Worldwide Market Forecast

218 237 March 218 Japan Aircraft Development Corporation

Foreword The aircraft industry is expertise-intensive on advanced technology and has spillover effect leading to advancement of the country s industrial structure. Therefore, the industry is essential for Japan to be a scientific and technological powerhouse and makes a great effort to develop and progress. It is essential to continuously collect and analyze data relating to the world commercial aircraft market so that Japan s aircraft industry can further develop in the future. In this document, we show demand forecasts for air transport and aircraft of passenger and cargo for the next 2 years from 218 to 237, based on results obtained by collecting and analyzing data relating to the global commercial aircraft market involving air transport, aircraft, airlines, aircraft makers, etc. This document summarizing such forecasts is widely distributed not only to those who are involved within and around the aviation industry, but also to the general public through our website (http://www.jadc.jp/en/). March 218 Japan Aircraft Development Corporation YGR-593 i

ii Worldwide Market Forecast

Contents 1. Executive Summary... 1 2. Introduction... 3 3. Market Environments... 5 4. Market Drivers... 15 5. Air Passenger Market... 25 6. Passenger Airplane Demand... 35 7. Air Cargo Market... 51 8. Jet Freighter Demand... 63 9. Airplane Sales... 71 1. Regional Overview... 75 11. Aero Engine Demand... 91 12. Methodology... 93 Abbreviations... 95 Glossary of Terms... 96 Appendix A Definitions of Airplane Categories... 97 Appendix B Definitions of Aero Engine Categories... 98 Appendix C Air Passenger Traffic... 99 Appendix D Air Cargo Traffic... 11 Appendix E Airplane Demand Forecast... 12 Appendix F Effect of Crude Oil Price on RPK... 14 Appendix G Evaluation of Second Demand... 15 Appendix H Variations of Cargo Transport Performance in Major Airlines...... 16 Reference Materials... 17 iii

iv Worldwide Market Forecast

1. Executive Summary Generally speaking, long-term demand forecast for the commercial air transport market provides useful information for evaluating and reviewing market risk when doing business associated with the commercial air transport sector, and for devising medium- and long-term business plans and product strategies. In this document, Japan Aircraft Development Corporation (JADC) specifically show demand forecasts for air passenger traffic, air cargo traffic and airplanes (passenger jets, passenger turboprop airplanes and jet freighters), as well as for aero engine demand, over the 2-year period covering 218 to 237. For the forecast period, global economic growth, in terms of GDP, will be growing at an average annual rate of 2.8%. For the forecast period, global air passenger traffic demand, in terms of RPK, will grow at an average annual rate of 4.5%, from 7.74 trillion passenger kilometers in 217 to 18.6 trillion in 237, which is 2.4 times larger than in 217. During the period, the Asia-Pacific region will show a growth rate of 5.3%, and its share will grow from 32% in 217 to 38% in 237. The in-service passenger jet fleet will increase from 22,337 units at the end of 217 to 39,867 units at the end of 237. Demand for new airplanes over the next 2 years will be 33,53 units, with a total value of 5.14 trillion U.S. dollars (at 217 list prices). Among demand for passenger jets, the largest demand will be for the 12-169 seat airplane class at 13,56 units. Regionally, large demand will be generated in Europe (19% share), China (2%), and North America (18%), and demand from these three regions will constitute 57% of the total demand in the global market. The Asia-Pacific region will generate a demand of 14,53 units (42%). The in-service passenger turboprop airplane fleet will increase from 3,44 units in 217 to 3,515 units in 237. Demand for new airplanes will be 2,68 units with a total value of 57.2 billion U.S. dollars (at 217 list prices). The largest demand will be for airplanes with the 6-79 seat class, amounting to 1,47 units. There will be no particular region with outstandingly large demand, and airplanes will be used widely throughout many regions. The Asia-Pacific region will have demand for passenger turboprop airplanes at 1,154 units (43%). For the forecast period, cargo traffic demand, in terms of RTK, will increase at an average annual growth rate of 4.1%, from 227 billion ton kilometers in 217 to 58 billion in 237, 2.2 times the figure for 217. The Asia-Pacific region will show a growth rate of 4.9%, and its share will expand from 37% in 217 to 43% in 237. The region will become the world's largest market, just as in the case of air passenger traffic. 1

World Economic Growrh (GDP) 217 237 Growth measures Sales (217 US$billion) 2.8%p.a. Passenger Demand (billion RPKs) 7,737 18,587 4.5%p.a. Passenger Jet Airplane Fleet 22,337 39,867 2.9%p.a. New Passenger Jet Airplane Deliveries 33,53 5,137 Cargo Demand (billion FTKs) 227 58 4.1%p.a. Jet Freighter Fleet 1,864 2,951 2.3%p.a. New Jet Freighter Deliveries 1,48 353 Total New Jet Airplane Deliveries 34,578 5,49 Passenger Turboprop Airplane Fleet 3,44 3,515.2%p.a. New Passenger Turboprop Airplane Deliveries 2,68 57 New Engine Deliveries 84,21 1,237 (Terms and abbreviations used in the text are shown after P. 93-94) The in-service jet freighter fleet will increase from 1,864 units in 217 to 2,951 units in 237. Demand for new jet freighters will be 1,48 units (of which 1,476 units will be converted from passenger airplanes), with a total value of 353 billion U.S. dollars (at 217 list prices). Among demand for production jet freighters, demand for large airplanes will be 528 units, and demand for medium-wide body airplanes will be 52 units. Regionally, the Asia-Pacific region and North America region will have the largest demand. Global aero engine demand (including spares) will be 84,21 units with a value of 1.24 trillion U.S. dollars (at 217 market prices). Among these, demand for jet engines will be 78,83 units, with a value of 1.22 trillion U.S. dollars, and demand for turboprop engines will be 5,938 units, with a value of 13. billion U.S. dollars. World Growth measures New Deliveries Economics (GDP) 2.8% 37,258 Pax. Traffic (RPK) 4.5% Sales value Cargo Traffic (RTK) 4.1% 217US$B Airline Fleet 2.6% 5,547 North America Growth measures New Deliveries Economics (GDP) 2.% 6,774 Pax. Traffic (RPK) 3.2% Sales value Cargo Traffic (RTK) 4.1% 217US$B Airline Fleet.7% 928 Latin America Growth measures New Deliveries Economics (GDP) 3.% 3,64 Pax. Traffic (RPK) 4.8% Sales value Cargo Traffic (RTK) 1.% 217US$B Airline Fleet 3.1% 356 Europe Growth measures New Deliveries Economics (GDP) 1.7% 6,916 Pax. Traffic (RPK) 3.8% Sales value Cargo Traffic (RTK) 1.7% 217US$B Airline Fleet 2.4% 972 Middle East Growth measures New Deliveries Economics (GDP) 3.4% 2,499 Pax. Traffic (RPK) 6.% Sales value Cargo Traffic (RTK) 5.4% 217US$B Airline Fleet 3.6% 649 Africa Growth measures New Deliveries Economics (GDP) 3.4% 1,171 Pax. Traffic (RPK) 3.8% Sales value Cargo Traffic (RTK) 5.3% 217US$B Airline Fleet 1.% 148 CIS Growth measures New Deliveries Economics (GDP) 1.9% 1,34 Pax. Traffic (RPK) 3.2% Sales value Cargo Traffic (RTK) 2.5% 217US$B Airline Fleet 1.2% 191 Asia-Pacific Growth measures New Deliveries Economics (GDP) 3.9% 15,53 Pax. Traffic (RPK) 5.3% Sales value Cargo Traffic (RTK) 4.9% 217US$B Airline Fleet 4.2% 2,33 *Airline fleet, new delivries and sales value are the aggregate for passenger jets, passenger turboprops and jet freighters. 2

2. Introduction The development of an airplane requires a period of nearly 1 years with development costs of more than one billion U.S. dollars, from the planning phase to entry into service. Even more time is needed to recoup the investment. Then, the newly developed model continues to be manufactured for several decades while several derivatives are developed. Once the airplane is delivered, it will continue to be operated for at least 1 years or so, and some for more than 4 years. Because airplanes are such long-lived products, the aircraft industry is said to have a very high business risk. Airlines that purchase and operate such airplanes are highly susceptible to the economic and social circumstances of the time, such as competition with new entrants including LCCs resulting from privatization and deregulation, and increased costs due to soaring fuel prices. Airplanes are very expensive, ranging from billions of JPY to tens of billions of JPY per unit. While the airline industry is a capital-intensive industry because airlines need many such airplanes, airfares are becoming cheaper and cheaper, and air tickets are now said to be commodities. In such a business environment, in order to minimize business and market risks, it is important to continuously and carefully monitor market trends related to the economic and social environments surrounding the aircraft industry and the airline industry, which is their customer. JADC has continuously been gathering information, and undertaking research and analysis of information on the global commercial aircraft market including airplanes, air traffic and airlines. For the members of JADC and the aircraft industry in Japan, JADC has made long-term demand forecasts for air travel and airplanes since the late 197s, in order for such data to be used as a source for creating long-term product strategies and business plans. The Worldwide Market Forecast, which is the long-term demand forecast by JADC, shows forecasts for air passenger and air cargo demand, as well as airplane demand for passenger turboprop airplanes with at least 15 seats, passenger jets with at least 2 seats, jet freighters and aero engines, over the 2-year period covering 218 to 237. These forecasts are widely released to the public including aircraft manufacturers, suppliers, airlines and financial institutions, etc., at home and abroad. 3

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3. Market Environments Business overview The global GDP growth rate in 217 was 3.%, a figure significantly greater than expected. The World Bank's Global Economic Prospects (GEP) forecasts a global GDP growth rate of around 3.1% for 218, considering that investment, manufacturing and trade will continue to recover and primary commodity export countries will benefit from stable commodity prices. While this recovery seems to be a short-term trend, in the long run, it is expected that GDP growth will be potentially slower due to the aging labor population in the world, etc. In addition, factors such as sharp monetary tightening worldwide, stronger trade restrictions and higher geopolitical tensions are considered to be risks that could cause economic stagnation. Operating Profits (US$ billion) 7 6 5 4 3 2 1 Passenger Traffic and Operating Profits Operating Profits RPK Revenue Passenger Kilometers (trillion RPKs) 9 8 7 6 5 4 3-1 -2 1997 22 27 212 217 2 1 source: IATA, ICAO In this economic environment, according to IATA s forecast of global air passenger traffic in 217, air passenger traffic in terms of RPK is expected to grow by 7.5%, and air traffic cargo in terms of RTK is expected to expand by 9.3%. Airlines in Japan saw a 3.7% year-on-year increase in the number of domestic air passengers, and a 5.2% increase in international routes, for a 4.% overall increase. The number of Japanese people traveling abroad increased by 4.5% year-on-year, and that of foreign visitors entering Japan rose 19.3%. The growth rate of the latter was reduced by half from the previous year (21.8%), but the actual number has been increasing, making the inbound demand as important as before. Looking at the financial situation in 217, although sales for the global airline industry as a whole 5

Net profit/revenue (%) Worldwide Market Forecast were up 6.3% year-on-year, to $754 billion, net income was down 2.3% year on year, to $34.5 billion, because airfare unit prices decreased and fuel prices moderately increased. Looking at the net profit margin to sales by region, airlines in North America were the highest at 7.2%, followed by Europe at 4.8% and the Asia-Pacific region at 3.8%. Airline Regional Profitability 1 8 216 217 6 4 2 Africa Asia-Pacific Middle East Latin America North America Europe -2 source: IATA December 217 Airplane order and delivery At the end of 217, the global fleet was comprised of 22,337 passenger jets, 3,44 passenger turboprop airplanes and 1,864 jet freighters in service. No. of Airplanes 4 Jet Airplane Orders 35 3 25 2 15 1 5 125 1366 14 32 14 117 21 997 162 63 92 396 44 163 543 67 Others Embraer Bombardier Airbus Boeing 327 352 153 23 323 2 395 589 932 41 13 217 347 89 856 712 51 172 124 3 27 87 66 73 347 355 385 314 251 246 271 1855 1927 2 49 79 34 213 12 754 79 939 91 2523 85 51 114 1147 14 44 22 1126 737 553 723 13 21 2 357 24 1315 125 55 54 587 494 225 127 48 1467 846 3468 3491 79 38 125 334 18 61 947 1279 1485 1456 868 777 1997 22 27 212 217 1) Net orders. 2) Passenger jets, including combi and quick change, and jet freighters, etc. source:airbus, Boeing, Bombardier, Embraer, FlightGlobal, JADC(partly estimation) 2713 25 239 2397 256 159 1764 127 28 96 3 89 38 183 1984 27 48 64 148 838 1215 1185 128 6

The number of annual orders (net orders excluding cancellations) for passenger jets (including Combi and Quick Change jets) and airliner variants of jet freighters, etc., was 2,397 in 217, a year-on-year increase of 21%. This was due in part to trying to secure airplanes to meet demand for future air transport, as well as to fill demand for replacement by new models which comply with stricter environmental regulations; however, the major factor was indeed a fierce bidding competition between Airbus and Boeing at the end of 217. 89% of orders were for narrow body aircraft and 6% for regional jets, yet orders for wide body jets decreased by 16% from the previous year. In 217, there were orders for 11 jet freighters, down 7% year-on-year. The number of orders for turboprop passenger planes was 168, almost twice the number from the previous year. No. of Airplanes 18 16 14 12 1 8 6 4 2 677 27 33 6 182 375 Others Embraer Bombardier Airbus Boeing 95 22 6 75 229 564 1131 117 1192 38 97 82 294 62 48 157 99 311 39 154 147 325 492 527 997 8 12 185 Jet Airplane Deliveries 97 923 892 11 8 4 88 135 121 1617 1652 1563 1529 27 2 21 11 18 145 26 11 43 92 53 1317 15 44 59 9 8 26 116 1171 16 187 181 14 113 5 122 18 718 115 635 688 97 1 133 629 59 47 162 13 34 626 6 79 61 588 498 51 534 222 175 99 453 434 483 33 378 35 32 723 762 748 763 61 648 381 398 441 481 462 477 375 281 285 29 1997 22 27 212 217 * Passenger jets, including combi and quick change, and jet freighters,etc. source:airbus, Boeing, Bombardier, Embraer, FlightGlobal The number of jet airplanes delivered in 217 reached 1,652, marking a record high topping 1,617 units in the previous year. Both Airbus and Boeing are trying hard to increase their production of narrow body aircraft, and they delivered 558 units of the A32 family aircraft and 529 units of the 737 family aircraft in 217. The number 1,652 includes 29 freighter jets, of which the 767-3F constitutes the largest type, accounting for 1 units. There were 123 passenger turboprop airplanes delivered in 217, which is slightly less than the 13 delivered in the previous year. The combined order backlog of passenger airplanes and jet freighter variants as of the end of 217 stood at 14,798 units, or almost twice the amount at the end of 27. Regionally, the Asia-Pacific regional airlines were the biggest both in 27 and 217, but orders from undisclosed customers have recently increased. It is said that the delivery positions of narrow body aircraft for major manufacturers are almost 7

No. of Airplanes Worldwide Market Forecast completely filled until 22. Airbus has been trying to increase monthly production of the A32 family to 6 units by the middle of 219, and Boeing has been trying to increase monthly production of the 737 family to 57 units by 219. To ensure an early delivery of orders, the manufacturers are considering further increases in production. The order backlog for main turboprop airplanes was 426 units at the end of 217. Regional Distribution of Jet Airplane Backlog 16, 14, 12, 1, 8, 6, 4, 2, unknown CIS North America Europe Middle East Asia-Pacific Latin America Africa 7,527 24% 22% 35% 14,798 1% 2% 19% 9% 32% 27 217 7% Restructuring of the Airline Industry In December 213, American Airlines and US Airways merged. In the U.S., Northwest Airlines had already merged with Delta Air Lines, Continental Airlines with United Airlines, and AirTran Airways with Southwest Airlines. After the mergers, these four companies have had a capacity share, in terms of ASK of 78% (as of September, 217) of the U.S. domestic market. In December 216, Alaska Airlines acquired Virgin America. Similarly, industry restructuring is also proceeding in Europe and Latin America. Many airlines entered the U.S. market after the deregulation of the industry more than 3 years ago, which drove down airfares through fierce competition. However, due in part to exogenous shocks such as rising fuel prices, terrorism and the financial crisis, the financial condition of airlines had been worsening until a few years ago. To survive in this environment, companies have merged in order to reduce costs and expand their market share. The greatest benefit from this restructuring by M&A is the decrease in the number of competitors in the industry. Even within the restructuring of the airline industry, cross-national mergers are still rare. Due to current regulations, airlines cannot be funded with foreign capital in excess of 5%, although there are some exceptions. While it is difficult for an investor in a foreign airline to carry out a complete takeover, 8

investments within the scope of the regulations can be made in pursuit of business objectives. Etihad Airways has made a 49% investment in Alitalia, a 49% investment in Air Serbia, and a 25% investment in Virgin Australia. Qatar Airways has made a 2% investment in IAG. This kind of action will continue to expand, and it is believed that airlines will be regionally consolidated into a few companies or groups. Alliances There are three major global airline alliances: Star Alliance, SkyTeam and oneworld. Using the number of IATA members as a parameter, the airlines belonging to these three alliances account for 59% of RPK and 64% of operating revenue. It is possible for an airline partnership within an alliance to obtain antitrust immunity, which refers to the exemption from persecution under antitrust laws. Although competition has mainly existed between individual airlines, it has been changing and the present competition is between alliances. The alliances are looking to expand membership so that they will be able to provide seamless service through networks spanning the entire globe. To join an alliance, an airline must make sure that its level of service is in line with the alliance s standards, which is expensive. For small- to medium-sized airlines, however, the cost is worthwhile, as it is becoming difficult for them to survive independently outside of an alliance. However, airlines do not conduct all business within their respective alliances. Cases of airlines entering into business partnerships with carriers in other alliances are increasing. Market Share of 3 Major Alliances (216) Others 23% Others 23% 41% 36% 16% 2% 18% 23% Air Passenger Traffic (RPK) Operating Revenue In addition, alliance network strategies are being affected by instances of airlines leaving one alliance to join another, as was the case when US Airways merged with American Airlines and LAN merged 9

