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Why Are Airlines Leasing More Aircraft?

Mylene Scholnick, ICF Senior Advisor 30 October 2018 . Background . The Role of Operating Lessors . Rationale for Aircraft Leasing . New Chinese Lessors

Agenda

ICF proprietary and confidential. Do not copy, distribute, or disclose. Background

ICF proprietary and confidential. Do not copy, distribute, or disclose. 3 BACKGROUND Global passenger traffic has doubled every 15 years in the commercial jet era… HISTORICAL WORLD TRAFFIC (RPKS) AND GLOBAL GDP GROWTH, 1990-2017 (INDEXED 1990 = 100)

7% Financial 500 Crisis 6% September 11 450 400 5% Asian Crises 350 4% 1st Gulf War 300 3% 250 2% 200 1% 150

0% 100

-1% 50

World GDP Growth Indexed GDP Indexed RPKs

Source: ICAO; IATA Airline Industry Economic Performance June 2018; IMF, World Economic Outlook, October 2018

ICF proprietary and confidential. Do not copy, distribute, or disclose. 4 BACKGROUND ..And demand for air travel is expected to continue growing… AIR PASSENGERS ANNUAL FORECASTED GROWTH RATE

12% . Current trend in traffic growth is anticipated to 10% continue over the near term, with strong traffic 8% growth, anticipated to accelerate between 2017

6% and 2018 and slow down in 2019-2020 . Regionally, traffic growth is expected to be 4% uneven, ranging between 3.5% and 7.8% 2% through 2020. 0% . The strongest growth is predicted in Africa, Asia, 2016 2017 2018 2019 2020 -2% the Middle East, and Latin America. The overall world trend is forecasted around the 4.8% average through 2020. Global North America Europe Asia Latin America Middle East Africa

Source: IATA Passenger Forecast, 2016

ICF proprietary and confidential. Do not copy, distribute, or disclose. 5 BACKGROUND ..Which has propelled the need for aircraft worldwide

ACTIVE COMMERCIAL JET FLEET HISTORY BY CLASS

30,000

25,000

20,000

15,000

Number of Aircraft of Number 10,000

5,000

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Narrowbody Widebody Regional Jet

Source: Airline Monitor June 2018

ICF proprietary and confidential. Do not copy, distribute, or disclose. 6 BACKGROUND The worldwide demand for aircraft is anticipated to continue experiencing sound growth 2017 – 2027 AIR TRAFFIC FORECAST . Aircraft orders have created an all-time high 45,000 2017 – 2027 backlog for aircraft manufacturers. CAGR 40,000 . and Airbus have a combined backlog of Africa, 3.5% more than 12,000 aircraft, and a wait of up to 35,000 Middle East, 5.6% seven years for the most popular types.

30,000 South America, 3.6% . Need for new aircraft will vary by region. Europe, 2.5% . ICF projects that the Middle East will have the 25,000 highest growth in aircraft demand, with a CAGR of North America, 0.8% over 5% in the between 2017 and 2027 20,000 Asia Pacific, 5%

Number of Aircraft of Number . Overall world new aircraft needs will average an

15,000 TOTAL = 3.1% increase of 3.1% over the decade studied. . Boeing forecasts deliveries of 41,030 jet aircraft 10,000 (including regional jets) between 2017 and 2036, while Airbus forecasts 34,900 deliveries 5,000 (excluding regional jets) 0 2017 2027

Source: ICF analysis

ICF proprietary and confidential. Do not copy, distribute, or disclose. 7 BACKGROUND Several sources of financing will be required to meet that volume INDUSTRY AIRCRAFT DELIVERY FINANCE OUTLOOK, BOEING

$200 $189 $185 $180 $172

$160 $153 $139 $140 $122 $122 $122 $115 $120 $104 $96 24% 23% 28% $100 25% $77 26%

$80 25% Total Financing Total (in USD billions) USD (in $62 28% 30% 26% 18% 19% 34% $60 15% 20% 14% $40 15% 25% 21% 24% 28% 31% 27% 28% 33% $20 33% 33% 34% 33% 26% 15% 13% $0 8% 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F

Export Credit Bank Debt Capital Markets Cash Tax Equity Manufacturer

Source: Boeing Capital Corporation 2018 Outlook

ICF proprietary and confidential. Do not copy, distribute, or disclose. 8 The Role of Operating Lessors

ICF proprietary and confidential. Do not copy, distribute, or disclose. 9 THE ROLE OF OPERATING LESSORS Over 45% of Global Fleet Owned by Operating Lessors

