Engine Investor & Financier

London Roadshow
Tuesday September 19th 2006
Bob James

TES Aviation Group Overview

¾ Established 1995, HQ Cardiff, UK. Privately owned
¾ Professional 52 person team
¾ Over 60 customers in 20 countries
¾ 700 engines under fleet management
¾ ~100 Shop Visits per year
¾ Independent Technical, Commercial & Logistic expertise
¾ OEM agreements (GTA’s) in place - training, manuals &
¾ Established industry relationships with repair shops, airlines,
lessors, financiers & legal firms
¾ ISO9000-2000 / AS9100 / AC056A Quality accredited

TES Aviation Group

“Aircraft Engine Tech / Commercial
Asset Management and technical

“Aircraft Engine Physical Asset
Mgt, Parts provisioning,
remarketing and disposition.”

“Tailored software solutions for
effective asset management.”

TES Aviation
Aviation Group
Group –– Complete
Complete Asset
Asset Management
Management Services

0bn bn www.TES’ Engine Portfolio CF6-80E Engine Quantity by Type CF6-80A2 CF6-50C2 CF6-50E2 JT8D-200 APU CF6-80C2 CFM56-7 PW125B V2500-A5 V2500-A1 PW4000 RB211-535E4 CFM56-5B CFM56-5A CFM56-5C CFM56-3 700 700engines enginesvalued valuedin inexcess excessof of$2.com .tes-uk.0 $2.

com .TES’ Customer Portfolio Banks and Leasing Companies Manufacturers US Based Aircraft Manufacturer UK Based Engine Manufacturer Airlines www.tes-uk.

Breaking up is never easy ! When to part out ? How much value is left at the end? Key types ? What are the main considerations from an investors perspective? What Whatare arethe thekey keyconsiderations considerationsof ofReduce ReduceTo ToProduce Produce(RTP) (RTP) programs programson onaircraft aircraftengine? engine? www.com .tes-uk.

tes-uk.Where is the residual value in an aircraft ?…… OR www.com .

until untiltthe engines enginesaccount accountfor foralmost almostall allthe theresidual residualvalue value www.Engine Value Projections with Time Engine he Enginevalue valueincrease increaseas asaapercentage percentageof ofaircraft aircraftvalue.tes-uk. value.com .

tes-uk.Financial.com . Management and Trading Phases Where Whereare areyour yourasset assetinvestments investmentsin inthe theaircraft aircraftlife lifecycle? cycle? www.

com .Financial Phase .tes-uk. removal rate ¾ Guarantees – reliability. piece part life. fuel burn ¾ OEM grow data & experience ¾ OEM campaigns supported ¾ Provisioning kits supported ¾ Limited aircraft remarketing ¾ Less demands for Technical Asset Management New NewEquipment Equipmentat atOEM OEMlist listpricing pricingtypically typicallyless lesslikely likelyto tooffer offer financially financiallyviable viabledisassembly disassemblyprogram program www.Attributes ¾ New equipment ¾ No engine shop visit liability ¾ Premature removals OEM supported ¾ Warranties – on wing life.

Financial Phase Hopefully the warranty and guarantees are in place! www.com .tes-uk.

Focus ¾ Engine Removal Planning and Forecasting ¾When ? What ? How Much ? Where ? ¾ Engine shop visit liabilities ¾Contract Definition ¾Workscope definition / control ¾Design standard of parts fitted? ¾ Maintenance reserve draw downs ¾Workscope and replacement material ¾Shop contract terms ¾Industry support programs AD’s SB’s ¾ Transaction contract management ¾Delivery / Re-delivery / Configuration planning Technical Technical&&Commercial CommercialManagement Managementbecome becomeimportant importantwith with specific specificproducts productssuited suitedto todisassembly disassemblyprograms programs www.com .tes-uk.Management Phase .

Management phase Engines beyond economical repair offer exchange potential www.tes-uk.com .

tes-uk.Trading Phase .com .Attributes ¾ Equipment obsolescence ¾ Engine values may exceed aircraft value ¾ Cost of overhaul exceeds cost to replace ¾ Engine exchanges rather than repair ¾ Reliability decreasing ¾ Cost of operations increasing ¾ Operators look to phase out equipment ¾ Disassembly of equipment for parts ¾ Aircraft and engine trading ¾ Entrepreneurial / opportunistic investments ¾ Technical decision making important to risk management ¾ Asset values not generally proportional to lease income Disassembly Disassemblyprograms programsincreasingly increasinglyoffer offeraapreferred preferredexit exitroute route www.

tes-uk.Trading phase What do we do with this – is there residual value? www.com .