ATLANTA GA, US (ATL) CHICAGO IL, US (ORD) LOS ANGELES CA, US (LAX) DALLAS/FORT WORTH TX, US (DFW) BEIJING, CN (PEK) DENVER CO, US (DEN) CHARLOTTE NC, US (CLT) LAS VEGAS NV, US (LAS) AMSTERDAM, NL (AMS) SHANGHAI, CN (PVG) PARIS, FR (CDG) LONDON, GB (LHR) HOUSTON TX, US (IAH) ISTANBUL, TR (IST) FRANKFURT, DE (FRA) TORONTO ON, CA (YYZ) NEW YORK NY, US (JFK) SAN FRANCISCO CA, US (SFO) MEXICO CITY, MX (MEX) TOKYO, JP (HND) Landing and takeoff (milliom/year) HONG KONG, HK (HKG) MEMPHIS TN, US (MEM) SHANGHAI, CN (PVG) INCHEON, KR (ICN) DUBAI, AE (DXB) ANCHORAGE AK, US (ANC) LOUISVILLE KY, US (SDF) TOKYO, JP (NRT) PARIS, FR (CDG) FRANKFURT, DE (FRA) TAIPEI, TW (TPE) MIAMI FL, US (MIA) SINGAPORE, SG (SIN) LOS ANGELES CA, US (LAX) BEIJING, CN (PEK) DOHA, QA (DOH) AMSTERDAM, NL (AMS) GUANGZHOU, CN (CAN) LONDON, GB (LHR) CHICAGO IL, US (ORD) Cargo Traffic (million ton/year) ATLANTA GA, US (ATL) BEIJING, CN (PEK) DUBAI, AE (DXB) LOS ANGELES CA, US (LAX) TOKYO, JP (HND) CHICAGO IL, US (ORD) LONDON, GB (LHR) HONG KONG, HK (HKG) SHANGHAI, CN (PVG) PARIS, FR (CDG) DALLAS/FORT WORTH TX, AMSTERDAM, NL (AMS) FRANKFURT, DE (FRA) ISTANBUL, TR (IST) GUANGZHOU, CN (CAN) NEW YORK NY, US (JFK) SINGAPORE, SG (SIN) DENVER CO, US (DEN) JAKARTA, ID (CGK) INCHEON, KR (ICN) Passenger Traffic (million/year) Worldwide Market Forecast with TAM, and in 214 the two new airlines left Star Alliance to join oneworld. Within alliances, things like code-sharing, FFP integrations and joint purchasing of equipment are already taking place, and the joint purchasing of airplanes is also being considered. Even with these developments, some airlines such as Emirates Airlines and Hawaiian Airlines attach importance to the demerits of alliance membership, and are attempting to expand their networks and increase convenience independently. Airlines also exist which invest in other airlines and become involved as equity partners, such as Etihad Airways. However, even for these airlines, it is difficult for them to realize everything on their own, and there are increasing numbers of cases in which one airline forms a business partnership with another that fits its strategy, for example Emirates and Qantas. Passenger Traffic on Major Airport 12 29 216 1 8 6 4 2 source:aci, IATA 5. 4. 3. 2. 1.. Cargo Traffic on Major Airport 29 216 Infrastructure source:aci, IATA Infrastructure development, such as airports and airspace, is important for the growth of air transport. 1.2 1. Traffic Movements on Major Airport 29 216 Currently, Europe, the U.S. and Japan are.8 upgrading to next-generation air traffic.6 control systems to improve congestion and.4 economic viability by making efficient use.2 of airspace. However, there are technical. challenges and cost restraints that are making the change difficult in the short term, and as such there is no choice but to implement the new systems in phases, over source:aci, IATA a period of time. 1

At major airports in each country, congestion and a lack of landing slots are resulting in delays, impeding the opening of new routes and increases in frequency. At many of the major airports around the world, delays from 3 minutes to one hour are becoming regular occurrences during peak travel times. Heathrow Airport in London has already reached the limits of its capacity, and it has become difficult to secure slots for arrivals and departures there. New airport construction, as well as upgrades to existing airports, such as new or improved runways and aprons, as well as terminal facility improvements and expansions, require a very considerable investment of time and money. In recent years, with a growing awareness about the environment, the understanding of nearby residents must be obtained regarding the issues of noise and air pollution around airports. Even in Asia, which is experiencing remarkable growth, an improvement of the infrastructure is urgently needed, and some projects are already under construction or in the planning phase. China, where domestic airlines are expanding rapidly, is also planning to build about 1 airports by 22. According to Eurocontrol, the delayed time per flight in 28 EU countries will increase from 8.8 minutes in 212 to 14.2 minutes in 235, and the resulting total loss of time value is expected to increase from 4 billion in 212 to 13.4 billion in 235. Presently, infrastructure development such as airports and aerospace around the world is not keeping pace with the air traffic growth. Environmental challenges Traditionally, environmental issues involving aviation were focused on the noise and air pollution affecting the environment surrounding airports. Recently, the problem of global warming has taken the spotlight, and attention is focusing on aircraft CO 2 emission volumes. In 215, greenhouse gas emissions in the form of CO 2 from international air traffic amounted to 53 million tons, just 1.6% of total global emissions; however, this is expected to increase along with the growth in air traffic. ICAO, at its 37th Assembly in 21, adopted a global reduction goal of improving fuel efficiency by 2% annually until 25, and to prevent any increase in CO 2 emissions from 22 onwards, as goals including both developed countries and emerging countries. (Against this backdrop, from 212, the EU began applying CO 2 emission regulations and emissions trade obligations (EU Emissions Trading System - EU-ETS) to aircraft. As this system is applied to all flights operated from or to Europe, including flights by foreign carriers, the governments of the U.S., China, India, Japan, Russia and other countries have expressed opposition to such a system. The EU, with regard to carriers which operate from or to Europe from January 214 to 22, revised the regulations to be relevant only to flights within Europe, which are covered by the EU-ETS). 11

CO 2 Emissions(million tons) Worldwide Market Forecast Moreover, at the 38th Assembly of ICAO in 213, it was confirmed that various countries will work comprehensively by taking every measure available in order to achieve the reduction goals that were set in 21. It also set new goals to build an emissions reduction system using market mechanisms (so called emissions trading) in 216, and goals applicable from 22. 6 CO 2 Emissions from International Aviation 5 4 3 2 1 Other Energy Industry 5.1% Manufacturing & Construction 18.8% Others 1.2% Electriciry & Heat 41.9% Emission share in 215 Transport 24.% 199 1995 2 25 21 215 Road 17.9% Aviation 1.6% Marine 2.% others SOURCE: IEA At the 39th Assembly of ICAO in 216, 191 nations agreed to the regulatory framework for greenhouse gas emissions related to international aviation. This agreement compensates for the increase of CO 2 emissions from aircraft from 22 onwards, and makes it mandatory for each airline to offset any increase by purchasing emission units. The reduction of greenhouse gas emissions based on the purchase of emission units under this scheme will begin in 221, involving 64 nations that will participate voluntarily. From 227 onward, participation in this scheme will be mandatory for all nations, excluding those whose emissions are below a specific level, etc. The emission units to be purchased will be allocated to airlines by dividing the overall increase of emissions from international aviation from the 22 level in accordance with the emissions of each airline. Starting from 23, the reduction efforts by the individual airlines will be reflected in a phased manner. According to data by the Ministry of Land, Infrastructure, Transport and Tourism (or MLIT, Japan), the total emission units to be purchased by Japanese airlines each year are expected to increase from one billion and several hundred million JPY in 221 to several tens of billion JPY in 235. In addition, with regard to exhaust gas standards to be set based on aircraft size, a new aircraft CO 2 emissions standard, which is contained in a new Volume III "Aeroplane CO 2 Emissions" to Annex 16 of the Convention on International Civil Aviation (Chicago Convention), was adopted as a standard required in such a manner that indicators based on aircraft fuel consumption rates shall be certain values or below. The standard will apply to jet airplanes with a maximum takeoff weight of more than 5.7 ton and to propeller airplanes with that of more than 8.6 ton. Effective dates of the standard shall 12

be: January 1, 22 for newly developed models to be applied for model certification by manufacturers (January 1, 223, however, for jet airplanes whose maximum takeoff weight is 6 tons or below with a maximum number of fewer than 19 seats); January 1, 223 for models already in-production to be applied for model modification; and January 1, 228 for airplanes other than the above which continue to be manufactured. Accordingly, airplanes subject to regulation will not be able to be manufactured after the effective dates if they do not meet the standard. As the production of CO 2 corresponds directly to fuel combustion, improving the fuel consumption in aircraft would lead directly to lower CO 2 emissions. However, as the examination of CO 2 emissions reduction progresses, it has become clear that it will be difficult to reach the goals simply by means of technological innovations in aircraft and improving methods of operation, so the potential for substitute fuels for fossil fuels, following the idea of carbon neutrality, has been considered, and research is progressing on biofuels made with vegetables. Regarding the problem of noise in the vicinity of airports, even now, with aircraft that are quieter than those of the 197s starting to make appearances, it continues to be a major concern as an environmental issue. For the purpose of noise abatement, many of the world s major airports are limiting the number of departures and arrivals, and restricting nighttime flights, namely, putting a curfew in place. With the growth of air traffic, increased frequency and the operation of larger airplanes have become necessary. However, because this can also lead to a worsening of the environment around airports, it is difficult to relax departure and arrival restrictions at existing airports or expand facilities. This also makes new airport construction difficult. In such a situation, the ICAO adopted the application of Noise Standards Chapter 14, which is stricter than the current standards, at the 38th ICAO general meeting in August 213. The application period and target for the new standard are aircraft obtaining model certification from January 1, 218 (or from the end of 22 for aircraft with a maximum takeoff weight of less than 55 tons). Environmental standards will become increasingly stronger in the future. As a result, airlines will have to promote such measures as the use of equipment with higher fuel efficiency, adoption of efficient methods of operation that will lead to fuel conservation, and use of alternative fuels, regardless of fuel price trends. 13

14 Worldwide Market Forecast

4. Market Drivers 4.1 World Economy The global economy has continued a moderate recovery centered on the U.S., and the real economic growth rate for 217 was 3.%. The global economy for the time being is affected by and at risk from the normalization of the easymoney policy and the increase of interest rates in the U.S., revision of trade relations, deceleration of China and other emerging economies, problems such as refugees, terrorism, government debt, and the trend towards the reversal of European integration, as well as falling and rerising of resource prices including crude oil. In the long term, during the forecast period from 218 to 237, the real global GDP (calculated in 21 USD) is forecast to grow at an average rate of 2.9%. During this time period, South Asia, China, and Southeast Asia are expected to have high GDP growth rates. Economic Forecast by Region World Asia/Pacific North America Europe Breakdown of Europe Westen Europe Eastern Europe 2.% 2.23% 1.72% 1.81% 1.62% 1.71% 2.79% 2.87% 2.73% 3.14% 3.89% 4.37% 1998-217 Breakdown of Asia/Pacific Japan Oceania China North-East Asia South-East Asia South Asia Middle East.86%.75% 2.43% 2.8% 3.1% 3.4% 4.81% 3.86% 4.39% 4.37% 3.93% 5.86% 6.61% 8.79% Latin America Africa CIS 2.97% 2.46% 3.43% 1.94% 3.69% 4.15% % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Real GDP Growth Rate per annum Although the average annual growth rate for China is expected to drop to 4.8%, which is much lower compared to the rate of 8.8% that has been enjoyed over the past 2 years, its huge size will still account for massive GDP growth. In contrast, economic growth in developed regions is expected to maintain the status quo or slow, and is forecast to be 2.% in North America, 1.7% in Europe, and.9% in Japan. As a result, global GDP will grow by a factor of 1.73, from 8 trillion dollars in 217 to 138 trillion dollars in 237. 15

Looking at real GDP by region, the Asia-Oceania Region, which has already ranked first in the world by overtaking North America, will increase its share from 33% in 217 to 4% in 237. China especially will increase its share from 13% to 19%, and grow to be on a par with North America and Europe. World Real GDP Growth 1% 8% World Advanced Countries Real GDP Growth Rate(%) 6% Emerging Markets 4% 2% % 27 212 217 222 227 232 237-2% -4% -6% World GDP Share in 237 CIS 3% Latin America 7% Africa 4% Middle East 4% Northeast Asia* 2% Europe 22% Asia Pacific 4% China 19% South Asia 7% Southeast Asia 5% North America 21% Japan 5% Oceania 2% * excluding China and Japan. World Total GDP (21 US$): 138 trillion 16

Spot Price ($/bbl) Worldwide Market Forecast 4.2 Crude Oil Prices In the airline industry, changing fuel prices have a direct effect on airline profits. Crude oil maintained high prices until the first half of 214, but the crude oil markets suffered an oversupply due to decreased demand for crude oil attributable to the remarkable economic deceleration of China and uncertainty over the future of the global economy, the U.S. government lifting the ban on exports of crude oil for the first time in 4 years following the industrialization of shale oil, and Iran restarting oil exports after it was released from economic sanctions. Moreover, based on the fact that OPEC has postponed coordinated production cuts and non-opec countries are increasing oil production, crude oil prices have dropped significantly in the year and a half until early 216. Spot prices of Brent Crude, an international index for oil prices, dropped 73%, from $111.8 per barrel in June 214 to $3.7 18 Relationship between Crude oil and Jet fuel 16 14 Jet Fuel Brent 12 1 8 6 WTI 4 2 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 Source:EIA per barrel in January 216. Later, in February 216, it turned upward. As of March 218, the average annual price increased 115% from the early 216 level, to $66. per barrel, partly because the OPEC countries agreed to production cuts at the Extraordinary Meeting of the OPEC Conference that was held in September 216. The price of jet fuel (U.S. spot price) also dropped by 68% due to the sudden decrease in crude oil prices, falling from $2.88 per gallon in June 214 to just $.93 per gallon in January 216. However, as in crude oil prices, the price of jet fuel turned upward in February 216. As of March 218, it stood at $1.86, up 1% from the early 216 level. Looking at the average annual price, it was $2.7 per gallon in 214, $1.53 per gallon in 215, and $1.25 per gallon in 216. Accordingly, many international airlines set their fuel surcharges at (zero) in the middle of 216, but since around February 217, many airlines have imposed fuel surcharges on passengers, reflecting the 17

Average Spot Price (217US$/bbl.) Worldwide Market Forecast subsequent rise in jet fuel prices. World Oil Demand Breakdown of Non-OECD Europe (incl.cis) Africa Middle East Latin America Other Asia China Non-OECD OECD 213 2 199 source: IEA 1 2 3 4 5 6 million barrels/day 25 Transition and Forecast of Crude Oil Prices (Brent Crude Oil) 2 15 1 5 Brent Crude Oil Price (Average Spot Price) EIA High Oil Price Case EIA Reference Case EIA Low Oil Price Case 199 2 21 22 23 24 Source : EIA Demand for crude oil prior to 2 was mostly for the consumption in developed countries. After 2, the rapid economic development of Asian countries, especially China, as well as other BRICS countries, was accompanied by major increases in demand for crude oil. Because of this, according to the IEA, demand for crude oil from non-oecd countries, as a fraction of global demand, increased from 37% in 2 to 49% in 213. After 2, following strong global demand and rising prices, the amount of crude oil supplied grew from 77.3 million barrels per day to 91.4 million barrels per day in 213. Notably, the amount supplied from non-opec oil producing countries has increased 18

dramatically, rising 8.1 million barrels per day from 2 to 213. This is due to Russia and other CIS countries enhancing their production capacity, development of deep sea oil fields in West Africa and Brazil, and the development of shale oil fields in North America. In contrast, the amount supplied from OPEC countries has risen 5.9 million barrels per day. The forecasts of future crude oil prices published by various institutions generally indicate drops in the short term due to oversupply and the economic standstill. In the long term, it is expected that the oversupply will be resolved due to the rising demand for energy accompanying economic development in emerging countries, and that crude oil prices will rise again, although the proliferation of energysaving technology as well as the transition to alternative energy sources will reduce demand for crude oil. For example, according to the median estimate (Reference Case) of the IEA (217), the price of crude oil will be around $7 per barrel around 22, reaching the 25 level. Although the increase will be moderate thereafter, the price is expected to reach $9 per barrel around 23, and $15 per barrel around 24. Even though this price rise speed will be more moderate than before, it is conceivable that airlines will be confronted with rising fuel prices again. According to the low estimate (Low Oil Price Case) of the same forecast, the price of crude oil will be at about $45 per barrel in 24. In this case, it will be easy to draw out increased transportation demand accompanying economic recovery and development, because lower fuel costs will keep the transportation costs and yield low. However, there will be the effects of slower investment in fleet renewal for improving transportation efficiency. 4.3 World Population In emerging countries, including those in Asia, partly due to their high economic growth rate, middleclass income (annual household disposable income range between $5, and $35,) has been expanding rapidly. During the ten-year period from 2 to 21, the middle-class income population increased at an average annual rate of 13.3%, reaching 2.1 billion. By 22, the figure is expected to reach 3.1 billion. According to population estimates for 217 by the United Nations, the world population will rise to 8.33 billion in 227, up from 7.55 billion in 217. It is estimated that the population in emerging countries will grow from 6.29 billion in 217 to 7.5 billion in 227. As a result, the global middle class population, which comprised 1% of the total global population in 2, is expected to account for 4% of the total global population in 22. Regionally, Asia, containing both China and India, will, as expected, have the largest middle class population, growing from 1.5 billion in 21 to 2.3 billion in 22, and accounting for 76% of the middle class overall. The global population will grow from 7.55 billion in 217 to 9.2 billion in 237. 97.6% of this growth will be in emerging countries. Urbanization has been taking place partly due to population expansion and economic growth. The urban population will rise from 51.6% of the world population in 21, to 58.% in 225 and 19

