icf.com/aviation 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 Source: CLASS BY HISTORY FLEET JET COMMERCIAL ACTIVE BACKGROUND Number of Aircraft worldwide for aircraft theneed has propelled ..Which 10,000 15,000 20,000 25,000 30,000 Airline Monitor JuneMonitor Airline 5,000 ICF proprietary and confidential. Do not copy, ordisclose. distribute, copy, not Do confidential. ICF proprietary and 0 1990 2018 1991 1992 1993 1994 1995 1996 1997 1998 Narrowbody 1999 2000 2001 Widebody 2002 2003 Regional Jet Regional 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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 . Boeing 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 .