't think you can just take this quarter and say -- for this year and say, project that forward. So look, I think that will continue to sell at some gains, but it's hard to say what the margin will be.

Vincent Caintic -- Stephens -- Analyst

OK, understood. And second question, so nice to see that you've had over 90% of your leases placed through 2020 and beyond. Just trying to see if there are any difference in yields or structure of the leases that you're seeing with your future leases? And I'm kind of thinking within the context of rising interest rates and the competitive environment. Thank you.

Aengus Kelly -- Chief Executive Officer

Sure, I mean, look, I think, that -- it's customer-dependent. If you have a customer that is an extremely strong credit, you're certainly not going to guess security deposits that you would have in the past and the overall terms do you reflect that. And where you have customers aren't, that strong then it is a different proposition. So it's a mix across the board as well.

But I wouldn't see any dramatic change in what we've been leasing at over the last years to what we see in the current market.

Vincent Caintic -- Stephens -- Analyst

OK. Got it. Thank you.

Aengus Kelly -- Chief Executive Officer

Thank you.

Operator

There are no further questions in the queue. Mr. McGinley, I would like to hand the call back to you for any additional or closing remarks.

Joseph McGinley -- Head of Investor Relations

Thank you, operator, and thank you all for joining us for the third-quarter call. We look forward to speaking to you again with full-year results in the new year. Thank you.

Duration: 42 minutes

Call Participants:

Joseph McGinley -- Head of Investor Relations

Aengus Kelly -- Chief Executive Officer

Pete Juhas -- Chief Financial Officer

Mark DeVries -- Barclays -- Analyst

Ross Harvey

Jamie Baker -- J.P.Morgan -- Analyst

Gary Liebowitz -- Wells Fargo Securities -- Analyst

Helane Becker -- Cowen & Company -- Analyst

Scott Valentin -- Compass Point -- Analyst

Krish Patel -- Deutsche Bank -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Kevin Crissey -- Citi -- Analyst

Vincent Caintic -- Stephens -- Analyst

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