Aircraft Lessor 3.4.2019

4 March 2019
Aircraft Leasing
Deutsche Bank
Aircraft Lessor Update
Research
North America Industry Date

United States
Industrials
Aircraft Lessor 4 March 2019
Aircraft Leasing Update Industry Update
Solid industry fundamentals underpin a

favorable risk/reward set-up
Koosh Patel
Research Analyst
+1-212-250-8356
Michael Linenberg
Research Analyst
+1-212-250-9254
Matt Fallon
Research Associate
+1-212-250-7161
Doug Runte, CFA

Research Analyst
+1-212-250-9319
Source: Deutsche Bank
Distributed on: 04/03/2019 11:40:36 GMT
Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS
ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.
7T2se3r0Ot6kwoPa
Deutsche Bank
Research
North America Industry Date

United States
Industrials
Aircraft Lessor 4 March 2019
Aircraft Leasing Update Industry Update
Solid industry fundamentals underpin a

favorable risk/reward set-up
Koosh Patel
Reiterating positive sector view and Buy ratings on aircraft lessors AER, AL &
FLY Research Analyst
We are reiterating our Buy ratings on AER, AL and FLY. Despite last year +1-212-250-8356
being a very profitable year for the publicly-traded lessors, their share prices
Michael Linenberg
underperformed the market in 2018 as they faced a multitude of headwinds
Research Analyst
ranging from trade tensions to geopolitics, concerns over the slowing pace of
global economic growth, the threat of rising interest rates and heightened airline +1-212-250-9254
bankruptcy activity. Furthermore, overall airline profitability has remained healthy,

Matt Fallon
while a tight aircraft supply-demand dynamic has prevailed, underpinned by
Research Associate
strong air traffic growth and a severely constrained industrial supply chain. The
+1-212-250-7161
aircraft leasing stocks have rebounded YTD in 2019 and we think the momentum
will continue, supported by strong demand and access to attractive financing as Doug Runte, CFA
well as a supportive macroeconomic backdrop. As such, we forecast $2.2 billion Research Analyst
in industry pretax profits in 2019, which represents a 27% pretax profit margin. +1-212-250-9319
Long-term demand for travel growth maintains its momentum

Over the next 20 years, Airbus and Boeing predict passenger air traffic will grow Companies featured
at an average rate of 4.7% and 4.4% per annum, respectively. Global air traffic Air Lease Corporation (AL.N),USD38.06 Buy
has grown at approximately 1.5x - 2.0x the pace of global GDP historically, and AerCap Holdings N.V. (AER.N),USD45.07 Buy
we anticipate that solid momentum in air traffic growth will translate favorably FLY Leasing Limited (FLY.N),USD11.46 Buy
Aircastle Limited (AYR.N),USD19.81 Hold
into strong demand for new aircraft to support growth and replacement. As
Source: Deutsche Bank
people across the world have ascribed greater utility to travel, we have observed a
tremendous increase in propensity to travel, which has been led by the emergence
of the middle class across Asia and enabled by globalization and increasing Valuation and risks
freedom of movement across borders. There are various valuation methodologies
investors can use to analyze an aircraft
Lessors well positioned to capture an increasing market share and markets lessor’s equity including P/Es, Price to
remain supportive with attractive funding Pretax Earnings, Distributable Cash Flow
Lessors have financed a growing portion of global fleet growth, with ~40% market Yield, EV/EBITDA, EV/CMV, Price to Book
and NAV. On a P/E basis, lessors are
penetration in 2018. OEM order backlogs consist of ~$800 billion worth of new trading at 6.4x and 5.6x 2019E and 2020E
aircraft to be delivered to airlines between 2019 and 2023, and we anticipate EPS, vs. the group's historical averages
lessors may ultimately capture 50% market share by 2023. To put this into of 11x current year and 9x next year,
perspective, the International Association Transport Association (IATA) estimates respectively. On a P/B basis, lessors are
trading at 0.7x vs. a historical 1.0x average.
the global airline industry generated ~$32 billion of net profits in 2018. Granted Key risks include potential oversupply of
the insatiable appetite for capital, access to low-cost financing is critical to the aircraft, credit issues associated with airline
success of the lessor business model. In addition, we believe high-quality aircraft customers and geopolitical and economic
orderbooks held by AER, AL and FLY position these lessors well to capitalize on volatilities, which pose a threat to the pace
of air traffic growth.
profitable growth opportunities and support a runway for high quality multi-year
revenue growth.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS
ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.
4 March 2019
Aircraft Leasing
Table Of Contents
Aircraft Leasing Industry Overview.................................... 4

Current Market Update and Industry Fundamentals...........5
Long-term demand trends for air travel remain strong......................................5
Trade and e-commerce are key drivers for air freight growth............................7
An increasing propensity to travel around the globe......................................... 8
Demand for air travel has been resilient.......................................................... 10
Aircraft leasing market poised to grow along with global air trav................... 11
Fleet replacement also fuels significant demand.............................................12
In-demand, new-tech narrowbody and widebody supply limitations in...........13
Aircraft supply-demand fundaments remain in tight balance..........................16
Aircraft lease rate and valuation trends........................................................... 18
Lessors funding an increasing portion of the global fleet expansi................... 21
Publicly-traded lessors have exercised discipline and demonstrate.................21
Protections for lessors: a brief overview of the Cape Town Conven................ 27
Asset selection and management is paramount to success............................28
Risks to Consider.............................................................. 29
Slowing macroeconomic backdrop could impact aircraft demand..................29
Emerging market volatility............................................................................... 30
Protectionist trends threaten air travel demand...............................................31
Risk of oversupply and obsolescence.............................................................. 32
The threat of heightened competition..............................................................32
Key Drivers of Financial Success...................................... 33

Experienced management team...................................................................... 33
Financial track record.......................................................................................33
Attractive portfolio acquired at attractive valuations....................................... 33
Diversification of customers/assets..................................................................33
Well-capitalized – of capital............................................................................. 34
Order book = highly visible earnings growth...................................................34
Comparison of key drivers............................................................................... 34
The Nuts and Bolts of Aircraft Leasing.............................36

The aircraft leasing business model.................................................................36
Acquisition of aviation assets at favorable prices............................................ 37
Leverage the assets/company.......................................................................... 37
Manage the asset base.................................................................................... 37
Operating lease agreements............................................................................ 37
Anatomy of an Aircraft Lease...........................................40

Analysis of returns on equity for aircraft lessors............................................. 44
Sources of Financing........................................................ 46
Securitizations/Non-Recourse ABS...................................................................47
Unsecured debt................................................................................................ 48
Export credit agency (ECA) financing.............................................................. 48
Recourse secured financing............................................................................. 49
Commercial bank debt..................................................................................... 49
Pre-delivery payment (PDPs) financing............................................................ 49
Valuation Metrics.............................................................. 50
P/Es vs. Price to Pretax Earnings..................................................................... 50
Distributable Cash Flow Yield.......................................................................... 50
Enterprise Value/EBITDA.................................................................................. 50
EV/CMV, Price to Book, and NAV....................................................................51
Assessing residual value risk by “following the cash”.................................... 51
Page 2 Deutsche Bank Securities Inc.

4 March 2019
Aircraft Leasing
Table Of Contents
Equity Positioning............................................................. 52
Buy ratings on AerCap (AER), Air Lease (AL) and Fly Leasing (FLY)................ 52
We rate Aircastle (AYR) a Hold........................................................................54
Valuation tables................................................................................................ 55
Deutsche Bank Securities Inc. Page 3

4 March 2019
Aircraft Leasing
Aircraft Leasing Industry

Overview
The aircraft leasing industry encompasses over 100 publicly traded and privately
held lessors with an estimated ~$350 billion in assets based on current market
values (CMV). At present, the top 15 lessors represent ~50% of asset value.
Publicly-traded aircraft lessors include AerCap (AER), Air Lease (AL), Aircastle
(AYR) and Fly Leasing (FLY), which are listed in the U.S., and BOC Aviation
(covered by Deutsche Bank Analyst Jacky Zuo), which is listed in Hong Kong.
While there are only five publicly-traded aircraft lessors, there have been a large
number of new entrants to the market over the last few years and we note that
the aircraft leasing industry is still in its early stages, with respect to publicly-
traded equities. In figure 1 below, we rank the largest lessors by CMV of their
asset portfolios.
Figure 1: CMV of owned aircraft (January 2019)

35.0
31.2
30.0
25.0
US$ (in billions)
20.4
20.0 18.4 17.4
15.0 13.1 13.0

9.8 9.1
10.0 8.5 7.7 6.8 6.0 5.4 5.1 5.1
5.0
0.0
Source: Ascend and Deutsche Bank Research

4 March 2019
Aircraft Leasing
Current Market Update

and Industry Fundamentals
Long-term demand trends for air travel remain strong
Since the dawn of the aircraft leasing industry in the late 1960s, demand for air
travel has grown at a compounded annual growth rate of 6%, while the global
aircraft fleet has grown at ~5%. In spite of volatilities stemming from global and
regional economic cycles, the industry has only seen three years of negative
air traffic growth (1991, 2001 and 2009). As such, we believe the industry has
demonstrated its resilience to externalities, supporting our positive view on the
sector.
Figure 2: Global passenger traffic and commercial jet aircraft
8,000 31,500
9/11 & aftermath

7,000 27,000
US-Iraq War
2008/2009
financial
6,000 crisis 22,500
Number of Aircraft
5,000
RPKs (in billions)
18,000
4,000
13,500
3,000
9,000
2,000
1,000 4,500
0 0
Global RPKs (in billions) Commercial Jets
Source: Ascend, Boeing,company filings and Deutsche Bank Research
Recent economic data has suggested mixed messages about the forward
trajectory of the pace of global economic growth with the consensus amongst
economists (according to Bloomberg) and the IMF for global GDP growth to slow
to 3.5% in 2019 (versus 3.7% in 2018). Near-term macro uncertainties including
Sino - U.S trade-related tensions, Brexit, the threat of rising interest rates and
a further devaluation of key emerging market currencies against the USD are
likely to continue to drive increased market volatility in 2019. However, given the
resilience of the leasing business model and air traffic growth figures, we do not
anticipate these short-term market volatilities to translate negatively with respect
to demand for aircraft or for aircraft values, stressing that industry fundamentals
remain strong. Furthermore, we anticipate emerging Asian economies (primarily
China and India) to once again be the greatest driver to continued air traffic growth
in 2019.

4 March 2019
Aircraft Leasing
As we consider the market outlook on a longer-term basis, we continue to believe

industry growth potential is poised to be strong for the foreseeable future. Air
travel demand stimulation is predicated upon three key drivers. First, the growth
of the emerging middle class, in countries such as China and India, where the
combined middle class populations grew from 100 million in 2007 to over 400
million by 2017. The middle class in China and India alone is expected to increase
by an incremental ~300 million people over the next 10 years based on an analysis
by Boeing and IHS Markit. Second, the increasing market penetration of low cost
& ultra-low cost carriers (LCCs/ULCCs) has driven air fares lower (airfares declined
by an average of 0.9% over the last 10 years according to Boeing) and made air
travel more easily accessible. And third, the growth in international tourism, a
market which grew by over 350 million in absolute terms between 2010 and 2016
and continues to outpace GDP growth, based on figures published by the World
Tourism Organization.
Airbus and Boeing predict passenger air travel demand to grow at an average of
4.7% and 4.4% respectively over the next 20 years. Furthermore, both OEMs are
in consensus that Asia will be the biggest market, followed by North America and
Europe. Airbus estimates 42% of new deliveries will be to the Asia-Pacific region,
while North America and Europe combined will comprise 35% of new deliveries.
Meanwhile, Boeing anticipates 40% of new deliveries will be in Asia and 40% of
new deliveries will be to North America and Europe over the next 20 years. A key
distinction between the regions is that demand in Asia is expected to be driven
primarily by growth, while demand in North America and Europe is expected to
be skewed more toward replacement aircraft. As such, Boeing forecasts 70% of
new deliveries to be growth-oriented and 30% to be a function of replacement
aircraft over the next 20 years, while Boeing forecasts 56% of new deliveries to
be driven by growth and 44% attributed to replacement.

4 March 2019
Aircraft Leasing
Historically, a good rule of thumb has been that global air traffic has grown at
approximately 1.5x - 2.0x the pace of global GDP. We anticipate that the trends
the industry has seen in recent years with respect to strength in passenger traffic
should also translate favorably to strong demand for new aircraft. We note there
are two primary ways to increase capacity, through increasing load factors and by
upgauging to larger aircraft. Over the next 20 years Boeing estimates a doubling
of the global commercial aircraft fleet from 24,400 aircraft in 2017 to 48,540 by
2037 (see figure 3 below).
Figure 3: Total airplanes in service - by type

2017 - 2037E
Growth
60,000 Passenger Fleet Growth: 101%
Replacement Freighter Fleet Growth: 74%
Current Fleet
50,000 Freighter 48,540 48,540

Regional Jet 3,260
Widebody 2,550
40,000 Narrowbody
9,180
24,140
30,000
24,400
1,870
2,540
20,000
4,290 33,550
18,590
10,000
15,700
5,810
0
2017 2037E 2037E
Source: Boeing Current Market Outlook 2018 and Deutsche Bank Research
Trade and e-commerce are key drivers for air freight

growth
While the market for air freight has also been an important component to driving
commercial aircraft demand, its recovery following the global financial crisis in
2008 - 2009 has been more volatile with growth rates that had largely lagged
historical averages and fell short of global GDP growth. However, the industry
saw robust growth in 2017, with 10% YoY growth in revenue tonne kilometers
(RTKs), driven by a global inventory restocking cycle, while 2018 saw growth
which was more in-line with historical averages at +3.5%. The primary drivers
contributing to positive air freight growth are global GDP and international trade
growth. The rising trend of e-commerce has certainly bode well for the air cargo
industry, with new entrants such as Amazon contracting a fleet of ~50 dedicated
widebody freighters (which are leased through Air Transport International, ABX
Air and Atlas Air) since the end of 2015 and we anticipate that e-commerce will
continue to comprise a relevant driver to future RTK growth. We think the trends
seen over the last two years are supportive of Airbus and Boeing's estimates for
global air freight traffic growth, at an average rate of 4.5% and 4.2% over the next
20 years, respectively. In the near term, however, we believe the greatest threat to
air freight growth will be the inability of the world's major economies to resolve
their differences around trade. We saw evidence of this in December 2018 when
global cargo FTKs contracted 0.5% after 32 consecutive months of growth.