Population (billion) Worldwide Market Forecast 61.7% in 235. During that period, the urban population of emerging countries, with everexpanding urbanization, will increase by about 1%, up from 46.% to 55.8%, while that of the developed countries will increase by 4.6%, up from 77.5% to 82.1%. Urbanization in emerging countries will accelerate. Forecast of World Population (Middle Scenario) 1, 8, 6, 4, 7,55 25 646 1,256 4,139 9,23 332 8,335 293 747 74 1,977 1,593 4,46 4,67 Middle East Latin America Africa Asia/Pacific World.98%p.a. Emerging Countries 1.14%p.a. 2, 1,26 1,285 1,296 217 227 237 Developed Countries.14%p.a. *Developed countries complies North America, Europe, Japan, Australia and New Zealand. Source:UN World Population Prospects: The 217 Revision In addition, there were 23 cities globally with populations in excess of 1 million in 21, and this 2

number will rise to 41 in 23. Seventeen of these cities were in emerging countries in 21, and this number will increase to 34 by 23, meaning these countries will be further urbanized. The population of cities with more than 1 million inhabitants as a percentage of the global urban population will increase from 1% in 21 to 14% in 22, and this level will be maintained until 23. From a regional point of view, the number of cities in Asia with populations in excess of 1 million will increase from 13 in 21 to 24 in 23, which means that about 6% of the cities with populations over 1 million in the world will be in Asia. 4.4 Demand for Travel According to the UNWTO (United Nations World Tourism Organization), the number of international tourist arrivals (overnight visitors) in 216 grew 3.9% year-on-year, to 1.235 billion, despite conflict and economic hardship in some regions. From a regional perspective, Europe increased by 4.7% to 616 million, the U.S. increased by 5.9% to 199 million, the Asia-Pacific region increased by 5.6% to 38 million, and the Middle East increased by 1.7% to 54 million. Of these international tourists arrivals, 8% were movement within the region, and conventionally markets have been concentrated in Europe, the U.S., and developed countries in the Asia-Pacific region. In recent years, however, rapid growth can be seen accompanying the rising middle class populations in Asia, Central and Eastern Europe, the Middle East, Africa, and Latin America. 21

Market Share (%) Number of International tourist Arrivals (million) Worldwide Market Forecast 2 15 1 International Tourist Arrivals (Overnight Visitors) Middle East Africa Americas Asia-Pacific Europe Actual Forcast 5 199 1995 2 25 21 215 216 22 23 Source:UNWTO According to the same organization s prediction for the number of international tourist arrivals (overnight visitors) worldwide from 21 to 23, this number will reach 1.8 billion by 23, growing at an average rate of 3.3%. The average growth rate of arrivals in emerging countries will be 4.4%, or double the rate of developed countries, so that in 23 the share of international tourist arrivals is estimated to reverse to 57% in emerging countries and 43% in developed countries. The annual growth rate will be 4.9% in the Asia-Pacific region, which will expand the most, while growth is estimated to be more moderate in Europe and the Americas. As for the share of international tourists in the global market, it is estimated that the Asia-Pacific region (from 22% in 21 to 3% in 23), the Middle East (from 6% to 8% in the same time period), and Africa (from 5% to 7% in the same time period) will increase their shares, while North America (from 16% to 14% in the same time period) and Europe (from 51% to 41% in the same time period) will account for lower shares. In the statistics for 217, 55% of travelers with accommodations used airplanes, and airplanes are increasing their share of transportation. Looking at the purpose of travel, we see that 53% of travel was for leisure, 27% was to visit friends and relatives (VFR), undertake pilgrimages, or seek health treatments, and 13% was for business. International Tourism by means of Transport 6 Aviation 5 Road 4 3 2 1 Marine Rail 24 25 26 27 28 29 21 211 212 213 214 215 216 Source: UNWTO 22

Trips per Capita Number of Foreign Travels per person per year Worldwide Market Forecast 1. Relationship between Income Level and Number of Foreign Travels* 1. Hungary Russia Germany Netherland UK Canada New Zealand Italia France Australia USA Switzerland.1 China Japan Brazil.1 India ( * : including land and sea travels ) 1, 2, 3, 4, 5, 6, 7, 8, 9, Source : UN, IBRD, IHS, JADC Nominal GDP per Capita (US$) In emerging countries with low GDP per capita, even slight growth causes a sudden increase in the demand for international travel. In comparison, economically mature countries are not as sensitive to this increase. Demand for travel continues to increase along with rising incomes due to economic growth, growing rapidly when GDP per capita reaches $5, to $1,. Emerging countries are creating a massive new middle class through remarkable economic and population growth. As their income improves, their strong consumer appetite turns not only to the purchase of goods, but also to services such as travel, and the demand for air travel is also likely to greatly increase over time..4 china India.3 Republic of Korea Thailand Colombia Czech Republic.2 Trip per Capita vs.gdp Capita(1995-215).1. 1 1, 1, 1, Nominal GDP per Capita($US) Source:UN, Worldbank, ihs, JADC 23

24 Worldwide Market Forecast

RPK Growth(%), Yield Growth (%) GDP Growth (%) Air Passenger Traffic (trillion RPKs) Worldwide Market Forecast 5. Air Passenger Market 5.1 Air Passenger Market Trend Air passenger traffic Entering the 21 st century, global air transport based on RPK experienced a significant decline due to the 21 terrorist attacks in the U.S., the Iraq War and SARS in 23, the U.S. financial crisis in 28, and the subsequent debt crises in Europe. Nevertheless, since the latter half of 29, the trend toward recovery became clear, and strong growth continued thereafter. For the 2-year period from 1998 to 217, growth averaged 5.% annually. This growth was primarily led by strong air passenger demand in emerging countries, such as those in the Asia region. World Air Passenger Traffic 8 198-1982 1991-1993 21-23 28-29 6 4 Growth Rate 1987-1997 5.2% 1997-27 4.8% 27-217 5.3% 1997-217 5.% 2 217 215 213 211 29 27 25 23 21 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 *Shaded area denotes aviation recessions. source: IATA, ICAO, JADC It is understood that air passenger traffic demand is generally affected by matters such as income level, airfare, population, distance, frequency, seasonality and availability of alternative modes of transportation. Above all, income levels and airfares are strongly related to demand. Recently, air travel 24 2 16 12 8 4 1987 1992 1997 22 27 212 217-4 -2-8 -12-16 Gulf War GDP Terror Attacks Yield Iraq War SARS Financial Crisis Crude Oil Price Down RPK 12 1 8 6 4 2-4 -6-8 25

LCC capacity share of total seats (%) Worldwide Market Forecast demand has fluctuated markedly due to exogenous shocks, such as war, terrorism, disease, and financial crisis. For the management of airlines, it has become a more important issue than ever to take measures against these kinds of event risks. Liberalization and LCC LCCs (Low-cost carriers) were established by the airline liberalization in countries in North America, Western Europe and other regions. In 212, LCCs were established in Japan and Taiwan, which were called blank areas for LCCs. Additionally, airline liberalization is in progress in emerging countries, along with which, many LCCs have been established. 6 5 LCC Capacity Share for Intra Regional Route 27 217 4 3 2 1 Source:Flightglobal, OAG, JADC In 217, 29.5% of available seats of intra-regional routes in the world were supplied by LCCs. Irish LCC Ryanair has maintained the top position among international airlines for at least five years in terms of the number of passengers. In Southeast Asia, LCCs accounted for 52.4% of available seats on intra-regional routes in 217, and some forecasts predict that it will exceed 7% in 22. In regional lines in Africa and China, the shares accounted for by LCCs is about 11.% and 8.2% respectively, but their shares are also expected to increase further in these regions due to the expansion of aviation liberalization. 北米 西欧 West 東欧 East CIS CIS 中南米 Latin 中東 Middle アフリカ 中国 日本 北東アジアオセアニア東南アジア南アジア Oceania South World 世界 Europe Europe Americ East Asia North America Africa China Japan North East Asia In addition, LCCs are advancing into international markets as well as domestic and regional ones. This seems to be viable in terms of cost if the flight distance is short enough for the crew and aircraft to return without spending the night at the destination, which will enable operation in a daily cycle. Forays into long-distance international routes that require crew lodgings and the replacement of equipment and personnel are difficult in many cases because of the costs, and entries and withdrawals were seen one after another in the past. In 216 and thereafter, however, Norwegian and JetBlue began South East Asia 26

to make an attempt at Atlantic routes, and in 217, Air France launched JOON and IAG launched LEVEL, both new medium- and long-haul airline, respectively. Moreover, IAG has made a move to establish a new LCC for long-distance routes. AirAsia X, Scoot, and other airlines have also revived long-distance routes that had once been suspended, attracting attention to the future trends in LCC long-distance routes. According to Research on the economic ripple effect regionally by the entry of LCCs (215) by the Policy Research Institute for Land, Infrastructure, and Transport (or MLIT, Japan), 17% of LCC users responded in the questionnaire, Without LCCs, I would not have made this trip. It could also be said that LCCs create new air passenger traffic in Japan as well. The entry and expansion of LCCs into the market will make airfares so low that it will drive further increases in air travel demand, and even those who were previously unwilling to use airlines or did not use them often because of expensive airfares will find it easier to use them. It was said that LCCs had a 5% to 6% cost advantage over FSCs (full service carriers), but LCCs have incurred rising labor-related costs against a strong performance backdrop. On the other hand, FSCs have continued to streamline their business and reduce costs in order to survive, and the gap between the two types of companies is getting smaller. Although the low cost makes LCCs business viable despite cheap airfares, there are actually cases where impossibly cheap airfares are offered in a price competition between LCCs. These LCCs are financially weak and vulnerable to big changes in the economy and event risks. At the end of 217, in the Asia-Pacific Region LCC market, which was crowded with 6 companies, some LCCs have experienced severe financial situations due to increased competition, and some LCCs have changed their strategy from the conventional expansion of networks to an emphasis on more profitable routes. In the flooded LCC market, there is potential for consolidation of progress as the market matures, and there were also mergers of LCCs, like Southwest Airlines and Air Tran. High-speed rail Partly due to an issue related to greenhouse gas emissions, such countries as Brazil, India, the U.S., and Indonesia have announced new plans for high-speed railroad construction. However, since such construction and maintenance of a railroad line infrastructure require a lot of time and money, and recovering those costs stretches into the long term, long-term demand forecasts and careful management decisions are required in order to execute such plans. In that regard, airplanes can be flown as long as airports are built, so air routes can be established with relatively lower infrastructure construction costs, making entry to the business easy. An airplane can travel at nearly three times the speed of a high-speed train, and the longer the travel distance, the greater the advantage becomes for the former. Accordingly, competition between these two means of transportation occurs mainly in short-haul routes. Competition between air transport and 27

Billion passenger-km Worldwide Market Forecast railway transport has already occurred in Japan, Europe, China, South Korea, and Taiwan, which have high-speed railway networks. Above all, the competition is fierce at routes where it takes one to two hours to complete travel by airplane. It is said that a high-speed railway has the advantage on routes which a high-speed train can complete by traveling within four hours. Not only do high-speed railroads connecting major cities with a large population have large number of passengers, they are also used for business travel. Such routes are important for airlines as well. Railroads can provide direct access between city centers, are less influenced by weather, do not require passengers to set aside time for security checks, and have no restrictions on the use of mobile phones and the Internet. They can also have meals even if passengers do not use first-class cars. As such, many people feel trains are safer, surer, and far more comfortable than airplanes, and use high-speed trains. LCCs have also flown their airplanes on such routes so lower airfares have been available. Recently, high-speed rail fares have also dropped and even train fares that cost about 5% of regular airfares or even lower than LCC fares have become available in Europe. There are several instances in which it is believed that high-speed railways caused the closure of LCC routes. In addition, the operating speed of high-speed rail trains is increasing every year, resulting in shorter travel times, and such a situation is becoming harder and harder for airlines to handle. 8 6 High Speed Rail Traffic in the world China Japan Korea Taiwan France Germany Spain Italy Other European 4 2 21 211 212 213 214 215 216 source:international Union of railways (UIC) Passenger load factor 28

The global passenger load factor reached 8.9% on average in 217. It increased by about 12% over the past 2 years, from about 69.% in 1997. In North America and Europe, the annual average passenger load factor reached 83.7% and 82.3% in 217 respectively, and the U.S. exceeded a passenger load factor of 85% during the busy season of 217. Passenger load factors in other regions also have been rising every year, with many exceeding 8% on average. This high passenger load factor is the result of striving to improve RASK (revenue per ASK). while making the increase of ASK lower than that of RPK, in order for airlines to secure their profits in Load Factor (%) 1 9 Load Factor by Region 1997 217 237 8 7 6 5 4 3 2 1 N.AMERICA EUROPE ASIA-PACIFIC M.EAST L.AMERICA AFRICA CIS WORLD response to the significant rise in the break-even load factor due to a decrease in revenue resulting from lower airfares due to competition between airlines including LCCs, and an increase in operating costs resulting from soaring fuel prices. Crude oil prices, which had soared for nearly 1 years, have fallen sharply since the autumn of 214. However, forecasts about future crude oil price trends, while they differ in matters of degree, have predicted rising prices due to increased demand for oil due to economic recovery and economic development. In addition, in an environment where every country should be required to achieve significantly lower CO 2 output towards 25, it will be difficult to carelessly increase consumption of fuel. Since passenger fares are also not expected to rise significantly, due in part to competition among airlines, the global passenger load factor is believed to be maintained at a high level considering that airlines will precisely adjust demand and supply in the future, and it is estimated to rise from 8.9% in 217 to 82.8% in 237. 29

% Passenger Load Factor in U.S. Airlines 9 85 8 75 monthly 7 (high fuel price) yearly 65 (Source:BTS) 6 23 25 27 29 211 213 215 217 Passenger yield The world average real passenger yield fell 2.2% per annum over the past 2 years, between 1998 and 217. Major factors that reduced the real yield over that period were airlines efforts to reduce operating costs by introducing new models of airplane with better operational economy, and their streamlined operation. Recently, the advent of LCCs and their competition with existing airlines have been added to these factors. Going forward, there would be room for airfares to be further lowered due to further improvement of airplane operational economy and corporate efforts by airlines, competitiveness among airlines including LCCs, the falling of fuel prices that continued to soar for about a decade, and others. However, even cost reductions through restructuring and mergers/acquisitions by airlines seem to almost reach their limit, which means the trend will have a more moderate decline in airfares than ever before. 21 US cent/rpk 3 25 2 Trend of Real Yield by Region Western Europe 15 World 1 North America 5 1987 1992 1997 22 27 212 217 source: AEA, A4A, ICAO, IATA 3

5.2 Air Passenger Traffic Forecast For the 2-year period covering 218 to 237, the global RPK will grow at 4.5% per annum, from 7.74 trillion passenger kilometers in 217 to 18.6 trillion in 237, approximately 2.4 times the figure for 217. For the forecast period, it is predicted that the real passenger yield will fall.6% per annum partly due to competition among airlines. (trillion RPKs) World Air Passenger Traffic Forecast 2 Actual Forecast 16 12 2.4 times 8 5.% p.a. 4.5% p.a. 4 2.7 times 1997 22 27 212 217 222 227 232 237 World Air Passenger Traffic Forecast by Region Asia-Pacific 5.3% Breakdown of Asia/Pacific (China) 5.6% (Southeast Asia) 5.5% (South Asia) (Oceania) 3.2% (Northeast Asia) 2.7% 7.6% Traffic in 217 Increase from 218 to 237 (Japan) 3.2% Europe 3.8% Breakdown of Europe (West Europe) 3.5% (East Europe) 7.3% North America 3.2% Middle East 6.% Latin America 4.8% CIS 3.2% Africa 3.8% 1 2 3 4 5 6 7 8 RPK (Trillion) 31

Looking at air passenger traffic by region, North America and Europe will have a lower average growth rate over 2 years than the other regions in the world due to the maturation of their markets, at 3.2% and 3.8% respectively. Because of this, the RPK of North American airlines will increase from 1.78 trillion passenger kilometers in 217 to 3.32 trillion passenger kilometers in 237, while the RPK of European airlines will increase from 1.91 trillion passenger kilometers to 4. trillion passenger kilometers in the same period, and the global market share will contract from 23% and 25% respectively in 217 to 18% and 22% respectively in 237. Asia-Pacific and Middle East airlines will increase their share in place of European and North American airlines. Asia-Pacific Airlines have experienced a growth of 6.8% per annum in RPK over the past 2 years, and this region has grown to be the largest market in the world. In the future, China, ASEAN countries and India will take center stage and continue a growth of 5.3% per annum in RPK, expanding from 2.47 trillion passenger kilometers in 217 to 7. trillion passenger kilometers in 237, 2.8 times higher. The share will grow from 32% to 38%. World Air Passenger Traffic Share by Region (RPK) Middle East 1% Japan China Africa 3% 14% Latin America 2% Oceania 3% 3% South Asia 5% 3% 217 Share Others (2%) Asia-Pacific (32%) Southeast Asia 7% CIS 3% Northeast Asia North America 23% Europe (25%) 1% 23% East Europe West Europe Middle East Japan China Africa 2% 13% 2% 17% Latin America CIS 237 Share 6% 2% Others (23%) Asia-Pacific (38%) North America 18% 2% 9% Oceania 6% Southeast South Asia Asia Europe West (22%) Europe 19% 2% East Europe 2% Northeast Asia Looking at the annual growth rate of airline passenger demand by region, Chinese airlines have enjoyed growth at an average rate of 12.8% for the past 2 years. Although this will slow to 5.6% over the next 2 years due to recent economic uncertainty and the maturation of the market, it will retain strong growth potential, and the RPK in 237 will be three times that in 217, growing from 1.9 trillion passenger kilometers in 217 to 3.26 trillion passenger kilometers in 237. Major growth is expected also in South Asian airlines, mainly India, at an annual growth rate of 7.6%, 32

and Southeast Asian airlines at an annual growth rate of 5.5%. Middle East airlines will take in a lot of transfer passenger demand, and show an annual average growth of 6.%, increasing from.74 trillion passenger kilometers in 217 to 2.37 trillion passenger kilometers in 237, increasing their market share from 1% to 13%. RPK Growth per Year (%) 2 1998-217 World Air Passenger Traffic Growth by Region 15 12.8 11.7 1 9.3 8.9 7.3 7.6 5 5. 4.5 3.2 2.7 5.9 4.8 4. 3.5 5.4 3.8 6. 3.2 3.2 3.2 5.6 3.6 2.7 6.2 5.5 6.3 3.2 1.1 World North America Latin America West Europe East Europe Africa Middle East Oceania Japan China Northeast Southeast Asia Asia South Asia CIS Based on such an RPK and load factor, the total global ASK is estimated to grow at an annual average of 4.4% over the next 2 years, reaching 22.5 trillion seat kilometers in 237, which is 2.3 times what it was in 217. The total global ASK will grow at an annual average of 4.4%, reaching 2.9 trillion seat kilometers in 236, which is 2.3 times what it was in 216. 33