PW4000 CFM56.CF6-80 5C 5A 535 896 2344 1042 1300 1208 3327 TAY CFM563 JT8D200 1874 3936 2468 ALF500 RB211.com .PW2000 RB211. Engine s Financial Management Trading Not Notall allassets assetsprogress progresschronologically chronologicallythrough throughthe thephases phases www.0 20.0 10.CF6-50 524 816 1038 1414 JT9D JT8D Basi c CF6-6 CFM562 1582 6263 249 2308 Engine Type + No.0 25.0 0.Engine Life Cycle – Which assets are where in the cycle ? Engine Life Cycle Profile Average (AC) Age 45.TRENT 7 5B 984 2756 1914 1368 688 GE90 V2500 CF34 260 1906 3016 CFM56.0 5.0 15.tes-uk.0 BR700 CFM56.0 30.AE3007 CFM56.0 40.0 35.

com .tes-uk. Y Aircraft Deliveries by Year Management -out ManagementPhase PhaseEngines Engines––Potential Potentialfor forpart part-out www.Engine Life Cycle – “Management Phase” Engines - CF6 80 Tay 650 CFM56-5A RB211-535E4 PW4060 PW2037 CFM56-3 JT8D-217/9 Source : ACAS Axes : X – Aircraft Age.

com .tes-uk.Engine Life Cycle –”Trading Phase” Engines CF6-50 CFM56-2 Axes : X – Aircraft Age. Y Aircraft Deliveries by Year Source : ACAS What Whatare arethe themarket marketdemographics demographics?? www.

Demographic considerations ¾ How many engines in service ¾ What are the operator demographics? ¾ Geographic spread / concentration of operators ¾ Engine type applications to different aircraft ¾ Engine thrust ratings and upgrade potential ¾ What are the SV arisings / material forecast ¾ Obsolesence. regulatory directive considerations? ¾ How many repair facilities are there? ¾ Future value predictions for the type? ¾ Spare engine availability? Market Marketdemographics demographicssignificantly significantlyinfluence influencedecision decisionmaking making www.tes-uk.com .

Individual Operator Fleet Size 2 Operators 158 Engines 3 Operators 492 Engines No. of a/c 1 to 5 3 Operators 88 Engines 6 to 10 11 to 20 21 to 50 21 to 50 51+ 62 Operators 230 Engines Total RB211-535E4 Operators Total RB211-535E4 Engines installed Total Operators with <6 aircraft : 82 : 1140 : 62 51+ 15 Operators 70 Engines 4 Operators 54 Engines Total PW2000 Operators Total PW2000 Engines installed Total Operators with <6 aircraft : 27 : 862 : 15 Source : ACAS May 2006 Operator -535E4 than Operatordiversity diversitysignificantly significantlygreater greaterof ofRB211 RB211-535E4 thanPW2037 PW2037 www.Indiv idual Ope rator Fle e t Size 8 Operators 226 Engines 3 Operators 224 Engines 2 Operators 362 Engines No. of a/c 1 to 5 6 to 10 7 Operators 98 Engines 11 to 20 PW2037 powered B757 .Demographics – by Operator ( Example) RB211-535E4 powe re d B757 .com .tes-uk.

com . use. ¾ 110 100 Predictions show peak values 90 circa 2009. ¾ Index 80 More money.all allwithin within12 12mths mths www.tes-uk. chasing fewer 70 deals = fewer disassembly 60 programs. 1976 1979 1982 1985 1988 1991 1994 Years 1997 2000 2003 2006 2009 50 2012 Source Avitas We Wehave haveseen seenB757 B757programs programsmove movefrom fromviable viabledisassembly disassemblyto to conversions conversionsto tocontinued continuedpassenger passengeruse.Engine Life Cycle – Aircraft Values Value Index for All Commercial Jets (History and Forecast) ¾ Forecast History Value dictated by position in 120 the life cycle.