4 March 2019
Aircraft Leasing
An increasing propensity to travel around the globe

Propensity to travel is a metric which effectively measures demand for air travel.
As people across the world ascribe an increasingly higher utility to travel, we have
observed a tremendous increase in propensity to travel across every single region
and demographic. This increase has been driven by a number of factors, the
greatest of which can be attributed to economic prosperity and the hyper growth
of the global middle class, which expanded by ~1 billion people globally (to ~3.2
billion) between 2010 and 2016. As a result, growth in international departures
was led by "middle income" travellers, defined as those with an annual per
capita income ranging between $996 and $12,055. The number of international
departures for those in the middle-income demographic tripled from 145 million
in 2000 to 457 million by 2016; see figure 4 below.
Figure 4: International departures by income bracket

CAGR
2000 2008 2016 2000-2016
High income 552 660 770 2.1%
Upper middle income 91 173 314 8.0%
Lower middle income 54 92 143 6.3%
Low Income 13 25 43 7.6%
Source: World Bank and Deutsche Bank Research
From a geographic perspective, China's growth trajectory is most noteworthy

with international departures up ten-fold from 10 million in 2000 to 135 million by
2016, driven primarily by the country's tremendous growth in disposable income
and a relaxing of visa restrictions for Chinese nationals. During this time, China
experienced a 17.3% compounded annual rate of growth (CAGR) in international
departures, while other emerging market regions including South Asia, Latin
America and East Asia & Pacific (ex. China) also saw an above average CAGR at
9.5%, 4.9% and 4.2% respectively. The European Union (EU) meanwhile, despite
being the largest overall point of origin for international departures, saw a much
more moderate pace of growth with a 1.6% CAGR between 2000 and 2016,
while North America saw a similar 1.7% CAGR over this time. We attribute
the slower rate of growth seen in the EU and North America to the fact that
these are relatively more developed markets along with the fact emerging market
economies saw a much greater rate of economic growth over the same time
frame.
Figure 5: International departures for select geographies

CAGR
2000 2008 2016 2000-2016
European Union 343 416 445 1.6%
E. Asia & Pacific (ex. China) 125 169 241 4.2%
China 10 46 135 17.3%
North America 80 91 106 1.7%
Latin America & Caribbean 31 43 67 4.9%
South Asia 7 15 30 9.5%
World 828 1,096 1,459 3.6%

4 March 2019
Aircraft Leasing
In addition to economic prosperity, changes in culture and lifestyle (such as

aspirational travel and a marked secular shift of travel from luxury to lifestyle)
are other factors driving demand for travel. Demand for travel has been
further enabled by globalization, relative geopolitical stability and an increasing
openness of borders in recent decades. Emerging market economies, which most
meaningfully contributed to the rise of the global middle class, will continue to
drive the greatest rates of growth in the coming decades, in our opinion; see
figure 6.
Figure 6: An increasing propensity to travel across the globe

Trips per capita: CAGR
2017 2018 2019E 2020E 2027E 2037E 2017-2027E 2017-2037E
India 0.1 0.1 0.1 0.1 0.2 0.4 8.4% 7.9%
China 0.4 0.4 0.5 0.5 0.8 1.4 7.1% 7.1%
Indonesia 0.5 0.5 0.6 0.6 0.9 1.4 6.6% 6.3%
Turkey 1.0 1.1 1.2 1.2 1.8 2.6 5.7% 5.4%
Brazil 0.4 0.4 0.5 0.5 0.7 1.0 4.7% 4.7%
Russia 0.6 0.6 0.6 0.6 0.8 1.2 4.3% 3.9%
South Korea 1.2 1.3 1.3 1.4 1.8 2.4 3.9% 3.8%
Saudi Arabia 1.1 1.1 1.2 1.2 1.5 2.0 3.3% 3.3%
Germany 1.3 1.4 1.4 1.4 1.8 2.3 3.2% 3.0%
Japan 1.1 1.1 1.2 1.2 1.5 1.9 2.8% 2.8%
Netherlands 1.5 1.6 1.7 1.7 2.1 2.7 3.1% 2.8%
Mexico 0.4 0.4 0.4 0.5 0.5 0.8 2.7% 2.8%
Italy 1.6 1.7 1.7 1.8 2.1 2.7 2.9% 2.7%
Spain 3.0 3.1 3.2 3.3 3.9 5.0 2.9% 2.6%
United Kingdom 2.2 2.3 2.3 2.4 2.9 3.6 2.7% 2.5%
France 1.3 1.3 1.3 1.4 1.6 2.0 2.6% 2.4%
Australia 3.1 3.2 3.3 3.4 3.9 4.7 2.4% 2.3%
Switzerland 2.9 3.1 3.1 3.2 3.8 4.6 2.6% 2.3%
Canada 1.8 1.8 1.8 1.8 2.0 2.4 1.5% 1.5%
United States 1.8 1.9 1.9 1.9 2.1 2.5 1.4% 1.4%
Source: Airbus Global Market Forecast, Sabre, IHS and Deutsche Bank Research
Note: data inclusive of top 20 countries by GDP in 2017 and sorted based on overall rates of growth

4 March 2019
Aircraft Leasing
Demand for air travel has been resilient

Notwithstanding our positive outlook for global air travel demand, we note the
resilience of air travel trends to global economic downturns. While the impacts
of the last global economic downturn were far reaching, with the S&P 500,
FTSE 100, Nikkei, Hang Sang and Shanghai Stock Exchange Composite down
24%, 16%, 31%, 21% and 38%, respectively, between 2008 and 2009, global
international departures declined by only 4% (or ~40 million departures) in 2009,
before reverting back to the longer-term trend of growth by 2010; see figure 7
below. We attribute this to two factors: 1) global recessions are typically less
impactful to air travel than those concentrated in individual economies and; 2) air
travel demand has historically been driven by higher income brackets, which are
generally less impacted by short-term economic downturns.
Figure 7: Global international departures

1,500,000
1,400,000
International Departures ('000)
1,300,000
1,200,000
1,100,000
1,000,000
900,000
800,000
2000 2008 2009 2010 2011 2012 2013 2014 2015 2016

4 March 2019
Aircraft Leasing
Aircraft leasing market poised to grow along with global

air travel demand
The aircraft leasing market represents an important source of financing for the
global airline industry. The lessor business model reduces the initial capital
requirement for airlines (for example, a new 2018 build Airbus A320neo has
a list price of $111 million) while also allowing airlines flexibility to adjust
capacity to shorter-term market fluctuations. Over the past 40 years, lessor market
penetration has grown from just 2% globally in 1978 to ~40% in 2018; see figure
8. The past decade has attracted an increasing amount of capital to the aircraft
leasing market, with the number of lessors increasing from 118 in 2008 to 153 in
2018 as new entrants sought to capitalize on the scalable nature of the business
along with stability in long-term cash flows the business offers. We estimate that
over the long term, the industry is likely to achieve up to 50% share of the global
market by 2023.
Figure 8: Lessor fleet ownership

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

Note: fleet includes turboprop and jet passenger aircraft in service.
Operating leases have gained an increasing amount of traction with airlines

across the globe for several reasons. First, leasing offers airlines greater financial
flexibility and requires relatively low up-front capital investment. In addition,
leasing offers greater fleet flexibility as lease terms are typically seven to twelve
years in duration, which means airlines can facilitate fleet transitions without
taking on residual value risk. With aircraft delivery slots in high demand and
already booked out for several years, leasing may be the only option available to
airlines. The popularity of the low cost and ultra-low cost (LCCs/ULCCs) business
model has also contributed materially to the increasing demand for operating
leases, granted that the low relative capital requirements associated with leasing
are very attractive to start-up carriers.

4 March 2019
Aircraft Leasing
Fleet replacement also fuels significant demand

Commercial passenger aircraft have a typical useful life of 25 years, following
which they may be parted-out for spares, converted to freighters (freighters
typically have a longer lifespan of ~40 years) or simply scrapped. The average age
of the North American fleet is currently 13.3 years and ~18% of aircraft within
the region are over 20 years of age, supporting the thesis that developed North
American markets will be a key component to driving future demand for aircraft
in the coming years. To that point, several major U.S. carriers such as American
and Delta, are well into multi-year fleet replacement programs spanning several
hundreds of aircraft sourced from both major OEMs.
Figure 9: Average age of aircraft/aircraft over 20 yrs old in select markets

18 45%
16 40%
14 35%
% of aircraft at least 20 years of age

36%
12 30%
Average age of aircraft
10 23% 25%
8 18% 20%
15% 15%
6 15%
4 9% 10%
2 5%
1%
0 0%
Africa North America Latin America Europe Middle East Asia Pacific China
Average age of aircraft % of aircraft at least 20 years of age

4 March 2019
Aircraft Leasing
In-demand, new-tech narrowbody and widebody supply

limitations in recent years have been driven by OEM supply
chain issues
Leading up to 2014, the market had seen record orders for new aircraft, reaching a
peak in 2014 at 3,200 orders placed with Airbus and Boeing. However, the market
has since retrenched, with new orders averaging 1,900 aircraft between 2015 and
2018. While still somewhat above historical averages, we think the slowdown in
orders should ease investor and analyst concerns of near-term oversupply.
Figure 10: Airbus and Boeing orders by year

3,500
Boeing
3,202
Airbus
2,942
3,000
2,500 1,449
2,267
2,199 2,206
2,117 1,443 2,042
2,000
816 1,726 1,755
1,604 999
1,125 862
1,500 1,279
1,226 777
1,073 1,008
901
1,000 553
494 1,753
1,451 1,499
521 1,207
1,074 1,180
500 949
240 838 747
703 673 579
281
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Airbus, Boeing and Deutsche Bank Research

4 March 2019
Aircraft Leasing
Although there are doubts whether some emerging market carriers will ultimately
take delivery of their entire orderbooks, we do not necessarily view this as
problematic for the industry – neither the OEMs, nor the airline industry and the
lessors – as we believe demand for aircraft is likely to continue to accelerate in-line
with demand for air travel. In fact, delivery slots for the most highly-sought-after
aircraft – Airbus A320neo, Boeing 737 MAX, Airbus A350, Boeing 787 – remain
difficult to secure for years to come. At the end of December 2018, Airbus had
a backlog of 7,577 aircraft while Boeing had a backlog of 5,873 aircraft. Below,
in figure 11, we detail the backlog of select in-demand aircraft as a frame of
reference.
Figure 11: Airbus and Boeing backlog for select aircraft types (in years)
8.4
6.9 7.1
6.6
5.9
5.5
3.6
A220 A320 family B737 family A330 B787 A350 B777/B777X

Source: Airbus, Boeing, Ascend, FlightGlobal and Deutsche Bank Research
Figure 12: Airbus and Boeing annual deliveries

1,800 Boeing
1,606
Airbus 1,481
1,500 1,397 1,436
1,352
1,274
1,189
1,200 806
748 763
723 762
900 648
601
600
718 800
300 626 629 635 688
588
0
2012 2013 2014 2015 2016 2017 2018
Source: Airbus, Boeing and Deutsche Bank Research

4 March 2019
Aircraft Leasing
In addition to sizeable backlogs held by both Airbus and Boeing, we note almost
all new variant and new model aircraft have faced a multitude of supply-chain
related delays in recent years, primarily related to engines. Notably, this has driven
incremental demand for lessors, while aircraft storage rates have trended toward
all-time lows. In order to understand the issues surrounding supply-chain upsets,
it is important to understand the issues surrounding each of the various engine
programs. The most high profile were engine-related issues with Rolls Royce
Trent 1000 powered Boeing 787s, both CFM LEAP 1A (CFM international is a
joint-venture between GE and Safran) and Pratt & Whitney GTF (geared turbofan)
powered A320neo family aircraft and CFM LEAP 1B powered Boeing 737 MAX
aircraft.
■ Pratt & Whitney GTF: The Pratt & Whitney GTF is one of two engine
options for the A320neo family of aircraft. The GTF's issues centered
around uneven cooling of the powerplant and unusual vibrations
experienced during flight operations, both factors which contributed to
engine shutdowns while in-flight, coupled with the fact that Pratt &
Whitney has not been able to produce the engines fast enough to meet
market demand. While issues related to the GTF engine itself have been
mostly resolved, this led Airbus to delay deliveries of the highly sought-
after A320neo family aircraft due to a lack of engines throughout the
course of 2018, and more recently, Airbus has struggled to reintegrate
the airframes back into its assembly lines, which are operating at or near
full capacity utilization. Delivery delays averaged 3-4 months in 2018.
■ CFM LEAP: The CFM LEAP engine is the primary powerplant option for
the 737 MAX (LEAP 1B) and also an option for the A320neo (LEAP 1A).
In early 2018 CFM disclosed quality and durability issues with respect
to the deterioration of a layer of coating, which negatively impacted
performance at higher levels of thrust and resulting in excessive out-of-
service maintenance-shop time for these engines. Although CFM moved
quickly to resolve these issues by mid-2018, it resulted in delivery delays
of as much as 6 weeks for each of the OEMs.
■ Rolls-Royce Trent 1000: The Trent 1000 is one of two powerplant

options for the Boeing 787 aircraft. In mid-2018, Rolls Royce disclosed
that turbine blades on these engines were degrading faster than
anticipated. While the issues have since been resolved (through the
replacement of impacted engines), we note that this was not the first
time the Trent 1000 experienced operational issues and that this led
several operators to ground substantial numbers of their 787 fleets for
an extended period of time as a result.
■ Rolls-Royce Trent 7000: The Trent 7000 is the sole engine option for
the A330neo aircraft. In late 2018, as Airbus was gearing up to make
its first A330neo deliveries to customers Rolls Royce reported it was
challenged by production ramp-up supply-chain issues, which ultimately
caused Airbus to miss internal A330neo delivery targets in 2018.

4 March 2019
Aircraft Leasing
Aircraft supply-demand fundaments remain in tight

balance
The market for commercial passenger aircraft, as indicated by the percentage
of the fleet stored, continues to post year-over-year improvement. We believe
that this trend, coupled with continued growth in global air traffic, is indicative
of a healthy demand appetite for aircraft. The market for narrowbody aircraft in
particular is quite strong, with record high levels of utilization.
Figure 13: Mainline western passenger aircraft operating trends
Source:Ascend Fleet Analyzer, Deutsche Bank Research
As reported by Deutsche Bank Fixed Income Analyst Doug Runte, the overall
percentage of stored passenger aircraft fell from 6.5% in December 2017
to 5.3% in December 2018. Sequentially, the storage rate of passenger jets
was unchanged from November 2018 to December 2018. The improvement in
year-over-year storage percentages was consistent across younger and older
passenger aircraft cohorts, with a large increase in scrapped aircraft driving much
of the improvement in the storage rates for older passenger aircraft. Storage rates
of newer passenger aircraft improved alongside a significant growth in the size
of the overall fleet. New aircraft deliveries have continued to accelerate over the
last several years, driven in significant part by narrowbody passenger aircraft.
This increase in new aircraft deliveries has been successfully absorbed, as strong
traffic growth and high load factors over the last several years have resulted
in increased demand for aircraft. Strong demand for aircraft and the absence
of near-term delivery slots for new aircraft has resulted in a higher percentage
of airlines electing to extend or renew leases, reducing the number of aircraft
in temporary storage for maintenance and other work while moving between
operators.

4 March 2019
Aircraft Leasing
Storage rates can be adversely impacted by factors which negatively affect

airline profitability including increased competition, high fuel prices, geopolitical
tensions and economic slowdowns, amongst other factors. In recent years, such
factors have led airlines including Avianca Brasil, Alitalia, Jet Airways, Norwegian
and WOW Air to seek measures by which to restructure operations and financial
obligations, while others including Air Berlin, Primera, Germania and Flybmi have
subsequently terminated operations. We believe that the longer-term trend seen
in declining aircraft storage rates is supportive of our thesis that the market
has demonstrated its ability to absorb aircraft coming out of financially troubled
airlines; see figure 13.
Figure 14: Age distribution of parked mainline aircraft (%) of aircraft type (December 2018)
Source:Ascend Fleet Analyzer, Deutsche Bank Research

4 March 2019
Aircraft Leasing
Aircraft lease rate and valuation trends

Aircraft have historically represented a tremendous store of value because they
are hard assets, denominated in U.S. dollars, which are fungible and long-
lived (with an approximate useful life of 25 years). As a result of these factors,
aircraft are typically easily financeable, particularly as it pertains to young, in-
demand variants. Although aircraft values and lease rates (both narrowbody and
widebody) were hard-hit in the 2008 - 2009 global recession (as per figures 15-18),
the underlying resilience in demand trends for global air travel supported a quick
recovery and both industry aircraft values and lease rates have enjoyed relative
stability since the onset of the last global slowdown.
Given that most of the new-tech aircraft on the market (i.e. 737 MAX, A320neo)
have a somewhat limited operating and financial history, our analysis of aircraft
values and leases rates focuses on current-tech aircraft. Historically, there has
been a two-year lag between the directionality of lease rate and aircraft values,
although we would argue factors which are unanticipated in nature (such as
supply-shocks) may impact this lag. A recent example is the relative improvement
seen in values for both brand new and used A321ceo aircraft, which has been
a benefactor of both operator demand to upgauge in order to meet accelerating
air travel demand trends as well as supply-chain issues with the new-to-market
A320neo family aircraft. Based on half-life return conditions 10-year old A321ceo
aircraft have a current market value of $22.4 million and have been trending
consistently higher since 4Q 2015; see figures 15-16.

