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Market Update – Narrow bodies and transition management

May 2016

Phil Seymour ‐ CEOStuart Hatcher – CIO

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SELECTION• Target intelligence• Market entry• Competitive intelligence

OPPORTUNITY• Asset DD & values• Competitor analysis • Key stakeholder DD• Benchmarking

THE DEAL• Negotiation• Critical factors• Risk assessment

RUNNING THE ASSET• Technical & regulatory support and advisory• Redelivery planning• Maintenance reserves and DOC analysis• Regular reporting around fleets & values

EXIT• IPO readiness• DD on prospective buyer • Sell side advisory

ADDRESSING ISSUES• Portfolio monitoring & analysis• Early warning of concerns• Litigation & dispute support

4.EXIT

3.BUILDING VALUE

2.AQUISITION

1.IDENTIFICATION

Full service

• Data, asset management, technical advisory

Independent

• No vested interest in a deal progressing or in placating advertisers

• No conflict in treatment of assets under management or for sale

Diversified talent pool

• Imaginative solution finding from a breadth of backgrounds

Exclusive data

• Unique access to critical data and intelligence

Enhancing Decision Making

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• Economic View

• Traffic

• Narrow body Market

• Rest of the year

2016 Catch‐up

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2016 Qu2 Economic Views

• Oil volatility persists and pricing is becoming more sensitive to supply disruptions

• Canadian Wildfire, Libyan unrest, Saudi Oil Ministry change

• Chinese demand increase – but for how long?

• Pricing maybe low now, but as oil discovery budgets have reduced from $95bn to $40bn, current supply could be hit hard within next 20 years!

• USD has been dropping, but signs of a return are apparent

• Oil/Gold/Stock ‘v’ USD

• No absence of new investors continuing to pile into the space

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Economic Outlook

Signals

• Oil

• Interest Rates

• GDP

• World Trade

• USD

Regional Forecast

• Europe

• North America

• China

• Latin America

• Asia Pacific

• World

2016 2017

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Traffic Relationship has shifted

Source: IATA

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Pax Traffic remains steady

Source: IATA

• Passenger traffic growth up at 7.9% in February,

• Whilst economic signals look poor for China, service industry business growth continues to hold.

• Once again, India remains on top. Fastest growing economy and >20% YOY growth and growing

• Domestic Japanese & Brazilian market remains under pressure.

• Russia recovered well in March after loss in January

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The Impact on the Aviation Cycle 

Demand trends

• Pax traffic

• Freight traffic

• Yield

• Load Factors

• Orders

Supply factors

• Deliveries

• Parked

• Secondary market

• Economic life

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Single Aisle Points

• Slow orders for 2016• Oil may shift focus• Fewer lessor orders with more bias

towards operators that haven’t bought yet• Expect keener pricing from Boeing to

steady 737MAX market share• Availability Falling• Storage Falling• Lease Rates under pressure – will leak

into pricing• Market remains liquid across all ages,

but…. At a price

Sale & Leasebacks

Sales with leases attached

Lease Rate Factors

OEM pricing

Lease Term Lengths

Extensions

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Potential New Orders ‐ AirbusA320 family Operators Fleet BacklogAMERICAN AIRLINES 363 138CHINA EASTERN AIRLINES 250 0EASYJET 249 174CHINA SOUTHERN AIRLINES COMPANY 238 0AIRASIA 174 306JETBLUE AIRWAYS 159 87UNITED AIRLINES 153 0LUFTHANSA 151 126TAM - LINHAS AEREAS 134 0BRITISH AIRWAYS 131 35DELTA AIR LINES 129 79AIR CHINA 128 0AIR FRANCE 122 3LATAM AIRLINES GROUP 112 78INDIGO 108 426VUELING 106 58UNDISCLOSED 104 676TURKISH AIRLINES 103 100SICHUAN AIRLINES 100 0AIR CANADA 94 0AEROFLOT RUSSIAN AIRLINES 87 0SPIRIT AIRLINES 85 81ALITALIA 79 0SHENZHEN AIRLINES 78 0WIZZ AIR 67 144AVIANCA 67 136AIR INDIA 66 0AIR BERLIN 65 3

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Potential New Orders ‐ BoeingB737 family Operators Fleet BacklogSouthwest Airlines 599 248Ryanair 351 223United Airlines 312 139American Airlines 271 134China Southern Airlines 147 25Delta Air Lines 141 62Air China 138 22GOL Transportes Aereos 134 71Hainan Airlines 128 9Xiamen Airlines 125 37Alaska Airlines 129 60WestJet 114 70Lion Air 108 240Shandong Airlines 90 13Shenzhen Airlines 86 7Turkish Airlines 92 86SAS 85 0Garuda Indonesia 80 50Virgin Australia 74 45COPA Airlines 76 70China Eastern Airlines 76 43Jet Airways 70 75Qantas 67 0Shanghai Airlines 72 0Norwegian Airlines 59 130

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Other Considerations – Single Aisle

• New generation engine technology reliability & reserve rates• Economic life debate continues• Premium of neo/MAX ‘v’ ceo/NG• Developing economic market softness• Lease rate factors under pressure• Shorter lease term economics• Order bubble• Lots of interior flexibility but will it lead to marginalised fleets• Ramp ups on the way

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Values & Rates – Single Aisle

• A320-200

• A319-100

• A321-200

• A320neo

• A320 Classics

• 737-800

• 737-700

• 737-900ER

• 737 MAX 8

• 757-200s

• 737 Classics

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Other Asset Classes• Turboprops Storage rising, regional distress, falling lease rates & values

• Regional Jets Storage rising, demand remains strong for specific types, a lot of new

aircraft technology coming

• Twin Aisle Storage rising, A330 production line bridged, 777 still has some way to

go. Softness in placing speculative orders – challenged by low oil price.