capacity.Which Assets do we part-out – Key considerations ¾Purchase price / Book Value – how much do we need to realise ? ¾Full part-out modelling required :¾Airframe value ¾Age / operator profile ¾Volume in service ¾Commonality ¾Airframe Part-out location ¾Who can disassemble? ¾Logistics.com . environmental concerns ¾Reputation.tes-uk. storage and part-out cost ¾Engine Removal ¾Costs ¾Certifications and records Airframes Airframesoften oftensold soldseparately separatelyto toengines engines www.

where. ¾ Sales Demand .B.D) ¾ Sales outlets to be defined ¾ Competition – OEM pricing.Location.C.com . ¾ Sales Prices – Overhaul sales price by line item and part no. DER/PMA pricing.Sales timing – prioritisation of parts (A. repair investment and timescale ¾ Scrap Rates . material availability Engine Enginedisassembly disassemblycan canbe belogistically logisticallyand andtechnically technicallycomplex complex www. capability. space & cost ¾ Parts Repair .Which parts.Scrap rates by line item by P/No. capacity.tes-uk.Which Assets do we part-out – Key considerations ¾ Engine disassembly .

tes-uk. ¾ Specific LLP’s may account for 75% of total LLP value – rejection during inspection may adversely impact value of material recovery ¾ Technical documentation increasingly important – standards vary ¾ As a lender. how do I maintain asset security post disassembly to parts? Maintaining Maintainingsecurity securityremains remainsaacritical criticalaspect aspectto toasset assetbacked backed financing financingof ofdisassembly disassemblyprograms programs www.com .Which Assets do we part-out – Key considerations ¾ Can we lease the engine residual life before disassembly? ¾ Engine Life Limited Parts (LLP’s) status vs potential rebuild life ¾ Key material scrappage based upon time since “Overhaul” and known technical issues.

¾ Birth document ¾ Non incident statement from every operator ¾ AD’s– certified means of compliance. repair standards and OEM “soft” time recommendations.Full Due-Diligence Inspection ¾ Full records check – updated and certified ¾ Traceability – documentation requirements of piece parts significantly greater than if installed in an engine ! ¾ Certified operator on / off disk sheets. ¾ Repair Certifications – FAA/EASA not local release ¾ Key modification incorporation – major impact on obsolescence and material value recovery.tes-uk. Accurate Accuratecost costmodelling modellingrequires requiresboth bothtime timeand andexpertise expertise www.com . ¾ Historical shop visit data – Full definition of works performed ¾ Key component configuration – number of previous repairs.

Full Due-Diligence Inspection (Contd…) ¾ Current MPA performance check – full take-off power check in addition to ECM ¾ Full video boroscope – overviewed by experienced engineers ¾ Log books updated for Ferry Flights – 2 hours and 1 cycle can have a major value impact ¾ Full physical inventory – your definition of “Bare” and QEC” will not be the same as mine ¾ Storage & preservation review – 30 days means 30 days. 45 days means a technical deviation or an expensive engine shop visit !! Total Totaltechnical technicalcontrol controland andfocus focusrequired requiredto tomaximise maximisevalues values www.com .tes-uk.

new part cost. competitors and market players ¾ Airlines – Who ? Where ? How Big ? ¾ Parts Traders – Who ? What ? How Much ? ¾ Repair Shops – How Many ? Where ? Repair Volume ? Critically it Criticallyassess assessyour yourdisposition dispositionprovider provideras asrequired requiredfor forcred credit committee committeeapproval approvalon onan anunsecured unsecureddebt debttransaction transaction www.Sales Outlets – influencing factors ¾ Market demand – shop visit arisings.com . repairability and obsolesence. ¾ Material availability .tes-uk.quantity and quality of material available.

China GE Malaysia Bedek Aviation (IAI).US Delta Tech Ops .com GE .China Snecma – France & AFIBelgium .Australia www.US HAESL – Hong Kong PGTC – US ITR Mexico Iberia Spain Avio Italy Bedek Aviation (IAI).Spain Volvo Sweden AeroThru st .US Finnair Finland Delta Tech Ops .UK MRO Geographic Location – JT8D-200 Iberia .France Iberia Spain MTU China GAMCO – Abu Dhabi .Turkey Snecma .US AMECO .France TAP Portugal Snecm aMoroc co GE .US GE Celma .Brazil AeroThrust US LTAI Ireland P&W (NEC) Norway GE Wales MRO Geographic Location – CFM56-5A Lufthansa Technik Germany THY .US IHI Japan ST Aerospace Singapore Lufthansa Technik Germany Air Canada Canada MTU .Wales Snecma France AFI . Israel ST Aerospa ce Singapor e P&W – New Zealand MRO Geographic Location – CFM56-3 TIMCO . Israel Jet Turbine . US GE .China TAESL – US AES .US MTU Canada United Services.tes-uk.Repair Shops – How Many ? Where ? Repair Volume ? MRO Geographic Location RB211-535E4 RR .