34 Worldwide Market Forecast

6. Passenger Airplane Demand 6.1 Passenger Airplane Analysis ASK distribution by route distance Passenger airplanes are chosen on the basis of their suitable route distance by airlines. According to ASK distribution by route distance for scheduled nonstop services, passenger turboprop airplanes are mainly operated within a range of 7 km, and the peak distance is around 3 km. Regional jets are mainly operated on routes ranging from 3 to 1,3 km, but in North America, which is a main market for them, their routes extend to about 2, km. Narrow body jets can cover 5 to 5, km, and they are mainly operated on routes ranging from 1, to 2, km. Routes within 3,5 km account for 91% of ASK. For routes within 4,5 km, they account for 8% or higher of total ASK worldwide, and looking at all distance groups, they account for 52% of total ASK worldwide. Wide body jets are operated in a wide range of routes from short distance to long distance, mainly covering 6, to 9,5 km, and routes from 4,5 to 11, km account for 75% of total ASK of wide body jets. ASK (billion) Range Category and ASK Distribution 12 1 8 6 4 Turboprop Regional Jet Narrowbody Jet Widebody Jet 2 Regional Short Range source: OAG September 217 Medium Range Long Range Range (km) 35

ASK distribution by airplane seating capacity According to ASK distribution by airplane seating capacity in accordance with route distance categories, in the route distance category of 1 to 1, km, you can find a small peak of 4-99 seats in passenger turboprop airplanes and regional jets, and a large peak of 12-169 seats (A32, 737-7/8, etc.) in narrow body jets, which means airplanes with a 12-169 seat capacity are mainly used. Route ASK Distribution - World ASK (billion) 18 16 14 12 1 8 6 4 2 451-21-45 11-2 Range (km) 1-1 Aircraft Size (Seats) 1-19 2-39 4-59 6-79 8-99 1- Regional, 119 12-169 17- Turbo Prpo 229 23-39 31- Narrow Body 399 4-499 5- source: OAG September 217 8 Wide Body Even within the range of 1,1 to 2, km, 12-169 seat airplanes are the largest, and 17-229 seat narrow body jets (A321, 737-9ER, 757, etc.) and 23-399 seat wide body jets are also operated. In the range of 2,1 to 4,5 km, 12-169 seat airplanes are also mainly used, and 17-229 seat narrow body jets and 23-399 wide body jets (A33, 767/787, etc.) are operated. In this range, partly because the route distance is longer, relatively large airplanes such as 17-229 seat narrow body and 23-399 wide body jets are used more actively than for over 1,1-2, km. In the range of 4,51 km or more, 31-399 seat jets (A34, 777, etc.) are mainly operated, followed by 23-39 seat jets (A33, 787, etc.), 5-8 seat jets (A38), and 4-499 seat jets (747). 4-499 seat airplanes have declined in number due to the recent decrease in the number of 747 jets. 36

Index (21=1) Worldwide Market Forecast Increase of average seat numbers / Upgage of airplanes Comparing 24 with 213 with regard to the relationship between the number of arrivals/departures and the number of passengers at the top 5 airports in the world, the number of arrivals/departures did not change much, while the number of passengers increased. While the average number of passengers per departure/arrival in 24 was 87, it increased 1.3 times, to 113 in 213. During this period, the global load factor increased by 6.7%, from 73.1% to 79.8%, and even without this increase, it can be seen that the average number of seats per airplane increased. This suggests that airlines are responding to the increased passenger numbers by increasing the number of seats or upgaging their airplanes. 115 Trend of Average Seats per Airplane 11 L.T. 1,km 15 1,1-2,km 1 95 9 G.T. 4,5km 2,1-4,5km 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 source: OAG Generally speaking, due to the advent of regional jets, the introduction of twin-engine airplanes capable of long-distance operation, and widespread use of smaller jets with high frequency in operation, the average number of seats per airplane had decreased by the mid-2s. However, since 37

No. of Retired Airplanes Year No. of Retired Airplanes Year Worldwide Market Forecast the late 2s, with the emergence of LCCs, rising fuel prices, slot limitations due to airport congestion, reorganization of redundant routes and reduction in the number of flights due to airline mergers, the average number of seats per airplane on routes of 2, km or shorter has first shown an increase. Then, since 212, when the passenger load factor went up to its limit and a considerable number of large four-engine airplanes had been retired, the average seat number even on medium- and longdistance routes exceeding 2, km has shown an increase. There have been more seats available on airplanes, and airplanes within the same family have been enlarged. Airplane retirement The retirement age (or replacement age) of passenger airplane depends on changes in economic conditions (demand for transport), changes in fuel prices, compliance with noise regulations or the like, advent of new models of airplanes with new technologies, etc. Looking at recent years, the retirement of aging airplanes to Trend of Passenger Jets Retirement which the Chapter 2 Noise Standard of ICAO Noise Standards applies (those aged around 3 years) took place intensively until 22. The several years following the retirement of aging airplanes was relatively calm, when airplanes aged around 25 years constituted the majority of retired planes each year (the average retirement age of airplanes was around 27 years). However, since fuel prices began to rise in 25, airlines were forced to replace even relatively young airplanes, not to mention aging ones with high maintenance costs, with even more fuel-efficient ones. As a result, especially since 29, the retirement age of airplanes has 8 6 4 2 2 1 2 4 6 8 1 12 14 16 18 2 22 24 26 28 3 32 34 36 38 4 42 44 46 48 5 Western Build Passenger Jets Only Source : FlightGlobal Trend or Passenger Turboprop Retirement 2 4 6 8 1 12 14 16 18 2 22 24 26 28 3 32 34 36 38 4 42 44 46 48 5 52 54 Western Build Passenger Turboprops Only Source : FlightGlobal Age of retirement Age of Retirement 217 215 213 211 29 27 25 23 21 1999 1997 217 215 213 211 29 27 25 23 21 1999 1997 38

rapidly been getting younger, with those aged around 22 to 25 years constituting the majority of retired airplanes and even those aged around 18 years being retired. Thereafter, the stabilization of fuel prices since 215 seems to have calmed down a temporary rush for retirement/replacement of airplanes; yet, the average retirement age of airplanes dropped to approx. 23 years, which still remains. While the pressure for retirement has been eased due to fuel prices stabilized at a low level, it is believed the current level of service life will be maintained for a while, partly because of the huge back-order. Looking at passenger jet airplanes from Western manufacturers, in 25, 36 airplanes were retired, with an average retirement age of 27.5 years. Since 28, however, over 4 airplanes are retired each year. The number has been larger than 5 since 211. During this period, the average age of retired airplanes declined from 27-28 years to approx. 23 years. In 217, it was 23.2 years. At present, the majority of retired airplanes are ones that were delivered around 199, or from the late 198s to the early 199s. Looking at passenger turboprop airplanes from Western manufacturers, 1 airplanes were retired in 25 with an average retirement age of 25.8 years, but 121 were retired in 212 (average age of 26. years), and 39 were retired in 217 (average age of 26.4 years). The number of turboprop passenger airplanes retired yearly has grown smaller than before, similar to the trend of passenger jet airplanes. However, the average age of retired turboprop passenger airplanes has gradually increased over the past 5 years or so, in contrast to that of passenger jet airplanes, and in recent years the level has reached 26 to 28 years. Partly because turboprop passenger planes have been reappreciated due to their superior fuel efficiency in the face of soaring fuel prices, and suitable substitute airplanes with certain capacities in terms of number of seats are not in production, turboprop passenger airplanes now tend to experience longer use than passenger jets. Fuel prices Crude oil prices, or fuel prices, greatly affect air transport economy. Soaring crude oil prices make the global economy (GDP) cower, and such soaring fuel prices, together with rising airfares (yield), will cause a shrinkage in demand for air transport (RPK). The recent soaring crude oil prices came to an end after about 1 years. However, there is always a possibility that crude oil prices would rise again due to a future change in the balance of supply and demand, or an incidental or external factor. While forecasts by some specialized institutes are in common with the above in that crude oil prices will be qualitatively on a rising trend, a plurality of forecasts based on several scenarios are shown with a large margin in a quantitative manner. The idea that crude oil prices will be maintained as they are and that they will rise has strong arguments from contradictory perspectives such as expansion and shrinkage of demand for crude oil due to global 39

Average Spot Price (217US$/bbl.) Worldwide Market Forecast economic growth and promotion of alternatives to fossil fuel, production adjustment by OPEC, and increasing production by non-opec countries. The JADC believes that supply will not be tightened for a while, but predicts that it will moderately increase, considering increasing production by non- OPEC countries, decreasing demand for conventional crude oil due to commercialization of shale oil, the idea that there are many oil-producing countries whose primary balance is still negative at the current level of crude oil prices, and other factors. The graph below shows the pricing used by the JADC. For the forecast period, crude oil prices will rise at 1.3% on average per annum, and will be included in changes in RPK through the changes in yield (please refer to Appendix F as well). 25 Transition and Forecast of Crude Oil Prices (Brent Crude Oil) 2 15 1 5 Brent Crude Oil Price (Average Spot Price) 199 2 21 22 23 24 Source : EIA EIA High Oil Price Case EIA Reference Case JADC EIA Low Oil Price Case In-service fleet Globally, there were 5,572 passenger turboprop airplanes and 12,156 passenger jets in service in 1997, while in 217, there were 3,44 passenger turboprop airplanes and 22,337 passenger jets. During this period, the number of the former decreased by 2,168 units, and that of the latter increased by 1,181 units. The number of airplanes in service has been increasing with the rise in income level thanks to economic growth, and the accompanying increase in the travel demand. There is evidently a positive correlation between the number of airplanes in service per population of one million and GDP per capita, although there may be differences of varying degrees depending on the size of national territory, the development of ground transportation networks, etc. At the end of 217, there was an order backlog for 14,798 jet airplanes, of which 32% were orders from airlines in the Asia-Pacific region. In Asia, especially in China, South Asia and Southeast Asia, a large number of airplanes have been ordered with the strong air travel demand. In those regions, GDP per capita (USD as of 21) is expected to be about 1.86 thousand dollars in China, 4.6 thousand dollars in South Asia (mainly India), and 8.6 thousand dollars in Southeast Asia in 237. These figures are 2 to 2.6 times the level of 217. Since an increase in income along with 4

No. of Airplanes per 1 million persons Worldwide Market Forecast economic growth and growth in travel demand along with increase in income are expected, these regions will have strong demand for airplanes in the days ahead. 1 GDP per Capita vs. Passenger Jet Airplanes per Capita North America 1 Middle East Other Asia Europe Oceania 1 Africa Latin America Japan.1 South Asia China Asia-Pacific.1 1 1, 1, 1, Passenger jet airplane in service only. GDP per Capita (21US$) Asia-Pacific includes China, Japan, Other Asia, South Asia and Oceania. source: Ascend, UN 41

No. of Airplanes Worldwide Market Forecast 6.2 Passenger Jet Airplane Demand Demand for transport is expected to increase (RPK: an annual average of 4.5%) due to global economic growth (real GDP: an annual average of 2.8%) even though it is in a downward trend, and thus, the fleet size required in 237 to meet a required ASK will increase 1.78 times, from 22,337 airplanes in 217 to 39,867 airplanes in 237, despite some factors suppressing the increase of required airplanes, including rising load factors, introduction of airplanes with more seats available, and the extension of annual flight hours of airplanes by more efficient maintenance. The number of delivered passenger jets in the 2 year period from 218 to 237 will be 33,53 airplanes. Among these, 16, airplanes will replace current airplanes, accounting for 48% of total new deliveries. The remaining 17,53 airplanes will be due to new demand in response to growing air passenger demand. Fleet Developments of Passenger Jet 4, 39,867 3, 22,337 2, 1, Growth 17,53 52% Replacement 16, 48% New Deliveries 33,53 Retained 6,337 217 237 At the end of 217, 3,234 regional jets with 1 or fewer seats were in service. The number of passenger jets in service will increase to 3,41 in 237, but the share of airplanes in service will decrease from 14.5% to 8.6%. Between 218 and 237, 2,731 jets will be retired, and 2,97 new jets will be delivered, an 8.7% share of new deliveries. With the advent of new, more economically efficient regional jets, from the latter part of the 199s through to the early 2s, the number of regional jets with 5 or fewer seats increased, taking away demand from passenger turboprop airplanes, opening new routes, and taking mainline low-demand routes away. However, thereafter, under such circumstances as aviation industry recessions after the September 11 attacks in the U.S. and rising fuel prices, airplanes in this class whose CASK was high due to their small size were so high cost ones that they hastily needed to be changed to larger ones, and because of this reason as well as their shorter service life due to their structure based on bizjets 42

Share Worldwide Market Forecast that were their prototype, they were reduced in number. The production of regional jets with 5 or fewer seats such as CRJ1/2 and ERJ135/145 jets has already ceased. Recently, in many cases, even a regional jet has been equipped with first- or business-class seats, or constituted by two classes, so slightly larger airplanes are required. Because the restriction by the scope clause for regional jets has been relaxed to 76 seats, major U.S. airlines have settled on introducing 76 seat airplanes as replacements for 5 seat or smaller airplanes, and have placed orders for the CRJ9, ERJ175, and MRJ9. These airplanes are rather large with the standard number of 86 to 9 seats in mono class, but the total seats can be reduced to 76 with the installation of a first class section. Along with the seat number, the scope clause imposes a limitation on the maximum takeoff weight of 86, lbs. While certain measures must be taken for airplanes exceeding this weight limitation, such airplanes will be the staple airplanes in service from now on. 1% Fleet and New Deliveries Regional Jet Narrowbody Widebody 8% 4,252 9,989 8,928 6% 4% 14,851 26,468 21,695 2% % 3,234 3,41 2,97 217 Fleet 237 Fleet New Deliveries The types of airplanes in the 9-seat class that are in service or being developed include CRJ1, ERJ19/19E2, MRJ9, ARJ21, and Superjet1. In order to increase demand for such airplanes, especially in the U.S., it is necessary to liberalize the scope clause to increase the number of seats to 8 or 9. With that in mind, regional jets with 6 to 99 seats, which are the main staple of regional jets, will increase from 2,25 in service in 217 to 3,293 in 237. The number of airplanes delivered in this class will be 2,794 units throughout the 2-year period. At the end of 217, 14,851 narrow body jets with 1 to 229 seats were operated, but they will increase to 26,468 in 237, and the share of in-service airplanes will be 66.4%. Between 218 and 237, 1,78 jets will be retired and 21,695 new jets will be delivered to airlines. The share of new deliveries will be 64.7%. 43