4 March 2019
Aircraft Leasing
Narrowbody aircraft lease rate and valuation trends

Over the last few years, as the demand for air travel has continued to accelerate,
coupled with the fact that most recent new-technology aircraft have seen a slew
of supply-chain related delays, the market for current-tech aircraft has seen values
remain relatively stable in-spite of having to compete with newer-technology. In
addition, as airlines have focused on upgauging to larger aircraft variants to meet
increasing demand, we have seen stronger lease rates and aircraft values for
the A321 versus the A320, for example. As such, we are bullish on valuations
for narrowbody aircraft and generally favor larger variants of aircraft families.
Although mindful of risk factors, including a slowdown in the pace of growth
of the global economy, we'd note narrowbody aircraft generally have lower
transition costs and have a broader application base, which makes valuations
more resilient and makes lessor assets more attractive.
Figure 15: Lease rates for select current-tech narrowbody aircraft over time
0.5
0.4
Monthly Rental Rate (US$ in mm)
A320-200 (0 yrs)
A321-200 (0 yrs)
737-800 (0 yrs)
0.3 A320-200 (5 yrs)

A321-200 (5 yrs)
737-800 (5 yrs)
A320-200 (10 yrs)
A321-200 (10 yrs)
0.2 737-800 (10 yrs)
0.1
Figure 16: CMVs for select current-tech narrowbody aircraft over time
50.0
45.0
Current Market Value (US$ in mm)
40.0
A320-200 (0 yrs)
A321-200 (0 yrs)
35.0 737-800 (0 yrs)
A320-200 (5 yrs)
A321-200 (5 yrs)
30.0
737-800 (5 yrs)
A320-200 (10 yrs)
25.0 A321-200 (10 yrs)

737-800 (10 yrs)
20.0
15.0

4 March 2019
Aircraft Leasing
Widebody aircraft lease rate and valuation trends

Relative to narrowbodies, we are less optimistic about the forward outlook for
widebody aircraft values and lease rates; although there has been a meaningful
reduction in the percentage of widebody aircraft in storage over the last 12
months (highlighted above in figure 14), we believe these were largely a result
of short-term supply-chain disruptions. We think this will be offset by increasing
rates of production of new-generation widebodies, including the 787, which will
reach 14/month this year, up from 12/month in 2018. And while there had already
been some rumblings in the marketplace regarding oversupply of widebodies,
preceding the most recent spate of engine issues, and an overconcentration of
orders with a relatively small customer set (compared to that for narrowbody
aircraft), the market has seen some of this angst come to fruition in the way of
material deferrals and cancellations of large widebody orders - including Etihad's
recent cancellation of 30 (out of 60) of its A350 orders, for example. Widebody
aircraft typically have higher transition costs, higher cost of ownership and can
be more difficult to finance due to the inherently higher associated risks versus
narrowbody aircraft.
Figure 17: Lease rates for select current-tech widebody aircraft over time
1.5
1.4
1.3
1.2
Monthly Rental Rate (US$ in mm)
1.1
1.0 A330-300 (0 yrs)

0.9 777-300ER (0 yrs)
A330-300 (5 yrs)
0.8
777-300ER (5 yrs)
0.7
A330-300 (10 yrs)
0.6 777-300ER (10 yrs)
0.5
0.4
0.3
0.2
Figure 18: CMVs for select current-tech widebody aircraft over time
175.0
150.0
Current Market Value (US$ in mm)
125.0
A330-300 (0 yrs)
777-300ER (0 yrs)
100.0
A330-300 (5 yrs)
777-300ER (5 yrs)
A330-300 (10 yrs)
75.0
777-300ER (10 yrs)
50.0
25.0

4 March 2019
Aircraft Leasing
Lessors funding an increasing portion of the global fleet

expansion
Lessors have financed an increasing portion of recent global fleet growth, now
accounting for 40% ownership of the global commercial aircraft fleet, up from
34% in 2008 and just 1% in 1970. Looking at the forward orderbooks for the two
largest aircraft OEMs, Airbus and Boeing have a combined order backlog totaling
>13,000 aircraft, and Boeing estimates that ~$800 billion in value of aircraft will
be delivered between 2019 and 2023. Assuming that 75% of the purchase price
can be debt-financed, the remaining 25% represents $200 billion of equity, which
will be required. According to the International Air Transport Association (IATA),
the global airline industry is on pace to produce net profits of $32.3 billion for FY
2018 and $35.5 billion in FY 2019. Putting this into perspective, the total equity
required for 2019 - 2023 deliveries is ~6x 2018 net profits, which is a significant
capital commitment relative to the industry's potential earnings power. As such,
we believe it is very likely that aircraft lessors will play a major role in financing
a large piece of the projected order book, which we think could reach 50% over
next five years. This would represent an equity requirement of at least $75-$100
billion over the next 5 years and would represent a major source of fleet growth
for the aircraft leasing industry.
Publicly-traded lessors have exercised discipline and

demonstrated profitability through the cycle
The aircraft leasing industry demonstrated its resilience during the last global
recession in 2008 - 2009, in spite of record losses in the global airline industry,
which posted $31 billion in net losses over the same two-year period (see figure
19). Subsequently, there were a number of bankruptcies and restructurings that
followed (particularly in the U.S. where most of the legacy carriers ultimately filed
for bankruptcy), which led many market participants to believe there would be a
significant number of defaults and grounded aircraft. The current global economic
expansion cycle, now in its 10th consecutive year, has seen the global airline
industry generate record profits, in excess of $30 billion per annum since 2015.
Despite the record profitability and relative stability across the industry, we have
seen air pockets across geographies caused by imprudent capacity additions,
over-leverage and regional economic and geopolitical volatilities, which have
resulted in additional restructurings/bankruptcies, mergers/acquisitions and in
some cases liquidations in recent years. Lessors have navigated these situations
with minimal impact to profitability by managing risk to specific asset types and
geographies and by building in protections with security packages, and the results
are portrayed through the consistency seen in lessor profitability; see figure 20.

4 March 2019
Aircraft Leasing
Figure 19: Global airline industry profit track margin

60 6.0%
50
$36 $38 4.0%
40 $34 $36
$32
30
2.0%
20 $15 $17
($ in billions)
$14
$8 $9 $11
10 $5 0.0%
0
-2.0%
(10) ($6) ($4) ($5)
(20)
-4.0%
(30) ($26)
(40) -6.0%
Net Profits Net Margin
Source: IATA December 2018 financial forecast and Deutsche Bank Research
Publicly-traded aircraft lessors in particular, fared quite well during the last global
economic recession and beyond. Although pretax income margins declined from
25% in 2007 to a low of 18% in 2009, the industry maintained profitability over
this time, although down ~25% from peak (2007) to trough (see figure 20). Since
then, however, the aircraft leasing industry as a whole has grown tremendously,
with the global leased fleet of aircraft increasing by ~38% from 6,787 leased
aircraft in 2008 to 10,971 by year-end 2018. Over this time, lessors also captured
an incremental 6 percentage points of market share and now represent ~40%
of the world's passenger aircraft fleet. Despite the high rate of overall growth
over the past decade, the public leasing companies have consistently produced
solid margins, with pretax profit margins improving by as many as 6 percentage
points above the 2007 peak at 25% to 31% by 2016, although we forecast a rate
somewhere in-between the two on a longer-term basis.
Figure 20: Profit track record for publicly-traded aircraft lessors

$3,000 40%
$2,750
35%
2,459
$2,500 2,359
2,285 2,303
$2,250 2,194 2,221 30%
31%
Pretax Income (US$ in millions)
29% 30%
$2,000 28% 28%
27% 25%
26% 26% 26% 26%
Pretax Margin
$1,750 1,683
24% 25%
$1,500 20%
21%
$1,250 18% 18%
15%
$1,000
770
$750 701 10%
640
436 479 433

$500
358
248 5%
$250
$0 0%
Source: AL, AER, AYR, FLY, GLS company filings and Deutsche Bank Research
Note 1: AL data from 2010 onward only
Note 2: FLY data from 2008 onward only
Note 3: GLS was acquired by AER on February 25, 2010
Note 4: ILFC was acquired by AER on December 13, 2013; prior year periods do are not pro forma for ILFC financials as the company was not
a stand-alone publicly-traded entity

4 March 2019
Aircraft Leasing
Aircraft leasing companies have also demonstrated a resilience to fluctuations in

interest rates and oil prices, with lease rate factors averaging 12%; see figures
21-22. Lease rates are influenced by factors including aircraft supply dynamics,
interest rates, demand from airlines, amongst others. As a result, a tightening
of credit markets typically correlates with an increase in demand for leasing as
airlines' ability to secure attractive debt financing may diminish. Lessors typically
include interest rate escalators in lease contracts to mitigate against interest rate
risk, we note that there is typically a 3-6 month lag between a rise in interest rates
and lease rates.
Figure 21: Aircraft lessor annualized lease yield vs. interest rates
16% 5.00%
14% 4.50%
12% 4.00%
10% 3.50%
Annualized Basic Lesae Yield
10-year Treasury Rate

8% 3.00%
6% 2.50%
4% 2.00%
2% 1.50%
0% 1.00%
AER AL AYR FLY 10-year Treasury Rate
Source: Bloomberg and Deutsche Bank Research

Note: Representative of senior tranches with approximate spreads to benchmark treasury at issuance
Figure 22: Aircraft lessor annualized lease yield vs. oil prices
16% $180
14% $160
12% $140
10% $120
Annualized Basic Lesae Yield
Brent Oil ($/bbl)
8% $100
6% $80
4% $60
2% $40
0% $20
AER AL AYR FLY Brent Oil ($/bbl)
Since the beginning of 2017, equity performance (including dividends and share
price appreciation) have been somewhat mixed; see figure 23. In addition, the
publicly-traded lessors underperformed major benchmark indices in 2018; see
figure 24 below. We attribute much of the underperformance in 2018 to concerns
around the pace of global economic growth, rising interest rates, escalating Sino
- U.S. trade tensions and emerging nationalistic and protectionist philosophies
across developed and developing economies which threaten demand for air

4 March 2019
Aircraft Leasing
travel. In addition, pre-existing investor concerns of oversupply in the aircraft

market were further exacerbated by concerns over a moderation of the pace
of economic growth. Air Lease and AerCap are widely regarded as the highest
quality names amongst the four public lessors and the aforementioned were the
most impactful reasons for their underperformance of benchmark indicies over
the past 1-2 year time frame. Meanwhile, Aircastle underperformed the S&P index
as it faced investor concern around the impact an accelerated number of aircraft
remarketings could have upon its net interest margin as well as the Avianca
Brasil bankruptcy and its related exposure in the latter part of 2018, in addition to
aforementioned macro and demand related concerns.
Figure 23: Indexed share prices of publicly-traded aircraft lessors vs. S&P 500
150
140
130
120
110
100
90
80
70
Air Lease Aercap Aircastle FLY Leasing S&P 500
Figure 24: 2018 total return analysis (share price appreciation + dividends)*
BA 9%
AIR-FR 1%
SPX (1) -6%
TRAN (1) -14%
XLI (1) -15%
DJUSAR (1) -17%
FLY -18%
BKX (1) -20%
AER -25%
AYR -26%
AL -37%
-50% -40% -30% -20% -10% 0% 10%
Source: Bloomberg Finance LP and Deutsche Bank Research

Note: *Assumes the reinvestment of dividends into the security
(1) BKX represents the KBW Philadelphia Bank Index. SPX represents the S&P 500 Index. TRAN represents the Dow Jones Transportation
Average. XLI represents the Industrials Select Sector SPDR. DJUSAR represents the Dow Jones U.S. Airlines Index.

4 March 2019
Aircraft Leasing
The lack of investor confidence is also evidenced by the fact that three of the
four public lessors were trading below book value at September 30, 2018 (which
coincided with an intra-year high for the S&P 500). The equities continued to
sell off until end of the Dec Q with all four ending the year below Dec Q book
value. Between the end of the Dec Q and present the equities have rebounded,
although they are still trading at a discount to Dec Q book value; see figure 25.
In aggregate, the four public lessors are now trading at a 22% discount to book
value versus a 38% and 4% discount in aggregate at the end of the Dec Q and
Sep Q, respectively. Presently, FLY offers the greatest discount to December 31,
2018 book value, trading at a 46% discount to book value, AYR, AER and AL trade
at 26%, 25% and 12% below book value, respectively. The underperformance
of the sector over the past few years presented an attractive opportunity for
the lessors to return capital to investors through the repurchase of their shares,
and also boosting per share earnings metrics, and we note both AER and FLY
have proactively repurchased shares. We note that the sector's relatively small
size, with only ~$13 billion in market capitalization amongst the four publicly-
traded lessors, has been a historic limiting factor for the equity performance of
the public lessors. Larger equity focused asset managers have often been unable /
less willing to take positions in the sector due to the relatively small market
capitalization of the industry.
Figure 25: Public lessor book value vs. equity value

$10,000
$8,870 $8,828
$8,453
$8,000
$6,624
US$ in millions
$6,000 $5,650
$4,775 $4,807
$4,479
$4,223
$4,000 $3,352
$1,959 $2,009
$2,000 $1,691
$1,301 $1,488
$682 $696
$460 $345 $374
$0
AER AL AYR FLY
Book Value at 9/30/18 Equity Value at 9/30/18 Book Value at 12/31/18 Equity Value at 12/31/18 Equity Value at 3/1/19
Source: Company filings, Bloomberg and Deutsche Bank

4 March 2019
Aircraft Leasing
Overall, we continue to have confidence in and remain supportive of the public

lessor business model. Importantly, we stress our confidence in the value of
each lessors' asset portfolio, supported by a track stability in lease yields and a
record of solid gains on asset dispositions; see figures 37-38 for further company
specific asset detail. Furthermore, we believe that the demonstrated resilience in
lessor profitability through the last global recession (and namely the largest global
economic crisis since the Great Depression) serves as a good case study which
speaks to both the viability and strength of the business model to largely mitigate
such economic volatilities. As a result, we think the current market environment
represents a good opportunity for the sector. This thesis has begun to materialize
as evidenced by lessor equity performance year-to-date, with three of the four
public lessors - AER (+14%), AL (+26%), AYR (+15%) - outperforming the S&P
500; see figure 26.
Figure 26: 2019 YTD total return analysis (share price appreciation +
dividends)*
BA 37%
AIR-FR 36%
AL 26%
XLI (1) 19%
BKX (1) 17%
AYR 15%
TRAN (1) 14%
AER 14%
SPX (1) 12%
FLY 9%
DJUSAR (1) 6%
0% 10% 20% 30% 40%

Note: *Assumes the reinvestment of dividends into the security; market prices as of March 1, 2019.
(1) BKX represents the KBW Philadelphia Bank Index. SPX represents the S&P 500 Index. TRAN represents the Dow Jones Transportation
Average. XLI represents the Industrials Select Sector SPDR. DJUSAR represents the Dow Jones U.S. Airlines Index.

4 March 2019
Aircraft Leasing
Protections for lessors: a brief overview of the Cape Town

Convention
The Cape Town treaty sets in place an international set of standards for the
registration, security, lease, transactional and legal aspects of aircraft-related
assets while also addressing default and insolvency of operators. The treaty took
effect in March 2006, and has been ratified and put into effect in some form by
over 73 nations and the EU; see figure 27 below. Seeking to protect the interests
of creditors, Cape Town provides an unambiguous and cost effective means by
which to re-claim (and export) possession of an asset within a specified time
frame should the debtor fail to meet contractual obligations. This provides greater
certainty around recoverability of assets and mitigates some of the associated
risks, which in-turn supports higher credit ratings and lower borrowing costs to
creditors and debtors.
Figure 27: Cape Town signatories
Source: Boeing Current Aircraft Finance Market Outlook 2019, AWG Analysis, Deutsche Bank Research
Aircraft lessors prudently manage exposure on the basis of geographic region

and customer concentration in order to mitigate risk in addition to protections
offered under Cape Town. We also note that the Cape Town Convention has its
limitations and is not perfect, as evidenced by the current situation in Brazil with
Avianca Brasil (see risks section for additional detail).

4 March 2019
Aircraft Leasing
Asset selection and management is paramount to success

We attribute the resilience of the publicly-traded lessors to exercising discipline
with respect to pro-active management of aircraft portfolios, asset selection,
geographic exposure, customer base and leverage profile. As it pertains to
portfolio management, younger aircraft generally translate to greater demand
and stronger residual values given they are generally more efficient and offer
more advantageous operating cost metrics and dispatch reliability. In addition,
values for younger and newer assets are more resilient to market volatilities and
have greater liquidity against tightening credit markets, given that demand for
assets has a strong correlation to ability to obtain financing. As a result, the
disposal of aircraft assets is as important as the acquisition. Lessors actively
engage in aircraft trading via one-off sales (which can be tracked via the sales
margin and gains / losses booked on financial statements) and through asset-
backed securities (ABS) market. Hence, we have seen lessors get more creative
on both the acquisition and disposal front in recent years:
Fly Leasing: growth via acquisition of AirAsia orderbook

Given the tight aircraft supply environment seen over the last several years,
aircraft orderbooks and delivery slots for in-demand aircraft have become a highly
valuable asset. Growth via opportunistic aircraft purchases through orderbooks
with OEMs is the most direct form of organic growth for lessors. However,
lessors may choose to pursue investment strategies at different points throughout
an aircraft's life cycle, noting that the lessors acquiring new-build narrowbody
aircraft typically assume three 7 - 12 year lease terms for each asset. Fly Leasing
has not historically engaged in placing opportunistic orders for new aircraft; in
February 2018, however, FLY entered a definitive agreement to acquire 34 Airbus
A320ceo aircraft and 7 CFM engines from AirAsia, an orderbook consisting of 21
A320neo aircraft to be delivered new from the OEM between 2019 and 2021 and
the rights (options) to purchase 20 additional A320neo aircraft from Airbus in the
future. At a high level, the transaction provides FLY with a more definitive runway
by which to grow revenues over time, as it begins to market aircraft it now has on
option to new and existing customers. The company has indicated it may pursue
additional acquisitions similar to the AirAsia transaction over time.
Air Lease: leveraging the Thunderbolt platform to divest mid-life assets

Air Lease's Thunderbolt platform is an excellent example of a prudent asset
disposition strategy, which allows AL to exert greater control around the process.
AL utilizes the Thunderbolt platform to de-risk via reducing the average age of its
overall portfolio and maintaining ownership of only the most in-demand aircraft by
securitizing mid-life assets to a broader investor base, while maintaining existing
customer relationships and the associated revenues from aircraft management
fees.

