Outlook and Opportunities in Corporate Aircraft

Outlook and Opportunities in Corporate Aircraft Don Gies Vice President & Group Manager Business Aviation Finance Presented to the ELA Large Ticket Conference April 25, 2006

Outlook and Opportunities in Corporate Aircraft Table of Contents 1. Introduction 2. Market Overview 3. Current Market Conditions 4. Aircraft Finance Marketplace 5. Regulatory Environment 6. Outlook 7. Opportunities 8. Conclusions

Introduction

Introduction Business Aircraft Benefit Companies by: Saving Employee Time Increasing Productivity Enroute Minimizing Non-business Hours Away from Home Ensuring Industrial Security Maximizing Personal Safety and Peace of Mind Exercising Management Control Over Efficient, Reliable Scheduling Projecting a Positive Corporate Image Source: NBAA. 1

Introduction (cont d) Corporate Aircraft Financing is Attractive Because: Strong Credit Quality of Borrower / Lessee Superb Collateral that can be remarketed worldwide Transactions of sufficient size / scale to grow portfolio quickly Wide diversity of industries represented in the customer base Strong residual value of long-life asset Cross Selling Opportunities Strong and growing market for new and used aircraft 2

Corporate Aviation Introduction (cont d) Differences Between Corporate and Commercial Aviation Commercial Aviation Aircraft used to transport executives part of travel expense budget Used in wide variety of industries - strong credits Usually have only one or two aircraft per company Financed by cash or debt some lease financing Aircraft used by traveling public - produces revenue for airline and air freight company Used only in airline and air freight marginal credits Usually have a fleet with hundreds of aircraft Typically financed by leveraged leases or operating leases some debt 3

Market Overview

Market Overview Geographic Distribution Turbine Business Aircraft as of April 10, 2006 Bermuda / U.S. / Canada Operators = 11,277 10,481 6,814 Europe Operators = 1,113 1,670 876 Total Turbine Aircraft 23,969 Total Operators 14,722 534 356 569 347 Asia & Middle East Operators = 333 Mexico & Central America Operators = 478 263 520 South America Operators = 866 552 914 Africa Operators = 395 117 278 Oceania Operators = 260 14,008 Jets 9,962 Turboprops The U.S. has 10,903 operators of Business Aircraft Equals 74% of Worldwide Total There are more operators in Mexico, Central and South America than there are in Europe Source: Amstat April 2006 4

Market Overview (cont d) Corporate Jet Aircraft Currently in Production / Development Manufacturer Light Jet Light Medium Medium Medium Large Large Long Range Ultra Long Range Price ($ mil) $4.0 - $5.5 $5.5 - $10.0 $11.9 - $13.3 $6.3 - $21.0 $22.0 - $33.0 $30.0 - $38.0 $40.0 - $62.0 A318 Elite A319 Corporate BBJ1 BBJ2 BBJ3 Lear 40/40XR Lear 45/45XR Lear 60 XR Challenger 300 Challenger 605 Challenger 850 Global 5000 Global Express XRS Citation CJ1+ Citation CJ2+ Citation Bravo Citation CJ3 Citation Encore Citation XLS Sovereign Citation X Dassault Falcon 50EX Falcon 2000 DX Falcon 2000 EX Falcon 900 DX Falcon 900 EX Falcon 7X Embraer Embraer Legacy Gulfstream G100 Gulfstream G150 Gulfstream G200 Gulfstream G350 Gulfstream G450 Gulfstream G500 Gulfstream G550 Premier 1 Hawker 400XP Hawker 850XP Hawker 4000 SJ30-2 5

Current Market Conditions

Current Market Conditions Current New Aircraft Marketplace New Aircraft Deliveries in 2005 There were 750 new Business jets delivered in 2005, up 26.9% from the 591 delivered in 2004 New Jet Deliveries world wide by Manufacturer (2005) in Units: Boeing 1% Gulfstream 12% AvCraft 0% Embraer 3% Raytheon 19% Dassault 7% Airbus 1% Total: 750 Units Source: GAMA. Bombardier 25% Cessna 32% Manufacturer Units Airbus 9 AvCraft 1 Boeing 4 Bombardier 188 Cessna 247 Dassault 51 Embraer 20 Gulfstream 89 Raytheon 141 Total 750 6