. In 2017, airlines operated more than 27,000 commercial jet aircraft valued at over $696 billion (active and parked aircraft); more than 49% (by value) were owned by operating lessors . Historic aircraft operating lease penetration rate have grown from 0.5% in 1970 to approximately 41% in 2014, and is now the largest single source for financing new deliveries, at nearly 47% of the global fleet by volume . This represents an average annual growth rate for the leasing sector of approximately 15%, compared to overall fleet growth of 4% over the same period

EVOLUTION OF OPERATING LEASE PENETRATION BETWEEN 1970 AND FORECAST BY 2020

Source: Boeing Capital Corporation 2014 Outlook Note: Active fleet includes narrowbody, widebody and regional jet aircraft in commercial service. Excludes Russian manufactured aircraft

ICF proprietary and confidential. Do not copy, distribute, or disclose. 10 THE ROLE OF OPERATING LESSORS The aircraft leasing industry has grown significantly in the past five years ESTIMATED MARKET VALUE OF LEASED AIRCRAFT

400

350 . Since 2014, the value of the portfolio of leased aircraft across the industry has grown at over 15% CAGR, 300 equivalent to a doubling of the size of the industry every 5 years 250 . This increase has been driven both by a continuous increase in the worldwide aircraft fleet and by the increase of the proportion 200 of leased aircraft . The number of large lessors, with a fleet value of over $1 150 billion, has also grown to become more than double that of 10 years ago. 100

50

- 2014 2015 2016 2017 2018

Source: CAPA; ICF Analysis

ICF proprietary and confidential. Do not copy, distribute, or disclose. 11 THE ROLE OF OPERATING LESSORS This growth has been facilitated by the arrival of new entrants TOP LESSORS BY NUMBER OF CURRENT AIRCRAFT

1,400 $40 Aircraft New Lessors (<10 yrs) Value 1,200 $35

$30 1,000 $25 800 $20 600

$15 Current Aircraft Current 400 $10 Billions Value, Aircraft

200 $5

0 $0

Source: CAPA, ICF Truebook, ICF Analysis

ICF proprietary and confidential. Do not copy, distribute, or disclose. 12 THE ROLE OF OPERATING LESSORS Leases are dominant for narrowbody jets but have also penetrated the widebody and regional jet segments VALUE DISTRIBUTION OF GLOBAL JET FLEET BY AIRCRAFT TYPE AND OWNERSHIP (# OF AIRCRAFT)

Narrowbody Widebody RJ 100%

90%

80% 8,125 2,606 Other 70% 3,779

60%

50%

Ownership 40% Leased 30% 8,554 20% 2,336 1,843

10%

0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Aircraft Type

Source: ICF Analysis; CAPA, November 2017 Note: Includes narrowbody, widebody and regional jet aircraft in commercial service or inactive.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 13 THE ROLE OF OPERATING LESSORS Regional differences: Latin America has the largest proportion of leased aircraft

Region Owned Leased Fleet Fleet . Latin American airlines have the largest proportion of Latin America 41% 59% leased aircraft, with 59% of their total fleet on operating

Europe 48% 52% lease . Europe also has a significant level of penetration, driven by Middle East 58% 42% a large number of LCCs

Asia/Pacific 58% 42% . As North American airlines have a wider access to Capital Markets, the proportion of leasing is the lowest in the world Africa 70% 30%

North America 70% 30%

Source: ICF Analysis; CAPA Fleets, November 2017 Note: Includes narrowbody, widebody and regional jet aircraft in commercial service or inactive.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 14 Rationale for Aircraft Leasing

ICF proprietary and confidential. Do not copy, distribute, or disclose. 15 RATIONALE FOR AIRCRAFT LEASING Attractive to various stakeholders

TO AIRLINES Financial Benefits: . Low ownership costs/ risks – No capital outlay – No residual value risk . Higher liquidity availability and cash preservation (sale-leasebacks on unencumbered aircraft) – Avoid pre-delivery payments for new aircraft – Capital freed to finance business and growth . Diversification of funding Operational Benefits: . Fleet planning flexibility — Airlines can meet short-term demand or variations . Access to key slot deliveries from lessors’ order book and flexibility in deliveries . Access to new technology aircraft with more fuel-efficient engines

TO INVESTORS . Predictable cash flows . Stable asset value over time — dominated by young, narrowbody fleet . Availability of aircraft debt financing . High risk-adjusted returns — diversified customer base and generally well managed fleet portfolio