One recent trend has been the popularity of such larger airplanes, such as the A32/A321 and the 737-8/-9ER/MAX-8, rather than the A319 and the 737-7 from the viewpoint of soaring fuel prices, airport congestion, etc. There is also a trend toward a higher average number of seats. For example, the average number of seats on 737-8 belonging to European airlines is already 18. Some airlines require the 757 successor or airplanes of the class with superior high-temperature and high-altitude performance, and the ability to cross the Atlantic Ocean with some 2 seats. While LCCs are mainly operating on short- and medium-haul routes up to 4 or 5 hours flights which the A32 and 737 jets currently in use can fly, they also seem to operate longer flight ranges along with the maturing of that transport market. The demand for airplanes that are bigger than mainstay airplanes and can fly longer distance is likely to increase in the future. While narrow body airplanes with a lower CASK compared with wide body airplane are preferred by airlines that greatly pay attention to cost-performance, they seem to be approaching their limits as single-aisle airplanes due to their seat capacity, and there is a possibility that they will be replaced by twin-aisle airplane. Nonetheless, as far as the number of airplanes is concerned, over the next 2 years, the demand for narrow body jets will remain the highest among all types of jets. The forecast shows that among narrow body jets, the largest deliveries will be those with 12 to 169 seats, totaling 13,56 units, and the number of airplanes in service in this class will be 16,93 in 237. With the need for airplanes with larger capacity or longer flight ranges, there will be large deliveries of airplanes with 17-229 seats, amounting to 6,85 units. The demand for narrow body jets with 1 to 119 seats will be mainly for the CS1 and ERJ 195, amounting to 1,789 units. On the other hand, it is convenient for some to No. of Airplanes 18, 16, Passenger Jet Fleet and Delivery Forecast by Seat Category Regional Jet Narrow body Jet Wide body Jet 16,93 14, 12, 1, Existing New Delivery Retained 217 237 11,845 Total 217 Year-End: 22,337 237 Year-End: 39,867 New Deliveries: 33,53 8, 7,65 6, 11,845 13,56 5,375 4, 2, 3,293 4,887 2,25 2,393 1,888 2,223 1,638 3,797 2,794 3,874 984 2,25 613 1,789 2,393 2,223 1,638 391 359 984 117 113 499 613 8 99 488 458 391 244 4 115 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 2-59 Seats 6-99 Seats 1-119 Seats 12-169 Seats 6,85 17-229 Seats 23-39 Seats 4,255 31-399 Seats Over 4 Seats 44

segment the narrow body jets by 15 seats. For the sake of convenience, looking at the demand for narrow body jets in two categories, the 1-149 seat class and the 15-229 seat class, over the next 2 years, there will be deliveries of 11,196 units in the 1-149 seat class, and 1,499 units in the 15-229 seat class. The number of wide body jets with 23 or more seats will increase from 4,252 at the end of 217 to 9,989 in 237, with the share increasing from 19.% to 25.1%. 3,191 jets will be retired and 8,928 new jets will be delivered to airlines between 218 and 237. The share of new deliveries will be 26.6%. The main markets for wide body jets are medium- and long-haul international routes, and domestic routes with a high demand. With the introduction of highly fuel-efficient, mid-sized airplanes excellent in operational range performance, such as the 787, it is possible to enter the long-haul market where airlines have found it difficult to profit from larger airplanes such as the 747 and the 777. Among wide body airplanes, deliveries of jets with 23 to 39 seats are expected to be the most numerous at 4,887 units, and the number of jets in service will be 5,375 in 237. Deliveries of jets with 31 to 399 seats will be 3,797 units, and the number of jets in service will be 4,255 in 237. Due in part to airlines recent preference for medium-size airplane, sales of wide body airplane, especially of large jets with 4 or more seats, have not been going well. In the long run, some quarters believe that there will exist demand for large jets mainly flying on high-passenger traffic routes connecting major cities mainly because of limitations of the number of flights caused by airport congestion, long-term increase of fuel prices, and increasing concentration of population into urban areas with population growth and an advance in urbanization, but it is expected that there will be some demand for replacement of airplane currently in service, considering actual orders that airplane manufacturers have received. The number of airplanes in service with 4 or more seats will increase from 391 in 217 to 359 in 237. 244 units will be delivered in the next 2 years. By region, North America has a large number of airplanes in service, and 6,34 airplanes are in service at the end of 217, which will increase to 7,564 by 237. However, because there will be a large number of new deliveries in Europe and China during this period, North America will be ranked third and its share of airplane in service by region will decrease from 28% to 19%. There will be 6,17 units delivered during that period, making an 18% share of new deliveries. In Europe, the number of airplanes in service, which was 4,585 at the end of 217, will increase to 7,694 by 237, and its share will decline from 21% to 19% during this period. The number of new deliveries during these two decades will be 6,431, with the share being 19%, which will be the second largest in the world. In China, the number of airplanes in service was 3,345 at the end of 217, which was the third largest in the world. However, the number will increase to 8,297 by 237, and China will surpass both North America and Europe as the largest market in the world. The number of new deliveries during these 2 45

217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 Worldwide Market Forecast years will be 6,745, with a 2% share. In addition, 1,73 of the newly-delivered airplanes will be wide body jets (with a 17% share of newly-delivered wide body jets). China will thus be a huge market for wide body jets surpassing the Middle East (1,41 new deliveries with a 14% share). N.of Airplanes 18, 16, 14, Passenger Jet Fleet and Delivery Forecast by Region 16,474 Total Fleet 217 Year End: 237 Year End: Deliveries: 22,337 39,867 33,53 12, 1, 1453 New Delivery 8, 7,564 7,694 Retained 6, 4, 2, 617 6431 634 6987 1457 4585 1263 2421 6745 2,654 3,131 1,3 1,347 3516 3345 2677 1897 235 696 1552 541 1429 575 184 54154 291 627 1 57 658 14 138 34 1464 829 183 454 7 989 174 264 North America Europe Asia Pacific Japan China North east Asia South east Asia South Asia Oceania Middle East Latin America Africa CIS In Latin America, Southeast Asia (mainly ASEAN countries), the Middle East, and South Asia (mainly India), the passenger traffic demand is expected to grow at higher rates than the global average, and the number of passenger airplanes in service will also increase. In these four areas, the number of airplanes in service will be 3,131, 3,87, 2,654 and 1,997 respectively in 237. Units delivered will be 2,677, 3,516, 2,35 and 1,897 respectively. The Middle East, especially, will see 1,41 new deliveries of wide body jets, which will account for 6% of all new deliveries that will take place in this region. In the CIS, 1,83 units will be delivered, with a total of 1,347 jets in service in 237. The share of new deliveries will be 3.2%. 46

No. of Airplanes No. of Ordered Airplanes Jet Fuel Price * (US /Gallon) Worldwide Market Forecast 6.3 Passenger Turboprop Airplane Demand Passenger turboprop airplanes with 15 or more seats were operated by airlines worldwide peaked at 5,98 units in 1994, but with the expanding popularity of regional jets, those airplanes declined in number thereafter, and it was 3,44 at the end of 217. Currently, passenger turboprop airplanes are almost exclusively being operated on routes of 1, km or less. For this distance range, some routes require a minimum of transportation services societally and some routes are difficult to switch over to jets technologically. Therefore, even if airlines reduce the amount of flights or withdraw from unprofitable routes, it is expected that a certain transportation capacity will be maintained. Additionally, due to the rise of fuel prices that lasted for a long period, fuel-efficient turboprop airplanes are revaluated, and orders began rising again in 25. 6 5 4 3 2 1 Trend of Orders for Passenger Turboprop Passenger Turboprop 1997 22 27 212 217 *Jet Fuel Refiner Price to End Users source : FlightGlobal, EIA Jet Fuel Price * Regional Jet Actually, in addition to the continued competition between 6 to 79 seat turboprop airplanes and regional jets, since there are few models in production suitable for new procurement for turboprop airplanes in the 8-99 and 2-39 seat class, it will be difficult to make more units even if they are more highly evaluated. Turboprop airplanes in service will slightly increase from 3,44 at the end of 217 to 3,515 at the end of 237. During this period, 2,569 of these airplanes will be retired, and 2,68 new 35 3 25 2 15 1 5 5, Fleet Developments of Passenger Turboprop 4, 3,44 Growth 111 4% 3,515 3, 2, Replacement 2,569 96% New Deliveries 2,68 1, Retained 835 217 237 47

217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 217 237 Worldwide Market Forecast airplanes will be delivered. By region, the number of passenger turboprop airplanes in service is large in North America and Europe, as in the case of passenger jet airplanes. However, 3 to 45 passenger turboprop airplanes are used in each of the other regions, such as Latin America, Africa, Oceania, and Southeast Asia. It can be said that this type of airplane is used widely throughout many regions, and not eccentrically located. N.of Airplanes Passenger Turboprop Fleet and Delivery Forecast by Region 1,6 1,4 1,2 1, 8 151 1154 Total Fleet 217 Year End: 3,44 237 Year End: 3,515 Deliveries: 2,68 New Delivery Retained 6 549 4 2 453 713 397 338 547 115 152 999 347 45 77 57 12 21 5225 4217 529 444 361 444 36 242 249 149 197 345 44 6 75 31 83 3713 365 451 159 287 213112 78 47 North America Europe Asia Pacific North South Japan China east east South Oceania Asia Asia Asia Middle East Latin America Africa CIS Routes which require a minimum level of aviation services or geographically specific routes (e.g., routes to isolated islands) will continue to require turboprops, even if they are low in demand. It is expected that airplanes with 15 to 19 seats will continue to be operated on such routes, and 292 units will be delivered during the next 2 years. However, the number of such airplanes in service will decrease from 1,57 in 217 to 395 in 237, and the airplanes out of service will be replaced by airplanes with 2 to 39 seats as described below. In 217, 534 airplanes with 2 to 39 seats were in service. Since, among them, the economic lifespan of some airplanes such as the DHC8-2 and Saab34 will end in the early 22s, North American airlines are especially calling for replacement airplanes. However, no suitable replacement airplanes in this class have currently been in production. The JADC, making a calculation based on high-speed cruise type turboprop airplanes with 3 seats in this class, forecasts that demand for new airplanes will be 843 units for the next 2 years, and 86 units will be in service in 237. However, since there has been no actual supply of new airplanes, an averaged age of existing airplanes in service is 27 at the end of 217 and it is increasing over the years. Therefore, it has been hoped for some new models of 48

airplanes to start their production. Airlines operating on short distance routes with comparatively high demand for transport have an interest in turboprop airplanes with 9 to 1 seats. Bombardier, in order to respond to this interest, is developing the DHC8-4 with 86 seats as an option, and ATR is hoping to develop airplanes with 9 seats. Since no new airplanes in this class have currently been supplied, the JADC, making a calculation based on high-speed cruise type turboprop airplanes with 9 seats, forecasts that demand for new airplanes will be 367 units for the next 2 years. Although turboprop airplanes in this class seem to compete with regional jets, the disadvantage of turboprop airplanes in their long flight hours due to lower flight speed of them are small on shorter distance routes and moreover can be diluted by the effect of time spent on the ground of airports. Passenger Turboprop Fleet and Delivery Forecast by Seat Category No. of Airplanes 2, 1,8 1,6 1,4 Total 217 Year-End: 3,44 237 Year-End: 3,515 New Deliveries 2,68 1,662 New Delivery Retained 1,2 1, 8 6 4 2 1,175 1,57 1,47 86 638 534 395 367 843 231 615 292 131 367 13 17 1 217 237 217 237 217 237 217 237 217 237 15-19 Seats 2-39 Seats 4-59 Seats 6-79 Seats 8-99 Seats Since 2, demand in the turboprop market has shifted to larger airplanes partly because there have been no suitable small airplanes in production due to the exit of turboprop manufacturers from the market, and other reasons. and with regard to passenger turboprops in service, the number of 6 to 79 seat turboprop airplanes in service including ATR72 and DHC8-4 was 1,175 (a share of 35%), the largest part of the passenger turboprop airplane market, at the end of 217, and it is expected that the number will be 1,662 (a share of 47%) in 237. The number of new deliveries in this period will be 1,47, which will constitute 39% of all new deliveries. The market is expected to grow in the next 2 years even by absorbing currently existing transport demand for 4 to 59 class airplanes. In this class, newly manufactured airplanes have been supplied, and existing airplanes in service were still young at the age of 6.9 on average at the end of 217. On the other hand, the average age of 15-49

19 seat class airplanes was 28, that of 2 to 39 seat class airplanes was 27, and that of 4 to 59 seat class airplanes was 24, respectively, and it seems that airplanes that meet conditions including economic efficiency which airlines hope for, have not been supplied even in a class in which airplanes are still in production. Although there are a few manufacturers for the passenger turboprop market, considering that one manufacturer of turboprop passenger airplanes has completed the development of a new model of passenger jet airplanes and its EIS (Entry Into Service) took place, some airlines expect that such a manufacturer could develop a suitable new model of passenger turboprops in the near future. 5

7. Air Cargo Market 7.1 Air Cargo Market Trend Air cargo traffic Global air cargo traffic, in terms of RTK, grew at an average rate of 2.8% per annum during the 2- year period from 1998 to 217. Compared to the passenger business, the cargo business is more susceptible to economic changes, and in the last ten years, due in part to the effects of the U.S. financial crisis and credit concerns in Europe, its average growth rate was 2.8% per annum, recovering to almost the same level as the ten-year period between 1998 and 27, which saw an average annual growth rate of 2.7%. In the early economic recovery phase, the degree to which air transport has been used from the inventory cycle has increased, and RTK escaped the downturn that had continued from 28 to 214. In the first half of 216, however, it slowed down more significantly, due in part to the Chinese economic downturn and confusion in the financial market caused by the Brexit shock. Subsequently, a gradual recovery continued in the second half of 216, partly reflecting the recovery of the U.S. economy, support for the Chinese economy through various policies, and the prompt response to the Brexit shock by the central banks of key nations. The global economy in 217 was significantly improved by being driven by major advanced economies, though there were many political events and geopolitical risks such as elections in major Western countries including the US. According to IHS (Global Insight), the global real GDP growth rate was 3.1% in 217, recovering from a year-on-year 51

rate of 2.4% in 216, which was the lowest since the Global Financial Crisis, and it will be 3.2% in 218. Meanwhile, the global air cargo traffic growth rate in 217 published by the IATA (International Air Transport Association) significantly increased at a rate of 9.3% year-on-year in terms of RTK, despite an average rate of around 2% over the last 5 years. In addition, according to the IATA s estimation, the global air cargo traffic growth rate over the next 5 years from 218 to 222 will be 4.9% on average, which is not as high as the figure in 217, but still high. 52

Regionally, air cargo traffic growth rates by airlines in Africa and Europe significantly increased at rates of 24.8% and 11.8% year-on-year respectively, which were higher than 8.1% by airlines in the Middle East. As a result of Middle East airlines exceeding 8.1%, there was growth in all regions. Asia Pacific Airlines grew by 7.8%, North American Airlines by 7.9%, and South American Airlines by 5.7%. Recently, there have been active movements, such as the manufacture of value-added products in emerging countries, and companies from emerging countries expanding their business to other emerging countries, which differ from conventional methods such as shifting manufacturing bases for low-value-added products from developed countries to emerging countries. In recent years, in many cases, air cargo products have been shifting from end products such as mobile phones and audio-video equipment to electronic components, lenses, etc., because final assembly has been carried out in lowlabor-cost countries or in places close to consumer regions. In addition, with advances in packaging technology, cargo volume has become smaller than before. Since air cargo goods have become smaller and lighter, air cargo capacity as a whole is overcapacity. Airlines face circumstances including declining cargo yields and worsening profit due to soaring fuel costs. They also see an increasing number of passenger airplanes, which have a large-volume lower hold that can accommodate a relatively large amount of cargo, such as the A33 and the 777-3ER. To increase revenues other than those from passenger transport, airlines have been reducing freighter transportation and increasingly using such lower holds in their passenger airplanes. LCCs have also been entering the cargo business as a source of revenue other than their passenger business. Although the global economy has continued upturn for a while, there remains uncertainty in the economies of emerging countries and Europe, and there are also downturn risks caused by conflicts and terrorist attacks in the Middle East and Europe. In the long run, however, with the continuing globalization of companies, inventory reductions, and economic growth in emerging countries, and consequently the expansion of the middle class with increased purchasing power, it seems that the movement of people and goods will become more active, and air cargo demand will increase further. Competition from other transportation modes Unlike air passenger transport, which is only competing with high-speed rail and long-distance buses over short-haul routes, air cargo transport has to compete with other modes of surface transport such as trucks and freight trains in addition to maritime container ships, making the environment for air cargo transport much more difficult. For the last 1 years, global trade in goods and services has been growing at an average annual rate of 3.4% on an export value basis. During this period, compared to ocean container shipping, which grew at an annual rate of 2.6% in terms of TEU, air cargo traffic grew at 2.7% in terms of RTK. This growth rate is slightly higher. 53

Because of the declining prices of their products, companies must reduce their logistics costs. As such, they tend to use maritime cargo shipping and other modes of lower cost transportation as opposed to higher-priced air cargo. In the last few years, however, the global economy has been robust, and air cargo traffic has been increasing because of urgent transportation of semiconductor components and automobile components. This has resulted in air cargo transport overtaking ocean container shipping for the first time. In recent years, higher added-value products, which can take advantage of the higher speeds of airplanes, such as perishable goods, pharmaceuticals, time-critical goods and precision equipment, have been considered more important as air cargo. Cargo load factor The system cargo load factor, when seen from the combination of transportation by freighters and transportation by lower holds in passenger airplanes rose from 49.4% in 1997 to 49.8% in 217, meaning it slightly increased, even though it was affected by demand fluctuation. The freighter load factor slightly increased from 66.% in 1997 to 7.6% in 217, which showed strong cargo traffic. The freighter load factor had already reached a high level, and thus it will be difficult for it to further increase significantly. During the same period, the lower hold cargo load factor slightly increased from 38.9% to 4.1%, which likewise showed strong cargo transportation. 54

It seems that because of things like the entry of LCCs into the cargo business, smaller and lighter cargo goods, and the advent of wide body passenger airplanes that can carry a large amount of payload, cargo traffic in the lower holds of passenger airplanes will increase, and the load factor will rise further in the future. Cargo yield Although the real global cargo yield, an indicator of cargo revenue, decreased by 3.2% per annum in the decade from 1988 to 1997, it slowed its rate of decline rate dramatically, to an average annual rate of 2.1% in the 2 year-period from 1998 to 217. In the 198s, the real cargo yield showed a significant decline due in part to the introduction of large freighters such as the 747F to the market. Yet, since 199, with the expansion of international trade due to the globalization of the world economy, demand for air cargo transport has grown, and the yield has not much decreased. However, from now on, while there is a requirement for reducing cargo charges due to competition from other modes of transportation and reduced logistics costs by companies, it is conceivable that the yield is relatively more unlikely to decrease due in part to a shortage of supply generated by increased demand for air cargo created by e-commerce and other businesses, and also to a shortage of pilots and some other reasons. 55

7.2 Air Cargo Traffic Forecast Global air cargo traffic, in terms of RTK, will grow at an average rate of 4.1% per annum over the next 2 years, increasing 2.2 times, from 226.8 billion ton kilometers in 217 to 57.9 billion ton kilometers in 237. The real cargo yield during this period is estimated to decrease at an average rate of.8% per annum. 56

Routes between the Asia-Pacific region and North America will be the largest market, and the average annual growth rate is expected to be 4.4%. The routes of 41.7 billion ton kilometers in 217 will grow to 99. billion ton kilometers in 237. The growth rate will be higher than the global average, so the share will increase slightly to 19.5%. These routes will be the market with the largest growth in the next 2 years. Intra-Asia-Pacific routes will grow at an average annual rate of 5.%, increasing from 34.6 billion ton kilometers in 217 to 92.2 billion ton kilometers in 237, while increasing their share from 15.2% to 18.1%. In Asia, the capacity of truck shipping and other forms of land transportation will increase significantly along with progress in the development of the land transport infrastructure. However, air shipping will also increase significantly at the same time. Asia-Pacific to Europe routes will show an average annual growth rate of 4.2%, growing from 4.6 billion ton kilometers in 217 to 91.9 billion ton kilometers in 237, with the share rising from 17.9% to 18.1%. Routes between the Asia-Pacific region and the Middle East will show an average annual growth rate of 6.8%, growing 3.7 times from 12.6 billion ton kilometers in 217 to 46.8 billion ton kilometers in 237, with the share rising from 5.5% to 9.2%. Routes between Europe and the Middle East will show a growth rate of 3.8%, growing 2.1 times from 11.2 billion ton kilometers in 217 to 23.8 billion ton kilometers in 237, with the share slightly falling from 4.9% to 4.7%. These routes will also absorb the routes to Africa and Latin America through the Middle East. 57

