IATA Maintenance Cost Conference The financial impact of extending or reducing a lease. 24 September 2015 Miami, Florida

IATA Maintenance Cost Conference The financial impact of extending or reducing a lease 24 September 2015 Miami, Florida

Index Introduction SGI Aviation Leasing landscape Maintenance reserves Effects on maintenance cost - Extending or reducing the lease term - Engine maintenance cost - Other cost Conclusions Questions 1

SGI Aviation Who are we? SGI Americas Technical services Engine services SGI Amsterdam Asset management Aircraft & Engine technical services Business jets Consulting Regulatory services 37% Airlines Client base 150+ Management 63% Lessors & financiers Services Technical services Engine management Asset management Consulting services 2014 Engagements SGI Singapore Aircraft & Engine technical services Business jets 25+ aircraft under management Annual Pre purchase Valuation Redeliveries 41 32 50 40 4 SGI has offices located in Amsterdam, Singapore, Guernsey and New York. 45+ Over 45 experts, located on almost all continents 15 Local experts in 15 countries who speak the language & know the culture 100+ More than 100 inspections performed, including 40 aircraft redeliveries in 2014 150 Over 150 engines inspections, including management of 20 shop visits 7,500 More than 7,500 inspection days performed in 2014 2

Initial lease term The lease term has increased slowly, on average, over the last two decades Duration (years) 9 8 7 6 5 4 3 Initial lease term world fleet average lease term 6,2 5,9 5,7 5,6 4,8 4,8 4,7 6,2 5,4 5,5 +3% 5,7 6,4 5,6 6,1 5,7 5,7 6,8 7,3 7,3 9,0 Initial lease terms have varied greatly over the years Overall the term has increased slightly in the last two decades Airlines are more risk averse, usually opting for a shorter lease term Lessors prefer a longer lease term, lowering remarketing and associated movement cost 2 1 The historical average duration for the first lease for the world fleet is roughly 6 years 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Ascend database 4

Different lease terms Wide body aircraft typically have longer lease terms American Airlines 11.9 years Emirates Airline 10.1 years Air China 12.0 years Singapore Airlines 8.7 years easyjet 8.1 years Ryanair 7.0 years AirAsia 5.3 years 2010-2015 Leased aircraft Aircraft type Average of lease period (year) Leased amount Year of first delivery A380 11.8 11 2007 787 11.2 17 2011 777 9.9 44 1995 A330 8.4 110 1994 747 4.2 16 1970 A340 3.8 8 1993 767 3.5 50 1982 737 (NG) 9.0 395 1997 A321 9.3 109 1994 A320 7.6 411 1988 A318 6.6 30 2003 A319 5.7 103 1996 757 3.9 20 1982 Source: Ascend database Note: Situation as of 01 September 2015 5

Average lease rates Lease rates largely depend on supply and demand and also follow macro economic developments During times of aircraft shortages, lease terms and lease rates will increase This is further influenced by global GDP growth Airlines may not always be in a position to negotiate the lease term that best fits their operation The large fluctuations in lease rates may also result in airlines having pay an additional premium when extending the lease term Lease rate US$ x (1000) 480 460 440 420 400 380 360 340 320 300 280 260 240 220 Tech bubble, 9/11 Ryanair order Hurricane Katrina Fuel price spike Economic crisis Announcement of A320 NEO Monthly lease rates 12% Airbus A320-200 Boeing 737-800 CPI 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% CPI 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: SGI Aviation internal database, Ascend database, World Bank 6

Lease term Airlines typically use a sophisticated decision making model to determine their requirements Negotiation the initial lease term and any possible extensions requires airlines to look at all influencing factors Operating cost (fuel) Aircraft Availability Lease rates AIRCRAFT LEASE Commercial requirements (new routes) Aircraft life cycle (upcoming maintenance) Upgrades/ Modifications Determining the effect of each influencing factor requires extensive knowledge and expertise, which airlines sometime lack Some elements can be determined relatively easily, whilst others are much more subjective The complexity of the lease agreement, associated maintenance reserve mechanisms and redelivery conditions make it difficult to determine the influence of major maintenance items The lease duration is typically centred around the major maintenance events 7

Maintenance reserves What are maintenance reserves? Maintenance reserves are a pro-rata distribution of cost over the maintenance interval, usable for the various operators of the aircraft Maintenance reserves are paid on a monthly basis and reduce the lessor s exposure to unfunded maintenance events in case of an airline bankruptcy Maintenance reserves accumulate over time and are reimbursed to the airline once the maintenance event has taken place - Reimbursement is limited to total accumulated maintenance reserves - Shortfalls are funded by the airline - Surplus is typically not returned to the airline Maintenance reserves cover all major maintenance events; airframe heavy check, LDG overhaul, overhaul and LLP replacements and engine performance restoration First operator Second operator Third operator Accumulated Maintenance Reserve 6 years check 9

