Aviation Seminar

Investing in Aviation
Watch the video here

30th March 2017
Phil Seymour & Jonathan McDonald

phil.seymour@iba.aero
www.iba.aero Minimising Risk, Maximising Opportunity

The Aviation Growth Story
 Air travel still doubling every 15 years
 IATA still bullish
 Developing market growth
 Doubling of commercial fleet over 20 years. 40,000 aircraft delivered
between 2016 and 2035 – five a day
 Capital markets supporting financing demands
 Why lease:
 Latest tech
 Fuel efficiency
 Lower capex
 Flexibility
 Access the backlog
 Avoid residual risk

General Demand – Traffic
 RPK – Up 9.6% for January 2017 v January 2016
 Load Factors @ 80.2 % for January 2017 representing slight increase of 1.2% over January 2016
 Freight traffic FTK up 6.9% for January 2017 compared to January 2016
Source: IATA

Financing Structures
Source: Boeing

The Aircraft Operating Lease Sector
The Growth of the Sector.
 Why airlines like leases – flexibility

 Why investors like leases – typical returns
 The changing face of the top 50 lessors
 The new money
 The variations in leasing entities from the mega lessors who order speculatively, the mid-band and the new entrants
 The downside – what can go wrong?
 How to mitigate risk

Why invest
Lots of reasons But…be careful with

 Demand increasing  Credit risk: security, reserves, lease rate
 Stable cash flow  The spec of your assets
 Regulation minimises corner-cutting  Records
 Capetown  Maintenance
 Mobile and liquid (see opposite) assets  Operations
 Predictable returns  External influences

The market is strong for investors
Getting In
but returns are trickier to realise and risks need to be mitigated Asset selection and valuation
Asset purchase
Financing arranged
 Maturity – many more players Credits assessed
Getting
 Competition – LRFs declining In
 Over-Supply? - narrow bodies just keep on coming

Target
 Volatility – uncertainty/regional pressures ROI
Getting Staying
out in
Getting Out Staying In
Redelivery management Risk mitigation
Transition options: sell, Getting paid
part out, extend Utilisation and
Remarketing maintenance

Shifting sands. The lessor market
 The top tier  Mr 10%

 Listed  10-20 aircraft
 Buying direct from OEMs  Mid-life narrowbodies
 Need to trade regularly  Chasing returns, not scale
 Broad mix of operators and aircraft types
 The mid market  The new entrant

 Consolidate or IPO  Insurance, Pension, SWF or PE
 Can be broad or niche  Asian focus last few years
 Evolution  Disruptive in terms of margin, experience and
 A look at the ownership – buyers or sellers? ambition

Getting In
Getting In
Asset selection and valuation
Asset purchase
Getting Credits assessed
In
Target
ROI
Getting Staying
out in
Transition options: sell, part out, extend, P2F Getting paid
Remarketing Utilisation and maintenance

Where To Go and Not To Go
The good, the bad the ugly – jurisdictions, regions and countries – how to monitor risk.
 The mix of risk and reward
 Tier 1, Tier 2 and Tier 3 airlines;

 Qualitative analysis
 Quantitative analysis
 FAA/EASA Banned lists
 Changing circumstances – e.g. Brazil (GOL) Turkey (THY)
 Use of registers
 Cape Town Treaty

Appraised vs Trading values
Understandable frustration
 Excusable reasons for lack of accuracy

 Crystal ball – 9/11, GFC
 Large carrier goes under
 Inexcusable reasons for lack of accuracy

 Leaned on for value X
 Didn’t ask what it was for
 Steps being to improve definitions

 We cannot put the genie back, but we can make it more clear what you are buying

A320-200 Maintenance Value - 2016 Constant USD - V2500-A5, 2:1 (W.Europe)
Maintenance Value HL Level
16.00
14.00
12.00
Maintenance Value US$m
10.00
8.00
6.00
4.00
2.00
0.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Age (years)

Historic Performance – How accurate are appraisals – Boeing 737-800
 The example used here is a Boeing 737-800 of 2006 YOB

 To do this – IBA must look at its 10 year forecasts from 2006
 Our 2006 records stated that the aircraft in 2016 would be worth US$ 25.50m with 2.5% annual inflation
 IBA’s 2016 records show a MV of US$ 24m
 Adapting for actual inflation gives a 10 year forecast of US$ 23.7m – a variation of 1.25%
 Similar variations seen for A320 family / other high demand narrow-bodies to +/-4%
 All performed according to ISTAT Definitions