4 March 2019
Aircraft Leasing
Risks to Consider
Slowing macroeconomic backdrop could impact aircraft
demand
With recent economic data suggesting mixed messages about the forward
trajectory of the U.S. and global economy and the Bloomberg consensus among
economists for global growth to slow in 2019 - 2020, this could translate to a
reduction in growth of air travel and hence demand for aircraft. The International
Monetary Fund (IMF) is currently forecasting a global economic growth rate of
3.5% for 2019, which we note has been revised downward twice since October
2018, when the IMF was forecasting growth of 3.9%. The consensus amongst
economists according to Bloomberg is for the global economy to expand at 3.5%
in 2019 and 3.3% in 2020, compared to 3.7% global GDP growth in 2018 and an
average of ~3.6% since 2011. In the near term, however, we believe the greatest
threat to air freight growth will be the inability of the world's major economies
to resolve their differences around trade. We saw evidence of this in December
2018 when global cargo FTKs contracted 0.5% after 32 consecutive months
of growth. Meanwhile, the new export order subcomponent subcomponent of
the Global Manufacturing Purchasing Managers' Index (PMI), which has been
a good historical leading indicator to air freight trends (as measured by IHS
Markit) has been below 50 since September 2018. A sub-50 reading is indicative
of contracting activity. While we stress that current GDP estimates are still
suggesting a healthy, and in fact robust, pace of growth, trade-related tensions
between the U.S. and China, the threat of rising interest rates and concerns
with respect to a further devaluation in key emerging market currencies against
the USD are factors which threaten the positive rate growth in air traffic and
incremental demand for aircraft. As such, the new export order subcomponent of
the ISM U.S. Manufacturing PMI has also trended closer to 50 in recent months.
Figure 28: International air freight trends vs. ISM U.S. PMI manufacturing
new export order component
40% 70
ISM U.S. PMI manufacturing New Export Orders
Air Freight (FTK) Year-over-Year Change
30% 65
20% 60
10% 55
0% 50
-10% 45
-20% 40
-30% 35
Air Freight (FTKs) ISM U.S. PMI New Export Orders
Source: IATA, ISM and Deutsche Bank Research

4 March 2019
Aircraft Leasing
Emerging market volatility

In addition, most lessors have material exposure to emerging markets, which
have been a leading source of airline traffic growth, much of which has been
carried by airlines based in those countries. A slowdown in the pace of growth
of the global economy may put pressure on these economies, and thus adversely
impact lessee airlines from these regions, which may, in turn, lead to missed rental
payments and grounded aircraft. Below we address recent lessor and lessee
trends in selected emerging markets:
■ Brazil: Brazil is in the midst of a modest economic recovery that has

been beset by numerous challenges including a devaluation of the BRL,
October 2018 presidential election, high fuel prices and a truckers'
strike in summer 2018 negatively impacted demand. The country's
fourth largest airline, Avianca Brasil was hardest hit. Lessor Aircastle
announced in December that it had terminated 11 aircraft leases with
Avianca Brasil, including 10 Airbus A320ceo aircraft with an average age
of 3.5 years and a single 2015 build A330-200 aircraft as a result of the
airline's failure to make lease payments. Other lessors including BOC
Aviation and GECAS were also impacted forcing Avianca Brasil to file for
bankruptcy protection as a result of the threat of repossession of >30%
of its fleet. Aircastle continues to face roadblocks as it tried to remove
its assets from Brazil but on February 1st the Brazilian bankruptcy court
granted Avianca Brasil the right to use the assets through mid-April as
it resumed its monthly rental payments. The fact that Brazil is a Cape
Town signatory did not seem to weigh on the court's decision. We are
of the view that a perception of non-compliance with Cape Town could
have negative implications for Brazil's aviation industry with respect to
attracting new capital and cost of funding.
Figure 29: Compliance with Cape Town Convention protocol
Source: Boeing Current Aircraft Finance Market Outlook 2019, AWG Analysis, Deutsche Bank Research
■ China: IATA estimates that China will overtake the U.S. as the world's
largest aviation market by 2022, there will undoubtedly be tremendous
demand for aircraft in years to come. Demand for air travel in China
is expected to grow at a compounded annual rate of 7.2% between
2017 and 2027, according to Airbus' Global Market Forecast. As a result,
unfavorable economic consequences which may result from Sino - U.S.

4 March 2019
Aircraft Leasing
trade tensions may have also negative implications for the pace of long-
term air travel demand growth in China.
■ India: The Indian passenger air travel market has seen tremendous
growth in recent years, and the region is expected to see demand for
air travel grow at a compounded annual rate of 8.4% between 2017
and 2027, the fastest in the world based on according to Airbus' Global
Market Forecast. Over the past decade the Indian market has seen an
influx of capacity additions as new entrants have sought to capitalize on
the rise of its middle class. As a result of this rapid expansion, there has
been tremendous pressure on air fares, which has subsequently led to a
deterioration of profitability across the industry. Perhaps most impacted
has been Jet Airways, which has defaulted on its loans and announced it
had to ground 21 of its aircraft (out of a total of 121 aircraft) after it failed
to make lease payments, and it is currently in the midst of a restructuring
process as a result. We think some of the issues surrounding airlines
in India are structural, with respect to the regulatory environment - for
instance, airlines must have a minimum of 20 aircraft and an operating
history of 5 years in order to participate on international routes, which
can be highly lucrative, while there are also stringent rules surrounding
the structuring of route networks (which are based on a set of "Route
Dispersal Guidelines" issued by a governmental body). This has been
further exacerbated (and perhaps even supported by) a heavy reliance on
sale-leaseback transactions to support near-term profits (meaning OEM
supply chain delays offer potential drive wide swings in quarterly profits).
Overall, we believe that the outlook for emerging markets is stable and anticipate
it will continue to represent the greatest source for aircraft demand over the long-
term. Aircraft lessors prudently manage exposure on the basis of geographic
region and customer concentration in order to mitigate risk. Also offsetting
these risks are protections offered under the Cape Town Convention (although as
noted above Cape Town has its limitations), and robust security and maintenance
reserve agreements to ensure a smooth and cost-effective transition of aircraft
between lessees.
Protectionist trends threaten air travel demand

Much of the rapid increase in demand for air travel since 1980 has been enabled
by increasing globalization and trade and greater freedom of movement across
borders. The recent surge in nationalistic and protectionist movements seen
in many developed and developing economies across the world (including but
not limited to the United States, China, the United Kingdom, France, Germany,
Brazil, India and Australia) threaten to slow the pace of air travel growth
and hence aircraft demand. Furthermore, threats stemming from trade wars,
anti-immigration movements and other protectionist trends tend to translate
negatively with respect to global economic growth, which ultimately underpins
demand for air travel. Escalating trade tensions between the U.S. and China over
the course of 2018 are a prime example.

4 March 2019
Aircraft Leasing
Risk of oversupply and obsolescence

Both major global manufacturers - Airbus and Boeing - are planning to increase
production rates in 2019 and beyond. For instance, Airbus plans to increase the
production rate for its A320 model to 60 aircraft per month by mid-2019 and is
evaluating a further ramp to as high as 70 aircraft per month, while it has also
confirmed plans to increase the rate of production of its A220 model from 60
aircraft per year in 2018 to 73 aircraft per year in 2019. Similarly, Boeing plans
to increase the rate of production of its top-selling 737 model from 52 aircraft
per month in 2018 to 57 aircraft per month in 2019 and its 787 model from 12
aircraft per month in 2018 to 14 aircraft per month in 2019. Should demand
slow, oversupply of aircraft can negatively impact lease rates, thereby putting
downward pressure on lessor asset values as well as the future earnings power
of the current asset base. Similarly, the launch of new, re-engined narrowbodies
by both major manufacturers – the Airbus A320neo and Boeing 737 MAX – are
likely to ultimately impact lease rates and values of their predecessors.
The threat of heightened competition

The aircraft leasing industry is only modestly fragmented with a small number of
large-scale players and likely to remain so given the capital intensive nature of
the business (aircraft assets are very expensive). For instance, the top 15 aircraft
lessors represent ~50% of the industry's asset value. That said, we have noted
an increasing number of new competitors over the past few years, as the number
of aircraft lessors has increased from 118 in 2008 to 153 in 2018. Our sense is
the strong cash generating power and diversification the aircraft leasing business
offers, along with the availability of debt financing, are key reasons for why the
industry has attracted a slew of new players. While such developments are a
concern, our sense is that the sector will continue to be dominated by the already
large and established players given the complexity of the business and our view
that airlines typically prefer to deal with experienced counterparties (without any
conflicts of interest) when entering into such “big ticket” transactions. So while
we could see the number of new entrants grow, we expect much of the business
to be transacted by the dozen or so largest lessors.
Also, for investors of aircraft leasing stocks, the growth of publicly-traded lessors
is a potential concern. Every new publicly-traded leasing company represents
another investment option for the equity investor. Given that equity capital is
finite (and at times scarce), this could mean lower valuations, on average, for the
group. Conversely, a larger universe of publicly-traded aircraft lessors could lead
to increased investor interest/awareness and rising valuations.

4 March 2019
Aircraft Leasing
Key Drivers of Financial

Success
We have identified six attributes that we think are key drivers to the financial
success of an aircraft leasing company:
Experienced management team

Years ago, the adage was that the management team with the biggest rolodex
had a significant competitive advantage in the aircraft leasing business as the
larger the customer base, the greater the optionality and flexibility to place
aircraft especially on short notice (e.g. in the event of a customer default). Fast
forward to the present, and it’s the management team with the largest Microsoft
Outlook contact list or iPhone directory of customers who has the edge. Strong
relationships require years of experience and are critical to succeeding in the
aircraft leasing business, especially when dealing with disparate global customers
and big ticket transactions both on the buy and sell-side (hard to think of a
business that is more “high touch” than commercial aircraft sales/leasing).
Financial track record

Nothing spells success better than the financial scoreboard. Investors should
be focused on the consistency of profits, ample cash generation, and financial
gearing that falls within the 2:1 and 4:1 range. And in conjunction with the above,
we like to see pretax returns to the equity holder of at least 10% (most aircraft
lessors pay little to no cash taxes).
Attractive portfolio acquired at attractive valuations

A key determinant in the profitability of an aircraft lessor is the purchase price
of the aircraft. If an aircraft lessor directly purchases in bulk from an aircraft
manufacturer, they can expect to receive volume discounts. Aircraft purchases
can also be found in the distressed market or from financial institutions looking
to exit the business, among other sources. The lessor can also participate in a
purchase-leaseback transaction (or a sale-leaseback from the perspective of an
airline). Furthermore, as we indicated earlier, having a portfolio of the highest
quality aircraft provides a good defense in the event of an economic slowdown.
Diversification of customers/assets
My mother once told me “don’t put all of your eggs in one basket”, which is an
apt message for aircraft lessors seeking to minimize risk. We don’t like to see
more than 10% of a portfolio with a single customer. What we do like are: 1) broad
geographical diversification of the customer base; 2) healthy balance of airline
lessee credit quality (i.e. all of the customers should not be sub-investment grade
credits); 3) portfolio with a reasonably staggered lease expiration/renewal profile;
and 4) good mix of aircraft types (e.g. a large percentage of the portfolio’s CMV
should not be accounted for by Airbus A380s).

4 March 2019
Aircraft Leasing
Well-capitalized – of capital
Access to capital is one thing, but access on attractive terms is another and
can provide a significant competitive advantage. For example, AerCap and Air
Lease both have some of the industry’s lowest borrowing costs of 4.1% and
3.4%, respectively (per latest company reports). High quality aircraft lessors have
a number of different ways to pursue an appropriate cost of capital, including
adjusting their mix of fixed/floating, mix of secured/unsecured or the use of
interest rate hedges to lock in low rates, among other strategies. Lessors that
possess a flexible capital structure have more financing options, which can
include traditional sources of financing (e.g. export credit agency financing) or
non-traditional ones (e.g. we note Air Lease's recent capital raise of $250 million
of preferred stock). Lastly, an aircraft lessor must also have access to capital in
times of distress as well as prior to a surge in demand.
Order book = highly visible earnings growth

Aircraft on order are a high quality source of future earnings growth for leasing
companies, in our view, especially those that have already been placed with
customers. An order book of aircraft in high demand can be a powerful tool as
it relates to managing the portfolio. For example, a lessor could offer a customer
some of its scarce delivery slots in exchange for the lease of other aircraft in the
portfolio that may be coming off lease with another customer. Lastly, an order
book provides a lessor the opportunity to further diversify not only its portfolio,
but also its customer base.
Comparison of key drivers

In figure 30 below, we highlight how each publicly-traded lessor stacks up based
on some of the factors described above as well as other key financial metrics,
such as leverage, average lease duration, average fleet age, net interest margin,
or net spread (lease revenue less adjusted interest costs over average net book
value of aircraft assets) and return on aircraft sales.

Figure 30: Aircraft lessors: key financial metrics

Aircraft Leasing
4 March 2019
Avg. Avg.
Assets Net Debt Adj. Cost Order Lease Fleet FY 2018 FY 2018
to to of Fleet Number of Book Duration Age Net Return on Return on
1 2 3 4 5 6
Company Equity Equity Debt Size Lessees Size (years) (years) Spread Equity Aircraft Sales7
AIRCRAFT LEASING
AerCap Holdings N.V. 2 4.9 3.2 4.2% 962 200 363 7.4 6.3 8.1% 11.5% 12.9%
Aircastle Limited 3.9 2.3 5.3% 248 81 12 4.5 9.1 6.8% 13.1% 7.1%
Air Lease Corporation 3.8 2.3 3.0% 275 94 372 6.8 3.8 9.1% 12.3% 7.6%
Fly Leasing Limited 6.2 4.2 5.1% 112 27 21 6.5 6.2 8.0% 12.7% 9.2%
Note: FLY figures are shown as of September 30, 2018; AerCap, Aircastle and Air Lease figures are shown as of December 31, 2018
(1) Calculated as interest-bearing debt less unrestricted cash over shareholders equity
(2) May differ from reported figures due to standardized calculation: calculated as annualized adjusted interest expense over average total debt
(3) Aircastle, Air Lease, and FLY's average lease terms shown are weighted averages based on net book value
(4) Aircastle, Air Lease, and FLY's average ages shown are weighted averages based on net book value
(5) May differ from reported figures due to standardized calculation: calculated as annualized basic lease rents less annualized adjusted interest expense over average net book value of aircraft assets. Note the calculation does
not reflect the depreciation cost of the asset, which we could generically assume is 3.4% (as the typical depreciation schedule for aircraft assumes a 25 year useful life and a 15% residual value)
(6) May differ from reported figures due to standardized calculation: calculated as adjusted return over average shareholders equity (with adjusted return including the impact of losses (gains) on aircraft sales and impairment expense
(7) May differ from reported figures due to standardized calculation: calculated as gain on aircraft sales over implied book value of assets sold
Source: Company filings and Deutsche Bank Research
Source: Ascend, company filings and Deutsche Bank Research

Page 35
4 March 2019
Aircraft Leasing
The Nuts and Bolts of

Aircraft Leasing
The aircraft leasing business model
In the most basic sense, an aircraft lessor is a financial services company involved
in the acquisition and lease of aviation assets. Aircraft lessors seek to maximize
the difference between revenues generated from the lease of an aircraft asset
and costs associated with the asset which are principally interest expense and
depreciation (i.e. the “spread” = lease revenue less aircraft ownership costs).
Aircraft lease rates are largely a function of two inputs: 1) aircraft cost and 2)
financing cost (although there are other determinants that influence the rate – see
sub-section “Aircraft lease rates” below). As such, the most successful aircraft
lessors have a keen sense of knowing when the time is right to acquire aircraft
assets (as well as when to unload them) while at the same time funding their
purchases at very attractive financial costs. In that regard, successful aircraft
lessors’ portfolios can drive annual yields (which we define as annual lease
revenue divided by current market value or CMV of the lease assets) of 11% - 16%
before depreciation. Assuming the standard depreciation policy for passenger
aircraft (generally depreciated on a straight-line basis over a 25-year life from
the date of manufacture to a 15% residual value, which results in an annual
depreciation rate of 3.4%; cargo aircraft are typically depreciated over a longer
timeframe such as 35 years to zero residual value), the asset base can drive annual
asset yields of 8% - 13%.
It is important to note that the spread between aircraft lease rates and financing
costs have been fairly constant through the cycle as higher interest rates tend
to accompany stronger economic backdrops when demand for aircraft is robust
resulting in rising lease rates. Conversely, lower interest rates tend to accompany
weaker economic backdrops when demand for aircraft is less robust resulting
in declining lease rates. However, we do think there could be a lag between a
rise in interest/funding costs and lease rates, which would pose a risk for lessors
with high variable debt without interest rate protection (or those with order book
positions, without lease rate escalators). We think the publicly-traded aircraft
leasing companies are relatively well-positioned in this regard, as they either
have interest rate protection for their floating rate debt (in the form of swaps
or other derivative instruments) to limit their cash flow exposure and/or have
rate escalators built into their lease contracts for forward orders. Lessors that
don’t have speculative aircraft orders are also less impacted by a rise in interest
rates, as they incorporate the current interest rate environment when making
investment decisions. Finally, we also think a rising interest rate environment may
be welcomed by lessors, as a rise in costs for alternative funding sources for
aircraft may incline more airlines to lease rather than purchase aircraft outright.