Main elements How is it calculated? Maintenance Reserve Calculation Challenge Airframe heavy check Uncertainty over the heavy check cost. Cost can be difficult to predict if the equipment is mature, in aging aircraft programs or when checks are customized Landing gear Overhaul interval is typically calendar based or cycle based. Prediction is relatively accurate Engine performance restoration Performance restoration cost and mean time between removal is heavily dependent on the type of operation, operating environment and engine maturity LLP replacement Predictable, little to no uncertainty overhaul Overhaul cost and mean time between removal is dependent on type of operation and operating environment 10

Maintenance reserves How does this mechanism effect the airline? A320 CFM56-5B 737-800 CFM56-7B Maintenanc e Reserve Event Cost Interval Full life Typical rate Maintenance Reserve Event Cost Interval Full life Typical rate 6Y Check $930,000 72 Mth $930,000 $12,917 12Y Check $730,000 144 Mth $730,000 $5,069 Nose Gear $145,000 120 Mth $145,000 $1,208 LH Gear $165,000 120 Mth $165,000 $1,375 RH Gear $165,000 120 Mth $165,000 $1,375 overhaul $260,000 5000 HR $260,000 $52 Engine overhaul $2,900,000 25000 FH $5,800,000 $232 Engine LLPs $2,981,014 Variable $5,962,028 Variable Source: SGI Aviation internal database Note: All figures are indicative Total maintenance value $12,524,028 8Y Check $550,000 96 Mth $550,000 $5,729 10Y Check $400,000 120 Mth $400,000 $3,333 12Y Check $600,000 144 Mth $600,000 $4,167 Nose Gear $103,000 120 Mth $103,000 $858 LH Gear $103,000 120 Mth $103,000 $858 RH Gear $103,000 120 Mth $103,000 $858 overhaul $257,000 5000 HR $257,000 $51 Engine overhaul $2,700,000 27000 FH $5,400,000 $200 Engine LLPs $2,901,860 Variable $5,803,720 Variable Total maintenance value $13,319,720 11

Typical redelivery condition (Narrow Body) Lease extensions provide the airline with the opportunity to re-negotiate redelivery conditions OTHERS Strict requirements on documentation and certification AIRFRAME Clear of all tasks not less than 24 months, 6,000 Flight Hours and 4,500 Cycles. No more than 2,000 Hours since last overhaul or heavy repair LANDING GEAR No less than 24 months or 2,000 FC remaining ENGINES & LLPs A minimum of 24 months, 6,000 flight hours and 4,500 cycle until the next Engine Performance Restoration At least 3,000 Flight Cycles remaining 13

Maintenance life cycle With an average lease term of 7.6 years, airlines are typically forced to perform an expensive engine shop visit US$ (x1000) 6.000 Average lease term (7.6) Mandatory clearance period as per lease agreement 4.500 3.000 1.500 C check 6Y check 12Y check LDG Engine RP Engine LLPs 6Y Check Engine Performance Restoration LDG 12Y Check Engine Performance Restoration Criteria: CFM56-5B equipped Assume the aircraft is operating 5 flight cycles per day Non equalized/escalated maintenance program (MPD) North American or European climate (non-harsh climate) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: SGI Aviation internal database, industry data Note: All figures are indicative 14

Lease-extend scenario Extending 2-year lease term adds on, LDG and 12Y check cost US$ (x1000) 6.000 Average lease term (7.6) 9.6 Mandatory clearance period as per lease agreement 4.500 3.000 C check 6Y check 12Y check LDG Engine RP Engine LLPs Engine Performance Restoration Engine Performance Restoration 2 year increase in lease term Add-on cost - overhaul - LDG overhaul 12Y Check - 12Y-check 1.500 6Y Check LDG 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: SGI Aviation internal database, industry data Note: All figures are indicative 15