ICF proprietary and confidential. Do not copy, distribute, or disclose. 16 RATIONALE FOR AIRCRAFT LEASING Airlines — The Growth of Low-Cost Carriers (“LCCs”) — a Large Consumer of Operating Leases

LCC SHARE BY WORLD REGION, 2017

Europe 42% 58% . LCC penetration varies depending on region, but has

North America 33% 67% reached about a third or more of the airlines in North America, Latin America and Europe Latin America 32% 68% . LCCs are often startup airlines with little capital available

Asia/Pacific 28% 72% and/or no credit history to benefit from lending opportunities or capital markets. Middle East 23% 77% . With the reduced availability of export credit financing, many LCCs have turned to Sale Lease-Backs (SLBs) to Africa 9% 91% finance new deliveries of aircraft. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Low Cost Carrier Full Service Carrier

Source: PaxIs/OAG; ICF Analysis, 2017 Note: Includes in-service passenger narrowbody, widebody, and regional jets. Excludes aircraft with unknown operator region.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 17 RATIONALE FOR AIRCRAFT LEASING SLBs have allowed many LCC to grow their fleet

CURRENT AND HISTORIC FLEET ON SLB (30 OR MORE), 2017

120 . In trying to avoid pre-delivery payments that may be 100 difficult to finance, airlines sell their positions earlier in the delivery process. 80 . While still placing volume orders to benefit from scale and reduced pricing, SLBs have allowed some airlines to raise 60 funding and make trading gains as they sell the aircraft upon delivery to lessors. 40 . Without the demand of the SLBs market, many LCCs would not have been able to cope with fast growth and 20 benefit from new and efficient modern aircraft. New LCCs such as Lion Air, VietJet, Wizz Air, Indigo, Volaris, and Air 0 Asia are among the top airlines leasing aircraft.

Source: Airfinance Journal, December 2017 Note: Count includes all historic transactions for aircraft, which may be currently retired.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 18 RATIONALE FOR AIRCRAFT LEASING Investors have supported lessors with large volumes of equity and debt, seeing attractiveness in aircraft leasing PREDICTABLE CASH FLOWS . Competition: Historically less competitive industry compared to airlines, even though competition is on the rise in recent years . Nature of assets: Subject to long-term lease. Not as impacted by short-term changes such as fuel price changes and passenger demand fluctuation, as in the case of airlines, providing stability.

STABLE ASSET VALUES OVER TIME . In general, lessors’ fleets are dominated by newer, fuel-efficient aircraft that are still in production, such as the Airbus A320 and Boeing 737NG. . These have strong market penetration and a broad base of operators with good geographic distribution. Consequently, liquidity and value retention for these aircraft tend to be better than older, out-of-production, and technically inferior types

AVAILABILITY OF AIRCRAFT DEBT FINANCING FOR LESSORS . Aircraft lessors are able to secure long-term debt financing, given the industry’s operating cash flows, stable risk-adjusted returns, and superior asset value retention over time. . Lenders take comfort from the lower risk profile presented by lessors with a diversified pool of lessee credits, together with the underlying mobility of aircraft assets, which lessors can redeploy and re-lease to other airlines, including those in other geographic regions, should the need arise.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 19 RATIONALE FOR AIRCRAFT LEASING Sound risk-return profile of leasing, relative to other public and private alternatives, make it attractive to equity investors, principally via investment in lessors

RISK VS. REWARD 2007-2016 (ESTIMATED)

16%

14% Small-cap Equities

12%

10% Mid-cap Equities International Equities 8% Airline Stock Aircraft Leasing Commercial Real Estate

6% Historical Historical returns

4% US CPI

2% Risk-free assets High-yield Bonds IG Bonds 0% 0% 5% 10% 15% 20% 25% 30% 35% Standard deviation

Source: Radar Asset Management LLC

ICF proprietary and confidential. Do not copy, distribute, or disclose. 20 RATIONALE FOR AIRCRAFT LEASING Many new lessors have been established by management teams, backed by equity REPRESENTATIVE START-UPS

Year Startup Management Equity Portfolio Focus 2017 Airborne Cap. Sundaram/ Dooley TBD TBD