4 March 2019
Aircraft Leasing
Acquisition of aviation assets at favorable prices

As previously noted, the purchase price of an asset is the key determinant in the
value that a lessor will return on the asset. An aircraft lessor can leverage this
by purchasing assets in bulk directly from a manufacturer or acquiring a fleet of
aircraft from a distressed seller. For the largest lessors such as AerCap and Air
Lease, the bulk purchase of equipment from Boeing and Airbus (as well as the
engine manufacturers) allows them to achieve better price economics.
Leverage the assets/company

The aircraft leasing business is very capital-intensive, hence a lessor must
incorporate financial leverage. In terms of leveraging the asset base/company, a
lessor must also strive to maintain a low cost of acquiring aircraft via the capital
markets. Furthermore, some lessors have been successful in achieving attractive
debt costs by financing the company rather than the asset (i.e. unsecured debt
financing rather than secured debt).
Manage the asset base

Finally, a lessor must be diversified in terms of fleet, customers, and geography.
The diversification allows the aircraft lessor to mitigate the effects of regional
recessions and economic downturns. The lessor must also manage the maturity
profile of its operating leases. A lessor would want to spread the maturities of
various lease obligations. The aircraft lessor also must manage credit risk versus
lease rental payments.
Operating lease agreements

Operating leases are typically subject to “triple-net” leases, whereby the lessee
is responsible for crew, maintenance, insurance, and taxes (also known as a “dry
lease”). The lessee airline is also required to place the aircraft on its air operator’s
certificate. Generally, the lease agreements are also under a “hell-or-high water”
obligation, in which the lessee must make unconditional lease payments for the
term of the lease regardless of circumstances affecting the aircraft or the lessee.
Operating leases are normally paid in monthly installments. The lease agreements
can be either fixed or variable (typically based on LIBOR), with a majority of leases
fixed and denominated in U.S. dollars.
The length of an aircraft lease would typically range in the three to ten year
timeframe. As aircraft have useful lives of 25 years and beyond (the latter more
applicable to passenger-to-cargo conversions), the operating lessor needs to
manage the aircraft throughout its life cycle. During the course of an aircraft’s
life, the lessor seeks to maximize its return on the aircraft through an outright sale
or re-leasing and eventually selling or “chopping up” the aircraft into parts.

4 March 2019
Aircraft Leasing
Finally, although the aircraft leasing business can be quite profitable, it is not until
the final sale (or selling of parts), that the lease can be officially considered a
profitable investment.
Some of the key characteristics of an operating lease are outlined below:
Security deposits
In the event of a lessee defaulting on a lease agreement, operating lessors, in
some cases, will have security deposits or letters of credit. These deposits allow
the operating lessor to mitigate losses related to the remarketing of the aircraft.
In general, security deposits are paid to the lessor prior to delivery and are equal
to one to three months worth of rentals. Including the first month’s rent, the total
up-front cost for a lessee could mean 2% to 4% of an asset’s value.
Aircraft lease rates

In the most basic sense, a lease rate is the monthly payment to rent an aircraft.
Typically the monthly rental payment is expressed as a percentage of an aircraft’s
value and referred to as a lease rate factor. To illustrate this concept using the
latest fleet valuation data from Ascend, the value of a 2018-build Boeing 737-800
is $40 million and its monthly lease rental payment is $335,000. This implies that
the lease rate factor of this aircraft is 0.84%. On an annual basis, this represents
an asset yield of 10.1%. Lease rate factors for the public lessors are typically in
the 0.75% to 1.50% range.
Aircraft operating lease rates are affected by the following factors:
1) type of lease;
2) interest rates;
3) tax considerations;
4) terms of the lease;
5) starting value of the aircraft;
6) assumption of residual value of aircraft; and
7) credit quality of the airline lessee.
There is a risk-reward balance that an aircraft lessor must manage for monthly
lease rental rates. If a lessor decides to lease an aircraft to a less credit-worthy
airline, they could get compensated with a higher monthly lease rate (plus
maintenance reserves). However, the lessor must balance this with the potential
for a default or repossession. Additionally, one of the key determinants in the
pricing of an operating lease is the difference between the actual and expected
residual value of the aircraft asset at the end of the lease. Aircraft generally have
useful lives of approximately 25 years. As a rule of thumb an aircraft will be worth
70% of its beginning value after 5 years, 50% after 10 years and 35% after 15
years. Lastly, we think investors should be mindful not only of an operating lease’s
monthly value but also its tenor. During better times in which lease rates are
relatively strong, an aircraft lessor will typically negotiate for longer-term leases,
in order to “lock in” the higher rate over a longer period of time.

4 March 2019
Aircraft Leasing
Maintenance obligations
Under an operating lease agreement, airlines are generally responsible for normal
maintenance obligations (and compliance with return conditions) for the aircraft
on lease. However, operating lease agreements could include “maintenance
reserves” or “supplemental rent.” This additional rent is collected to secure the
cost of certain major overhauls or other maintenance events. In general, the rent
is based on usage of the aircraft, in terms of hours flown or cycles operated. Upon
certain planned maintenance events, the lessor may be obligated to reimburse
the lessee for expenses.
Maintenance reserves are generally required with the exception of top-tier

lessees. These lessees will instead include an end-of-lease or redelivery payment,
which allows the lessee to not pay monthly maintenance payments, but instead
a “true-up” at the end of the lease based on usage of the aircraft and condition.
Return or redelivery conditions

The lessor will demand that return or redelivery conditions will be as good as
possible. Upon redelivery, the lessor would want the aircraft to be in a condition
to be remarketed or re-leased to another lessee.
Aircraft write-downs/asset impairments

During the last two major industry downturns, which depressed aircraft values
(2001 – 2004 and 2008 - 2010), there were a number of instances from airlines
and lessors of asset impairments and write-downs of aircraft values. With a few
exceptions, the magnitude of charges has actually been modest relative to overall
fleet values. We believe this is because aircraft assets are not regularly marked-
to-market, but instead considered long-lived assets, and therefore, subject to
less volatile accounting treatment. Furthermore, we believe the accounting rules
provide for a meaningful degree of interpretation when it comes to arriving at fair
value, which determines whether an impairment should be taken.

4 March 2019
Aircraft Leasing
Anatomy of an Aircraft
Lease
In figure 31, we lay out the economics of a 5-year aircraft lease for a 5-year
old Boeing 737-800 using the latest available aircraft values and lease rates per
Ascend. Presently, the market value of a 5-year Boeing 737-800 (build year 2013)
is $29.0 million and the monthly lease rate is $290,000. From this we can derive a
lease rate factor of 1.00% (12.0% per year asset yield), which is the monthly lease
rate divided by the value of the aircraft (for a fixed-rate lease). In our analysis, we
assume a debt-to-capital ratio of 75%, annual depreciation rate of 3.4% (25-year
life, 15% residual value), SG&A cost equal to 1.5% of the value of the asset at
the start of the lease, 4.0% annual cost of debt, a 10% cash tax rate (which we
think would be very conservative for a lessor growing its asset base) and 2.5%
debt amortization per year for the company, which will allow leverage to remain
constant over the 5-year lease term (assuming market value in year 5 equates to
book value).

4 March 2019
Aircraft Leasing
Figure 31: Anatomy of an aircraft lease

Assumes Lease Rate Factor = 1.00 which is defined as the monthly lease rate divided by the value of the aircraft
(for a fixed-rate lease), e.g. $3.5 million/12 = $290,000 = 1.00% of $29.0 million.
Year 1 Year 2 Year 3 Year 4 Year 5
Asset Value at Start of Lease $29.0 $28.0 $27.0 $26.0 $25.0

Debt Outstanding 21.7 21.0 20.3 19.5 18.8
Equity Value at Start of Lease 7.2 7.0 6.7 6.5 6.2
Rental Revenues 3.5 3.5 3.5 3.5 3.5

Depreciation -1.0 -1.0 -1.0 -1.0 -1.0
SG&A -0.4 -0.4 -0.4 -0.4 -0.4
EBIT $2.1 $2.1 $2.1 $2.1 $2.1
EBIT Margin 59.2% 59.2% 59.2% 59.2% 59.2%
Interest Expense -0.9 -0.8 -0.8 -0.8 -0.8

Pretax Income $1.2 $1.2 $1.3 $1.3 $1.3
Pretax Margin 34.3% 35.1% 35.9% 36.8% 37.6%
Taxation -0.1 -0.1 -0.1 -0.1 -0.1

Net Income $1.1 $1.1 $1.1 $1.2 $1.2
Net Margin 30.9% 31.6% 32.3% 33.1% 33.8%
Pretax Return on Assets 4.2% 4.4% 4.7% 5.0% 5.3%
Return on Equity (no reinvestment) 15.1% 16.1% 17.1% 18.2% 19.4%
Return on Equity (reinvestment) 17.9% 19.3% 20.7% 22.3% 24.0%
Cash Return on Equity (no reinvestment) 29.0% 30.4% 32.0% 33.8% 35.6%
Average Returns over Lease Period

Return on Assets 4.7%
Return on Equity (no reinvestment) 17.2%
Return on Equity (reinvestment) 20.8%
Cash Return on Equity (no reinvestment) 32.2%
Debt Amortization -$0.7 -$0.7 -$0.7 -$0.7 -$0.7

Cash Retained for Reinvestment $1.3 $1.4 $1.4 $1.4 $1.4
% of Asset Value at Start of Lease 4.6%
% of Initial Equity 18.4%
*Model assumes no asset appreciation; market value in year 5 = book value.

Source: Deutsche Bank Research

4 March 2019
Aircraft Leasing
From our analysis, there are several points worth highlighting. The economics of
aircraft leasing are very attractive, especially for equity investors as evidenced by
EBIT margins of 59%, pretax margins of 34% - 38% and net margins ranging from
31% - 34%. Furthermore, the aircraft leasing model generates meaningful cash
for reinvestment even after debt repayment -- $1.3 - $1.4 million per year, which
represents 4.6% of the starting asset value and 18.4% of the initial equity. As a
result, return on equity starts at 15.1% and rises to 19.4% by year 5 assuming
no reinvestment (average of 17.2%). Assuming reinvestment of the excess cash,
return on equity would range from 17.9% to 24.0% (average of 20.8%). These
ROEs would be well in excess of the industry’s cost of equity, which we estimate
to be about 10% (based on our analysis of publicly-traded aircraft lessors). Pretax
return on assets rises from 4.2% in year 1 to 5.3% in year 5, reflecting the
reduction in book value due to depreciation expense.
The sensitivity of the model’s ROE to changes in leverage is material. For example,
if we assume more leverage in the model and raise the debt-to-capital ratio to
80%, ROEs with no reinvestment range from 18.0% to 24.4% (average of 21.1%)
and 22.1% to 31.7% with reinvestment (average of 26.6%). If we go the other
way and reduce the debt/equity ratio to 2:1, ROEs with no reinvestment range
from 12.2% to 14.9% (average of 13.5%) and 14.0% to 17.6% with reinvestment
(average of 15.7%). Although the returns would be much lower, they are still
nonetheless attractive given the industry’s estimated 10% cost of equity.
Not surprisingly, small changes in lease rate factors can significantly impact
returns. For example, if we increase our initial lease rate factor assumption by
10 basis points to 1.10 (13.2% annual asset yield), ROEs with no reinvestment
would average 21.7% (4.5 percentage points higher than our previous example)
and ROEs with reinvestment would average 27.3% (6.5 points higher). Similarly,
if we reduce our initial lease rate factor assumption by 10 basis points to 0.90
(10.8% annual asset yield), ROEs with no reinvestment would average 12.2% (5.0
percentage points lower than our base case) and ROEs with reinvestment would
average 14.2% (6.6 points lower than our base case). From the aforementioned
scenarios, it should become clear that lessors who fail to raise lease rate factors
for aircraft as they age, particularly as the asset transitions from one lease period
to the next, will suffer from lower returns. Given that the market is fairly efficient,
observed lease rate factors are lower for newer aircraft and higher for older
aircraft. The same relationship holds for lease rate factor volatility, which is higher
for older aircraft. In our estimation, for lessors to maintain ROEs in the 15% - 18%
range for 20+ year-old aircraft, lease rate factors would likely have to increase
to around the 1.5% threshold for narrowbody aircraft and be at around the 2%
threshold for widebody aircraft.

4 March 2019
Aircraft Leasing
Figure 32: Current narrowbody lease rate factors

1.6%
Airbus A320-200
Airbus A321-200
Boeing 737-800
1.4%
Lease Rate Factors
1.2%
1.0%
0.8%
0.6%
Year of Build
As shown in figure 32 above, new narrowbody aircraft such as the Airbus

A320-200 and Boeing 737-800 have lease rate factors in the range of 0.85% and
remain below 1.00% for the first few years. Over time, narrowbody lease rate
factors will creep up to a peak of about 1.50% as aircraft age exceeds 20 years
as evidenced by the Airbus A320 (investors should be mindful of the fact that
manufacturers constantly upgrade their aircraft/engines such that a new A320
could easily have 15% - 20% better economics than the oldest A320s).
Figure 33: Current widebody lease rate factors

2.2%
Airbus A330-300
Boeing 767-300ER
2.0%
Boeing 777-300ER
1.8%
Lease Rate Factors
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
Year of Build
Widebody aircraft follow a similar path initially and then tend to experience much
higher lease rate factors (around of 2.00%) as aircraft values decline at a much
faster pace than the drop in monthly lease rates (see figure 33). Our sense is that
this phenomenon, which is most notable with the Boeing 767-300ER, has some
correlation to production delays surrounding new technology widebody aircraft.

4 March 2019
Aircraft Leasing
Analysis of returns on equity for aircraft lessors

Return on equity (ROE) is one of the most commonly used financial metrics by
investors and management alike because it measures how efficiently a company
utilizes owners’ capital. Usually expressed as a percentage, ROE reflects a
company’s earnings per dollar of invested equity capital. ROE can be restated
in terms of its three underlying components as follows (this exercise is also
known as a DuPont analysis): ROE = Profit Margin x Asset Turnover x Financial
Leverage where Profit Margin equals a company’s earnings per dollar of sales;
Asset Turnover equals the sales generated from each dollar of assets utilized; and
Financial Leverage equals the amount of debt used to finance the assets. The
elegance of this analysis is that it shows how ROE captures a company’s income
statement as well as the left and right sides of its balance sheet. For the most
part, increasing one or all of these ratios will result in a higher ROE. If we were
to exclude the Financial Leverage component from the equation, the end result
would be a company’s return on assets (ROA). Unlike ROE, which measures profit
as a percent of shareholders’ equity, ROA measures profit as a percent of total
assets. Another way to think about ROA is that it measures how efficiently a
company allocates and utilizes its assets. In figure 34 on the following page, we
have broken-out the constituent parts of ROE for the four publicly-traded lessors.
Not surprisingly, financial leverage is a significant driver of return performance
for each company.