Historic Performance – How accurate are appraisals – Airbus A330-300
 The example used here is Airbus A330-300 of 2006 YOB
 To do this – IBA must look at its 10 year forecasts from 2006
 Our 2006 records stated that the aircraft in 2016 would be worth US$ 44.38m with 2.5% annual inflation
 IBA’s 2016 records show MV of US$ 49.68m
 Adapting for actual inflation gives a 10 year forecast of US$ 46m
Performed according to ISTAT Definitions

Trading - “Naked” aircraft versus “encumbered/with lease attached”
An economic analysis reveals the real value….
Then there are further considerations:
 Lease income, security deposits.

 Lessor contributions
 Other lease terms – extension/purchase option
 Delivery/Redelivery Conditions
 Maintenance Reserves and compensation for use
 Cost of finance

Staying In
Getting In
Asset purchase
In
Target
ROI
Getting Staying
out in

Ongoing AM and monitoring…..the WWWWWWH guide
The Asset and its Technical Condition
 Who? – IBA tech team – usually one senior Lease Credit Asset Technical Jurisdiction Transition
surveyor. Lessee tech team – records and
physical.
 Which? – for portfolios there is sometimes a
sampling process – e.g 4 aircraft on lease,
choose which one is on maintenance. Reserves vs Maintenance PESTEL Scheduled v
IBA Score Values
 Why? Asset value, building rapport, compensation costs analysis unscheduled
ensuring compliance. Lease v Regulatory can
create different approaches – monitor the
differences
 Where? – ideally at main base where Ambiguity Track record Residuals Utilisation Capetown Reconfig costs
records are held and aircraft inspection
ideally during extended downtime or heavy
maintenance.
 When? – per the lease clause – usually Deferrals & End of life Technical Due Reserves or
AD cost share Courts
route changes options Diligence cash
annual rights for lessor
 What can change? See next slide
 How? – finance and lease management
Return Management Asset Liquidity of
aware - via lessee technical team contacts. conditions
Market shift
Inspections
Arrests
asset
team
Security passes.

What can change?
The inspection provides the opportunity to assess the

Utilisation variables associated with the use of the asset and to
assess if there is anything that may impact the value
and future use (remarketability) of the asset:
Maintenance
Damage
Program
1. Utilisation: per initial expectation? Any changes?
2. Maintenance Program: these can develop from OEM
of from lessee – check variations.
3. Flight Operations – any changes to operating weights,
de-rate, performance and procedures?
Modifications Flight Ops 4. Changes to components, including engines. Title?
MRO influence
5. Modifications: Configuration, Source documents.
Components 6. Damage: Per OEM, who/how performed, per lease,
insurance, repeat inspections.

Asset Management During the Lease
Use of CMS – Client’s and IBA’s access.
Monitoring and analysing Lessee input – utilisation reports, operator mod. requests,
damage rts, certificate and insurance renewals.
epor
Are the aircraft flying?
Mid–term Aircraft/Records Inspections at appropriate frequencies.
General Monitoring – ADs, Regulatory Changes, etc.
Maintenance Reserves – reserve invoicing and fund balances, workscopes,

drawdown approvals.
Packaged to build a comprehensive “moving picture”.

Warning Signs
Late Payment of rentals or reserves

Financial reporting, business plans
Press articles/peer networks, other lessors/financiers concerns
Key staff changes, route cancellations
Supplier payment issues
Economic/regulatory changes
Order deferrals
SO......WATCH FOR THE SIGNS

INTEGRATE THE COMMERCIAL AND TECHNICAL ASPECTS
BUILD THAT MOVING PICTURE

Risk monitoring, easy in hindsight
Look at operator and macro environment as well as the
asset itself.
 Financial reporting, business plans
 Route changes and cancellations
 Records & maintenance issues
 Political, economic & regulatory changes
 Key staff changes
 Order deferrals
 Staff and suppliers not getting paid
 Desktop: Trade, Business, Stats like these to my right