Maintenance life cycle With an average lease term of 9.9 years, airlines are typically forced to perform an expensive engine shop visit US$ (x1000) 9.000 Average lease term (9.9) Mandatory clearance period as per lease agreement 7.500 6.000 4.500 3.000 1.500 0 C check 8Y check LDG Engine RP Engine LLPs 1 2 3 4 Engine Performance Restoration 5 6 7 Engine Performance Restoration 8Y Check 8 9 LDG 10 Engine Performance Restoration 11 12 13 14 15 Criteria: GE90-115B equipped Assume the 777 is operating 1.7 flight cycles per day Non equalized/escalated maintenance program (MPD) North American or European climate (non-harsh climate) Source: SGI Aviation internal database, industry data Note: All figures are indicative 16

Maintenance life cycle With an average lease term of 9.9 years, airlines are typically forced to perform an expensive engine shop visit US$ (x1000) 9.000 7.9 Average lease term (9.9) 7.500 6.000 4.500 3.000 C check 8Y check LDG Engine RP Engine LLPs Engine Performance Restoration Engine Performance Restoration 8Y Check Mandatory clearance period as per lease agreement Engine Performance Restoration 2 year reduction in lease term Possible additional cost for cabin refurbishment Reduced cost: - LDG overhaul - overhaul -C-check 1.500 0 LDG 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: SGI Aviation internal database, industry data Note: All figures are indicative 17

Engine shop visit and LLP replacement Engine maintenance cost is the largest contributer to the overall maintenance cost A320 with CFM56-5B 13,500 18,800 FC 1 st SV 8,800 12,900 FC 2 nd SV A320 5B SV cost: $2.9 million (excl. LLP) Average period 1 st run: 8.9 year Average period 2 nd run: 5.9 year Life Cycles LLP Cost 15,000 20,000 FC 1 st SV 12,000-18,000 FC 2 nd SV 20,000 $1,502,580 25,000 $817,700 737NG with CFM56-7B 30,000 $661,400 0 8y 16y B737NG 7B SV cost: $2.7 million (excl. LLP) Average period 1 st run: 9.6 year Average period 2 nd run: 8.2 year LLP Life Cycles Cost 20,000 $1,768,660 25,000 $811,500 Source: SGI internal database, OEM data Note: Assumes the engines are set at 22k thrust rating and operating 5FC per day 30,000 $321,700 19

Cabin reconfiguration Aircraft cabin reconfigurations are costly and time consuming Engineering $370,000 LOPA change $80,000 Monument change (each) $30,000 CAM development $20,000 IFE database upgrade $100,000 Seats certification $20,000 Seats $3,876,500 Economy seats (each) $5,500 Business seats (each) $20,000 In-seat video (each) $6,000 31 Business-class seats 267 Economy-class seats A full reconfiguration can be anything from US$100,000 to several millions Interior parts $3,481,000 Full height monument restoration $280,000 Class divider kits (per pair) $50,000 PSU (each) $8,000 PSU spacer panels (each) $400 Standard sidewall panels (each) $5,000 Seat to seat cables (each) $600 Placards set $4,000 Miscellaneous $15,000 21

Other operational requirements There are many other cost drivers which should be taken into consideration $80,000 TCAS 7.1 EASA 2015 2016 2017 $240,000 FTIS 100%fleet FAA 2018 2019 $400,000 FANS B+ EASA 2020 $100,000 ADS-B Out EASA 2021 Authorities continuously introduce new operational requirements and safety programs These may not be known at the start of the lease Lease agreements typically cover cost sharing for Airworthiness Directives Operational requirements may not always be mandated by an AD $80,000 TCAS 7.1 ICAO $150,000 SATCOM CAAC $100,000 ADS-B Out FAA These operational requirements may lead to additional modifications and cost Note: Cost per narrow body aircraft. 22

Summary Engine maintenance and modifications are main drivers in this process 6.000 4.500 Engine Performance Restoration Engine Performance Restoration Operating cost (fuel) Lease rates AIRCRAFT LEASE Aircraft life cycle (upcoming maintenance) 3.000 1.500 0 12Y Check 6Y Check LDG 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Aircraft Availability Upgrades/ Modifications Commercial requirements (new routes) 24

Recommendations Each extension of the lease term will allow you to renegotiation certain terms Each situation is different and you should look at all the aspects Don t under estimate the complexity Develop or get in the expertise to analyze the complete situation Each change to the duration of the lease will require a revision to the contract Airlines should use this to their advantage Renegotiate restrictive redelivery conditions Include aircraft age (and its secondary market) The engines are the biggest contributor, so pay special attention to their performance and future shop visits Try to increase flexibility to cope with future changes 25

Questions? Joost Groenenboom Executive Director Airlines T +31 20 880 4238 F +31 20 890 8490 M +31 6 506 36001 Email: jgroenenboom@sgiaviation.com Web: http://www.sgiaviation.com 27