Engines - Managing The Asset and Residual Values

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1 Engines - Managing The Asset and Residual Values David Tokoph Vice President Valuations and Technical Analysis October 20,2011 washington frankfurt tokyo 1

2 Introduction About MBA Where the Value in Engines Lies Retaining Value Engine Life Cycle Next Generation Engines Forecasting Engine Values 2

mba Background mba is an international consulting firm with offices in the US, Europe, and a marketing office in Tokyo, providing a broad spectrum of aviation services to airlines, governments, and

3 mba Background mba is an international consulting firm with offices in the US, Europe, and a marketing office in Tokyo, providing a broad spectrum of aviation services to airlines, governments, and the financial community. Consulting Services Include: Airline Consulting Financial Consulting Asset Management Washington DC Frankfurt Tokyo Valuations Technical / Audit Services Market Evaluation 3

4 The 2012 Future Aircraft Values The red books are going through some exciting changes: + Addition of engine values + Addition of C-Series and SSJ100 4

5 Where is the Value in Engines? An engine has two distinct value areas. -Life Limited Parts -Performance 5

6 Where is the Value in Engines? Life Limited Parts (LLP s) - Commercial Engine LLP disk stacks can range from $500,000 to upward on $5,000, Factors affecting LLP Cost. - Position in Life-Cycle - Engine Availability. 6

Engine O/H Status Where is the Value in Engines. - Engine performance restorations for commercial engines have a similar cost range as LLP s, $500,000 to upwards of $5,000,000.

7 Engine O/H Status Where is the Value in Engines. - Engine performance restorations for commercial engines have a similar cost range as LLP s, $500,000 to upwards of $5,000,000. -Engine Overhaul costs multiple factors such as: -Operation of the Engine, Max power requirements, etc. -Operating conditions. -Segment lengths. -Operators Maintenance Program. 7

8 Protecting Value Leases Return Conditions Musts Beyond Just Airworthy - Maximum Hours Since Shop Visit - Minimum LLP requirements. - Minimum Performance Margins - Engine Shop Visit Reserves - FAA or EASA Requirements - Engine Records (Back to Birth) 8

9 Protecting Value PMA vs. OEM -First PMA issued by FAA in 1955, over fifty years later the debate continues. -No concrete statistical evidence causing safety concerns, -Private partnerships now being struck between airlines and PMA Manufacturers. -PMA acceptance and future. 9

Mature In service with second tier operator.

10 Engine Life Cycle New Engine Values In Service with first tier operator, delivered on new airframe. Mature In service with second tier operator. Sunset In service with tertiary operator, nearing end of useful Years Since EIS 10

11 Engine Life Cycle 6.00% 5.00% 4.00% YoY % Decrease in FBV New Aircraft/Engine (YOM 2011) CFM56-7B % 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% Source: MBA Future Aircraft Values 11

12 Engine Life Cycle 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% YoY % Decrease in FBV - Mature Aircraft/Engine (YOM 1999) CFM56-3B1 Source: MBA Future Aircraft Values 12

13 Engine Life Cycle 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% YoY % Decrease in FBV Sunset Aircraft/Engine (YOM 1988) JT9D-15 Source: MBA Future Aircraft Values 13

14 Engine Values How Do Manufacturers affect Values? 14

15 Next Generation Engines Pratt & Whitney GTF -Geared Turbo Fan -New Technology -Lower Fuel Burn -Lower Emissions -Quiet Engine -In Flight Testing -EIS with C-Series

16 Next Generation Engines CFM LEAP-X -Proven Reliability -Incorporation of Composites -Stronger Core Materials -Low emissions -EIS with COMAC,

17 Next Generation Engines Pratt & Whitney or CFM? 17

18 Forecasting Engine Values Projected Aircraft Retirement A320 NEO EIS 737 MAX EIS A Source: MBA Future Aircraft Values 18

19 Forecasting Engine Values Classic Historical Market Value 737 NG Program Launch First 737 NG Delivered (YOM 1992) (YOM 1988) (YOM 1984) Source: MBA Future Aircraft Values 19

20 Forecasting Engine Values Boeing v. Airbus Active Fleet and Backlog Forecasted 20 Year Aircraft Requirement in Pax Range A A MAX A320 NEO A A320 Classic Family 737NG A320 Family 737 Family Airbus Backlog Boeing Backlog Source: ACAS, Boeing, Airbus- August

21 Forecasting Engine Values Source: Airbus August

22 Forecasting Engine Values How will current generation of engine values perform? For current generation A320 engines: V2500 will decrease in value 2-7% year over year for the next 5 years. V2500 projected to stabilize between 1.0%-2.0% value decline YoY after 7-9 years. CFM56-5B will experience a more stable decline in value (0.5%- 1.0% YoY) for the next 6-8 years. CFM56-5B projected to begin to decrease (2.0%-3.0% YoY) 7-9 years from now. 22

23 Questions? washington frankfurt tokyo 23

An Engine Manufacturer View Air Finance Journal Financing & Investing in Engines Hamburg Roadshow

An Engine Manufacturer View Air Finance Journal Financing & Investing in Engines Hamburg Roadshow The information in this document is CFM Proprietary Information and is disclosed in confidence. It is the