Looking at growth rates, routes between the Asia-Pacific region and the Middle East will grow at 6.8%, routes between Africa and the Middle East at 5.9%, and intra-middle East routes at 5.4%. This suggests that more cargo will be shipped east to west or south to north via the Middle East. In general, rapid growth is expected for routes within emerging countries such as in the Middle East and the Asia-Pacific region, and inter-regional routes. Especially, routes connecting the Middle East and the Asia-Pacific region will take the lead in growth. Routes between Europe and North America and routes within North America, which are mature markets, will grow at low growth rate of approx. 2%. Regionally, airlines in the Asia-Pacific region will have the largest amount of air cargo traffic, and reflecting the geographical spread and high economic growth rate, the 83.6 billion ton kilometers total in 217 will grow by a factor of 2.6 to reach 216.8 billion ton kilometers in 237. Airlines in North America will grow from 46.7 billion ton kilometers to 14.7 billion ton kilometers. Airlines in the Middle East will exploit their geographic superiority to multiply 2.8 times, from 3.8 billion ton kilometers to 87.7 billion ton kilometers, surpassing those in Europe to take third place. Airlines in Europe will grow from 49.3 billion ton kilometers to 69.4 billion ton kilometers, coming short of those in the Middle East, which will show major growth. Airlines in North America will grow at a rate of 4.1%, which is equal to the global average (4.1%), and their share will increase slightly, from 2% to 21%. On the other hand, airlines in Europe, which already have a mature market, will grow at a low rate of 1.7%, and their share will drop from 22.% to 14.%. The Asia-Pacific region, the world's largest market, will grow at a rate of 4.9%, and its share will expand from 37.% to 43.%. 58

The Middle East has a geographical advantage, and will see the highest growth of 5.4%. Africa and the CIS, despite suffering recently from economic uncertainty, will see growth rates of 5.3% and 2.5%, respectively, over the long term with their high economic growth trajectories. As with passenger traffic, air cargo growth will be driven by emerging countries in the Asia-Pacific region, the Middle East and Africa. Air cargo is transported using freighters or the lower holds of passenger airplanes. Passenger airlines, including LCCs, are increasingly using the lower holds of their fleet. The number of airplanes is increasing, such as the A33 or the 777-3ER, which have a large-volume lower hold, and in the future, the lower holds of passenger airplanes will continue to be further utilized. Partly reflecting the increase in the number of airplanes, the lower hold cargo load factor will increase from 4.1% in 217 to 43.3% in 237. The freighter load factor had reached the mid 6% range as of 217, and it will decrease from 66.6% in 217 to 63.% by 237. Overall, the cargo load factor will slightly increase from 49.% in 217 to 51.% in 237. Globally, air cargo capacity in terms of ATK will increase by 2.4 times from 49.9 billion ton kilometers in 217 to 1,171.3 billion ton kilometers in 237. 59

World Air Cargo Traffic Share by Region (RTK Base) 6

8. Jet Freighter Demand 8.1 Fleet Analysis In-service fleet The in-service jet freighter fleet increased globally from 1,8 in 216 to 1,864 in 217, of which 683 were narrow body airplanes, 611 were medium wide body airplanes, and 57 were large airplanes. The number of narrow body airplanes continued to decrease since 1998, but it slightly increased in 214, and it increased by 31 in 217 from the previous year. Although there were 746 narrow body airplanes in 27, accounting for about 39% of the total number of in-service jet freighters, the figure dropped to 683, and the share dropped to 37% in 217. Instead, the share of medium-wide body airplanes increased from 3% in 27 to 33% in 217. The number of large airplanes was 618 in 27, with a share of 32%. This decreased to 57 in 217, with a slightly decreased share of 31%. Planes converted to freighters In the jet freighter market, many freighters converted from passenger airplanes have been used, and about 5% of the in-service freighters used up to now were converted freighters. Passenger airplanes start to be converted to freighters once they pass 1 years of age, and conversions reach a peak once the planes are about 15 to 2 years old. 61

As long as there is no major change in the environment, conversion freighters will be used for about 15 years after conversion before they are retired. In 217, 48% (9 units) of in-service fleet were converted freighters. 62

Looking at the delivery history of production freighters and converted freighters since 1997, excluding 757 freighters manufactured in the 199s, no new freighters were manufactured in the West. For that reason, this market is a converted aircraft market, with a relatively stable demand for converted aircraft. 737-3/4s and 757s have especially been converted in large numbers. Recently, regional jets such as the CRJ2 and ERJ 145, and MD-8 converted freighters have been built. In regards to wide-body jets, in the 199s A3/A31s and DC-1s, and in the 2s 747s, 767s, and MD-11s, were converted into freighters for the converted market. Since 28, however, given a downturn in the air cargo market and skyrocketing fuel prices, 3- and 4-engine aircraft have been shunned for their poor fuel economy, and demand for these aircraft to be converted has fallen dramatically. In addition, an increasing number of production freighters have also been delivered as there is a shortage of aircraft suitable for conversion due to delayed development of new models, and a conversion program for the 777 has not been launched yet though freighter-converted A33s will be in service in 218 because a freighter conversion program for the A33 has just started. Freighters converted from wide body airplanes are not as appealing as they once were due in part to a downturn in demand for freight, a shortage of airplanes suitable for conversion, and soaring fuel prices. Freighters being upgaged In the past ten years, many 77F, 727F, 737-2F, 747-1F/2F/3F, DC-8F, and DC-9F have been retired, and many A3-6, MD-11, 747-4, 757, and 767-3ER passenger jets have been converted and introduced to the freighter market. Additionally, new A33-2F, 777F, and 747-8F 63

freighters have also been introduced. As a result, the maximum payload per jet freighter increased from 57.2 tons in 27 to 6.7 tons in 217. While it has decreased slightly from 61.8 tons in 212 due in part to a slight increase in small airplanes, it has increased overall by 6% in the past 1 years. In the past 5 years, it has remained halfway between 6 tons and 62 tons. Jet freighter retirements A jet freighters' service life is longer than 3 years, which is quite long, because many jet freighters are converted from passenger airplanes, and each freighter flies for a lesser number of hours each year than a passenger airplane. Since 21, partly because fuel prices have been soaring and cost-cutting has been taking place, the retirement of aging, fuel-inefficient airplanes (especially those 35-years old or older) with high maintenance costs has accelerated. Meanwhile, some relatively younger jet freighters whose service life is between 16 and 3 years have recently been retired partly because of the emergence of jet freighters with high fuel efficiency. In 27, 88 jet freighters were retired after an average service life of 37.8 years. The number of jet freighters retired in 212 was greater at 95, resulting in a shorter average service life at 34.1 years. This was followed by slight fluctuations, and in 217, 43 jet freighters were retired, resulting in an average service life of 33.5 years. The average service life became younger after hitting a peak around 21, although it has been fluctuating somewhat. 64

65 Worldwide Market Forecast

8.2 Jet Freighter Demand Over the period between 1997 and 217, freighter cargo traffic in terms of RTK increased at an average rate of 2.8% per annum, rising from 43% of the total cargo traffic in 1997 to 49% in 217. However, the share held by freighters had continuously decreased during this period, since it reached a peak of 58% in 27. In terms of RTK, companies dedicated to cargo shipping services, such as FedEx and DHL, have been exhibiting growth at around 3% since 213 due in part to the increased demand for e-commerce, etc. 66

In addition, when 26 and 216 are compared, major airlines with large cargo traffic have different strategies, and the RTK of major airlines excluding Emirates, Qatar, and Cathay -- that is, that of Singapore, Lufthansa, and Korean Air -- has been decreasing. During this period, the overall RTK of lower hold cargo for major airlines with large cargo traffic either remained flat or increased slightly while the RTK of freighters decreased. This indicates that air cargo transportation has been shifting from transportation by freighters to the lower holds in passenger airplanes. While Emirates and Qatar Airways are deploying more freighters, they are also greatly increasing their cargo traffic through the deployment of wide body airplanes with large lower-hold cargo, such that capacity has increased 2 to 3 times in the past 1 years. In the future, due to the increasing number of passenger wide-body airplanes, such as the A33 or the 777-3ER, with lower-hold cargo areas that have sufficient space, and expanded use of the lowerhold cargo of passenger airplanes by airlines trying to secure revenue not related to passenger revenues, cargo traffic carried in the lower-hold cargo of passenger airplanes will increase. On the other hand, companies dedicated to cargo shipping services, such as FedEx and DHL, have been increasing their capacity of freight transport in response to the increase of global demand for e-commerce and healthcare-related products. It is therefore conceivable that the share of freighter transport will increase gradually. Over the period from 218 to 237, freighter RTK will increase by about 2.3 times, from 111 billion ton kilometers in 217 to 259 billion ton kilometers in 237, at an average rate of 4.3% per annum, but freighter ATK will increase by 2.6 times, from 156 billion ton kilometers to 414 billion ton kilometers, so the share of freighter cargo traffic will increase to 51%. 67

The world jet freighter fleet will increase from 1,864 in 217 to 2,951 in 237. In 217, narrow body airplanes were the greatest in number, being 683 units with a share of 37%. Although they will increase to 856 units in 237, their share will be lowered to 29%. In comparison, large freighters will increase in number from 57 units to 1,149 units, and their share from 31% to 39%, respectively, during the same period. Meanwhile, 1,437 freighters will retire, and only 427 units out of the freighters in service in 217 will be still in service in 237. In the next 2 years, 2,524 freighters will be delivered. Of these, demand for replacements will comprise 1,437 units and 57% share, and demand for new freighters will comprise 187 units and 43% share. Approximately 57% of demand for jet freighters will be for replacements. Deliveries of jet freighters by size will be 853 narrow bodies, 79 medium-wide bodies and 881 large freighters, totaling 2,524 units. Their shares will be 34%, 31%, and 35% respectively. Of these, 1,48 deliveries will be production aircraft. The breakdown of production aircraft will be 52 medium-wide bodies and 528 large aircraft, which will comprise the majority with a share of 51%. As there are no suitable production narrow body freighters, the majority of new demand will be conversions from A32/321, MD8, 737, and 757 passenger jets. Even freighters converted from regional jets such as the CRJ1/2 and the ERJ145 have appeared. Wide body jets, mainly the A33 and the 777, can be expected to be converted to freighters. The A33-2F, 777F and 747-8F are production freighters. In the future, freighters converted from the A35, A38, and 787 will also probably appear. 68

Regionally, over the period from 217 to 237, the number of units in service in North America will increase from 856 units to 98 units; the Asia-Pacific region from 341 units to 881 units; Europe from 273 units to 374 units; the Middle East from 9 units to 238 units; Latin America from 87 units to 132 units; Africa from 64 units to 125 units; and the CIS from 153 units to 216 units. As a market for freighters, North America will remain the largest throughout this period. Emerging countries in the Middle East and Latin America will have more units in service, and especially those in the Asia-Pacific 69

region will be second to the amount in North America in 237. The number of new deliveries will be the greatest in North America with 82 units, followed by the Asia-Pacific region with 775 units, Europe with 32 units, the Middle East with 186 units, the CIS with 184 units, Latin America with 12 units, and Africa with 119 units. In Europe, Africa, and Latin America, these will mainly be converted freighters, but in North America and the Middle East, the ratio of new freighters will also be relatively high. Demand for production jet freighters in North America will be 329 units, followed by the Asia-Pacific region with 323 units, the Middle East with 118 units, the CIS with 19 units, and Europe with 88 units. The North America and the Asia-Pacific region have the largest new freighter markets. Ramp cargo door type freighters, which are principally a commercial version of the old Soviet-era military freighters such as the An-124 and Il-76TD, are operating in the HOM (Heavy and Oversize air cargo Market) to transport heavy and oversize cargo. The market share of HOM is very small in terms of RTK, at only about.5% of total air cargo traffic, but that market is expected to grow faster than average for global air cargo traffic due to growing demand in aerospace, machines and the mining industry, as well as humanitarian operations and disaster relief. As no replacements for current freighters such as the An-124, An-225, Il-76TD and Il-9VD exist at the moment, these airplanes should be continuously operating over the forecast period. Recently, the development of a commercial version of the military freighters that are currently in operation and are being developed in Western countries is being studied. 7

9. Airplane Sales 9.1 Jet Airplane Sales During the period from 218 to 237, the total number of jet airplanes delivered, including both passenger jets and jet freighters, will be 34,578 units, worth 5.49 trillion U.S. dollars in sales (at 217 list prices). By region, the world s greatest amount is in the Asia/Pacific region, where the total number of jet airplanes delivered will be 14,376, with a value of 2.28 trillion U.S. dollars and a share of sales at 41%. This is followed by Europe and North America, with 963 billion U.S. dollars (share of sales: approx. 18%) and 921 billion U.S. dollars (17%), respectively. Sales in the Middle East will be as large as 648 billion U.S. dollars compared to the demand at 2,468 units, partly because of the high demand for wide body jets, with a share of sales at 12%. Share of Jet Airplane Sales Middle East 12% Africa 3% Latin America 6% CIS 3% Asia/ Pacific 41% North America 17% 549 US$ billion Europe 18% No. of Airplanes 25, 2, Jet Airplane Sales Forecast by Region 2,277 Total 34,578 Airplanes 5,49 US$ billion 217 Price US$ billion 2,5 2, 15, 14,376 1,5 1, 921 963 1, 6,436 6,519 648 5, 35 2,468 2,73 143 188 884 1,192 North America Europe Asia-Pacific Middle East East Latin America Africa Africa CIS CIS *Total of passenger jets and jet freighters 5 71

Among the above, new deliveries of passenger jets will be 33,53 units, worth 5.14 trillion U.S. dollars in sales. Of these, 2,97 units will be regional jets, worth a total of 135 billion U.S. dollars and a 3% share of sales. New deliveries of narrow body airplanes will be 21,695 units, worth 2.4 trillion U.S. dollars and a 47% share of sales. New deliveries of wide body airplanes will be 8,928 units, worth 2.6 trillion U.S. dollars and a 51% share of sales. Sales will be highest for airplanes with 12 to 169 seats, constituting 39% of all airplanes delivered and generating the largest sales of 1.39 trillion U.S. dollars with a sales share of 27%, followed by airplanes with 31 to 399 seats with 1.36 trillion U.S. dollars and a sales share of 27% (3,797 units and 11%). Share of Passenger Jet Sales 4 over 2% 31-399 27% 2-59 % 6-99 3% 12-169 27% Widebody Narrowbody 51% 47% 23-39 22% 17-229 17% 5,137 US$ billion (SEATS) 1-119 2% No. of Airplanes 16, 14, 12, 1, 8, Regional Jet Total 33,53 Units 5,137 US$ billion Passenger Jet Sales Forecast 13,56 Narrow body 1,39 6,85 886 1,13 Wide body 1,363 217 Price US$ billion 1,6 1,4 1,2 1, 8 6, 4, 2, 4,887 3,797 2,794 1,789 132 124 19 113 2 244 2-59 6-99 1-119 12-169 17-229 23-39 31-399 4 over SIZE (SEATS) 6 4 2 New deliveries of jet freighters will be 1,48 units, worth 353 billion U.S. dollars in sales. Large airplanes, which have the greatest demand, will generate 244 billion U.S. dollars in sales. Medium-wide bodies will generate 19 billion U.S. dollars in sales. 72

9.2 Passenger Turboprop Airplane Sales In the passenger turboprop airplane sales forecast from 218 to 237, the total number of units sold will be 2,68, and the sales value (at 217 list prices) will be 57 billion dollars U.S. dollars. The number of these units accounts for 8.%, with the amount of units sold no more than 1.1% of that of the jet market. The sales value of passenger turboprops with 6 to 79 seats will be 27 billion U.S. dollars, accounting for about 47% of the amount of all turboprops sold. No. of Airplanes 2, Passenger Turboprop Airplane Sales Forecast 217 Price US$ billion 4 Total 2,68 Units 57 US$ billion 1,5 27 3 1,47 1, 843 2 13 12 5 292 367 1 2 131 3 Regionally, the Asia-Pacific region has the strongest demand with 1,154 units, worth 26 billion U.S. dollars, with a sales share at 45%. This is followed by North America, Europe, and Latin America, with demand worth 6.6 billion, 9.3 billion and 6.5 billion U.S. dollars, respectively. No. of Airplane 12 1 15-19 2-39 4-59 6-79 8-99 Passenger Turboprop Sales Forecast by Region 1,154 26 SIZE (SEATS) Total 2,68 Airplanes 57 US$ billion 217 Price US$ billion 3 25 8 2 6 15 4 2 397 9 361 338 287 7 7 6 112 2 31.7 North America Europe Asia-Pacific Middle East Latin America Africa CIS North America Europe Asia-Pacific Middle East Latin America Africa CIS 1 5 73