2017 SkyWorks Landess TBD TBD

2017 Altavair Rimmer TBD TBD

2017 Avi8 Sisson / Wegel / Tingey TBD TBD

2016 Chorus Aviation Ridolfi Fairfax Financial Regional

2016 TruNoord Turner/ Tieleman Bregal/ Blackrock/ Aberdeen Regional

2016 Cross Ocean Wilson Stone Point Capital Mid/End

2015 Goshawk Kelly/Carlisle New/ Mid

2015 Elix Panagopoulos Oaktree Turboprop

2014 Accipiter Sheridan Cheung Kong Holdings New/Mid

2013 Waypoint Washecka MSD/Cartesian Helicopter

2012 Merx Aviation Rothschild/Van Dorn Apollo Investment Corp Diversified

2010 Jackson Square Wiley Oaktree New SLB

2010 Slattery Cinven/CVC/Oak Hill/GIC New SLB

2010 AerSale Finazzo/Nichols Leonard Green End of Life

2010 Milestone Santulli Jordan Co./Nautic Helicopter

+Others

Representative Startups

ICF proprietary and confidential. Do not copy, distribute, or disclose. 21 RATIONALE FOR AIRCRAFT LEASING Among these new entrants, Chinese lessors have played a significant role and now have strong presence in the top 10 lessors worldwide

TOP LESSORS BY NUMBER OF CURRENT AIRCRAFT

1,400 $40 Aircraft Chinese Lessors Value 1,200 $35

$30 1,000 $25 800 $20 600

$15 Current Aircraft Current 400 $10 Billions Value, Aircraft

200 $5

0 $0

Source: CAPA, ICF Truebook, ICF Analysis

ICF proprietary and confidential. Do not copy, distribute, or disclose. 22 New Chinese Lessors

ICF proprietary and confidential. Do not copy, distribute, or disclose. 23 NEW CHINESE LESSORS Chinese lessors have now reached the critical mass to compete with mature lessors, and strong order books sets expectation for continuing growth along with the Asian air transport market CHINESE LESSORS

Lessor Fleet Units Value Order Units Value Total Units Value HNA/Avolon/CIT 605 $ 21.33 319 $ 20.26 924 $ 41.59 BOC Aviation 349 $ 15.58 157 $ 8.94 506 $ 24.52 ICBC Leasing 326 $ 15.22 159 $ 6.80 485 $ 22.01 CDB Leasing 192 $ 7.22 184 $ 9.79 376 $ 17.01 China Aircraft Leasing (CALC) 108 $ 3.95 210 $ 9.96 318 $ 13.91 BoCom Leasing 112 $ 4.75 0 $ - 112 $ 4.75 Goshawk 104 $ 4.42 0 $ - 104 $ 4.42 AVIC International Leasing 23 $ 0.64 45 $ 2.15 68 $ 2.78 China Merchants Bank (CMB) 54 $ 2.73 0 $ - 54 $ 2.73 Agricultural Bank of China (ABC) 0 $ - 65 $ 2.60 65 $ 2.60 Accipiter 61 $ 1.96 0 $ - 61 $ 1.96 China Construction Bank (CCB) 13 $ 0.65 26 $ 1.04 39 $ 1.69 China Aviation Supplies Holding Company (CASC) 0 $ - 15 $ 1.28 15 $ 1.28 Dragon Aviation Leasing 29 $ 0.91 0 $ - 29 $ 0.91 Minsheng Financial Leasing 27 $ 0.89 0 $ - 27 $ 0.89 Ping An Leasing 4 $ 0.46 0 $ - 4 $ 0.46 SkyCo International Finance Leasing 8 $ 0.35 0 $ - 8 $ 0.35 China Everbright Financial Leasing 4 $ 0.15 3 $ 0.14 7 $ 0.30 China World Aviation Leasing 3 $ 0.05 0 $ - 3 $ 0.05 Asia Pacific Aviation Leasing 1 $ 0.05 0 $ - 1 $ 0.05 Comsys Aero Leasing 1 $ 0.04 0 $ - 1 $ 0.04 Source: CAPA; ICF Analysis; ICF Truebook

ICF proprietary and confidential. Do not copy, distribute, or disclose. 24 NEW CHINESE LESSORS The Chinese lessor landscape has seen several new entrants grow and proliferate over the past few years TOP CHINESE LESSOR FLEETS AND MARKET SHARE MAIN CHINESE LESSOR PROFILES

700 . Launched in 2010, Avolon became the world’s third largest lessor after 30% its acquisition by HNA Group in 2016 and its merger with CIT in 2017. 600 As of today, Avolon has 156 customers in 64 countries.

