NAVIGATING 360° Rolland Vincent Associates, LLC June 2010

INSIGHTS Fractions of airlines Customers care about many variables that differentiate competitors In aviation, we are accustomed to - fleet, age, model mix; operating flipping a switch, pressing a keypad, Despite current market conditions, experience, safety standards, and or using our BlackBerry or iPhone to the significance of fractional network coverage; upfront and on- make things happen. Now, almost 2 ownership, jet card, and branded going prices; brand and service years into the current industry charter providers in the business features; on-time performance; downturn, business and government aviation industry is difficult to personal relationship with salesperson; leaders continue to grapple with underestimate. According to JETNET, etc. For some, bigger is truly better. As new realities, unpredictable cause- fractional program holders, jet card and-effect relationships, and other customers have come to realize, companies, and large charter operators however, size does not in itself ensure stubborn uncertainty. (10 or more aircraft) currently operate a service quality. Some of the most fleet of 1,129 aircraft (see below). innovative service providers are in fact Amidst this turbulence, it is clear to Annual utilization rates typically exceed us that the wise never stopped smaller, regionally concentrated the industry average by a factor of 2-3X programs with relatively young aircraft flying. Rather, they adjusted their or more. priorities, eliminated tasks with and fewer fleet types. These companies inadequate returns, and leaned Program Holder - Jets Fleet Size provide their customers with an elixir their operations for better NetJets, Inc. 448 of value, peace-of-mind, and friendly NetJets Europe 157 performance. While many have Flight Options 83 yet professional service. In some same- temporarily reduced their Flexjet 78 day-return cases, customers can enjoy consumption across all product and CitationAir 59 the convenience of having their pilots Aerolineas Ejecutivas 12 service categories, the most Executive AirShare 10 and aircraft remain with them during entrepreneurial continue to seize Total 847 the entire day. opportunities in the relative competitive vacuum. Program Holder - Turboprops Fleet Size Avantair 55 Experienced business jet operators Alpha Flying, Inc. - PlaneSense 34 are adept at weaving together the Recessions end when we collectively Total 89 complex, hyper-busy work schedules decide that the rewards for creating Charter Operator - Jets Fleet Size and lifestyles of their customers. While a future outweigh the risks of , LLC 28 many customers take solace in flying caution. We will be months beyond Sierra American Corporation 25 with the largest providers, other factors a recession before it will be , Inc. 22 AirNet Systems, Inc. 21 can be just as important to a customer officially announced as over. VISTAJET Luftfahrt.GmbH 21 purchase decision. In our view, one of Rather than wait, the wise are Group, Inc. 16 the most differentiating features driving DC Aviation GmbH 14 experimenting with ways to fill the long-term loyalty is how well a intriguing gap between business and Pel-Air Aviation Pty. Ltd. 13 XOJET, Inc. 12 company performs during times when commercial aircraft services. Value FAI rent-a-jet AG 11 aircraft, systems and people are under is also being rediscovered in SIRIO Executive Srl 10 Total 193 maximum stress. Some of these dates technologies already designed and are pre-identified each year as ‘Peak certified. In a time of reduced travel and capital budgets, Days’, when demand is at a predictable The formidable business maximum (see table below). unlocking value in adjacent markets combination of NetJets and Marquis and in known technologies – while Jet, by far the largest industry player, is CitationAir Jet Card's 10 Peak Days in 2010 competitors remain hunkered in Day Date Event firmly positioned as a price and service Saturday January 2 New Years Day their bunkers – is a recipe for leader. Despite recent disclosures of Friday February 12 Valentines Day success. It’s time to fly. losses and write-downs, NetJets Monday February 15 Valentines Day Sunday April 4 Easter remains the global brand of reference Sunday April 11 Easter Tuesday November 23 Thanksgiving Day and preference against which Wednesday November 24 Thanksgiving Day competitors publicly and privately Sunday November 28 Thanksgiving Day gauge themselves. The competition is Saturday December 25 Christmas Day Sunday December 26 Christmas Day fierce, and pricing pressure is intense. With margins and cash flows under on- Interestingly, most pre-determined going pressure, we remain convinced peak days have little directly to do with that multiple consolidation business operations. Holidays, sporting Rolland Vincent, President opportunities exist. and entertainment events, and cultural Rolland Vincent Associates, LLC