Appetite remains intact on financing for new deliveries to good credits

• Freighters Out of production large freighters still in turmoil, narrowbody demand

rising

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Economic Summary

• Economy – weak growth on the horizon – generally uneasy

• Traffic – on the up, LFs holding steady, freight struggling

• Airlines – great revenue for some, strong USD squeezing profits

• Developing economies dependant on oil – airline bankruptcies ahead

• OEM Challenges: Ramp-ups, market share

• Lessors – sales in the pipeline, falling LRFs, increasing competition & new accountingrules

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Redeliveries Revisited

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Extend or Return?

Extend• Good deals to be had, especially on

widebodies, given demand and fit out costs.

• Gap between current and next generation kit has narrowed, slowing adoption

• Still a big decision driven by a complex balance of rates, costs, reserves and demand.

Return• Last minute = bad news and/or big fees• Two years planning

• How to replace/where’s it going• What can I avoid paying for• What do I get next – engines, IFE

• Not a lesson in each side shafting the other

• In fact the opposite is true, doing the right thing = a better deal and more choice.

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Two years out

• We rarely see redeliveries planned sufficiently in advance, yet when they are, they cost less and take up less time.

• 24 months ideal, from 15 months out, you risk the domino effect

• Getting lessees to engage early enough is the biggest issue

ACTIVITY 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01INITIAL PHASEConfirmation of Lease ReturnPRE‐REDELIVERY PHASEAnalysis of Redelivery ConditionsMRO Selection (Lessee)Initial Meeting with LessorProject PlanCabin & Cargo Bays ‐ InspectionPreparation of Aircraft RecordsPreliminary WorkpackPreliminary Engine & APU Borescope InspectionsFinal Workpack (Lessor approval)Pre‐Input Meeting with MROREDELIVERY PHASEMaintenance Plan from MROPerform Workscope (MRO)Aircraft Records ReviewEngines ‐ High Power RunDemonstration FlightEngine & APU Borescope InspectionsFinal Discrepancy ListCommercial ResolutionAIRCRAFT RETURN

MONTHS PRIOR TO AIRCRAFT REDELIVERY

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$1.65m – It soon adds up and is increasing

 ‐  100,000  200,000  300,000  400,000  500,000  600,000

Wings & Empennage

APU

Interior and carpet

Corrosion

Landing gear

Fuselage, windows and doors

Components

General

Engines

Costs fall into three areas:• Redelivery planning: falling between cracks• Maintenance planning: work to the lease, not the MPD• Commerciality: the above two are OK, but the

negotiation goes badly

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Engines/APU - $630k

• Always complex to assess, forecast and maintain given the myriad of variables

• Borescope, by definition, is invasive, can they be avoided?

So what to do:

• Manage cycles and shop visits more strategically.

The main culpritsGeneral - $500k

• Watch for catch-all and ambiguous terms: good, clean, etc

• Damage and old repairs can create need for rework and lead time for materials almost always delays redelivery if only identified at the redelivery check.

• Modifications without detailed acceptable source documents and certification. “Back to Birth”, PMA and DER

So what to do:

• Plan better and that starts at the outset of the negotiations

Components - $260k

• Documentation is everything, yet we have never (that’s right, NEVER, seen a full set, on time and acceptable to the lessor

So what to do:

• Have tight control of the subcontracted component providers, to minimise downtime

Fuselage, Windows and Doors - $195k

• Records vital again in relation to the fuselage condition

• More ambiguity again. “Substantially free” etc.

• Corrosion: Watch again for ambiguity and clauses above and beyond what may be required by the MPD/SRM

So what to do:

• Replace components earlier if access is easy and monitor forceful life limitations terms

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Recent examples

Start up airline• 8 year lease• Marketing and sales 95% of

management time• Lease docs literally shoved in

drawer and ignored• 6 months out – nowhere near

return conditions, gears and engines late to MRO at peak time of year (Winter)

• Big prob for both parties – late delivery penalty, high costs for each side

• Lessor fails to deliver to next lessee on time.

Medium airline • Great tech team, but focus on

up, not back. • Focus on the day to day difficult

to change • Sufficient volume to really hit

core operations. • We are seeing moves for this

size of airline to realise limitations and outsource to specialists

Large airline• Some might say arrogance • Assume strong commercial

strength will mean lessors will concede

• Probably the worst at collating records, mods and repair files if various tech depts. are spread over a large area.

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Recent examples

Time

Cost

Ideal low cost / no delay

Oh dear, late and High cost………..

The cost weren’t highbut practicalities of missingrecords caused delays