Current Market Conditions (cont d) Current New Aircraft Marketplace New Jet Deliveries world wide by Manufacturer (2005) in Billings ($ Billions): Raytheon 10% Boeing 1% Bombardier 29% Manufacturer Dollars Airbus 0.45 AvCraft 0.01 Gulfstream 26% Boeing 0.19 Bombardier 3.86 Cessna 2.50 Dassault 1.42 Embraer 0.45 Gulfstream 3.43 Embraer 3% Dassault 10% Airbus 3% Cessna 18% Raytheon 1.32 Total (Billions) $13.63 Total: $13.634 in Billions Source: GAMA. 7

Current Market Conditions (cont d) Order Backlog of Key Aircraft Manufacturers Bombardier Aerospace Challenger 605 Global 5000 Next Available 4th Quarter 2007 1st Quarter 2009 Dassault Falcon Jet Falcon 2000 EX Falcon 900 EX Falcon 7X 1st Quarter 2008 1st Quarter 2008 2nd Quarter 2010 Gulfstream Aerospace Gulfstream G 450 Gulfstream G 550 2nd Quarter 2008 2nd Quarter 2008 8

Current Market Conditions (cont d) After growing nearly six-fold from 1996 to 2001, the total number of aircraft in fractional fleet continues to grow YOY but at a slower pace Fraction Shares Marketplace Total Fractional Fleet by Provider Total fractional fleet is approximately 875 aircraft In 2005, there were about 108 new aircraft delivered to fractional operators Source: JETNET and UBS estimates. 9

Current Market Conditions (cont d) NetJets, which accounts for 58% of the fractional fleet, is owned by Berkshire Hathaway Flexjet is a whollyowned subsidiary of Bombardier Flight Options is a wholly-owned subsidiary of Raytheon CitationShares is a majority owned subsidiary of Cessna Fraction Shares Marketplace Fractional Fleet Distribution by Provider, as of January 2006 Flexjet 10% Flight Options 19% Citation Shares 8% Other 5% NetJets 58% Source: JETNET and UBS estimates. 10

Current Market Conditions (cont d) Fraction Shares Marketplace Used Business Jet Marketplace Used Business Jets Available for Sale (rolling 3 month average) Inventory of used jets available for sale has declined 20% from its November 2002 peak Source: JETNET and UBS estimates. 11

Current Market Conditions (cont d) Fraction Shares Marketplace Used Business Jet Marketplace Age of Used Aircraft on the Market 80% of the available used aircraft are more than 10 years old 67% are over 20 years old 30+ 25% Used Available Jets by Age Class (in years), January 2006 0-5 6% 10-Jun 14% 15-Nov 5% 16-20 9% 47% are over 25 years old 26-30 22% Source: JETNET and UBS estimates. 21-25 19% 12

Current Market Conditions (cont d) Used Business Jet Marketplace Number of Retail Aircraft Sales in U.S. New & Used Number of Aircraft Sold 3,500 3,000 2,500 2,688 611 2,882 677 3,163 691 2,000 1,500 1,000 2,077 2,205 2,472 500 0 2003 2004 2005 Resale Resale Market is typically more than 3 times the number of New Deliver Aircraft. New Delivery Source: Amstat, April 2006. 13

Current Market Conditions (cont d) Large Cabin Corporate Aircraft Resale Values 10 year Track Percentage of Original New Price 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1996 Falcon 900EX 1996 Gulfstream V 1999 Global Express Source: Aircraft Bluebook. 14

Current Market Conditions (cont d) Midsize Cabin Corporate Aircraft Resale Values 10 year Track Percentage of Original New Price 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1998 Cessna Excel/XLS 1996 Hawker 800XP 1996 Lear 60 Source: Aircraft Bluebook. 15