9.3 Airplane Sales (total) The total number of global deliveries of passenger jets, passenger turboprop airplanes, and jet freighters (production airplanes) for the next 2 years, from 218 to 237, will be 37,258, and the total sales (at 217 list prices) will be 5.55 trillion U.S. dollars. No. of Airplanes 25, 2, Airplane Sales Forecast by Region 2,33 Total 37,258 Airplanes 5,547 US$ billion 217 Price US$ Billion 2,5 2, 15, 15,53 1,5 1, 928 972 1, 6,774 6,916 649 5, 356 2,499 3,64 1,171 148 191 1,34 North America Europe Europe Asia-Pacific Middle East Latin America Africa CIS Asia-Pacific Middle East Latin America Africa CIS *Total of passenger jets, passenger turboprops and jet freighters 5 Regionally, total sales in the Asia-Pacific region, which will have the highest deliveries with 15,53 airplanes, will be 2.3 trillion U.S. dollars, and the region will be the world's largest market with sales value accounting for about 42% of the world's total sales. This will be followed by 972 billion U.S. dollars in Europe and 928 billion U.S. dollars in North America, with these regions together accounting for about 34% of total global sales. Although the Middle East has almost no demand for passenger turboprop airplanes, the total sales will be 649 billion U.S. dollars, accounting for 12% of the market, because of the strong demand for passenger jets, especially wide body jets. Market Share of Airplane Demand and Sales by Region Africa 3% Latin America 6% CIS 3% North America 17% Latin America 8% Africa 3% CIS 3% North America 18% Middle East 12% Middle East 7% Europe 18% Europe 19% Asia-Pacific 41% Asia-Pacific 42% Total Sales : 5,547 US$ billion New Deliveries 37,258 Units 74

1. Regional Overview Worldwide Market Forecast Europe CIS North America Middle East Asia-Pacific Latin America Africa For the past 2 years, global GDP has grown at an average rate of 2.9% per annum, passenger traffic at 5.%, and cargo traffic at 2.8%. In the meantime, airline liberalization has progressed across the world, many state-owned airlines have become privatized, and many LCCs have entered the market. Airlines have been shifting their business strategy from forming individual networks on their own, to forming their networks by putting together a group of airlines called alliances. Previously, airlines from the U.S. and Western Europe drove the growth of the airline industry. In recent years, however, airlines from the Asia-Pacific region and the Middle East have grown and are now leading forces. In this way, airline business models and network strategies have been changing with the times; airlines glowing faster and their playing regions have also been replaced by other airlines and regions. In addition, requirements for airplanes vary depending on the region. Airlines in the Middle East, because of their regional requirements, have been demanding wide body jets that can fly long distances, while airlines in Europe have been using wide body jets with a range of 1, km or less. Meanwhile, in the U.S. and Western Europe, where many LCCs are operated, narrow body jets are operated mainly. Since the environment surrounding airlines differ from region to region, requirements for airplanes also differ accordingly. Passenger demand, cargo demand and airplane demand shown here by region are the sum of the demand for passengers and cargo transported, as well as number of airplanes in service and airplanes delivered to airlines belonging to the region. Every country is contained in its region geographically, and every airline belongs to the region through its country where it has its head office and is registered as a corporation. 75

No. of Airplanes 1.1 North America Worldwide Market Forecast The U.S. economy is surrounded by a mixture of expectation and confusion concerning new economic policies, trade and tariff/customs policies, immigration control, etc., as emphasized for job security under the administration of President Trump. Combined with the political trends in Europe, the open globalism adopted by the U.S. may change and affect movement of passengers and cargo. In autumn 217, the U.S. Department of Commerce made a preliminary decision to impose a 292% tariff on Bombardier (a Canadian aircraft manufacturer) C series passenger aircraft to be imported to the U.S. While this decision was rejected by the U.S. International Trade Commission in January, 218, this fuss at once led to realization of a partnership between Bombardier and Airbus, and as a result, C Series aircraft are going to be produced at an Airbus factory in the U.S. Although this awkward sequence of events seems to show present confused situations, it works well as a function to stop such uncontrollable policies. Airlines in North America were greatly damaged by the 9/11 terrorist attacks in 21. Since then, they have proceeded with the streamlining of their organizations, mergers with other companies, and other initiatives. As a result, major airlines in the U.S. have been nearly consolidated into three companies: American Airlines, Delta Air Lines, and United Airlines; and regional airlines also into three companies: SkyWest Airlines, Republic Airlines, and Trans States Airlines. Currently, four companies (American Airlines, Delta Air Lines, United Airlines, and Southwest Airlines) account for nearly 7% of the U.S. domestic market on an RPK basis, and these airlines are becoming increasingly dominant. Fleet Developments of North America Airlines 1, 8,997 8, df 7,873 Growth 1,124 15% 6, Replacement 6,141 New Deliveries 7,265 4, 85% 2, Retained 1,732 217 237 In particular, airlines in North America are now the most profitable in the world, resulting from the improved financial situation due to restructuring and the precise demand/supply adjustments. In 217, they accounted for approximately 45% (approximately 23% in terms of RPK) of net profits earned by 76

airlines worldwide. Worldwide Market Forecast In recent years, replacement of aircrafts has been progressing partly as a result of responding to declining funding costs following the zero interest policy and the quantitative easing policy, and to soaring fuel costs continuing for a long time. Aircraft have gradually been being replaced by those with more seats not only because of economic efficiency but also because major airports have been approaching their slot limits. Main regional jets with 5 seats have been being replaced by those with 76 seats due in part to easing of the Scope Clause. Similarly, there has also been some demand for narrow body jets in the 17-229 seat class, such as the A321 and the 737-9ER, slightly larger than those in the 12-169 seat class, such as the A319/32 and the 737-7/8, which are still main ones. In addition, some quarters hope for replacement aircraft for the 757, which may reach the limit of seating capacity as a narrow body airplane. Since there is fierce competition from LCCs over domestic routes, major airlines in North America have tried hard to further expand their business in international routes. Then there has been increasing demand for wide body jets such as the A35 and the 777/787. In North America, over the past 2-year period from 1998 to 217, GDP grew at an average annual rate of 2.2%, passenger demand at 2.7%, and cargo demand at.8%. As for the growth rate forecast from 218 to 237, GDP will grow at 2.%, passenger demand at 3.2% and cargo demand at 4.1%. The average growth rate of the transport demand in the mature North American market is considered to be slightly lower than the global average. In addition, 85% of the airplanes to be delivered in the forecast period will be replacements for the existing airplanes. The number of airplanes in service in North America will increase from 7,873 in 217 to 8,997 in 237. Over this period, the demand and the sales value (at 217 list prices) are expected to be 7,265 units and 927.9 billion U.S. dollars, respectively. Narrow body aircraft will account for 56% of all deliveries and airplanes with 1 or fewer seats, including turboprop airplanes, will account for 23%. Growth Measures () North America GDP 2. % RPK 3.2 % RTK 4.1 % Fleet.7 % Sales (217 List Price) 928 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 427 218 21 4-59 seats 113 14 9 More than 6 seats 173 221 128 Total 713 453 338 Passenger Jet 2-59 seats 685 2 6-99 seats 1,153 1,412 1,14 Regional Jet 1,838 1,414 1,14 1-119 seats 137 534 518 12-169 seats 2,76 2,688 1,982 17-229 seats 931 1,475 1,139 Narrowbody 3,828 4,697 3,639 23-39 seats 378 941 862 31-399 seats 259 512 466 More than 4 seats 1 Widebody 638 1,453 1,328 Total 6,34 7,564 6,17 Jet Freighter (New+Converted) Narrow Body 266 112 112 Medium Widebody 353 431 335 Large 237 437 373 Total 856 98 82 Total Fleet 7,873 8,997 7,265 77

No. of Airplanes 1.2 Europe Worldwide Market Forecast It is difficult to be optimistic about the future of Europe s politics and economy, due to the Brexit decision, changes in economic relationships expected to take place as a result of the decision, anti-eu trend concerning problems such as terrorism and refugees, and government debt problems of some countries, although they are not high-profile. Europe, where most countries in Western Europe, Eastern Europe and Northern Europe are EU members, is a single aviation market with a continental scale, in which the member states are opened to one another even for respective domestic operations under aviation agreements. Over the past 2 years, passenger demand basically showed a steady growth. Especially, since 21, LCCs have contributed to this growth. Europe s LCCs have rapidly developed after the 1997 liberalization and have now come to account for about 36% of the available seat capacity in Europe. In Europe, as high-speed rail networks have improved, the existing airlines are exposed to severe competition with LCCs and/or high-speed rail over domestic and intra-regional routes. Recently, there has also been competition between LCCs and high-speed rail. LCCs are also reported to be struggling on some routes. Under these circumstances, major airlines have been trying to find their way into interregional routes. Yet, the tough competition has continued, since airlines in the Middle East also have been advancing into European routes recently. 1, Fleet Developments of European Airlines 8,622 8, 5,45 6, 42% 4, 2, Growth 3,217 45% Replacement 3,931 55% Retained 1,474 217 237 New Deliveries 7,148 In Europe, the major airlines have already been nearly consolidated into three groups: Air France- KLM, IAG (BA, among others), and Lufthansa. In addition, there is a view in which small- and medium-sized airlines in Central Europe and Eastern Europe, where their business reconstruction has lagged behind compared to that in Western Europe, may be restructured in the future. 78

As in the U.S., the replacement of airplanes has been progressing in Europe. Because fuel prices soared at one time and slot limits at major airports will soon be reached, there has been increasing demand for slightly larger airplanes in the 17-229 seat class, such as the A321 and the 737MAX-1. The number of seats on the A32 and 737-8 has also increased from about 15 to about 18 with higher density, and recently there is not much difference between major airlines and LCCs. In Europe, over the past 2 years from 1998 to 217, GDP grew at an average annual rate of 1.8%, passenger traffic demand at 4.2%, and cargo at 2.%. As for the growth rate forecast from 218 to 237, GDP will grow at an average annual rate of 1.7%, passenger traffic demand at 3.8% and cargo demand at 1.7%. Similar to the U.S., the average growth rate of air transport demand in the mature European market is forecasted to be slightly lower than the global average. The total number of airplanes in service will increase from 5,45 in 217 to 8,622 in 237. Over this period, the demand and the sales value (at 217 list prices) are expected to be 7,148 units and 971.8 billion U.S. dollars, respectively. Of the units to be delivered, 55% will be replacements for existing airplanes. Narrow body airplanes will constitute 64% of units delivered. The outcome of the Brexit Referendum of June, 216 was received with a shock. If the Brexit is actually carried out, the EU will impose tariffs on components such as wings of Airbus aircraft manufactured in the UK, which will reduce the competitiveness of European companies themselves. Some UK-flag airlines have been considering transferring to another country within the EU for fear of effects by aviation agreements. However, election results in various countries in Europe after the Brexit Referendum indicated that the British people s complaint is no longer peculiar to other peoples in Europe. The JADC, assuming that a soft landing will be made, does not specifically adjust sales capacity to be set for Airbus aircraft for the next 2 years in this forecast. However, a UK airline that we visited last year pointed out that no specific decisions have been made yet even after the Brexit Referendum. Despite that, we have suffered losses because only the pound has been depreciated. Growth Measures () Europe GDP 1.7 % RPK 3.8 % RTK 1.7 % Fleet 2.4 % Sales (217 List Price) 972 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 175 136 127 4-59 seats 78 2 14 More than 6 seats 294 393 256 Total 547 549 397 Passenger Jet 2-59 seats 63 29 29 6-99 seats 374 588 498 Regional Jet 437 617 527 1-119 seats 143 441 47 12-169 seats 2,645 3,364 2,516 17-229 seats 47 1,573 1,48 Narrowbody 3,258 5,378 4,43 23-39 seats 291 959 874 31-399 seats 467 715 626 More than 4 seats 132 25 1 Widebody 89 1,699 1,51 Total 4,585 7,694 6,431 Jet Freighter (New+Converted) Narrow Body 126 181 181 Medium Widebody 71 88 72 Large 76 11 67 Total 273 379 32 Total Fleet 5,45 8,622 7,148 79

No. of Airplanes 1.3 Asia-Pacific The Asia-Pacific region is expected to see strong economic growth in the coming decades, given the expanding middle-class income associated with the region s large population and an impressive economic growth rate. Currently, China is exercising strong economic traction globally with its capacity based on both its population and economic growth rate. It has also created massive demand for air travel. Although the population of China is estimated to have reached its peak in 215 then entered the decline process and the aging of Chinese society will progress rapidly, its economic growth will Worldwide Market Forecast still continue through this forecast period (218-237). Moreover, the Southeast Asia region, that is ASEAN (Association of South-East Asian Nations) countries, which includes Thailand, Vietnam, and Indonesia, will have economic growth and expanded demand for air travel, and they will exceed the RPK growth and new passenger airplane delivery of South Asia (mainly India) during this forecast period, by 3% to 8%. South Southeast Asia China Oceania Japan Northeast Asia Fleet Developments of Asia-Pacific Airlines 2, 18,856 15, 1, 8,327 % 5, Growth 1,529 66% Replacement 5,453 34% New Deliveries 15,982 Retained 2,874 217 237 Airline deregulation has been in progress in this region as well. LCCs have been established in Japan and Taiwan, where no LCCs had existed before, and open skies in the ASEAN (full liberalization within the region) began to emerge from 216 in turn with the launch of the AEC (ASEAN Economic 8

Community). Worldwide Market Forecast While the Asia-Pacific region covers a geographically large area, its ground transportation networks have not yet been fully improved, and therefore, air transportation is more suitable for the region. However, infrastructure improvement, such as airports and air traffic control, has been left behind, with certain exceptions, and is now indispensable for further development. In the Asia-Pacific region, over the past 2- year period from 1998 to 217, GDP grew at an average annual rate of 4.4%, passenger demand at 6.8%, and cargo demand at 3.3%. In this period, the region shored up the growth of the world air transport. In the period from 218 to 237, this region is expected to continue growing significantly; GDP will grow at an average annual rate of 3.9%, passenger demand at 5.4%, and cargo demand at 4.9%. It is a growth market where 66% of airplanes to be delivered during the forecast period will be new demand. The number of airplanes in service in the Asia-Pacific region will increase from 8,327 in 217 to 18,856 in 237. Over this period, the new deliveries and the sales value (at 217 list prices) are expected to be 15,982 units and 2,32.9 billion U.S. dollars, respectively. Massive domestic markets also exist in India and China, and there is great demand for aircraft from LCCs, so narrow body airplanes will account for 61% of new deliveries. China, along with Europe and North America, will be one of the three major markets leading the global air passenger traffic demand in terms of RPK at the end of the forecast period (237). Short distance routes up to 2, km constitute a main part of China s RPK and will account for about 64% of the RPK in 237. 9% of these routes are expected to be domestic routes. The C919, etc., currently under development will apply to these routes, and they will have a market large enough even domestically so that it seems to be possible to nurture domestic production aircraft and the aviation industry only by the domestic market even if there might be no export. Although China is currently using the 737 and A32, according to its import replacement policy, it is expected to shift to mainly procure domestic production aircraft while absorbing these foreign technologies. Growth Measures () ASIA-PACIFIC GDP 3.9 % RPK 5.3 % RTK 4.9 % Fleet 4.2 % Sales (217 List Price) 2,33 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 389 427 386 4-59 seats 159 114 64 More than 6 seats 451 96 74 Total 999 1,51 1,154 Passenger Jet 2-59 seats 3 9 8 6-99 seats 291 629 589 Regional Jet 321 638 597 1-119 seats 74 571 556 12-169 seats 4,259 7,622 5,981 17-229 seats 717 3,48 3,212 Narrowbody 5,5 11,673 9,749 23-39 seats 526 2,311 2,18 31-399 seats 975 1,77 1,549 More than 4 seats 115 82 5 Widebody 1,616 4,163 3,77 Total 6,987 16,474 14,53 Jet Freighter (New+Converted) Narrow Body 151 372 372 Medium Widebody 48 287 274 Large 142 222 129 Total 341 881 775 Total Fleet 8,327 18,856 15,982 81

No. of Airplanes 1.4 Middle East Worldwide Market Forecast It is expected that the economies of oil-producing countries in the Middle East will slow due to the recent decline in crude oil prices, but countries in the Middle East are planning to develop new industries in preparation for the post-oil era and are focusing on the development of airlines as part of this. Airlines in the Middle East have maximized the geographical advantage to attract global air transport demand. Over the past 2 years, both passenger demand and cargo demand saw double-digit growth. In particular, Emirates Airlines, Etihad Airways, and Qatar Airways, which are called super connectors, have extended networks of routes from Dubai, Abu Dhabi, and Doha as their respective hubs throughout the world, and have attained a lot of transit demand. Therefore, these airlines need large wide-body airplanes with a longer range. In addition, their purchasing power allows them to exert huge influence on airplane manufacturers. Fleet Developments of Middle East Airlines 3, 2,936 Growth 2, 1,435 % 1,51 58% New Deliveries 2,567 1, Replacement 1,66 42% Retained 369 217 237 Regarding alliances, these airlines have adopted the following strategies to suit the nature of their respective companies. Emirates Airlines has partnerships with suitable airlines from region to region or from route to route. Etihad Airways has invested in other companies to form equity partnerships. Qatar Airways has joined oneworld, one of the alliances. Airline liberalization has even started in the Middle East. In Saudi Arabia, Flynas (formerly Nas Air), the only private airline in the country and an LCC, was founded in 21 and operates domestic and short-distance international flights. In the UAE, flydubai was founded as an LCC in 28. The airline, in cooperation with Emirates Airlines, has expanded their routes including the opening of direct flights from Dubai to Helsinki (with 737MAX8), and in 217, it booked and placed orders for 175 units of the 737. 82

