9 February 2014

Singapore Aviation Academy (SAA) Singapore

Brian O’Dwyer

Former Group Chief Financial Officer of Skywest Airlines

Embry-Riddle Aviation Symposium

Aircraft Financing and Leasing in Asia

Financing startup airlines –

crazy ideas for a crazy industry

Disclaimer

Some of the statements in this presentation constitute “forward-looking

statements” that do not directly or exclusively relate to historical facts.

Because actual results could differ materially, you are urged to view all

forward-looking statements contained in this presentation with caution.

No reliance may be placed for any purpose whatsoever on the information

or opinions contained in or given during this Presentation.

The information and opinions contained in or given during this Presentation

are not necessarily complete and are subject to change without notice.

2

Agenda

� Observations on airlines

� Observations on aircraft financiers

� Crazy ideas on how they come together

3

Airlines come in many shapes, sizes, models

capital structures, ownership profiles and goals

4

Flag

carriers

Full

service

Low cost

carriers

Regionals

/ Niches

Publicly

listed

Private

individual

HybridJoint

ventures

Private

equity

Airlines returns – a binomial distribution

5

“It works”

“It doesn’t”

New start

up airline

Per Wikipedia:

• Asia: 170 defunct (85%)

• US: 52 bankruptcies (81%)

Start up airlines either “work” or they “don’t” – no

perfect data, but proxy suggests a 15-20% success ratePer Bloomberg data:

• Asia: ~30 listed (15%)

• US: 12 listed (19%)

Per NYU data:

• Beta of 1.6 (highest of

any industry)

Note: NYU data from New York University Professor Aswath Damodaran.

Aircraft financiers are often nearly the

entire capital structure in a start up airline

42%

31%

90%

27%10%

Listed

(NYU data)

Start up

(illustrative)

Debt PV of Leases Equity

6Note: “Listed” includes 27 publicly traded airlines in Asia. Data as of 31 December 2012 and provided by New York University Professor Aswath Damodaran.

Equity for “Listed” is the market value of equity at 31 December 2012 less cash.

Average Asian

listed airline

– 73% debt or PV of

operating leases

– Market cap of

US$2bn

Illustrative

startup airline

– 90% PV of

operating leases

Airline capital structures – listed Asian carriers versus illustrative start up (% of enterprise value)

Aircraft financiers can be a source of

capital as a practical matter for start ups

� Need a fast way to generate US$1million of

working capital?

– Defer lease payments on a few aircraft

� Major maintenance capital spending that

exceeds reserves

– Ask the aircraft financier to help finance or cost

share

7

Financiers come in many shapes, sizes, models

capital structures, ownership profiles and goals

8

Financial

institution

Midlife

Wide body

Turbo

props

Freighters

Publicly

listed

Private

individual

OEM

parent

New

narrow

body

Private

equity

Insurance

parent Global

Country

focus

Conventional wisdom is that aircraft financiers

are consistently profitable unlike airlines…

9Note: Airline profits are actual based on ICAO and IATA. Lessor profits are illustrative.

Actual airline losses

Actual airline profits

Illustrative lessor

profits

(conventional

wisdom)

Worldwide net profits – actual airlines versus illustrative lessors(US$ billions)

Cumulative

airline profits

since 1990: ~$0

…however some data suggests lessors can be

risky – ILFC example

10Note: ILFC data from SEC filing. 10-year treasury yield as of January 2004.

Treasuries a better investment than ILFC over the past decade

(750)

(500)

(250)

-

250

500

750

1,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 9M Sept

2013

ILFC Net (loss) income 2004 – 2013(US$ millions)

10-year ILFC return on equity (ROE) = 3.6%

10-year treasury yield = 4.4%

Beta for publicly traded lessors is almost as

high (or as risky) as publicly traded airlines

11Note: Beta data as of 31 December 2012 and provided by New York University Professor Aswath Damodaran. Lessors includes AerCap, Air Lease

and Aircastle. Airlines include 27 listed airlines in Asia.