US Lufthansa Technik – Germany LTUAM.China P&W Cheshire US GE Malaysia P&W (ESA) Singapore MRO Geographic Location CF6-80C KLM – Netherlands GE . US United Services – US AMECO .com SAA Technic al – South Africa MTU Zuhai China P&W – New Zealand .Australia ANZES – New Zealand www.India P&W US Thai Airways .Thailand TAP Portugal GAMCO – Abu Dhabi Jet Turbine .UK Alitalia .tes-uk.US MRO Geographic Location PW4000 SRT Switzerland Volvo Aero Sweden MTU Germany Delta Tech Ops .Germany United Services.Repair Shops – How Many ? Where ? Repair Volume ? MRO Geographic Location – PW2037 P&W US Finnair .US GE Brazi l Lufthansa Technik -MTU GermanyGermany IHI Japan R-R .Finland Delta Tech Ops .Italy American Airlines .US MRO Geographic Location V2500 Lufthansa Technik Finnair -Germany MTU Finland Germany Air India .

tes-uk.So what values are achievable from engine disassembly programs? www.com .

shipping.5M ~$8.25M “residual” lease $945.000 X3 90 day leases @ $3.tes-uk. Net Sales Airframe Sales Value $2.Disassembly Example 1 B757 (RB211) 1986 C Check & Pylon mod required. one engine u/s. legal. mgt fees? www.5M Over 24 months Part-Out. Net Sales Revenue projection $2.500 per day Revenue projection $2. teardown. insurances.com Over 24 months Are we prepared for short term leasing to maximise returns ? . one engine low time remaining Do we reduce to spare parts #1 Engine Unserviceable What value can we get realise ? #2 Engine Serviceable 1800 cyc residual Lease out over 12 months Part-Out.000 investment in material repairs ? What are the program costs? Finance.2M over 2 year program Are we prepared for $500.

000 Total Costs Total Parts Sales Total Gross Profit $1.000 $1.000 $640.000 $50.000 $900.000 $300.com .000 Project Return 60% ROS ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ Acquisition / legal Shipping / stands Teardown Repair of parts Other $25.585.000 $25.650.000 $300.000 Project Return 39% ROS Would -50C2 engines Wouldyou youprovide providedebt debtagainst againstCF6 CF6-50C2 enginesfor for Would you provide debt against CF6 50C2 engines? Would you providedisassembly? debt against CF6-50C2 engines? disassembly? www.000 $60.000 ¾ Costs ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ ¾ Acquisition / legal Shipping / stands Teardown Repair of parts Other ¾ CF6-50C2 Program 2006 ¾ Engine purchases x2 $550.000 $100.000 ¾ Costs $75.000 $150.000 $2.415.585.000 $4.000 Total Costs Total Parts Sales Total Gross Profit $1.Disassembly Example 2 ¾ CF6-50C2 Program 2004/5 ¾ Engine purchases x6 $600.tes-uk.000.

!! Caution !! Trust my modelling we’ve done this before !! The The“Part “Partout” out”and and“break “breakup” up”business businesscan canattract attractringmasters. ringmasters.com .tes-uk. www.

com . ¾ Asset backed financing of engines for disassembly remains a niche market but offers significant returns for those prepared to invest with a trusted. ¾ Disposition management & control requires careful selection of a partner to manage the process with an excellent technical understanding of the product and sales outlets.tes-uk. www. experienced and respected service provider.Summary / Conclusions ¾ Complete technical and commercial control required throughout the key phases of the aircraft life in order to maintain residual value ¾ Study the market demographics carefully if you are to maximise the realiseable value from a disassembly program.

com .The ultimate residual value retaining asset www.tes-uk.

tes-uk. www.Thank you for your attention TES Aviation Group “The leading engine asset management service provider offering innovative commercial and technical solutions to investors and operators of commercial aircraft engines”.com .