Aircraft Finance Marketplace

Aircraft Finance Market Place U.S. Financial Institutions Market Segmentation Matrix Financial Institutions Finance Products Geographic Regions Credit / Collateral Focus Banks Bank of America Citibank JP Morgan Chase Key Bank RBS SunTrust Wachovia Wells Fargo Various Regional Banks Term debt True Leases Mostly in the United States plus select foreign markets Credit Focus: Focus of Quality Credits Lower interest Rates Structuring Sophistication Leasing Companies looking for tax benefits Finance Companies: Aviation Finance Group CIT GE Capital Merrill Lynch Capital Siemens A/C Manuf. Owned Finance Co.: Cessna Finance Raytheon Aircraft Credit Corp. Non-Recourse Debt Term Debt True Lease Operating Lease Finance Lease Mostly debt that is often syndicated or securitized Many finance in the United States plus select foreign markets As and where needed to sell new aircraft Asset Driven: Collateral Cushion: Security Deposits Letters of Credit Longer Terms w/ebo s Maintenance Return Cond. Many offer both loans and leases Most looking for tax benefits 16

Number of Retail Sales of Aircraft in U.S. Number of Aircraft Sold 3,500 3,000 2,500 2,000 2,688 1,118 Aircraft Finance Marketplace (cont d) Aircraft Financing Method 2003 to 2005 Cash/Loan/Lease 2,882 1,189 3,163 1,398 1,500 411 401 424 1,000 500 1,159 1,292 1,341 0 2003 2004 2005 Debt Financing Lease Financing Cash More than 40% of Aircraft are Purchased for Cash. Only about 15% of the aircraft are lease financed. Source: Amstat, April 2006. 17

Regulatory Environment

Regulatory Environment American Jobs Creation Act of 2004 Amended Section 274(e) of the Internal Revenue Code - eliminated Sutherland Lumber Deductions by Company for business aircraft expenses limited to the actual amount treated as compensation to the individual using the aircraft for personal use (Previously based on SIFL calculations) Internal Revenue Service Issued IRS Notice 2005-45 (on 5/27/05) entitled Treasury and IRS Issue Guidance on Personal Use of Corporate Aircraft Establishes methods for tracking the relative levels of business and personal use of company aircraft 18

Regulatory Environment (cont d) Securities Exchange Commission Regulation S-K Item 402 wants disclosure of all compensation paid to executives in a manner that is clear, concise and understandable Compensation could include personal use of business aircraft Aviation User Fees Airlines are pushing to eliminate airline passenger ticket tax and convert to a user fee system whereby ATC related expenses are charge by aircraft regardless of size Would shift about $ 2 Billion of annual costs from airlines to business / private aircraft 19

Regulatory Environment (cont d) Cape Town Convention Cape Town Convention on International Interest in Mobile Equipment became effective 1 March 2006 To date there are only 9 countries that have signed and ratified this treaty which are United States, Panama, Ethiopia, Nigeria, Pakistan, Oman, Ireland, Malaysia and Senegal Establishes a centralized aircraft registry in Dublin Ireland International Registry of Mobile Assets ( IRMA ) You must first file in you own country s aircraft registry 20

Regulatory Environment (cont d) Cape Town Convention (cont d) Based primarily on the U. S. Uniform Commercial Code Establishes laws dealing with buying, selling, leasing and financing of aircraft and engines Registration at the IRMA is required for: Aircraft with 8 or more seats including crew weight > 6,062 lbs Helicopters with 5 or more seats including crew weight > 992 lbs 21

Outlook

Outlook Honeywell Forecast Units (2005 Outlook for Executive Turbofan Deliveries) 9,900 New Aircraft Deliveries from 2005-2015 22

Outlook (cont d) Honeywell Forecast Dollars (2005 Outlook for Executive Turbofan Deliveries Constant 2005 Dollars) $156 B in New Aircraft Deliveries from 2005-2015 23