Caveat: Airline beta is for listed (e.g. “successful”) airlines

Selected industry betas

0.7 0.7

1.0

1.4 1.4

1.5 1.6

Tobacco Grocery Total Market Homebuilders Metals Lessors Airlines

The global

market

(40,000

firms)Less volatile

industries

More volatile

industries

Airlines and lessors

the most volatile

Conventional wisdom suggests leases are

a stable finance investment…

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Illustrative aircraft lease deal – from the lessor perspective(US$ millions)

(40)

(30)

(20)

(10)

0

10

20

30

0 1 2 3 4 5 6 7 8 9 10

#1 Lessor

buys aircraft

for $40

#2 Airline leases aircraft for 10 years

at 1% per month or $4.8 per year

Steady cash flow, 9% unlevered return

#3 Lessor sells aircraft at end of

lease for $24 (60% of purchase

price based on 4% annual

depreciation over 10 years)

Year

Customer renews

lease at good rate

Big gain on

maintenance

reserves

…however historical experience suggests

wide variation

Conventional wisdom Historical experience

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-30%

-20%

-10%

0%

10%

20%

30%

Illustrative aircraft lease returns(Unlevered IRR)

-30%

-20%

-10%

0%

10%

20%

30%

Illustrative aircraft lease returns(Unlevered IRR)

Bought low, sold high

Bought

too high

Default – delay in

getting aircraft out

of country X

Default; able to

release quickly

Technology change -

stuck with bad type

So what could this all mean?

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0%

10%

“It works”

“It doesn’t”

New start

up airline

-30%

-20%

-10%

0%

10%

20%

30%

If you want this…

Steady leasing cash flows Steady leasing returns

…but you have this…

Volatile leasing returnsBinomial airline returns

…you may want to think differently

Traditional efforts to create steady leasing

returns tend to focus on risk reduction…

Credit protections

• Lease deposits of up to 6

months aircraft rent

• Maintenance reserves

Portfolio management

• Diversify enough by airline,

geography, type, tenor, etc.

and the overall portfolio risk

is reduced

• Akin to securitizing a bunch

of subprime, no income

mortgage borrowers and

making a “safer” investment

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Return

Risk

Start up

airline

Add deposits

and reserves

…does it work? Sometimes? Most times?

What about rebalancing by increasing

return potential AND/OR mitigating risk?

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Return

Risk

Add warrants

and equity kicker

Add smaller deposits

/ reserves

Illustrative case study: start up airline lease

deposits

Case 1: 6-month lease deposit

• Aircraft financier wants to

de-risk deal and requires a

six-month lease deposit

• Airline only has cash for

deposits on one aircraft

• Fleet of four aircraft

Case 2: 3-month lease deposit

• Aircraft financier requires

three-month lease deposit

and some equity warrants

• Airline has cash for two

aircraft; better prospects

• Fleet of five aircraft

For start up airlines 25% more aircraft can

make a small difference

Situation

• Startup airline has three aircraft and wants to grow

• Each incremental aircraft very profitable because of fixed cost

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Illustrative case study: same start up airline

lease versus buy

Case 1: lease

• Rent: $2.4m annually ($20m

aircraft; 6-12 years; 1%

lease rate, $200K monthly)

• 6-month deposit: $1.2m

• Sufficient cash for deposits

on one aircraft only

• Fleet of four aircraft

Case 2: buy

• Purchase for $20m:

– Equity: Airline issues $10m in

equity (50%) to seller

– Debt: Aircraft debt of $10m

(50% LTV; 10% rate; balloon)

• Annual cash out: $1.0m

• Annual cash savings: $1.4m

(return on equity of 14%)

• Could do two or three

aircraft without deposit

• Fleet of six aircraft

For start up airlines

50% more aircraft can

make a big difference18

Why you would do it

Airline

• Doubles the fleet while

conserving cash

• “Back door” equity

issuance (no banker

fees, fund raising

process)

• Increases odds of

becoming a “success”– Easier to manage an AOG

with 6 versus 4 aircraft

Aircraft financier

• Provides a better risk /

return profile

• Allows you to sell an

aircraft but still ride the

upside

• If you are the capital

structure you may as

well have some upside

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Why couldn’t it work?

� Risk / credit / anti-doing business committee

� Doesn’t fit in investment mandate or profile

� Valuing the equity could be difficult

� Foreign ownership restrictions

� Conflict of interest to lease to competitors

� Actual debt and equity in the aircraft

� Book value issues

� What if airline fails? Could lessor clawback

rights to aircraft similar to a lease default? 20

Summary

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� Airlines returns are a binomial – it “works”

15-20% of the time

� Aircraft financier are the capital structure for

start up airlines

� Lessors can be volatile like their customers

� It could be more effective to de-risk and

increase return potential in lease deals

� Find a mutually beneficial way to tilt the

outcome towards a successful airline

Questions? Comments?

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