Figure 34: Aircraft lessors - 2018 return analysis

Aircraft Leasing
4 March 2019
Adjusted for Equity Market Value
Equity Avg. Equity 2018 Fin'l Leverage Fin'l Leverage
Market Book Average Net Profit Asset Financial After Tax Tax Pretax Debt/ Debt/ Profit Asset Financial Debt/ Debt/
Company Value Value Assets Sales Income (1) Margin Turnover Leverage ROE Rate ROE ROA Equity Capital Margin Turnover Leverage ROE Equity Capital
AIRCRAFT LEASING - 2018 Analysis

AerCap Holdings N.V. (2) $5,827 $8,704 $42,625 $4,800 $1,179 24.6% x 0.11 x 4.90 = 13.5% 13.3% 15.6% 2.8% 390% 80% 24.6% x 0.11 x 7.31 = 20% 631% 86%
Aircastle Limited (3) 1,301 1,958 7,535 890 156 17.5% x 0.12 x 3.85 = 8.0% 3.9% 8.3% 2.1% 285% 74% 17.5% x 0.12 x 5.79 = 12% 479% 83%
Air Lease Corporation (4) 3,144 4,467 17,048 1,680 780 46.4% x 0.10 x 3.82 = 17.5% -24.1% 14.1% 4.6% 282% 74% 46.4% x 0.10 x 5.42 = 25% 442% 82%
Fly Leasing Limited (5) 296 620 4,043 397 3 0.8% x 0.10 x 6.52 = 0.5% 78.2% 2.4% 0.1% 552% 85% 0.8% x 0.10 x 13.65 = 1% 1265% 93%
Sum/Average 10,568 15,749 71,251 7,767 2,118 27.3% 0.11 4.52 13.4% 3.0% 352% 78% 27.3% x 0.11 x 6.74 = 20.0% 574% 85%
Source: Bloomberg, company filings and Deutsche Bank Research

*Net Income is pro forma to exclude special items.
Page 45
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Aircraft Leasing
Sources of Financing
Access to relatively low cost financing is critical to the success of the airline
lessor business model, granted that aircraft lessors have an insatiable appetite
for capital. During the financial crisis of 2008 – 2009 we saw first-hand the
challenges lessors face when the credit markets seized-up. Although the publicly-
traded leasing companies were relatively well-positioned to withstand the credit
“crunch”, the equities reflected deeply discounted valuations, trading off upwards
of ~75% from peak to trough. Over much of the past decade, however, conditions
in the aircraft financing markets have improved drastically, in-line with one of
the longest periods of global economic expansion since World War 2, and by
extension, translated favorably to the aviation industry. Led by strong demand
for aircraft, the amount of financing required to fund new deliveries continues to
increase, with Boeing forecasting $143 billion of delivery funding required across
the industry in 2019 (+13% relative to 2018). Boeing expects the amount of capital
required to fund new aircraft deliveries to grow to ~$180 billion by 2023 to support
both growth and replacement demand. In figure 35 below, we highlight major
sources of aircraft financing for industry aircraft deliveries since 2010:
Figure 35: Sources of financing for industry deliveries

200
Insurance 3%
175
150 Cash 26%
125
100 Capital Markets 30%
75
50
Bank Debt 34%
25
Export Credit 7%
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E
Export Credit Bank Debt Capital Markets Cash Manufacturer Insurance
Source: Boeing 2019 Current Aircraft Finance Market Outlook and Deutsche Bank Research
Our recent observations suggest that overall market liquidity for aircraft financing
remains strong as investor appetite continues to increase with an influx of new
entrants seen in recent years across geographies. The capital markets, primarily
driven by asset backed securities (ABS) and enhanced equipment trust certificate
(EETC) issuances, also remain supportive of industry growth and are projected
to comprise 30% of the market in 2019+ (versus 28% in 2018). Funding from
commercial banks totaled ~$50 billion in 2018, with ~40% of new issuances
in 2018 originating from China and Japan. Demand from institutional investors
remains robust as well, with numerous new issuances of both secured and
unsecured corporate debt with $5.4 billion issued by the U.S. listed public lessors
(including AerCap, Aircastle and Air Lease) in 2018. In addition, U.S. listed lessors
have issued $1.8 billion of corporate debt year-to-date in 2019 and offerings were
generally well-received by the market at issuance and have traded up in the
secondary market since issuance. In figure 36, we include detail on public aircraft
lessor debt issuances over the past few years. Beyond the traditional structures

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Aircraft Leasing
which we review below, there have been some other financing structures used
by lessors such as secured, recourse debt and public bonds backed by the export
credit agencies such as the U.S. Export-Import Bank (Ex-Im) and the UK Exports
Credit Guarantee Department (ECGD), among others.
Figure 36: Recent lessor debt issuance

BBG Amount
Composite 2/22/2019 Issued
Issuer Rating Coupon Issue Date Maturity Ask Price ('$000)
Air Lease Corp BBB 4.25 1/23/2019 2/1/2024 100.754 $ 700,000
AerCap Ireland BBB- 4.45 1/16/2019 12/16/2021 101.557 700,000
Aircastle Ltd BBB- 4.4 9/25/2018 9/25/2023 99.729 650,000
Air Lease Corp BBB 4.625 9/17/2018 10/1/2028 98.534 500,000
Fly Leasing Ltd B+ 5.25 10/16/2017 10/15/2024 95.573 300,000
AerCap Ireland BBB- 3.65 7/21/2017 7/21/2027 90.523 1,000,000
Aircastle Ltd BBB- 4.125 3/20/2017 5/1/2024 97.584 500,000
Securitizations/Non-Recourse ABS
Securitizations/ABS (asset-backed securities) have historically been a major
source of lessor financing, with periods of large issuance followed by lengthy
periods of dormancy. Prior to 9/11, the non-recourse ABS was vibrant, with large
transactions, often greater than $1 billion, from many large lessors. After 9/11,
the ABS market went dormant, as many pre-9/11 securitizations composed of
older, out-of-favor aircraft performed poorly and investor appetite for the deals’
often complex cash flows waned. The ABS sector re-emerged in 2007 in robust
form, as the advent of low cost “wraps” (i.e. bond insurance) for secured aircraft-
backed securities and investors seeking triple-A rated paper at slightly wider
spreads (L+22 to L+40) prompted a rush of issuance by both established and
newer lessors. The window for this type of securitization shut with the onset
of the credit crisis in 2008 and the “wrap” structure became largely irrelevant
with the downgrading of the wrap providers and loss of their triple-A ratings.
Despite the potential challenges, non-recourse ABS remains an attractive option
for aircraft financiers and has had a strong return over the past several years
(2018 issuance was very strong). Securitizations allow lessors to raise low cost,
long-term capital on a non-recourse basis by pledging the cash flows of the
underlying asset pool. Given that the collateral is income-producing, mobile, and
often has the benefit of particular protection under the bankruptcy codes of many
regulatory regimes (e.g. Section 1110 in the U.S. generally allows repossession
of aircraft within 60 days of a bankruptcy filing), securitizations tend to be much

4 March 2019
Aircraft Leasing
cheaper than the issuance of traditional unsecured debt. The primary negative
with ABS, as we see it, is that the debt amortization is tied to a pool of collateral
which is subject to an annual impairment test. If the value of the collateral falls
below a certain threshold, then one consequence could be an increase in debt
amortization relative to expectations, diverting cash flow away from the servicer
and/or equity. This can be problematic if the increased debt amortization coincides
with some of the lessees (which are renting aircraft tied to the securitization)
falling behind on their monthly rental payments.
Unsecured debt
As we stated earlier, leasing companies have a huge appetite for capital.
Therefore, we believe a lessor should use a full spectrum of financing alternatives
to ensure the lowest cost of capital and increased flexibility. In that regard, our
preference is that lessors fund their business via a mix of secured debt (for
advantageous funding cost and often longer tenor) and unsecured debt (for the
flexibility it allows for aircraft redeployment and changes in the fleet). Over the
past few years, we have seen a slew of unsecured transactions and our sense
is that the market will be open to lessors partially to meet investor demand (and
especially for those lessors rated investment-grade). The one caveat is that too
much of a good thing (i.e. attractively priced, shorter-term, unsecured debt) could
result in a meaningful mismatch between assets and liabilities - the very situation
that was the undoing of some high profile lessors, including GPA in the early
1990s. The balance between unsecured debt, secured debt, equity and other
funding sources is ultimately a careful calculus of the often conflicting desires of
an issuer for maximum flexibility, lowest cost, attractive tenor and, in some cases,
the goal of an investment-grade rating. Above in figure 36 we have detailed recent
offerings by the public U.S. lessors.
Export credit agency (ECA) financing

Export credit agencies such as the U.S. Export-Import Bank (Ex-Im), Canada’s
Export Development Canada (EDC), Brazil’s Development Bank (BNDES), UK’s
Exports Credit Guarantee Department (ECGD), France’s Coface and Germany’s
Euler-Hermes provide significant financial support for both airlines and lessors.
The basic premise under this type of financing is that countries will support
the export of their aircraft, and, as an export-driven program, the airlines in the
“Home Countries” of each manufacturer are generally not eligible for this type of
financing. ECAs are generally private institutions that issue financing – either in
the form of credits or guarantees. ECA financing is very attractive to most airlines
to whom it is made available, as it provides high advance rates (85% of true
aircraft cost) and exceptionally low cost debt (often only a handful of basis points
above Libor). In addition, export credit is traditionally available for relatively new
aircraft programs with smaller operator bases that have not yet been well-received
at an economical price in the commercial markets. Offsetting these significant
benefits, to some degree, is a fairly rapid debt amortization profile that can leave
aircraft assets relatively under-levered after five to seven years compared to some
other forms of finance. Historically, ECAs provided financing for no more than
15% of all new aircraft orders (primarily through guarantees of the debt). During
the financial crisis in 2008, financing by ECAs quickly grew to over 30% of the
aircraft financing market when other sources of funding dried-up. In recent years,
ECA transactions have trended considerably lower to below 10%, see figure 35.

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Aircraft Leasing
Recourse secured financing

The recourse secured financing market for lessors emerged dramatically in 2010,
partly as a result of the continued closure of the non-recourse ABS market and
the desire of lessors to receive lower financing costs than would otherwise be
available in the unsecured market. Recourse debt has a particular attraction to
investors, as it combines the structural simplicity of a corporate bond with its
static amortization profile along with the credit improvement provided by a pool of
pledged aircraft collateral and associated loan-to-value covenants. Fixed income
investors have become very familiar with the benefits of aircraft collateral through
the long-standing issuance in the EETC market. The lessor recourse secured
financing market allows investors another opportunity to apply this knowledge,
often with very large, liquid benchmark deals. For the issuer, the lower financing
cost of recourse secured financing has a cost – covenants often limit the flexibility
of the issuer to deploy assets through various concentration limits, while recourse
financing, by definition, remains on a company’s balance sheet.
Commercial bank debt

Bank debt historically has been one of the more attractive means to finance
aircraft, with Asian and European banks playing a major role, but the hurdles one
must surmount to access capital tend to be much higher than other markets. For
example, banks will only lend against the highest quality collateral and concerns
regarding counter-party risk rule-out lower sub-investment grade companies (a
category which includes many global airlines). Given the higher standards, cost
of capital is lower and LTVs are higher than what a lessor could typically achieve
in the public markets.
Pre-delivery payment (PDPs) financing

When airlines and lessors place orders with the manufacturers, they are usually
required to put up a deposit that easily could be as much as 1/3 of the value of the
aircraft. And over time as the aircraft are being built, there are requirements for
additional deposits (which begin at de minimus levels at the time of the aircraft
order but escalate to as much as 80% of the cost of the asset by the time of
delivery). For larger orders, these pre-delivery payments can be sizeable, and
therefore, some airlines and lessors will elect to finance the PDPs. PDP financing is
short-term and tends to be the most expensive debt, given some of the contractual
and technical challenges if there is a default and the aircraft in production needs to
be completed, re-possessed and remarketed. The complexities of bankruptcy law
in many regulatory regimes create additional potential challenges for providers
of PDP financing. As such, the PDP market remains one of the most challenging
forms of aircraft-backed security for financiers.

4 March 2019
Aircraft Leasing
Valuation Metrics
There are various valuation methodologies that investors can use in order
to analyze an aircraft lessor’s equity, with P/Es, Price to Pretax Earnings,
Distributable Cash Flow Yield, EV/EBITDA, EV/CMV, Price to Book and NAV
being the most common metrics. Also, we think it is important for investors to
understand the residual value risk of a particular lessor in order to help assess
the potential for a future asset write-down/impairment; we review the underlying
analysis in greater detail below.
One of the key challenges in deriving the value of a publicly-traded lessor is

the fact that there are only a handful of publicly-traded market comparables. As
such, we have provided a comparable company universe which includes industrial
equipment leasing, shipping equipment leasing, car rental companies, aerospace
and infrastructure companies. The third issue is that all publicly-traded aircraft
leasing stocks are small and mid caps, and therefore subject to much larger
swings around fair value.
We discuss in more detail each of the key valuation methodologies below:
P/Es vs. Price to Pretax Earnings

The traditional P/E ratio is a good starting point in order to triangulate valuation.
However, for lessors that operate in a high tax jurisdiction such as the U.S.
(many lessors are headquartered in countries with low tax regimes such as Fly
Leasing and AerCap in Ireland), but are not expected to be a cash taxpayer for the
foreseeable future, we think investors will find Price to Pretax Earnings a more
useful valuation metric. This is most relevant for lessors that are in the midst of an
aircraft acquisition program, which results in accelerated depreciation, thereby
reducing their cash tax outlay to zero or close to zero.
Distributable Cash Flow Yield

At one time, dividend yield was the most commonly used valuation metric for the
aircraft lessors. Initially, aircraft leasing companies were yield plays given their
strong cash flows. In their trading history, the dividend-yielding aircraft lessors
(Aircastle, Babcock & Brown Air (renamed Fly Leasing) and Genesis Lease, which
was acquired by AerCap) have traded in a very wide range between 5% and 50%
(the high end of the range reflecting the depths of the credit crisis and just before
dividends were cut). More recently, the only two U.S. listed aircraft lessors paying
a dividend are Aircastle (6.1% dividend yield) and Air Lease (1.1% dividend yield).
To put all of the dividend and non-dividend paying names on the same page, we
like to look at distributable cash flow yield, which we define as net income plus
D&A divided by equity market capitalization.
Enterprise Value/EBITDA
One of the traditional metrics that lends itself nicely to cross-sector analysis, EV/
EBITDA is also a useful valuation metric to analyze lessors given the industry’s
strong cash flow characteristics. Historically the group has traded between
5x and 9x forward EBITDA, and is presently trading at 8.1x. EBITDA, and is
considered the “purest” form of operating earnings as it adjusts for accounting

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Aircraft Leasing
differences (depreciation policies, tax rates, etc.). In essence, EBITDA captures a

company’s cash generation before it is impacted by capital structure, tax profile
and investment requirements. For equity investors, we have always been a bit
less enamored of using a multiple tied to EBITDA as a primary valuation metric
because it treats debt and equity as one and the same. Or in other words, it is
assumed that every $1 of enterprise value is $1 of invested capital, regardless of
whether it is $1 of equity or $1 of debt. However, equity investors expect a higher
return than creditors given that stocks have inherently more risk (especially highly-
leveraged equities). As a result, once the creditor has received his or her fixed
return, any excess returns would accrue entirely to the shareholder. Unfortunately
this risk/return aspect is not captured in the EV/EBITDA multiple.
EV/CMV, Price to Book, and NAV

As aircraft leasing is a capital and asset-intensive business, we think valuation
metrics that are tied to the value of the fleet can be very useful in determining
valuation. The major drawback is that aircraft values can be volatile and there is
some interpretation in estimating the current market value of a particular fleet
(ask three licensed appraisers what an aircraft is worth and you are likely to hear
three different answers). Enterprise Value/CMV is probably the most commonly
used valuation metric tied to the value of the fleet. When many of the lessors went
public, EV/CMV averaged 1.2x; during the depths of the credit crisis EV/CMVs
dropped to as low as 0.8x before staging a recovery to around 1.2x. Price to Book
is another metric tied to the company’s asset base, however, it fails to incorporate
the changes in fleet value (unless, of course, an asset is impaired). Additionally,
NAV or “Sum of the Parts” is a useful way to derive a leasing company’s equity
value by marking-to-market all of the company’s assets and netting out the debt.
Lastly, we would add the asset valuation metrics discussed in this sub-section
are the ones typically used to analyze a non-public lessor. Under those types of
analyses, an appraisal of the “metal” is the single most determinant of value, in
our view.
Assessing residual value risk by “following the cash”

Along with the typical metrics used to analyze the equity values of aircraft lessors,
we think it is important for investors to understand the residual value risk of a
particular lessor in order to help assess the potential for a future asset write-down/
impairment. The best way to assess this risk is by “following the cash” which
can be done by subtracting future minimum lease rental payments, or contracted
cash flows associated with each lessor’s fleet, from the current net book value
of its aircraft. In this case, the lower the result the better, as it would indicate
that the carrying value associated with the lessor’s fleet is closely in line with the
cash flows it is expected to generate. We would then compare that value to each
company’s book equity value, again attributing the lowest values as the strongest.
Using the data, we could also compare each company’s contracted cash flows
with its interest-bearing debt balance as a means to evaluate its ability to fulfill
its future debt obligations.