500 . In 2006, Bank Of China acquired Singapore Aircraft Leasing to form

400 17% BOC Aviation, a now top 10 aircraft lessor which IPOed in 2016. As of December 2017, BOC Aviation had more than 150 airlines customers in 16% 52 countries. 300

9% 200 . ICBC Aviation is the leasing arm of Industrial and Commercial Bank of China. With a fleet in service exceeding 300 units, ICBC is among the 6% 5% 5% top 3 lessors in China, serving 69 customers all over the world. 100 3% 3%

0 . With some of the largest order books in China, CDB and CALC are Avolon BOC ICBC CDB Bocomm CALC Goshawk Accipiter CMB lessors expanding operations rapidly, working with 52 and 28 lessees Aviation Leasing Leasing Leasing respectively, skewed towards Asia Pacific. Narrowbody Jet Regional Jet Widebody Jet

Source: CAPA; Companies websites; ICF Analysis

ICF proprietary and confidential. Do not copy, distribute, or disclose. 25 NEW CHINESE LESSORS The quickly growing Asia-Pacific region (including China) concentrates more than 60% of the fleet leased by Chinese lessors

Europe China

20% North America Middle East 33% 8% 3%

1% 28% Asia Pacific Latin America (China exc.) Africa 7%

Source: CAPA fleets as of April 2018. Note: Includes In Service and Inactive Narrowbody, Widebody and Regional Jets

ICF proprietary and confidential. Do not copy, distribute, or disclose. 26 NEW CHINESE LESSORS Chinese lessors have grown their market shares domestically but are starting to expand their footprint in the broader region PENETRATION OF CHINESE LESSORS AMONG MAJOR CHINESE PENETRATION OF CHINESE LESSORS AMONG MAJOR ASIA PACIFIC AIRLINES (% FLEET ON LEASE) AIRLINES (% FLEET ON LEASE)

China Southern Airlines IndiGo 2018 2018 China Eastern Airlines Garuda Indonesia 2013 2013 Jet Airways Air China Malaysia Airlines Hainan Airlines AirAsia Shenzhen Airlines Lion Air Xiamen Airlines Air India Sichuan Airlines Virgin Australia Shandong Airlines EVA Air

Shanghai Airlines Asiana Airlines

Tianjin Airlines Philippine Airlines

Spring Airlines Citilink

Beijing Capital Airlines Cathay Pacific

VietJet Air Juneyao Air 0% 25% 50% 75% 100% 0% 25% 50% 75% 100% Average China owned lessor penetration among major Chinese Average China owned lessor penetration among all Asia Pacific airlines in 2018: 54% of total fleet on lease (29% in 2013) airlines (excl. China) in 2018: 25% (15% in 2013)

Source: CAPA fleets as of April 2018 Note: Includes In Service and Inactive Narrowbody, Widebody and Regional Jets.

ICF proprietary and confidential. Do not copy, distribute, or disclose. 27 THE NEED FOR SCALE AND GROWTH A large number of outright lessor acquisitions have taken place REPRESENTATIVE LARGE LESSOR MERGERS/ACQUISITIONS

Year Target Acquirer Seller Portfolio Value Portfolio Focus 2018 Sky Aviation Leasing International Goshawk Aviation SKY Leasing ~9.1B Mid/Old Limited 2017 AWAS DAE Terra Firma -$14B New/ Mid 2016 CIT Aerospace HNA/Bohai/Avolon CIT ~$10B New/Mid 2015 Milestone GECAS Jordan Co. ~$3.0B Helicopter 2015 EQT Private ~$3.3B Turboprop 2015 Avolon HNA/Bohai Public ~$8.0B New 2014 AerGo CarVal Private N/A Mid/Old 2013 ILFC AerCap AIG ~$40B New/Mid/Old 2012 Jackson Square MUFJ Oaktree ~$4.0B New 2012 RBS Aviation Sumitomo Mitsui RBS ~$7.3B New/Mid 2010 Genesis AerCap Public ~$1.8B New/Mid 2007 Pegasus AWAS Oaktree ~$5.0B New/Mid 2007 Pembroke Standard Chartered Medulla ~$0.5B New/Mid 2006 AWAS Terra Firma Morgan Stanley ~$2.5B New/Mid 2006 GATX Air Macquarie/Och Ziff GATX ~$1.5B New/Mid 2005 Debis Cerberus Daimler ~$1.3B Mid +Others Representative large lessor mergers/acquisitions

ICF proprietary and confidential. Do not copy, distribute, or disclose. 28 Let’s get started.

For questions regarding this presentation, please contact:

Mylene Scholnick ICF Senior Advisor [email protected]

ICF proprietary and confidential. Do not copy, distribute, or disclose. 29