 Peer networks
 Data: Fleet, Utilisation, Routes and Usage
 Spotters
 Fleet Info

Getting Out
Getting In
Asset purchase
In
Target
ROI
Getting Staying
out in

The Transition Management Minefield
 Top 10 contributors to transition
challenges
 Poor contract drafting around redelivery
conditions. Lesser inspection rights and
disputes processes
 Lack of lessee planning and early
engagement with lessor
 Inadequate focus on assets during
operations
 Lessee operational demands consuming
redelivery resource
 Decentralised, missing or incorrectly
completed records
 Underestimation of the total workload
 Discovery of additional work required
during maintenance input
 Lack of lessor appetite for returning aircraft
 Engines failing borescopes – carry out
precautionary borescope much earlier
 Underestimating lead times and lessor
expectations.

Pros and Cons of the options if you don’t have a new lessee
 Extend  Part Out

 Easiest option  Happening sooner
 Lower rent typical  OEM engine programs
 Heavy check triggered
 Sell  Convert
 Residual value  Interesting, growing market
 Naked can be tough  Amazon driving change

Demand: where are we? Orders: Airbus A320 & Boeing 737 CFM
Gross Orders
3000 1
0.9
2500
0.8
0.7
2000
0.6
1500 0.5
0.4
1000
0.3
0.2
500
0.1
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
NG MAX NEO CEO Oil
Source: IBA. iQ

Historic Narrow-body Production Levels
Delivery Profile
1200
1000
800
600
400
200
0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
737 CL 737NG CEO NEO

The Airbus A320 vs Boeing 737 MAX – Latest
Cumulative NEO/MAX orders – Source: IBA. iQ
6000
5000
4000
3000
2000
1000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016/7
MAX NEO

The Airbus A320 vs Boeing 737 MAX – Latest
 Airbus is ahead with the NEO in terms of cumulative orders, regardless of the fact that the NEO was launched 7-8
months earlier.
 In terms of firm orders Airbus have circa 5,000 NEO while Boeing have about 3,500 MAX
 Both the A319NEO and 737 MAX 7 have hardly set the sales stats on fire with sub 100 units each to date
 The A320NEO and MAX 8 are very closely matched with the NEO slightly ahead.
 The A321NEO is doing very well while sales of the MAX 9 are a little slow – No figures supplied as it is difficult to
determine which MAX orders are actually confirmed as the Dash 9
 Will Boeing do a MAX 10 ? Looking almost inevitable. 66 inch stretch (meaning it will still be slightly smaller than
A321).
 The 737 MAX 9 is a goer and it has now rolled out of factory
 Basically – both NEO & MAX very successful when looked at on a programme basis
 Boeing 737 MAX 8 should enter service with Norwegian / Lion Air circa June this year, WN circa September
 A321-Neo should enter service later this year too…

Passenger Aircraft – Lease Rates – Airbus A320-200
A320 Lease Rates - Constant Age
$0.450 7.0
$0.400
6.0
$0.350
5.0
$0.300
Lease Rates
% 3m Libor
$0.250 4.0
$0.200 3.0
$0.150
2.0
$0.100
1.0
$0.050
$0.000 0.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Age - 0 Age - 5 Age - 10 Age - 15 3m Libor
Source: IBA. iQ

Passenger Aircraft – Lease Rates – Boeing 737-800
737-800 Lease Rates - Constant Age
$0.450 7.0
$0.400
6.0
$0.350
5.0
$0.300
Lease Rates
% 3m Libor
$0.250 4.0
$0.200 3.0
$0.150
2.0
$0.100
1.0
$0.050
$0.000 0.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Age - 0 Age - 5 Age - 10 Age - 15 3m Libor Source: IBA

Source: IBA.Jet
iQData

Passenger Aircraft – Values – Airbus A320-200
A320 Market Values - Constant Age
$45.0
$40.0
$35.0
Market Values
$30.0
$25.0
$20.0
$15.0
$10.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Age - 0 Age - 5 Age - 10 Age - 15 Source: IBA. iQ

Passenger Aircraft – Values – Boeing 737-800
737-800 Market Values - Constant Age
$50.00
$45.00
$40.00
$35.00
Market Values
$30.00
$25.00
$20.00
$15.00
$10.00
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: IBA Jet Data