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Aircraft Leasing
Equity Positioning
We are Buy-rated on Air Lease (AL), AerCap (AER) and Fly Leasing (FLY) and Hold-
rated on Aircastle (AYR). We believe that AL and AER stand out amongst the
publicly-traded aircraft lessors, both embody the key attributes which constitute
a successful aircraft lessor. Air Lease (AL) is our top idea for investors seeking
growth, as the company plans to expand its aircraft fleet by as much as 30%
organically through its orderbook in 2019. AerCap (AER) represents our best
mature value pick, as the company has the potential to deliver stable cashflows,
pays a dividend and offers potential for modest and predictable growth through
the depth of its aircraft orderbook. Fly Leasing (FLY) offers attractive deep-value
exposure to the sector, based on its discounted valuation and opportunistic
acquisition strategy. See below for additional detail:
Buy ratings on AerCap (AER), Air Lease (AL) and Fly

Leasing (FLY)
AerCap (AER)
Buy; $71 PT
AER has placed 95% of its assets through 2020 and has negligible lease expiration
risk. In addition, the company has an attractive leverage profile, a resultingly
low overall cost of debt and a strong liquidity position. AER possesses highly
valuable orderbook consisting of 363 in-demand new-technology aircraft, which
provide a strong trajectory for revenue growth in years to come. Our price
target is derived by applying an ~11x P/E multiple to our 2019 forecast vs.
AER’s historical 10x – 11x range. AerCap's business model depends on the
continual re-leasing of its aircraft when the current leases expire. Failure by the
company to do so at favorable rates, if at all, would adversely impact revenue
generation. Also, AerCap operates in a capital-intensive business and will need
additional capital to fund further expansion. Inability to access the financial
markets and/or to do so at favorable terms could materially impact the company's
growth prospects. Additionally, the aircraft leasing business has experienced
periods of oversupply, during which lease rates and aircraft values have declined.
Any future oversupply situation could meaningfully affect AerCap's financial
results. Furthermore, AerCap's financial strength, to some extent, depends on
the fiscal strength of its lessees - the airlines. Widespread defaults and/or other
credit problems by airline customers could negatively affect AerCap's financial
performance. Moreover, because the company has a global customer base, it
could be impacted by general economic and geopolitical risks. Also, interest rates
have an impact on AerCap's financial results, and changes in interest rates may
adversely affect financial results and growth prospects, as well as its share price.

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Aircraft Leasing
Air Lease (AL)

Buy; $58 PT
Air Lease is well positioned to grow organically for the next several years, with
an orderbook consisting of 372 in-demand aircraft. Management has a proven
record of producing margin accretive growth and the company holds the most
attractive borrowing cost amongst public lessors (3.4% in the Dec Q of 2018) as
it embarks on its largest year of growth on-record with the fleet to grow by 80
aircraft in 2019 (>20% y-o-y). Our 12-month price target for AL shares is derived
by applying a ~11 P/E multiple to our 2019 GAAP EPS forecast (above the high
end of the historical group average of 9x - 11x) to reflect the our belief that we
are in the latter stages of the economic cycle. This implies a 1.4x multiple to
our book value estimate (above 1.0 to reflect Air Lease's steep projected growth
trajectory tied to its order book). Risk factors include execution risk as Air Lease is
a relatively young company with ambitious growth plans. Also, AL operates in a
capital intensive business and constantly needs additional capital to fund further
expansion. Inability to access the financial markets and/or to do so at favorable
terms could materially impact growth prospects. Additionally, the aircraft leasing
business has experienced periods of oversupply, during which lease rates and
aircraft values have declined. Furthermore, Air Lease’s financial strength, to some
extent, depends on the fiscal strength of its lessees – the airlines. Widespread
defaults and/or other credit problems by airline customers could negatively affect
Air Lease’s financial performance. Moreover, because the company has a global
customer base, it could be impacted by general economic and geopolitical risks.
Lastly, interest rates may impact on Air Lease’s financial results (although the
company structures leases in a way to minimize impacts of future interest rate
volatility), and changes in interest rates may adversely affect financial results and
growth prospects, as well as its share price.
Fly Leasing (FLY)

Buy; $18 PT
We view FLY as offering deep-value exposure to the sector as its valuation based
on P/E and price to book (P/B) are both trading at attractive levels relative to
peers and historical ranges. In addition, the company's acquisition of AirAsia's
orderbook will provide a solid runway for revenue growth through firm orders for
21 A320neo family aircraft (all of which have lease commitments) and flexibility
for incremental growth options to acquire 20 additional A320neo aircraft. We
applied slightly less than a 1.0x price to book multiple to arrive at our $18 price
target (versus its current ~36% discount). Our price target implies a P/E multiple
of ~3.8x our 2019 EPS forecast and 3.4x our 2020 EPS forecast. A key risk
for FLY is that FX volatility could become more widespread as trade disputes
become more protracted and may result in a slowing of economic growth. That
in turn would very likely mean reduced demand for aircraft potentially weighing
on aircraft values and lease rates. Additionally, FLY has exposure to emerging
markets, which have been a major source of growth in air travel. A slowing
of the global economy could put pressure on those economies, and thereby
adversely impact lessee airlines from those countries. Another risk is oversupply
of aircraft negatively impacting values and lease rates, thereby putting downward
pressure on FLY’s asset values as well as future earnings power of its asset base.
Furthermore, a change in depreciation/useful life assumptions or impairment
charges on FLY’s fleet could materially alter its return profile. Another risk is the
company’s small float.

4 March 2019
Aircraft Leasing
We rate Aircastle (AYR) a Hold

Aircastle (AYR)
Hold; $23 PT
High asset concentration to distressed operators in Brazil and India, along with
placement risk around the company's 25 aircraft Embraer E190/195-E2 orderbook
are the primary drivers underlying our Hold rating on AYR. Our PT is derived by
applying a ~10x P/E multiple to our 2019 forecast vs. AYR's historical trading
range of 8x – 11x. Our price target reflects a Price to Book (P/B) multiple of ~1.0x.
A key downside risk for Aircastle is that global economic weakness could reduce
demand for air travel. That, in turn, would very likely mean reduced demand for
aircraft. Additionally, Aircastle has exposure to emerging markets, which have
been a major source of air travel growth. A slowing of the global economy could
put pressure on those economies and therefore adversely impact lessee airlines
from those countries. This could lead to missed rental payments and grounded
aircraft. The company is exposed to customer or counterparty risk. A key upside
risk would be an improving lease rate environment that more than offsets lower
lease rates on the company's upcoming potential lease renewals. Other downside
risks include oversupply of aircraft negatively impacting values and lease rates,
thereby putting downward pressure on lessor asset values as well as future
earnings power of the current asset base. Another risk is the company’s small
float.

4 March 2019
Aircraft Leasing
Figure 37: Public lessor owned fleet overview

Aercap Air Lease Aircatle FLY Leasing
Airbus A320ceo 318 70 123 53
Airbus A320neo 97 20 10 -
Boeing 737 NG 261 102 80 45
Boeing 737 MAX 5 14 - -
Airbus A330 73 21 20 3
Airbus A350 24 6 - -
Boeing 767 31 1 - -
Boeing 787 76 15 - 4
Boeing 777 44 25 6 2
Other Aircraft 33 1 9 5
Total 962 275 248 112
Avg Age (yrs) 6.3 3.8 9.1 7.1

Avg Remaining Lesase Term (yrs) 7.4 6.8 4.5 5.9
Source: Company filings and Deutsche Bank Research
Note: AerCap, Air Lease and Aircastle data as of 12/31/18 and Fly Leasing data as of 9/30/18
Figure 38: Public lessor orderbook overview

Aercap Air Lease Aircatle FLY Leasing
Embraer E190 / 195-E2 49 - 25 -
Airbus A320neo 173 137 - 21
Boeing 737 MAX 99 154 - -
Airbus A330 24 - -
Airbus A350 2 18 - -
Boeing 787 40 39 - -
Total 363 372 25 21

Note: AerCap, Air Lease and Aircastle data as of 12/31/18 and Fly Leasing data as of 9/30/18
Valuation tables
On the following pages, we provide our valuation tables (figures 39-44) for all four
publicly-traded leasing companies. Our valuation tables are set up so that the first
page provides all of the key multiples that we track along with the underlying
financial drivers for the valuation metrics. The second valuation page provides
a much broader universe of comparable companies including other industrial
lessors (equipment and shipping companies), aerospace, infrastructure, and car
rental companies. The following pages present a return on invested capital (ROIC)
analysis for each of the public aircraft lessors in our coverage universe.

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Aircraft Leasing
4 March 2019
Figure 39: Aircraft lessors - valuation matrix
Equity
12 Month Shares Market Div. Div. Price/ Distributable Debt/
Price Price Implied Out. Value YTD 52 Week Yield Payout1 EPS Price/Earnings Pretax Earnings Cash Flow Yield2 EV/EBITDA Price/ EV/ Cap Price/Sales
Company Ticker 3/1/2019 Obj. Return (mm) (mm) Change High Low 2019E 2019E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2019E 2020E 2019E 2020E Book CMV 12/31/2018 2019E 2020E
AIRCRAFT LEASING
AerCap Holdings N.V. AER-US $45.07 $71.00 58% 142.7 $6,430 14% $58.30 $36.16 0.0% 0.0% $6.80 $6.65 $6.80 6.6x 6.8x 6.6x 5.8x 5.9x 5.8x 43.6% 46.8% 8.5x 8.0x 0.7x 1.2x 76.9% 1.3x 1.2x
Aircastle Limited AYR-US 19.81 23.00 16% 75.5 1,495 15% $23.14 $15.75 6.1% 53.2% 3.29 2.25 3.00 6.0x 8.8x 6.6x 5.9x 8.3x 6.3x 34.2% 42.4% 8.2x 6.5x 0.7x 1.3x 70.3% 1.8x 1.4x
Air Lease Corporation AL-US 38.06 58.00 52% 103.6 3,944 26% $47.34 $28.13 1.1% 6.7% 4.95 5.97 6.47 7.7x 6.4x 5.9x 6.1x 5.0x 4.6x 35.8% 42.7% 8.1x 6.3x 0.8x 1.3x 70.6% 1.9x 1.5x
Fly Leasing Limited FLY-US 11.46 18.00 57% 28.0 321 9% $15.32 $10.42 0.0% 0.0% 2.55 3.00 3.40 4.5x 3.8x 3.4x 3.9x 3.3x 2.9x 76.7% 82.3% 7.4x 7.5x 0.5x 1.3x 83.6% 0.7x 0.7x
Average 16% 1.8% 15.0% 6.2x 6.4x 5.6x 5.4x 5.6x 4.9x 47.6% 53.5% 8.1x 7.1x 0.7x 1.3x 75.4% 1.4x 1.2x
(1) Calculated as a percentage of net income

(2) Distributable Cash Flow defined as Net Income plus D&A
Note: All figures are based on pro forma (i.e. excluding non-recurring, non-core revenue/cost) estimates
Source: Bloomberg, Ascend, company filings and Deutsche Bank Research
Figure 40: Aircraft lessors - key drivers

Pretax Diluted Net Distributable S/H CMV of BV of CMV Premium/ Earnings
3
Sales EBITDA Pretax Income Earnings per Share Net Income2 Earnings per Share2 Cash Flow1 Equity Div. Aircraft Fleet Aircraft Fleet 4 (Discount) to Growth Rate
Company Ticker Rating 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E 12/31/2018 2019E 6/30/2018 6/30/2018 BV 2019E
AIRCRAFT LEASING
AerCap Holdings N.V. AER-US Buy $4,800 $5,010 $5,291 $3,941 $4,072 $4,365 $1,146 $1,101 $1,115 $7.77 $7.64 $7.82 $1,011 $957 $970 $6.80 $6.65 $6.80 $2,690 $2,802 $3,012 $8,828 $0.00 $29,152 $32,948 -11.5% -5.2%
Aircastle Limited AYR-US Hold 890 850 1,032 798 748 935 263 184 245 3.36 2.37 3.15 257 175 233 3.29 2.25 3.00 568 511 633 2,009 1.20 4,812 6,776 -29.0% -31.9%
2
Air Lease Corporation AL-US Buy 1,680 2,114 2,626 1,548 1,876 2,407 690 858 934 6.20 7.60 8.24 561 680 734 4.95 5.97 6.47 1,143 1,411 1,682 4,807 0.40 11,961 14,864 -19.5% 21.2%
Fly Leasing Limited FLY-US Buy 397 443 441 370 397 392 86 102 116 2.98 3.49 3.96 74 88 99 2.55 3.00 3.40 216 246 264 612 0.00 2,274 2,872 -20.8% 17.9%
Average / Total $7,767 $8,417 $9,390 $6,657 $7,093 $8,099 $2,185 $2,244 $2,409 $1,903 $1,900 $2,036 $4,617 $4,970 $5,591 -20.2% 0.5%
(1) Distributable Cash Flow defined as Net Income plus D&A

(2) Air Lease reports adjusted, pro forma net income by adding back booked taxes. We remove taxes to create a more comparable set of actual results/estimates to other lessors
(3) CMV stands for "Current Market Value" of the aircraft fleet. These figures are based on generic estimates made by appraiser Ascend. The estimates are driven by the age of the aircraft and assume half-life return conditions. Adjustments have been made by our team to tie the Ascend fleet outputs to the latest company filings.
For more detail, see our CMV analyses for each lessor (available upon request)
(4) BV stands for "Book Value"
Note: All figures are based on pro forma (i.e. excluding non-recurring, non-core revenue/cost) estimates
Figure 41: Aircraft lessors - enterprise value

Unrestricted
Shares Equity Cash &
Price Out. Market Preferred Minority Long-Term Short-Term Marketable Enterprise
Company Ticker 1-Mar-19 (mm) Value Equity Interest Debt Debt Securities Value
AIRCRAFT LEASING
AerCap Holdings N.V. AER-US $45.07 x 142.7 = $6,430 + $0 + $53 + $29,508 + $0 - $1,204 = $34,786
Aircastle Limited AYR-US 19.81 x 75.5 = 1,495 + 0 + 0 + 4,761 + 0 - 153 = 6,103
Air Lease Corporation AL-US 38.06 x 103.6 = 3,944 + 0 + 0 + 11,539 + 0 - 300 = 15,183
Fly Leasing Limited FLY-US 11.46 x 28.0 = 321 + 0 + 0 + 3,125 + 0 - 490 = 2,956

Figure 42: Aviation, lessor, consumer finance and related industries - valuation matrix (page 1 of 2)

Aircraft Leasing
4 March 2019
Equity
Shares Market Div. Div. Price/ Debt/
BBG Price Out. Value YTD 52 Week Yield Payout Price/Earnings Pretax Earnings EV/EBITDA Price/ Cap Price/Sales
Company Ticker 3/1/2019 (mm) (mm) Change High Low 2019E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E Book 12/31/2018 2018 2019E 2020E
AIRCRAFT LEASING
AerCap Holdings N.V. AER US $45.07 142.7 $6,430 14% $58.30 $36.16 0.0% 0% 6.6x 6.8x 6.6x 5.8x 5.9x 5.8x 8.9x 8.5x 8.0x 0.7x 76.9% 1.3x 1.3x 1.2x
Aircastle Limited AYR US 19.81 75.5 1,495 15% 23.14 15.75 6.1% 53% 6.0x 8.8x 6.6x 5.9x 8.3x 6.3x 7.6x 8.2x 6.5x 0.7x 70.3% 1.7x 1.8x 1.4x
Air Lease Corporation AL US 38.06 103.6 3,944 26% 47.34 28.13 1.2% 8% 7.7x 6.4x 5.9x 6.1x 5.0x 4.6x 10.0x 8.1x 6.3x 0.8x 70.6% 2.3x 1.9x 1.5x
Fly Leasing Limited FLY US 11.46 28.0 321 9% 15.32 10.42 0.0% 0% 4.5x 3.8x 3.4x 3.9x 3.3x 2.9x 8.7x 7.4x 7.5x 0.5x 83.6% 0.8x 0.7x 0.7x
Average 16% 1.8% 15% 6.2x 6.4x 5.6x 5.4x 5.6x 4.9x 8.8x 8.1x 7.1x 0.7x 75.3% 1.5x 1.4x 1.2x
EQUIPMENT LEASING
CIT Group, Inc. CIT US $51.25 100.8 $5,166 34% $56.14 $35.50 2.4% 26% 12.6x 10.7x 9.5x 8.8x 7.8x 7.0x 6.3x 17.5x 17.2x 0.8x 57.7% 1.6x 2.8x 2.7x
Mobile Mini, Inc. MINI US 37.30 44.7 1,667 17% 50.40 29.46 2.9% 57% 23.8x 19.4x 17.2x 36.2x 14.8x 13.9x 25.0x 11.1x 10.2x 2.1x 52.7% 2.8x 2.7x 2.5x
Ryder System, Inc. R US 62.33 53.1 3,311 29% 79.95 44.80 3.6% 37% 8.9x 10.1x 9.3x 6.5x 7.3x 6.8x 5.0x 4.6x 4.2x 1.1x 69.5% 0.4x 0.4x 0.3x
MACHINERY LEASING
Ashtead AHT LN $20.47 472.5 $9,673 -99% $24.61 $15.73 1.9% 22% 16.3x 11.8x 10.2x 18.3x 8.6x 7.3x 7.9x 6.4x 5.7x 3.5x 51.9% 2.6x 2.2x 2.0x
H&E Equipment Services HEES US 29.02 35.8 1,038 42% 44.24 18.12 3.9% 50% 14.6x 12.8x 13.3x 10.7x 9.4x 10.8x 5.3x 4.9x 4.9x 4.3x 81.3% 0.8x 0.8x 0.8x
United Rentals Inc URI US 135.69 79.6 10,800 32% 190.74 94.28 0.0% 0% 9.2x 7.1x 6.4x 6.9x 5.2x 4.7x 6.2x 5.1x 4.8x 3.2x 77.5% 1.3x 1.2x 1.1x
Average -8% 1.9% 24% 13.4x 10.6x 10.0x 11.9x 7.8x 7.6x 6.5x 5.5x 5.2x 3.7x 70.3% 1.6x 1.4x 1.3x
SHIPPING EQUIPMENT LEASING