festivals are periods of higher demand be built between seemingly disparate on business aviation (e.g. football, Borrowing from the airline segments of the air transportion horse racing, Formula 1, Olympics, Art playbook, strategies to grow top-line business. Basel). Innovations like Flexjet 25’s revenues are being deployed. 355-day card and CitationAir’s re- Lufthansa, formerly partnered with !"#$%&'()*+"',-%.&)%/)*01$&"11) launched Jet Card provide customers NetJets Europe, recently celebrated the 2"31)%4"+'3"-)*5)6%77"+6$'() '$+($&"1) with savings for avoiding peak-day 5-year anniversary of Lufthansa Private flying. For customers of either the Jet. The company manages a European F1#9G' !"#$%&' !63#$%&' ()' Citation XLS or Sovereign, the all-in --)' !*$&'+&%$,%' hourly cost difference for non-peak -.)' flying is 15-16% lower than the B$CCD3'/&*9' competition, according to CitationAir .E)' /0#123' and based on January 2010 <&=;' .4)' information. For individuals and !63#$%&'>' 51#63#' ?&#$@@3&;' 718$39' organizations who primarily need A)' :;$1;' access to their aircraft during the ()' Monday-to-Friday workweek, this represents real value. For customers, it’s a no-brainer. For airlines and their investors Additional unofficial ‘peak days’ unsatisfied with 12-cent yields, and occur throughout the year, driven by business jet operators seeking a return uncontrollables such as weather, to growth, we might humbly suggest natural disasters, national security, and that these opportunities represent a other so-called Acts of God. fleet of Citation aircraft, and is seeking ‘Go Get’.  Predictable events that tend to arrive expansion opportunities in the U.S. and unpredictably, these days are the true Asia. Echoing the experience of its Improving on a Legend tests for aviation service providers. former alliance, about 70% of Repeated, efficient situation recovery – Lufthansa Private Jet travelers fly with minimal inconvenience to point-to-point, off-network routes. For most of the last 100 years, customers while protecting a The company reports that it flies up 15 progress in civil aerospace technology company’s bottom line – is a flights a day at peak times, a small but was described by superlatives: newer, competitive differentiator. In these lucrative super-premium yield business. larger, faster, further, better, safer. In cases, size and experience truly matter. Similarly, Delta AirElite, with 45 business aviation, the latest generation owned and managed aircraft, is the of high-end jets is being designed to Bridges over the Oceans wholly-owned executive aviation span 7,000+ nautical miles (13,000 km), business of the world’s largest airline. and fly at speeds near Mach 1. This Delta AirElite’s professed strategy is to same trend is echoed in commercial With executive appointments from “offer differentiated products and aviation, where the longest range jets - outside the industry, and shareholder services and best-cost options to its Boeing’s 777-200LR and Airbus’ A340- pressures to improve margins and cash high-value customers”. 500 - can now fly 9000+ nm (about flow, business aviation providers of all 17,000 km) with a full passenger load. sizes are undergoing transformations In Asia, Singapore Airlines, The Airbus A380, with 202 firm orders aimed at lowering their costs of doing Korean Air, and Cathay Pacific deploy to date from 17 customers and just 27 business. Fleet management decisions business jets not as executive aircraft in service, is already the largest (disposition, acquisition, and transports but as flight training commercial aircraft yet flown. deployment) are front-and-center in platforms. Trans-Atlantic and trans- these strategic reviews. From the Pacific alliances by Flexjet and Jet With non-stop range capability to perspective of a business owner or Solutions with VistaJet and Korean Air, connect almost any two points on the investor, we remain convinced of the respectively, mirror developments at globe, it is fair to say that, as an cost advantages of operating larger global brand-building in the industry, the ‘Range’ box on fleets from fewer manufacturers. From international airline industry. engineering’s To-Do list is clearly a customer perspective, we see a checked. So, what’s next? marked tendency to seek better value With more than 100 business jets for the investment. Acting in concert, currently in use with commercial In the 1980s and 1990s, these two forces are creating an airlines, and more than 600 4-abreast+ commercial airliners began for the first environment of change and airliners serving as executive and head- time to ‘shrink’ – four-engine designs opportunity in the business aviation of-state transports, there is every were largely displaced by new- industry. reason to expect that more bridges will generation twinjets, driven by market