Source: IBA. iQ
Age - 0 Age - 5 Age - 10 Age - 15

Trading Volumes
Considering new operating leases, secondary sales and sale leasebacks, trading volumes for 2016 appears to be
close to levels encountered for 2015 – although majority of most liquid aircraft are down so far Secondary trading 2016F v 2015
Once again, we expect the top 3 families that trade under those scenarios to remain the same. In terms of % of
trades performed this year: Volume CMV
 A320 family = 22.9% ≡ 3.7% of the in service fleet – A320-200 ▼ ▲
– 737-800 ▼ ▲
 737NG = 14.2% (16.0% in 2015) ≡ 2.7% of the in service fleet
– A321-200 ▲ ▲
 737 classics = 8.8% (8.5% in 2015) ≡ 7.5% of the in service fleet – 767-300ER ▲ ◄
A320 family trading is at same level as for 737classics & 737NG
– A319-100 ▲ ▲
The top 3 specific models are the same as in 2015:
– 737-700 ▼ ▲
 A320-200 = 12.5% of trades – A330-200 ▼ ▼
 737-800 = 10.9% of trades – A330-300 ▼ ▼
– 787-9 ▲ ▲
 A321-200 = 6.3% of trades
Widebody trading is down from 2015 – but not far from long-term trend – 777-300ER ▲ ▼
– 777-200ER ▲ ▼
 767s = 4.1% of 2016 trades ≡ 10.2 % of the in service fleet – A350-900 ▲ ▲
 A330s = 2.6% of 2016 trades ≡ 4.6% of the in service fleet – 737-900ER ▼ ▲
– 787-8 ▼ ▲
 777s = 2.0% of 2016 trades ≡ 3.2% of the in service fleet
– A380-800 ▼ ▲ (new)
 4 engined aircraft overall remain down on previous year – A340-500/600 ▼ ▼

Wide – Body Market – Take Away Comments
Stronger performers
• New generation twins - Boeing 787-8/-9, Airbus A350-900
Strong appetite for sale and leasebacks, good credit lessees, wide operator base, leading edge technology and still in early in the product cycle. Residual value performance
is expected to be good.
Average performers – cautious future outlook

• Boeing 777-300ER, Airbus A380-800
Aircraft are entering the later stages of their product cycles, high fleet concentration within certain carriers and the secondary market is untested for these models. High
transition costs and potentially limited second-hand market compared with fleet size may place pressure on secondary market trading values.
Weaker performers – continued market softening

• Airbus A330-200/-300, Boeing 777-200ER, Boeing 767-300ER
Aircraft are either late in the product cycle (A330s) or out of production (B777 & 767). Whilst there are placement opportunities, the market is in oversupply for these
types, storage and availability are high and values and lease rates, particularly of older examples, are under pressure. Part-out is a likely eventuality for mature examples.
Weakest performers – transactions likely to be at distressed levels, limited demand

• Airbus A340-300/-500/-600, Boeing 777-200, Boeing 747-400, Boeing 747-8I
Airbus A340s and Boeing 747-400 are all out of production. The later A340 variants achieved poor market uptake, likewise the Boeing 747-8I has struggled in its passenger
form with only three carriers and circa 30 aircraft in service. Prospect for future placements is weak with narrow/narrowing operator bases. Secondary market value and
lease rate expectations are weak.
Source: IBA. iQ

Wide – Body Market Source: IBA. iQ
800 80%
75%
700 70%
600 60%
500 50%
400 40%
35%
30% 28%
300 30%
200 16% 20%

11% 13%
10%
100 10%
5% 5%
4% 5% 4%
2% 3% 1% 1%
0 0%
A330-200 A330-300 A340-300 A340-500 A340-600 A350-900 B747-400 B767-300ER B777-200ER B777-300ER B787-8 B787-9
Fleet size Parked Available

Wide – Body Market – Transactions Source: IBA. iQ
90
80
70
60
50
40
30
20
10
0
B767- B777- B777-
A330-200 A330-300 A340-300 A340-500 A340-600 A350-900 B747-400 B787-8 B787-9
300ER 200ER 300ER
Sold with lease 12 5 3 0 0 0 0 2 0 0 1 0
Sold off lease 12 1 17 3 1 0 14 58 11 5 0 0
Sale leaseback 1 14 0 0 0 5 0 0 0 7 13 17
Operating Lease 27 24 4 2 0 11 8 21 9 18 0 17