Capital Product Partners L.P. CPLP US 2.26 127.2 288 8% 3.31 2.05 8.0% 85% 32.7x 10.6x 7.8x 32.7x 11.4x 7.5x 8.1x 11.3x 11.5x 0.3x 33.4% 1.0x 1.8x 2.6x
DHT Holdings, Inc. DHT US 4.42 142.7 631 13% 5.60 3.28 4.2% 99% NM 23.3x 3.5x NM 25.2x 3.6x 12.5x 7.9x 4.4x 0.7x 52.9% 1.7x 2.1x 1.4x
Navios Maritime Partners L.P. NMM US 0.97 167.6 163 14% 2.15 0.78 11.0% 67% 7.2x 6.1x 2.4x 7.2x 6.2x 3.0x 7.3x 5.4x 4.1x 0.2x 39.5% 0.7x 0.8x 0.7x
Seaspan Corporation SSW US 8.83 215.4 1,902 13% 10.72 5.50 5.7% 50% 8.6x 8.8x 7.9x 6.1x 6.5x 5.3x 9.5x 8.8x 8.8x 0.8x NA 1.7x 1.6x 1.6x
Textainer Group Holdings Limited TGH US 11.08 57.4 636 11% 19.65 9.10 NA NM 18.0x 8.0x 7.2x 16.1x 7.9x 7.1x 7.0x 6.5x 5.9x 0.5x NA 0.9x 1.0x 0.9x
NR = No DB Recommendation; NA = Not Applicable; NM = Not Material

Page 57
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Figure 43: Aviation, lessor, consumer finance and related industries - valuation matrix (page 2 of 2)

Aircraft Leasing
4 March 2019
Equity
Shares Market Div. Div. Price/ Debt/
BBG Price Out. Value YTD 52 Week Yield Payout Price/Earnings Pretax Earnings EV/EBITDA Price/ Cap Price/Sales
Company Ticker 3/1/2019 (mm) (mm) Change High Low 2019E 2018 2019E 2020E 2018 2019E 2020E 2018 2019E 2020E Book 12/31/2018 2018 2019E 2020E
INFRASTRUCTURE
Macquarie Infrastructure Company MIC US $39.91 85.9 $3,427 9% $47.74 $33.71 10.1% NM 61.2x 22.8x 18.3x 73.3x 16.3x 12.9x 12.2x 9.6x 9.5x 1.1x 49.2% 1.9x 1.9x 1.8x
Average 9% 10.1% NM 61.2x 22.8x 18.3x 73.3x 16.3x 12.9x 12.2x 9.6x 9.5x 1.1x 49.2% 1.9x 1.9x 1.8x
AEROSPACE
Airbus Group NV AIR FP € 113.90 776.4 88,428 36% € 114.34 € 77.50 1.8% 35% 24.8x 19.2x 16.0x 17.7x 14.0x 11.7x 10.4x 8.2x 7.0x 9.3x 51.3% 1.4x 1.3x 1.2x
The Boeing Company (1) BA US $440.62 565.0 248,944 37% $446.01 $292.47 1.8% 40% 24.7x 21.8x 18.7x 22.2x 18.5x 15.9x 18.0x 14.6x 13.4x NM 97.1% 2.5x 2.2x 2.1x
CAR RENTAL
Avis Budget Group, Inc. CAR US $36.28 75.8 $2,749 61% $50.88 $21.63 NA NM 11.7x 9.3x 8.2x 7.2x 18.2x 4.8x 5.3x 19.7x 18.3x 5.3x 97.1% 0.3x 0.3x 0.3x
Hertz Global Holdings, Inc. HTZ US 19.35 83.9 1,624 42% 22.70 13.01 NA NM NM 38.4x 11.1x NM NM 4.3x 5.4x 29.8x 24.1x 1.3x 82.6% 0.2x 0.2x 0.2x
Average 52% NM NM 11.7x 23.9x 9.6x 7.2x 18.2x 4.5x 5.3x 24.8x 21.2x 3.3x 89.8% 0.2x 0.2x 0.2x
CONSUMER FINANCE
Alliance Data Systems ADS US $173.59 53.0 $9,200 16% $250.27 $142.58 1.4% 11% 9.9x 7.8x 7.0x 7.8x 5.3x 4.8x 12.8x 14.3x 13.5x 4.0x 91.5% 1.2x 1.1x 1.1x
Ally Financial ALLY US 27.03 402.7 10,884 19% 29.00 20.60 2.5% 19% 9.2x 7.6x 6.8x 7.1x 5.7x 5.2x 8.8x NA NA 0.8x 80.3% 1.0x 1.7x 1.6x
American Express AXP US 108.90 843.4 91,843 14% 114.55 89.05 1.5% 20% 12.8x 13.4x 12.2x 10.9x 10.3x 9.3x 10.2x NA NA 4.3x 73.4% 2.1x 2.1x 1.9x
Credit Acceptance Corp CACC US 446.83 18.8 8,392 17% 467.26 299.00 NA NM 15.0x 13.7x 12.9x 11.4x 10.4x 9.7x 13.1x NA NA 4.3x 65.7% 6.5x 5.8x 5.3x
Capital One COF US 84.26 467.9 39,424 11% 101.44 69.90 2.0% 15% 7.9x 7.6x 7.1x 6.5x 5.8x 5.4x 6.4x NA NA 0.8x 53.3% 1.2x 1.4x 1.3x
Discover Financial Svcs DFS US 71.84 328.4 23,591 22% 80.36 54.36 2.3% 19% 9.2x 8.3x 7.6x 7.0x 6.2x 5.7x 6.2x NA NA 2.1x 71.0% 1.8x 2.1x 1.9x
Springleaf Holdings OMF US 33.41 136.0 4,543 38% 37.29 22.47 1.3% 8% 9.0x 5.9x 5.5x 6.5x 4.1x 3.9x 10.7x NA NA 1.2x 80.0% 1.1x 1.2x 1.2x
Navient NAVI US 12.21 244.5 2,985 39% 15.03 8.23 5.4% 33% 6.3x 6.1x 5.9x 4.7x 4.6x 4.4x NA NA NA 0.8x 96.5% 0.5x 1.6x 1.6x
Santander Consumer USA SC US 20.78 351.4 7,301 18% 21.81 15.55 4.0% 32% 8.2x 7.9x 7.4x 6.3x 6.1x 5.7x 7.6x NA NA 1.0x 83.3% 1.0x 0.9x 1.1x
Sallie Mae SLM US 11.20 436.8 4,892 35% 12.46 7.95 0.5% 5% 10.5x 9.0x 7.8x 9.1x 6.5x 5.6x NA NA NA 1.7x 59.0% 2.6x 3.0x 2.7x
Synchrony Financial SYF US 32.46 709.9 23,042 38% 37.57 21.78 2.8% 21% 8.7x 7.4x 6.9x 6.6x 5.9x 5.3x 6.5x NA NA 1.6x 62.0% 1.3x 1.7x 1.7x
NR = No DB Recommendation; NA = Not Applicable; NM = Not Material

Figure 44: Return on invested capital analysis

Aircraft Leasing
4 March 2019
AerCap Holdings N.V. Aircastle Limited Air Lease Corporation Fly Leasing Limited
Net Operating Profit After Tax (NOPAT)

Pretax income as reported $1,151 $262 $640 $14
+/- Special charges 79 (a) 10 (a) 17 (a) 1 (a)
Pretax income excluding special charges 1,230 272 658 15
+ Interest expense 1,179 (b) 235 (b) 343 (b) 128
Net Operating Profit (NOP) 2,409 506 1,000 143
- Adjusted income tax expense 302 11 202 112
NOPAT $2,108 $495 $798 $31
Effective/marginal tax rate 12.5% 2.2% 20.2% 78.2%
Invested Capital (five-quarter average)

Total Equity $8,705 $1,955 $4,376 $571
(+) Total Interest Bearing Debt 28,656 4,427 10,599 2,559
Average Invested Capital $37,362 $6,383 $14,974 $3,130
ROIC (Return on Invested Capital), Pretax 6.4% 7.9% 6.7% 4.6%

ROIC (Return on Invested Capital), After Tax 5.6% 7.8% 5.3% 1.0%
Notes:
** AerCap, Aircastle and Air Lease are representative of 2018 ROIC metrics; Fly Leasing is representative of 2017 ROIC metrics
AerCap Holdings N.V.

(a) Includes share-based compensation and mark-to-market on interest rate caps and swaps,
(b) Amortization of fair value adjustment on debt amounted to $143 million in FY 2018 and resulted in a tailwind to book interest expense. We assume this does not impact ROIC figures.
Aircastle Limited
(a) Includes share-based compensation and gain on mark to market of interest rate derivative contracts (note the company also adjusts for
"loss on extinguishment of debt", "term financing no. 1 hedge loss amortization charges", and "securitization no. 1 hedge loss amortization charges" in its pro forma, adjusted
figures; for the purposes of this analysis, we run these items through).
(b) Interest includes "loan termination fees related to the sale of two aircraft during the year ended December 31, 2018" ($0.8 million), and "deferred financing fees written off related to the sale
of two aircraft during the year ended December 31, 2018" ($0.3 million).
Air Lease Corporation

(a) Includes share-based compensation and the insurance recovery of its legal settlement (note the company also adjusts for "amortization of debt discounts and issuance costs" in its pro forma,
adjusted figures; for the purposes of this analysis, we run these items through).
(b) Interest includes amortization of debt discounts and issuance costs.
Fly Leasing Limited

(a) includes amortization of fair value adjustments recorded in purchase accounting, and ineffective, designated and terminated derivatives (note the company also
adjusts for "deferred income taxes", "unrealized foreign exchange (gain) loss", "net (gain) loss on debt modification and extinguishment", "amortization of lease premiums, discounts and other",
"amortization of debt discounts and loan issue costs", and "aircraft impairment"; for the purposes of this analysis, we run these items through).
Page 59
4 March 2019
Aircraft Leasing
Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
AerCap Holdings N.V. AER.N 45.07 (USD) 1 Mar 2019 1, 2, 7, 8, 14, 15
Aircastle Limited AYR.N 19.81 (USD) 1 Mar 2019 2, 14, 15
Air Lease Corporation AL.N 38.06 (USD) 1 Mar 2019 8, 14, 15
FLY Leasing Limited FLY.N 11.46 (USD) 1 Mar 2019 7, 8, 14, 15
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors .
Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than
the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/
Research/Disclosures/CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?
topicId=RB0002. Investors are strongly encouraged to review this information before investing.
Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private
offering for this company, for which it received fees.
2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of
investment banking or financial advisory services within the past year.
8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking
services from this company in the next three months.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this
company within the past year.
15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it
received non-investment banking securities-related services.
Important Disclosures Required by Non-U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See
Important Disclosures Required by Non-US Regulators and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private
offering for this company, for which it received fees.
2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of
investment banking or financial advisory services within the past year.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our website
at https://research.db.com/Research/Disclosures/CompanySearch
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Michael Linenberg

4 March 2019
Aircraft Leasing
Historical recommendations and target price. AerCap Holdings N.V. (AER.N)

(as of 03/01/2019)
80.00 Current Recommendations
Buy
Hold
Sell
60.00 Not Rated
1
2 Suspended Rating
Security price
** Analyst is no longer at
Deutsche Bank
40.00
20.00
0.00
May '17 Sep '17 Jan '18 May '18 Sep '18 Jan '19
Date
1. 02/14/2018 Buy, Target Price Change USD 68.00 Catherine O- 2. 05/04/2018 Buy, Target Price Change USD 71.00 Catherine O-
Brien** Brien**
§§§§$$$$$§§§§§
Historical recommendations and target price. Aircastle Limited (AYR.N)

(as of 03/01/2019)
Buy
Hold
25.00 1 Sell
2 Not Rated
3 4 Suspended Rating
20.00
Security price
Deutsche Bank
15.00
10.00
5.00
0.00
Date
1. 11/02/2017 Hold, Target Price Change USD 23.00 Catherine O- 3. 08/08/2018 Hold, Target Price Change USD 25.00 Michael
Brien** Linenberg
2. 05/04/2018 Hold, Target Price Change USD 24.00 Catherine O- 4. 02/13/2019 Hold, Target Price Change USD 23.00 Michael
Brien** Linenberg
§§§§$$$$$§§§§§

4 March 2019
Aircraft Leasing
Historical recommendations and target price. Air Lease Corporation (AL.N)

(as of 03/01/2019)
Buy
Hold
50.00 2 Sell
3
Not Rated
Suspended Rating
40.00 1
Security price
Deutsche Bank
30.00
20.00
10.00
0.00
Date
1. 05/05/2017 Buy, Target Price Change USD 45.00 Michael Linenberg 3. 05/11/2018 Buy, Target Price Change USD 58.00 Catherine O-
Brien**
2. 02/26/2018 Buy, Target Price Change USD 53.00 Catherine O-
Brien**
§§§§$$$$$§§§§§
Historical recommendations and target price. FLY Leasing Limited (FLY.N)

(as of 03/01/2019)
Buy
Hold
Sell
15.00 Not Rated
1 Suspended Rating
Security price
Deutsche Bank
10.00
5.00
0.00
Date
1. 08/10/2017 Buy, Target Price Change USD 18.00 Catherine O-

Brien**
§§§§$$$$$§§§§§

4 March 2019
Aircraft Leasing
Equity Rating Key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder
return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy
or Sell.
Newly issued research recommendations and target prices
supersede previously published research.

4 March 2019
Aircraft Leasing
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4 March 2019
Aircraft Leasing
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4 March 2019
Aircraft Leasing
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Aircraft Leasing
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Aircraft Leasing
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Aircraft Lessor 3.4.2019

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4 March 2019

North America Industry Date

Aircraft Leasing Update Industry Update

Solid industry fundamentals underpin a

Doug Runte, CFA

Source: Deutsche Bank

Distributed on: 04/03/2019 11:40:36 GMT

Deutsche Bank Securities Inc.

North America Industry Date

Aircraft Leasing Update Industry Update

Solid industry fundamentals underpin a

bankruptcy activity. Furthermore, overall airline proﬁtability has remained healthy,

Long-term demand for travel growth maintains its momentum

Deutsche Bank Securities Inc.

Aircraft Leasing Industry Overview.................................... 4

Key Drivers of Financial Success...................................... 33

The Nuts and Bolts of Aircraft Leasing.............................36

Anatomy of an Aircraft Lease...........................................40

Page 2 Deutsche Bank Securities Inc.

Deutsche Bank Securities Inc. Page 3

Aircraft Leasing Industry

Figure 1: CMV of owned aircraft (January 2019)

15.0 13.1 13.0

Source: Ascend and Deutsche Bank Research

Page 4 Deutsche Bank Securities Inc.

Current Market Update

Figure 2: Global passenger traﬃc and commercial jet aircraft

9/11 & aftermath

Global RPKs (in billions) Commercial Jets

Source: Ascend, Boeing,company ﬁlings and Deutsche Bank Research

Deutsche Bank Securities Inc. Page 5

As we consider the market outlook on a longer-term basis, we continue to believe

Page 6 Deutsche Bank Securities Inc.

Figure 3: Total airplanes in service - by type

50,000 Freighter 48,540 48,540

Trade and e-commerce are key drivers for air freight

Deutsche Bank Securities Inc. Page 7

An increasing propensity to travel around the globe

Figure 4: International departures by income bracket

From a geographic perspective, China's growth trajectory is most noteworthy

Figure 5: International departures for select geographies

Page 8 Deutsche Bank Securities Inc.

In addition to economic prosperity, changes in culture and lifestyle (such as

Figure 6: An increasing propensity to travel across the globe

Deutsche Bank Securities Inc. Page 9

Demand for air travel has been resilient

Figure 7: Global international departures

Source: World Bank and Deutsche Bank Research

Page 10 Deutsche Bank Securities Inc.

Aircraft leasing market poised to grow along with global

Figure 8: Lessor ﬂeet ownership

Source: Ascend and Deutsche Bank Research

Operating leases have gained an increasing amount of traction with airlines

Deutsche Bank Securities Inc. Page 11

Fleet replacement also fuels signiﬁcant demand

Figure 9: Average age of aircraft/aircraft over 20 yrs old in select markets

% of aircraft at least 20 years of age

Average age of aircraft % of aircraft at least 20 years of age

Source: Ascend and Deutsche Bank Research

Page 12 Deutsche Bank Securities Inc.

In-demand, new-tech narrowbody and widebody supply

Figure 10: Airbus and Boeing orders by year

Source: Airbus, Boeing and Deutsche Bank Research

Deutsche Bank Securities Inc. Page 13