2 forces. Primary amongst these were generation of owners and operators. demand for classic models like the deregulation, fortress hubs, and And their success formula? Lighter- Caravan – a Land Rover with increased competition. Twin-engine weight and non-corrosive materials. wings and the fuel burn of a Honda families from Boeing, Airbus, New and upgraded engines with longer Civic – continues unabated. By the end Bombardier and Embraer now account maintenance intervals and lower of 2010, Cessna will have delivered for the vast majority of manufacturer operating costs. Digital cockpits. 2,000 Caravans to businesses, backlogs by number and value. Quieter, more comfortable, and individuals, and government agencies Promising new designs such as productively-equipped interiors. worldwide since initial deliveries began Bombardier’s CSeries are expected to Higher speeds. More payload. Longer in 1985. Cessna shipped 19 Caravans deliver unprecedented operating cost ranges. Lower operating advantages to operators through next- costs. Less maintenance. '#!" *+,'-+.'+)"#$"01.1-1&)" generation Pratt & Whitney GTF New talent. Innovative '!!" engines and light-weight materials. local suppliers. Welcoming &!" Boeing, Airbus, Embraer, Mitsubishi, communities and and other manufacturers are also development agencies. %!" evaluating their next moves in this Equity partners with a $!" large, global market. long-term view. Leaders !"#$"%&'()"*+,'-+.+/" #!" who accept the challenge While much of the focus and and responsibility to !" '((&" '(((" #!!!" #!!'" #!!#" #!!)" #!!$" #!!*" #!!%" #!!+" #!!&" #!!(" attention is on these high-profile preserve – and enhance – ,-.-/-0"#!&1%+*" ,-.-/-0"#!&2" developments, other segments of the market are also ripe with investment in Q1 2010, essentially unchanged year- opportunities. With more than 100 over-year. As measured by new years of powered flight, the industry shipments to customers, demand for has already created a rich heritage of the more capable C208B Grand innovative designs, some of which – by Caravan throughout the 2008-2009 today’s standards – were clearly ahead Great Recession was 74% higher than of their time. Pilots, flight department during the last industry slowdown in managers, dispatchers, A&P 2003-2004 - and higher, in fact, than at mechanics, CFOs, COOs, and any 2-year period in the model’s business owners may recognize value in history. different ways. Nevertheless, they can probably agree that practical, reliable Much like the Twin Otter and the technologies and designs never really soon-to-be-available Seastar, customers go out of style, and are very much in appreciate the Caravan’s rugged and tune with these times. forgiving design, hefty payload, high- wing for easy loading and protection Look Back to Look Forward

their family’s heritage. Viking Air and In the current environment, we are Dornier Seaplane Company are just the pleased to note that entrepreneurs and most recent examples of companies BEACONS investors are already benefiting from ! Gulfstream reported its 4th consecutive that have come to the realization that, the wisdom of looking back to see their quarter of positive net business jet orders in in aerospace, it’s possible to improve way forward. The revival of the Q1 2010; operating margin was 16.1%, up on a legend. 2.4% points YOY venerable Twin Otter and the decision ! Bombardier reported 6 net business jet to produce the innovative Seastar Despite oft-heard rumors of the orders for the quarter ending April 30, 2010 amphibian are two recent examples. de (vs. -41 for the same period last year); book- demise of turboprop-powered aircraft, Havilland and Dornier, pioneers of to-bill ratio (net orders divided by deliveries, in units) grew from -1.0 to 0.2 YOY in Q1 2010 rugged, reliable, go-anywhere, haul- ! Worldwide pre-owned fleet available for anything, fly-anytime aircraft, are sale fell to 15.6% of the fleet in Q1 2010 renowned brand names with long, ! Canada’s real GDP growth in Q1 2010 was productive bloodlines. Now, with new 6.1% (annualized) manufacturing processes, composite ! U.S. real GDP growth was in Q1 2010 was 3.2% (annualized); 2010 forecast is 3.4% construction, glass cockpits, upgraded ! Brazil has rebounded strongly from a brief Pratt & Whitney PT6 turboprop 2-quarter recession; real GDP growth was engines, and other features, Viking Air -0.2% year-over-year in 2009; in Q4 2009, and Dornier Seaplane Company are real GDP grew at 8.4% (annualized) ! Real GDP growth in China is forecast to be poised to deliver value to a new 10.0% in 2010; in India, 8.0%