Wide – Body Market – Monthly Lease Rentals (idealised market)
Aircraft Year 2017 2012 2007 2002

Low 1,850 1,050 600 -
Airbus A380-800 Source: IBA. iQ
High 2,250 1,380 850 -
Low 1,100 700 - -
Boeing 747-8I
High 1,250 800 - -
Low 630 480 350 245
Airbus A330-200
High 830 665 510 370
Low 680 520 375 250
Airbus A330-300
High 900 720 545 370
Low 1,000 - - -
Airbus A350-900
High 1,300 - - -
Low 920 760 - -
Boeing 787-8
High 1,050 860 - -
Low 1,000 - - -
Boeing 787-9
High 1,200 - - -
Low 1,150 930 750 -
Boeing 777-300ER
High 1,450 1,145 880 -

NB Market – The Disconnect in Lease Rates
2006 A320-200
Source: IBA. iQ
Value then $45,600,000
Lease rate then $395,000
LRF 0.87%
2016 / 2017 A320 NEO

Value now $47,950,000
Lease Rate now $350,000
LRF 0.73%

NB Market – The Disconnect in Lease Rates
2006 Boeing 737-800

Value then $46,200,000 Source: IBA. iQ
Lease rate then $400,000

LRF 0.87%
2017 Boieng 737 MAX 8

Value now $50,500,000
Lease Rate now $360,000
LRF 0.71%

WB Market – The Disconnect in Lease Rates
2006 A330-300
Value then 103,000,000 Source: IBA. iQ
Lease rate then 830,000

LRF 0.81%
2016 / 2017 Boeing 787-9

Value now 137,000,000
Lease Rate now 960,000
LRF 0.70%

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Investing in Aviation

Watch the video here

Phil Seymour & Jonathan McDonald

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

 RPK – Up 9.6% for January 2017 v January 2016

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

 Why airlines like leases – flexibility

www.iba.aero Minimising Risk, Maximising Opportunity

Lots of reasons But…be careful with

www.iba.aero Minimising Risk, Maximising Opportunity

 Over-Supply? - narrow bodies just keep on coming

www.iba.aero Minimising Risk, Maximising Opportunity

 The top tier  Mr 10%

 The mid market  The new entrant

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

 The mix of risk and reward

 Tier 1, Tier 2 and Tier 3 airlines;

 FAA/EASA Banned lists

 Changing circumstances – e.g. Brazil (GOL) Turkey (THY)

 Cape Town Treaty

www.iba.aero Minimising Risk, Maximising Opportunity

 Excusable reasons for lack of accuracy

 Inexcusable reasons for lack of accuracy

 Steps being to improve definitions

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

 The example used here is a Boeing 737-800 of 2006 YOB

 All performed according to ISTAT Definitions

www.iba.aero Minimising Risk, Maximising Opportunity

 The example used here is Airbus A330-300 of 2006 YOB

 To do this – IBA must look at its 10 year forecasts from 2006

 IBA’s 2016 records show MV of US$ 49.68m

 Adapting for actual inflation gives a 10 year forecast of US$ 46m

Performed according to ISTAT Definitions

www.iba.aero Minimising Risk, Maximising Opportunity

An economic analysis reveals the real value….

Then there are further considerations:

 Lease income, security deposits.

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

The inspection provides the opportunity to assess the

www.iba.aero Minimising Risk, Maximising Opportunity

Use of CMS – Client’s and IBA’s access.

Mid–term Aircraft/Records Inspections at appropriate frequencies.

General Monitoring – ADs, Regulatory Changes, etc.

Maintenance Reserves – reserve invoicing and fund balances, workscopes,

www.iba.aero Minimising Risk, Maximising Opportunity

Late Payment of rentals or reserves

SO......WATCH FOR THE SIGNS

www.iba.aero Minimising Risk, Maximising Opportunity

 Desktop: Trade, Business, Stats like these to my right

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

www.iba.aero Minimising Risk, Maximising Opportunity

 Extend  Part Out

www.iba.aero Minimising Risk, Maximising Opportunity

NG MAX NEO CEO Oil

www.iba.aero Minimising Risk, Maximising Opportunity

737 CL 737NG CEO NEO

www.iba.aero Minimising Risk, Maximising Opportunity