Regional Aircraft 2002 media brief

“a winter’s tale”(in three acts)

Lead actor: Paul Stirling - SVP Asset Management and the usual ‘company of players’

The bard: David Dorman

Globe Theatre - London

13th December 2002

Act I - the prologue

• Regional aircraft market update

• Regional market funding and economics

Act II

• Freighter programmes

• Product development

• Trading & Services

Act III

• Inside Regional Aircraft

• The Epilogue

Today’s stage performance

• RIP Fairchild Dornier

• Rapid growth of low cost airline model

• FlyBE, Swiss, SN Brussels stay with 146 / Avro RJ

• USAir and United go Chapter 11

• USAir and American F100’s to be retired

• Scope clauses under pressure but remain

• The first large of RJ paper plane finally arrives, but late and overweight?

• European majors react, early but fragile signs of recovery

• New regional jet order drought continues to worsen

2002 - Events so far

New small/regional aircraft status in 2002

Type Orders Cancellations Deliveries Backlog Net changein 2002

CRJ700 3 0 28 148 -25

CRJ900 0 0 0 30 0

EMB170/175 16 0 0 98 +16

EMB190 0 0 0 30 0

728Jet 0 -118 0 0 -118

928Jet 0 -4 0 0 -4

A318 0 -3 0 103 -3

B717 32 -7 13 56 +12

Total 51 -132 41 465 -122

The overall backlog in this sector has been reduced by over 25% in 2002

•Concerns in the financing community about aircraft assets

•“blue chip” majors can still close financings, but options for regionals are less clear

•In many cases, the regional operators have a relatively poor credit rating

•Today’s money is going to those who have best chance of long term success

•As a result, the manufacturers/export credit agencies will need to finance deliveries over the next few years

•How much more can the manufacturers’ balance sheets absorb, as well as the export agencies’ appetite given their already sizeable burdens

Financing in today’s market

Airline Industry - Credit rating history

-30

-25

-20

-15

-10

-5

0

“Even in the last good time, the average rating of the industry was just one notch above speculative grade - in difficult times, like the current period, the average rating has sunk to Ba3”

Moody’s investor report - July 2002

Baa1

Baa3

Ba2

B1

Baa2

Ba1

Ba3

BBB+

BBB-

BB

B+

BBB

BB+

BB-Peer group includes Lufthansa, ANA, Am West, AMR, BA, Air CanadaDelta, JAL, Qantas, Southwest, UAL

Source: Moody’s investor report (July 02)

Source: Airline Monitor Forecast (July 2002)/BAE Analysis

0

20

40

60

80

100

120

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Year

Value of Deliveries (US$bn)

Regionals

By 2020 over US$100bn of new regional aircraft deliveries will need to be funded...

Cumulative value of future deliveries - regionals

Programme/Aircraft Value Relationship

Yield

Time

Yield orCost per Seat

• Increasing competition in the market has put pressure on yields

Source: Lufthansa

Today ?

Programme/Aircraft Value Relationship

Yield

DOC per Seat

Time

Yield orCost per Seat

• Over time, improvements in technology have enabled a reduction in DOCs…but capacity cost

has risen over the same period

Source: Lufthansa

Today ?

Capacity Cost

Programme/Aircraft Value Relationship

Yield

DOC per Seat

Time

Yield orCost per Seat

• Diminishing advantage from new product DOCs forces the product cost into the foreground of

the competitive assessment

Source: Lufthansa

Capacity Cost

Today ?

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

40% 60% 80% 100% 120% 140% 160%

Trip Cost relative to ERJ170 (US$)

TO

C r

elat

ive

to E

RJ1

70(c

ents

/km

/sea

t)Regional jet operating cost comparison

BAe146-300

BAe146-200

ERJ170-100

CRJ700

CRJ900

ERJ190-200A318

B717

B737-500

500nm sector2001 economic conditionsEquivalent seat layout (max capacity)ISA+10°C en-route JAR reserves

Source: BAE analysis

Lease aircraft performance

Lease aircraft in the past 12 months in the 70-110 seat sector

146/RJ9%

MD874%

7179%

737-5/616%

737-20046%

F1006%

F703%

F287%

Leased in64%

Lease ext9%

Subleased10%

Wet Leased9%

Lease arr8%

160 aircraft lease transactions in past 12 months

Source: Airclaims CASE database

Small Jet Idle Fleet breakdown

BAC1-1121%

F2823%

F10025%

AvroRJ/14612%

7178%

CRJ9%

ERJ2%

Junk Stage 2136 a/c

44% of total

Older Stage 3116 a/c

37% of total

Newer Stage 358 a/c

19% of total

Oct 2002 - 310 regional jets parked

Source: Airclaims CASE database

Vs 1203 narrowbody jets parked

•Economic improvements offered by new types are limited

•Capital cost now has the biggest influence on DOCs in this sector

•Operating leased aircraft alleviates the current airline credit crunch

•Pre-owned aircraft offer the low cost/low risk solution

•Airlines lease to retain flexibility to match today’s uncertain environment

•Availability of types covering all seating capacities to best match market needs and respond to changing requirements of their major partners

•Aircraft tried and tested in service for several years

The attraction of the pre-owned lease market

“The BAe146-200 still represents a great aircraft, not least because BAE SYSTEMS worked hard to contain operating costs. Thus far the competition to the -200 remains limited and the type continues to be held in relative high regard by a myriad of large and small operators…”

Aircraft Value News - 18th November 2002

• The market is nervous - political risk - uncertainty

• The market is restructuring - lower costs - certainty

• More casualties in 2003 - airlines / aircraft programmes?

• Short termism will prevail - low risk solutions

• Scope clauses will come under renewed attack

• US F100 Auction - the Litmus Test

• Lease rates will continue to be under pressure as long as over

supply continues

• Freight conversion programmes will accelerate

2003 Outlook

• Lease extensions - THY RJ fleet

- NJS 146

- 17 Jetstreams

• Fleet Growth - CityJet 146

- CAT 146

- Westair ATPF

• Aircraft Sales - 18 Jetstreams

• Spares and Support - FlyBE Jetspares

• Product Development - Freighters

- VIP / Shuttle

- Special Missions

2002 Regional Aircraft - what is happening

PayloadTonnes

8 - 11

8

2

146QT

146F (Small door)

146F (Bulk loading)

ATPF (Large door) ATPF (Bulk loading)

Jetstream 31 Cargo

Freighter programmes

AtmosphericResearchAircraft

VIPAircraft

BAe748Water bomber

Developments

• Airbus A320 family placed with CCM and SN Brussels

• HSBC/BAE SYSTEMS RJ fleet sale and lease back with Air Malta

• US turboprop trading

• Consultancy Services

• Growing lease management business

• Expanded technical 3rd party re-deliveries / repossessions

Trading and Services

In-house full service lease manager capability from a major operating lessor - BAE SYSTEMS

Inside Regional Aircraft

• New facilities at Prestwick opened

• Key staff in position

• Co-located Engineering & Support

• First Prestwick support conference held for RJ/146

• Asset Management remains based in Hatfield & Washington

• Political uncertainty continues

• Cost down and lower yields are a certainty

• Credit worthiness of the whole industry in the spotlight

• All sectors under pressure

But …….

The epilogue...

•The pre-owned 70-110 seat jets market is moving and in better shape than that for new large regional jets

• Pre-owned leased aircraft offer the flexibility and low costs airlines need to survive the downturn

• Regional Aircraft is continuing to develop its products and support services to meet our changing markets

Questions?

As the immortal bard would say……

Stuff this, where’s the merriment and feasting?