Annual Report & Accounts 2019 2 Contents ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL 3 REPORT 2019 Highlights 5 Chairmanʼs Statement 6 Chief Executiveʼs Statement 8 Financial Review 12 Q&A: Aircraft Trading 16 DIRECTORSʼ REPORT AND CONSOLIDATED FINANCIAL STATEMENTS 2019 Directors and Other Information 24 Contents Directorsʼ Report 25 Statement of Directorsʼ Responsibilities 28 Independent Auditorsʼ Report 29 Consolidated Statement of Profit or Loss and Other Comprehensive Income 31 Consolidated Statement of Financial Position 32 Company Statement of Financial Position 33 Consolidated Statement of Changes in Equity 34 Company Statement of Changes in Equity 35 Consolidated Statement of Cash Flows 36 Company Statement of Cash Flows 37 Notes to the Consolidated Financial Statements 38 Acronyms and Abbreviations 77 ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL 4 Through active fleet management, we maintain one of the youngest fleets in the industry. 2019 Highlights ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL 5 OUR RATING OUR FLEET OUR PEOPLE A-/A- 720+ 185+ Fitch and S&P ratings, Our fleet comprises professionals working the highest rated of 720+ owned / worldwide. dedicated aircraft managed / committed leasing company in aircraft. the industry. OUR FLEET OUR TRADING OUR CUSTOMERS 4.2 400+ 150+ Years weighted c. 400+ aircraft sold to customers in over 50 average age of our 100+ investors. countries worldwide. fleet. We adopt a multi-layered approach to risk management, understanding our customers and their markets. Our shareholding base sets us apart by giving us one of the broadest product offerings in this industry. Our consistent, disciplined strategy has served us very well, allowing us to deliver consistent returns to our business and shareholders. ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL Figures correct as 31 March 2019 6 Chairman’s Statement I am pleased to report another strong year for the business in which we saw a number of significant developments for SMBC Aviation Capital including a $1 billion injection of investment ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL capital from our shareholders, a ratings upgrade to A- and an aircraft order for 65 A320neo family aircraft with Airbus. Shinichi Hayashida Chairman Our success is based on the strength of 7 our people and the exceptionally close relationship with our shareholders. That mutually beneficial relationship becomes stronger from year to year. On the one hand, SMBC Aviation Capital continues to deliver a strong return on investment to our shareholders while our business also benefits from the capital strength and financial support of Sumitomo Mitsui Financial Group and Sumitomo Corporation. We are engaged in a global business where the concept of Having a global bank as a shareholder normal business hours does means we can engage with the market not exist and our success is and raise capital very efficiently and at based on the dedication and attractive rates, which differentiates our business and gives us a competitive edge. commitment of our team. The backing of our shareholders also supports our strategy as we continue to diversify our funding base. From a customer perspective, it means I wish to express my gratitude to all of we are in a position to offer a full range of our employees who work hard to bring aviation finance products. An important transactions to a successful conclusion. part of our business is to work together We are engaged in a global business where with our shareholders who promote the the concept of normal business hours does business out of Japan, including JOL and not exist and our success is based on the JOLCO products. Deals of note during the dedication and commitment of our team. year include Lufthansa, Copa Airlines, ANA and Emirates. For the future, we may be facing into a more turbulent economic and financial While we secured and delivered a number environment, but I am confident that the of significant deals this year, the period fundamental strength of our business, the was also marked by some challenges in the strength of our team and our relationship industry, in particular the grounding of the with our shareholders will see us through Boeing 737 MAX fleet. We continue to work these challenges. closely with Boeing and our customers as we await the aircraftʼs return to service over the coming months. Overall, the industry fundamentals remain healthy. Anticipated interest rate increases failed to materialise while emerging markets have proven to be quite resilient in the face of some economic turbulence as a result of trade disputes and other issues. ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL Mature markets also continue to grow steadily, albeit at a slower pace. 8 This was another year of record profits for SMBC Aviation Capital, continuing a trend which we have maintained over the past 18 years. Chief Executive’s ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL Review Peter Barrett Chief Executive Officer This record performance has been achieved This year, our shareholders invested $1 9 thanks to a number of factors including the billion in new capital into the business. strength we gain from the support of our We also continued to diversify our funding shareholders, our highly experienced and base by raising a further $500m on the dedicated team as well as a combination bond markets on very attractive terms. of a broad spread of customers across The issuance was 4.7x over subscribed, the globe and an actively managed and demonstrating the marketʼs confidence in balanced aircraft portfolio. our strategy. Of fundamental importance is our financial This high level of confidence in our strength and longevity in the aircraft business by investors and lenders was leasing sector. The airline operating further reflected in the upgrading of our environment and wider financial markets credit rating to A- by S&P. This alongside have been positive for the past number of our rating of A- from Fitch means that years, but it is likely that this will change in we have the strongest credit rating of any the future. For this reason, we have adopted dedicated aircraft leasing company. a strategy of strengthening our capital and asset base to ensure we will continue to thrive in all market conditions. Our diverse customer portfolio is a source of We have created strong bonds strength. Customers are spread across Asia, with our global network The Americas and Europe with very low levels of concentration among individual of customers, built on the lessees. New customers and deals of note premise that the customer during the year included Icelandair, Viva always comes first. Aerobus, Southwest Airlines and Thai Airways. The depth of the relationships we have This financial strength will be a key developed with our customers is key differentiator for our business as will the to our business. We pride ourselves on quality of our portfolio of aircraft. Our understanding their business and their portfolio now comprises 236 owned aircraft particular needs. Those needs vary with a further 179 managed for investor depending on geographic region and customers. Our policy of combining market served and we endeavour to offer proactive aircraft trading with the purchase the solutions required. of the latest technology, most fuel-efficient aircraft has resulted in our fleet being We have created strong bonds with our one of the youngest in the world with a global network of customers, built on the weighted average age of 4.2 years, down premise that the customer always comes from 4.5 years at the end of March 2018. first. Critically important in building those Our strategy has resulted in increasing relations has been the quality and integrity the proportion of new technology aircraft of our team, many of whom have been in the portfolio to 37%, a trend which will with the company since we started out continue in the coming period. 18 years ago. We have been through good times and challenging times together and Aircraft trading is a critical element of our ANNUAL REPORT AND ACCOUNTS REPORT ANNUAL have grown stronger as a result. The pool strategy and ensures our continued success. of knowledge and expertise in aviation SMBC Aviation Capital, has been and finance accumulated over the years is of continues to be, one of the most active and incalculable value. successful traders in the market today and, working with our partners around the world, we sold 60 owned and managed aircraft during the year. We also signed letters of intent for the sale of a further 14 aircraft. 10 Chief Executive’s Review CONTINUED In terms of aircraft acquisition, we cost and environmental factors. While extended our existing order with Airbus there remains no viable alternative to the for A320neo family aircraft with 65 new continued use of fossil fuels in aviation, aircraft being delivered between 2023 and the requirement for the industry to reduce 2025. its environmental impact in terms of emissions per passenger mile travelled will We placed 47 aircraft from our order book only intensify. during the year and we signed sale and leaseback contracts for a further 40 aircraft. The best hedge against fuel price volatility and environmental impact is to have the The industry does face challenges, most fuel-efficient aircraft possible. Our however. Of critical importance over the latest technology aircraft, which have an next number of months is to ensure that average age of just 1.3 years, are up to 15% the Boeing 737 MAX aircraft safely re-enters more fuel efficient than their forerunners. into service. This has been a challenging period for both Boeing and our customers In terms of our people, we work hard to and we are now focused on ensuring that ensure that our team blends youth with we effectively manage the backlog of delays experience in order to ensure we are once the MAX is certified to fly by the continually exposed to new ideas and fresh regulatory authorities.