3 P/E RATIOS - trailing 12 months from FOD damage, and remove-the- BOEING Aerospace DASSAULT chocks-and-fly reliability. Recent C208 S&P 500 Industry INDUSTRY enhancements improve cabin comfort, BE AERO PREC CAST icing protection, runway distance, and Financial CAE time-to-climb. Blackhawk’s Caravan ROCKWELL COL Highlights GE STC package – including the 850 SHP EMBRAER UTC PT6A-42A engine, new cowling, and 4- HONEYWELL Sources: Reuters, Forbes, SPIRIT bladed Hartzell propeller – also enables AAR ADVFN – May 28, 2010. BOMBARDIER speeds approaching 200 knots. With GEN DYN (‘Industry’ includes both L3 numbers like these, and OEMs and FINMEC civil and defense.) ROLLS ROYCE STC providers ready to do business, new or upgraded aircraft like the - 5 10 15 20 25 30 35 40 45 Industry Summary: CURRENT AND QUICK RATIOS - most recent quarter Caravan can do wonders for the 5.0 bottom-line performance of business 4.5 4.0 and government. We remain • The 52-week average Current Ratio Quick Ratio P/E ratio of 6.5 for the 3.5 particularly impressed with the fuel 3.0 burn advantages of turboprop-powered aerospace industry has 2.5 aircraft - on shorter-haul missions, dropped year-over-year 2.0 from 10.5 in May 2009. 1.5 slightly longer block-to-block times to 1.0 move large amounts of payload at 40% 0.5 lower fuel burns is a trade-off that is • The industry’s 5-year - L3 GE BAE CAE CAE UTC UTC AAR

dividend growth rate of EADS certainly in tune with these times. SPIRIT FINMEC FINMEC BOEING S&P 500 500 S&P BE AERO GEN DYN GENDYN TEXTRON EMBRAER EMBRAER INDUSTRY INDUSTRY 4.5% is down DASSAULT PREC CAST PRECCAST GOODRICH GOODRICH

HONEYWELL BOMBARDIER ROLLS ROYCE ROYCE ROLLS In an age of value, where significantly from 11.6% COL ROCKWELL of one year ago. RETURN ON EQUITY AND ASSETS - trailing 12 months individuals, business, and governments 120% need better ROI, faster time to results, and lower life-cycle costs, aviation and • Five-year average 100% operating margins have aerospace technology are good friends. 80% Return on Equity (TTM) Return on Assets (TTM) improved over the past Off-the-shelf turboprop platforms like 60% the Cessna Caravan, Twin Otter, and 12 months, with the Beechcraft King Air are at work from current 5-year margin of 40% 12.9% up 55% from last Anchorage to Altenrhein to Abu Dhabi 20% – where short or unimproved runways May’s 8.3%.  0% L3 abound. In Asia, where most of the GE BAE CAE CAE UTC UTC AAR

-20% EADS SPIRIT FINMEC FINMEC BOEING

world’s airport investment is currently 500 S&P BE AERO GEN DYN GENDYN TEXTRON EMBRAER EMBRAER INDUSTRY INDUSTRY DASSAULT DASSAULT PREC CAST PRECCAST GOODRICH GOODRICH HONEYWELL

focused, we can also envisage runways BOMBARDIER ROLLS ROYCE ROYCE ROLLS without concrete. Protected saltwater COL ROCKWELL coastal areas – providing access to GROSS AND OPERATING MARGINS - trailing 12 months FINMEC communities, resorts, and natural DASSAULT GE resources – are set to flourish. With far BE AERO PREC CAST lower facility construction costs and S&P 500 ROCKWELL COL UTC minimal environmental impacts, a HONEYWELL EMBRAER network of aeromarine facilities and the ROLLS ROYCE TEXTRON era the Flugboot – envisaged by the BOEING GEN DYN Dornier family almost 100 years ago – AAR INDUSTRY may well be dawning.  SPIRIT GOODRICH EADS L3 BOMBARDIER -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Operating Margin Gross Margin

Rolland Vincent Associates, LLC is an aviation consulting firm. Drawing from over 25 years of aviation experience, we deliver trusted insights in market research, strategy, business and product development, industry analysis and financial modeling. We are here to help you understand customer needs and preferences, design products and services to delight your customers, and discover and seize business opportunities. We provide you with practical, intelligent solutions to unleash the power of your business and navigate for global aviation leadership.

Rolland Vincent Associates, LLC 7000 Independence Parkway, Suite 160-3, Plano, Texas 75025 USA Tel: 972-439-2069 (U.S. Central Time) [email protected] www.rollandvincent.com

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