Meanwhile, Qatar Airways founded a subsidiary called Al Maha Airways in Saudi Arabia so as to enter domestic routes there, and planned to launch operation there in 216, but the plan was called off in February, 217. Then, four countries including Saudi Arabia cut off their diplomatic relations with Qatar in June, 217, and even decided to refuse to allow aircraft from Qatar to fly over their territories. This stopped Qatar from transporting daily commodities by land, and Qatar has relied on transportation by sea and air. In addition, after flight routes between Qatar and the countries that cut off their diplomatic relations with it were blocked, the number of aircraft which operated in the Middle East in autumn 217 decreased by about 6% from the previous autumn. In addition, since flight routes to Africa were forced to take great detours because of these countries blockage, the number of aircraft to Africa decreased by 2% from around the same time of the previous year. In the Middle East, over the past 2 years from 1998 to 217, GDP grew at an average annual rate of 3.9%, passenger traffic demand at 11.7%, and cargo demand at 9.9%. Significant growth continues to be expected for the period from 218 to 237, with GDP set to grow at an average annual rate of 3.4%, passenger traffic demand at 6.%, and cargo demand at 5.4%. The number of airplanes in service will increase from 1,435 in 217 to 2,936 in 237. Over this period, the units delivered and the sales value (at 217 list prices) are expected to be 2,567 units, worth 648.8 billion U.S. dollars, respectively. Of the units delivered, 58% will be new demand. In addition, representing the characteristics of airplanes in the Middle East airlines, wide body airplanes will account for 6% of new deliveries for passenger airplanes. Growth Measures () Middle East GDP 3.4 % RPK 6. % RTK 5.4 % Fleet 3.6 % Sales (217 List Price) 649 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 8 8 8 4-59 seats 7 More than 6 seats 22 36 23 Total 37 44 31 Passenger Jet 2-59 seats 7 4 4 6-99 seats 58 6 56 Regional Jet 65 64 6 1-119 seats 12 5 48 12-169 seats 482 716 582 17-229 seats 63 262 25 Narrowbody 557 1,28 88 23-39 seats 185 423 383 31-399 seats 368 888 835 More than 4 seats 133 251 192 Widebody 686 1,562 1,41 Total 1,38 2,654 2,35 Jet Freighter (New+Converted) Narrow Body 1 15 15 Medium Widebody 31 27 13 Large 49 196 158 Total 9 238 186 Total Fleet 1,435 2,936 2,567 83

No. of Airplanes 1.5 Latin America Worldwide Market Forecast Latin America showed significant growth along with Asia over the past several years. With a surge in direct investment in Latin America thanks to the development of resources and the Free Trade Agreement, nominal GDP has more than doubled during over the ten-year period since 2. However, recently, there has been deceleration in the economies of developed countries and China, and as prices of resources, including oil, have fallen and exports have declined, the domestic demand that supported the Latin American economy has also declined, so the economies of Argentina, Brazil, Venezuela, and other Latin American countries is rapidly decelerating. It is likely that the economic growth rate will continue to fall in the mid-term as well. Airline mergers took place in Latin America as in the U.S. and Western Europe. Among major airlines, cross-border mergers have taken place between AVIANCA in Colombia and TACA in El Salvador, and between LAN Airlines in Chile and TAM Airlines in Brazil, respectively. As a result, airlines in this region have been consolidated into two major companies. In fact, airline restructuring made progress in Brazil as there were also domestic mergers. Fleet Developments of Latin America Airlines 4, 3,77 3, 1,995 2, % 1, Growth 1,712 54% Replacement 1,446 46% New Deliveries 3,158 Retained 549 217 237 In this region too, airline liberalization has been progressing. LCCs such as GOL in Brazil, Interjet and Volaris in Mexico, and Viva Colombia in Colombia were founded. With regard to available seat capacity for intra-regional routes, the share of LCCs rose by about 12 times, to 35% in 217, while it was about 3% in 21. In addition, in order to attract domestic demand in countries other than their own, LCCs have established subsidiaries in those countries necessary for handling the matter. Colombia is a country with a large population and remarkable economic growth in Central America, and thus, air transport demand has been growing. In this country, Copa Airlines has established Copa Colombia, and LAN Airlines has established LAN Colombia, respectively. Additionally, AVIANCA 84

(an FSC) and Viva Colombia (an LCC) are still in service, making Colombia a fiercely competitive domestic market. In Latin America, over the past 2 years from 1998 to 217, GDP grew at an average annual rate of 2.5%, passenger demand at 5.9%, and cargo demand at.3%. As for the growth rate forecast from 218 to 237, GDP will grow at an average annual rate of 3.%, passenger demand at 4.8%, and cargo demand at 1.%. In short, passenger demand is expected to grow at a high rate. The total number of airplanes in service will increase from 1,995 in 217 to 3,77 in 237. Over this period, the units delivered and the sales value (at 217 list prices) are expected to be 3,158 units and 356 billion U.S. dollars, respectively. Of the units delivered, 54% will be new demand. Growth Measures () Latin America GDP 3. % RPK 4.8 % RTK 1. % Fleet 3.1 % Sales (217 List Price) 356 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 281 231 219 4-59 seats 76 37 18 More than 6 seats 87 176 124 Total 444 444 361 Passenger Jet 2-59 seats 37 32 32 6-99 seats 176 324 288 Regional Jet 213 356 32 1-119 seats 115 21 182 12-169 seats 91 1,524 1,238 17-229 seats 77 58 459 Narrowbody 1,93 2,242 1,879 23-39 seats 125 393 348 31-399 seats 33 14 13 More than 4 seats Widebody 158 533 478 Total 1,464 3,131 2,677 Jet Freighter (New+Converted) Narrow Body 64 95 94 Medium Widebody 22 34 24 Large 1 3 2 Total 87 132 12 Total Fleet 1,995 3,77 3,158 85

No. of Airplanes 1.6 Africa Worldwide Market Forecast Since Africa has abundant underground resources such as oil and minerals, in recent years it has been growing rapidly mainly due to the development of these resources. Growth potential is especially so high in Sub-Saharan Africa that the middle class will emerge and their population will exceed 5 million by the year 23. Air transport demand will grow because of the increase of middle class peoples as a carrier of consumption. However, problems of poverty and infectious disease remain unsolved, hindering market growth. Fleet Developments of Africa Airlines 2, 1,493 % 1,215 Growth 278 23% 1, Replacement 957 77% New Deliveries 1,235 Retained 258 217 237 In the African market, airlines in Europe used to be strong, however, airlines in the Middle East have been extending their operations into Africa. Recently, airlines in the U.S. also have strengthened their African routes, paying attention to high economic growth in Africa. Although the routes connecting Africa and other regions have begun to be strengthened, non-stop flights operated within the African continent are very few. Thus, when moving within Africa region, for instance, passengers or cargo should be transported via a Middle East country. Therefore, the RPK of intra-africa routes, including domestic flights, accounts for only around 1% of the global RPK. Establishment of an infrastructure is necessary for the aviation industry to grow. However, infrastructure improvement in Africa is being kept behind with a lower priority, although protectionist measures with regard to the aviation business being taken. Although airlines in Africa used to operate used airplanes which came from Europe, the U.S., etc., it has been easier to have newly built airplanes in recent years, because it is relatively simple for them to raise purchase funds compared to before, and operating leases has also been available. 86

In Africa, over the past 2 years from 1998 to 217, GDP grew at an average annual rate of 4.1%, passenger demand at 5.4%, and cargo demand at 5.1%. As for the growth rate forecast from 218 to 237, GDP will grow at an average annual rate of 3.4%, passenger demand at 3.8%, and cargo demand at 5.3%. The number of airplanes in service will increase from 1,215 in 217 to 1,493 in 237. Over this period, the units delivered and the sales value (at 217 list prices) are expected to be 1,235 units and 148.4 billion U.S. dollars, respectively. 77% of units delivered will be to meet demand for replacement of existing airplanes, advancing the updates of old equipment. Worldwide Market Forecast Growth Measures () AFRICA GDP 3.4 % RPK 3.8 % RTK 5.3 % Fleet 1. % Sales (217 List Price) 148 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 27 171 152 4-59 seats 76 27 18 More than 6 seats 15 167 117 Total 451 365 287 Passenger Jet 2-59 seats 83 2 19 6-99 seats 69 16 94 Regional Jet 152 126 113 1-119 seats 38 29 27 12-169 seats 346 443 336 17-229 seats 8 134 133 Narrowbody 392 66 496 23-39 seats 82 142 114 31-399 seats 73 129 16 More than 4 seats 1 Widebody 156 271 22 Total 7 1,3 829 Jet Freighter (New+Converted) Narrow Body 4 63 63 Medium Widebody 15 14 14 Large 9 48 42 Total 64 125 119 Total Fleet 1,215 1,493 1,235 87

No. of Airplanes Worldwide Market Forecast 1.7 CIS The economies of CIS member countries have been growing significantly. Russia has overcome the destructive economic crisis after the dissolution of the former Soviet Union and recorded economic growth for 8 consecutive years since 2. Ukraine* has tried to promote a transparent marketoriented economy. Kazakhstan and Turkmenistan have shown steady economic development due to their rich resources. In Russia, the average wage rose from 2,2 rubles in 2 to 12,5 rubles in 27, and the number of people with middle-class income increased significantly, but instability has continued in recent years, due to falling crude oil prices and Western economic sanctions over the Ukraine situation. (* JADC keep Ukraine to be included in CIS in this report to retain continuity of statistics). Fleet Developments of CIS Airlines 2, 1,722 1,355 % Growth 367 27% 1, Replacement 1,12 73% New Deliveries 1,379 Retained 343 217 237 Air transport is important for movement within the region including domestic travel because the CIS has a vast land area, and thus distances between cities are long. Accordingly, there has been strong air transport demand. Above all, during the ten-year period from 24 to 214, when economic growth in this region was stable, the average annual growth rate of RPK reached 8.9%. Although it has stopped growing since then due to the economic slowdown in emerging countries, RPK seems to have been approx. 257 billion passenger kilometers, with a passenger load factor at about 79%, in 217. Among the airplanes operated in the CIS, those manufactured during the former Soviet era have been decreasing, with a shift to airplanes manufactured in the U.S. and Western Europe. As of the end of 216, 72% of airplanes in service being operated by airlines in the CIS and 82% of the backlog are airplanes by Western manufacturers including Airbus and Boeing. 88

In the CIS, over the past 2 years from 1998 to 217, GDP grew at an average annual rate of 3.7%, passenger demand at 6.3%, and cargo demand at 5.4%. As for the growth rate forecast from 218 to 237, GDP will grow at an average annual rate of 2.%, passenger demand at 3.3% and cargo demand at 2.5%. The number of airplanes in service will increase from 1,355 in 217 to 1,722 in 237. Over this period, the demand and the sales value (at 217 list prices) are expected to be 1,379 units and 19.6 billion U.S. dollars, respectively. 73% of units delivered will be to meet demand for replacements, as the updating of old models in progress. Worldwide Market Forecast Growth Measures () CIS GDP 1.9 % RPK 3.2 % RTK 2.5 % Fleet 1.2 % Sales (217 List Price) 191 US$ billion Fleet New Deliveries 217 237 Passenger Turboprop 15-39 seats 71 64 42 4-59 seats 119 19 8 More than 6 seats 23 76 62 Total 213 159 112 Passenger Jet 2-59 seats 79 21 21 6-99 seats 129 174 129 Regional Jet 28 195 15 1-119 seats 94 53 51 12-169 seats 452 573 421 17-229 seats 127 218 177 Narrowbody 673 844 649 23-39 seats 51 26 198 31-399 seats 48 11 85 More than 4 seats 9 1 1 Widebody 18 38 284 Total 989 1,347 1,83 Jet Freighter (New+Converted) Narrow Body 26 18 16 Medium Widebody 71 65 58 Large 56 133 11 Total 153 216 184 Total Fleet 1,355 1,722 1,379 89

9 Worldwide Market Forecast

11. Aero Engine Demand Aero engine demand is comprised of two segments: engines installed on airplanes at the time of delivery, and spares. The former is the result of multiplying the number of airplanes sold by the number of engines mounted on the airplanes, and the latter is the result of multiplying the number of engines mounted on airplanes at the time of delivery by a spare ratio of 1%. An engine is the most expensive equipment to purchase among components of an airplane, and engine prices account for about 2% of the amount of airplanes sold. The total number of engines sold over the 218 to 237 period will be 84,21 of which 78,83 will be jet engines for both passenger jets and freighter jets, and 5,938 will be turboprop engines for passenger turboprop airplanes. Their total sales value will amount to 1.24 trillion U.S. dollars (217 market prices). Of that amount, jet engines will account for 1.22 trillion U.S. dollars, and turboprop engines will make up the remaining 13 billion U.S. dollars. The jet engine with the largest share of the market at 6%, or 46,977 units is the 12, to 35, lbs. thrust class used in narrow body jets such as the 737 and the A32 series. This is followed by the 65, to 115, lbs. thrust class engine installed on wide body jets such as the 777/787 and the A33/A35/A38, whose value is 17,398 units (22% share), then by jet engines with less than 12, lbs. of thrust used on regional jets, at 7,332 units (9% share), and finally by the 35, to 65, lbs. thrust class of engine mounted on airplanes such as the 747/767 and the A34-5/6, at 6,376 units (8% share). 4, Aero Engine Delivery and Sales Forecast No. of Engines 6, No.of Engines Value (US$billion) 5, Turboprop 5,938 13 46,977 Jet 78,83 1,224 Total 84,21 1,237 517 217 Market Price (US$ billion) 531 6 5 4 3, 3 2, 17,398 2 1, 5,938 7,332 52 6,376 124 1 13 TurboProp <12 12-35 35-65 65-115 ATR42/72 DHC-8 L41 A318,A319,A32,A321 CRJ2/7/9 A34-2/-3 EMB135/145/17/19 737,MD-8/-9 ARJ21 MRJ7/9,CS1/3 *Including 1% of total number of engines installed on airplanes as spare engines. A3-6,A31 A34-5/-6 747,757,767 Thrust A38 ( 1 lbs) A35,A33 777,787 91

Looking at jet engine sales values, given higher unit prices, the 65, to 115, lbs. class, which are no more than 22% (17,398 units) of total units sold, will account for the largest share of the market, at 531 billion U.S. dollars, which is 43% of total sales value. This is followed by the 12, to 35, lbs. thrust class, which will sell the most units, with a value of 517 billion U.S. dollars (42% share). The 35, to 65, lbs. thrust class will be worth 124 billion U.S. dollars (1% share), and the smallest jet engine, the 12, lbs. or less thrust class, will be worth 52 billion U.S. dollars (4% share). By region, the Asia-Pacific region, which has the highest demand for airplanes, is the biggest market. The number of engines sold in the region will be 34,56, with a 41% share of engines sold, and the sales value will be 516 billion dollars, with a 41% share of sales. This will be followed by 15,357 units (18% share) and 221 billion U.S. dollars (18% share) in Europe, and 15,341 units (18% share) and 22 billion U.S. dollars (18% share) in North America. In the Middle East, the number of sales will be around 4% of the level in the U.S. and Western Europe, at 6,224 units; however, since there is strong demand for wide body jets, the sales value will be 142 billion U.S. dollars, which is around 7% of the level of the U.S. and Europe. No. of Engines 4, 35, 3, 25, Aero Engine Delivery and Sales Forecast by Region 34,56 516 Total 84,21 units 1,237 US$ billion 217 Market Price US$ billion 8 7 6 5 2, 15, 15,341 15,357 22 221 4 3 1, 5, 142 6,224 6,773 82 2,694 3,127 36 45 2 1 North North America America Europe EuropeAsia-Pacific Asia-Pacific Middle East Middle East Latin America Latin America Africa Africa CIS CIS *Including 1% of total number of engines installed on airplanes as spare engines. 92

12. Methodology Passenger Forecast Methodology The demand forecasting flow is divided into three sections (air passengers, available seats, and sale of aircrafts) as shown below: Forecast for air passenger demand: Forecasted air passenger demand is calculated by econometric method as a function of GDP and yields, because revenue passenger kilometers (RPK) are strongly affected by the correlation with income and fares. However, RPK significantly changes due to effects of various events, such as a major shift in aviation policies (e.g. liberalization of air transport), new entry of LCCs, and development of other transportation modes (e.g. high-speed railways). Therefore, it is difficult to forecast a future demand only based on the correlation with GDP and yields. JADC forecasts RPK by conducting an analysis on the basis of data on actual performance based on causal models using GDP and passenger yields and by considering the impact of possible future events. The RPK forecast is categorized by region (13 regions) and distance (4 segments). Forecast for available seat demand: The supplied transportation capacity needed to actually transport the forecasted air passengers (unit: ASK (available seat kilometers)) is calculated by using macro forecasts, while the new transportation capacity (available seats) likely to be needed is also calculated using the forecast of a decline in existing aircrafts (transportation capacity) based on the actual results of the service life of retired passenger aircrafts. The forecast is categorized by region (13 regions) and distance (4 segments), as well as seat size (15 segments). Forecast for sale of aircrafts: The number of each type of aircrafts, which is calculated by allocating the forecasted available seat to respective aircrafts according to their number of seats and cruising distance, is tallied by category. 93

Cargo Forecast Methodology The demand forecasting flow is divided into three sections (air cargo, supplied transportation capacity of cargo freighters, and sale of aircrafts) as shown below: Forecast for air cargo: Air cargo demand is known to have a correlation with GDP and cargo yields as is the case with the passenger aircraft demand. JADC forecasts the air cargo demand by analyzing past data based on causal models using GDP and real cargo yields and by evaluating various factors that affect the air cargo demand considering the present and future trends. After consolidating the global flight routes into 33 markets, the air cargo demand is forecasted by market. Forecast for supplied transportation capacity of cargo freighters: A forecast is calculated by the macroeconomic forecasting method (top-down analysis), in which the forecast is categorized by region (7 regions) and payload (3 segments). Air cargo is transported by cargo freighters or in the lower deck hold of passenger aircrafts. The forecasts of the cargo transport demand (as RTK) and supplied transportation capacity (as ATK) of cargo freighters can be calculated by deducting them of those passenger aircrafts from the results of the forecasted air cargo demand. The RTK and ATK of those passenger aircrafts are estimated based on the results of the forecasted passenger aircraft demand. Air cargo transport volume = Cargo transport volume carried in the lower deck hold of passenger aircrafts + Cargo transport volume carried by freighters By analyzing the aircraft type composition and flight routes and simulating the service life of freighters, the supplied transportation capacity needed in the future is forecasted by category. Forecast for sale of aircrafts: The forecasted number of aircrafts to be sold is calculated by allocating the supplied transportation capacity needed in the future to specific aircrafts in view of aircraft performance, including payloads and cruising distance, and the ratio of newly-built aircrafts and converted freighters. 94