Outlook (cont d) Dawn of a Very Light Jet ( VLJ ) Manufacturer Model Price Seating (Crew + Pax) Max Speed Range First Flight Estimated Certification Order Backlog Single Engine Diamond D-Jet $1 MM 1 + 4 315 ktas 1,320 nm April 2006 (est.) Late 2007 125 Excel Jet Sport Jet $1 MM 1 + 3 370 ktas 1,000 nm 1 Q 2006 (est.) 4 Q 2006 N/A Twin Engine Eclipse Eclipse 500 $1.295 MM 1 + 5 375 ktas 1,280 nm 31-Dec-04 Late 2Q / 2006 > 2,350 Adam A700 $2.1 MM 1 + 6 340 ktas 1,100 nm 27-Jul-03 4 Q 2006 282 Tam-Air Epic Elite Jet $2.1 MM 1 + 6 420 ktas 1,680 nm April 2006 (est.) 1 Q 2008 N/A Cessna Citation Mustang $2.553 MM 1 + 5 340 ktas 1,150 nm 23-Apr-05 4 Q 2006 N/A Embraer Phenom 100 $2.75 MM 1 + 7 380 ktas 1,160 nm 1 Q 2007 (est.) mid 2008 N/A Av. Tech. Group Javelin $2.795 MM 1 + 1 520 ktas 1,120 nm 30-Sep-05 2007 > 100 Eviation EV-20 $2.95 MM 1 + 9 350 ktas 1,200 nm Oct 2006 (est.) Oct-07 N/A Spectrum 33 $3.65 MM 1 + 9 415 ktas 2,000 nm 7-Jan-06 1 Q 2008 N/A Honda Honda Jet N/A 1 + 7 404 ktas 1,100 nm 3-Dec-03 N/A N/A 24

Outlook (cont d) Dawn of the Very Light Jet ( VLJ ) Market FAA Forecasted Deliveries (Oct.2005) Market entry in 2nd half of 2006 - deliveries of 100 aircraft Delivery rate grows thereafter - 400 to 500 per year By 2017 fleet of VLJ aircraft grows to 4,950 aircraft Number of Deliveries paced by success of on demand air-taxi business model (e.g. Day-Jet) which is in start-up mode Air Taxi companies seeking both equity and debt capital 25

Case For: Outlook (cont d) Is the VLJ Market for Real? Case Against: Sales will benefit from strong price elasticity of demand owner flown Price of only $ 1.3 MM is comparable to new piston twin aircraft Low ticket price will be strong stimulate to new air taxi market Can also be used by middle management of corporations Projections of air taxi market are too optimistic Too many models entering the market not all will survive New manufacturers need to prove themselves in training and product support Concern about air space becoming too congested 26

Opportunities

Opportunities Working the Large Backlog of Orders Forecast shows continuing strength in new aircraft deliveries for at least the next 10 years 9,900 aircraft worth $ 156 Billion Production in 2006 to reach an all time high of nearly 850 corporate jets Over the next 5 years, North American share of market slowing to 60% of total with offsetting growth in Europe, Latin America and Asia New deliveries will displace used aircraft providing additional opportunities for aircraft financing 27

Opportunities (cont d) Financing of Very Light Jets Honeywell survey shows demand for 4,500 to 5,500 VLJ s to be delivered over the next 10 years excluding the Air Taxi and Fractional Market Honeywell forecast is more optimistic than the FAA forecast Of this total, expect 3,700 to 4,600 to be delivered to the Owner-Pilot market and 800 to 900 for corporate operators Owner-Pilot market presents a very credit worthy customer base of High Net Worth individuals 28

Opportunities (cont d) Financing Foreign Business Aircraft US corporate aircraft finance market is hyper-competitive Significant and seemingly endless rate compression Some U.S. banks and finance companies looking to expand to foreign markets in search of better margins Foreign markets presents a number of significant challenges: Credit Underwriting Country Risk Concerns Know Your Customer Asset Management Enforceability of Contract Provisions License to do Business / Withholding Taxes 29

Conclusions

Conclusions Corporate aircraft manufacturers are enjoying a robust market and strong order backlogs Corporate Aircraft Financing is attractive to Lenders and Lessors Strong credits and superb collateral Diverse customer base in growing market Large ticket size providing good scale Attraction of business segment has led to hyper-competition between financial institutions 30

Conclusions (cont d) Dawn of Very Light Jet ( VLJ ) deliveries presents new opportunities / risks for aircraft financing Market segment is new and therefore unfamiliar Most of the aircraft are being built by upstart manufacturers No track record for how values of these aircraft behave over time Perhaps too many VLJ s coming to market at the same time Strong financing demand from start-up air taxi operators Owner-flown segment of VLJ market constitute credit worthy customer base 31