Aviation Market Overview

Martin Sutton, Executive Director Standard Chartered Bank

School of Aviation Finance

Aviation Market Overview January 2016 Martin Sutton Standard Chartered Bank

3

Strong Fundamentals will continue to drive Industry Growth

and Aircraft Demand

Demand

Traffic Growth

Oil Prices

Airline Profitability

OEM Strategy

Leasing Industry

AIRCRAFT DEMAND DRIVEN BY GDP

Global GDP growth expected to be around c.3.0% in 2016, rising to 3.1% in 2017 (source: SCB Research).

Forecast long term global economic

growth of 3.1% pa. (source: IHS Economics).

PASSENGER TRAFFIC GROWTH

Passenger traffic growth to continue above long-term trend of 5% p.a

Traffic growth of 6.9% expected for 2016, up from 6.7% in 2015 and 5.9% in 2014. (source: IATA).

LOWER OIL

Lower fuel costs expected to result in higher traffic growth and greater aircraft demand.

Higher oil prices would see a shift in demand towards more fuel-efficient types popular with operating lessors.

HIGHER AIRLINE PROFITABILITY

Improved profitability and credit quality driven by lower oil prices and stronger worldwide GDP growth.

Record industry net profits of $33Bn forecast for 2015, rising to $36Bn in 2016.

MANUFACTURER STRATEGY

Effective duopoly, with high barriers to entry.

Airbus and Boeing continually monitor production rates and supply of in-demand aircraft.

AIRCRAFT LEASING INDUSTRY

Increased demand for aircraft and financing from Lessors, who are set to account for 50% of the market.

Established platforms being challenged by new entrants from China.

Industry Overview

4

Asia-Pacific airlines expected to achieve a 3.2% net profit margin, driven primarily by lower fuel prices and traffic growth of 8.0%.

China economy slowing, but at c. 7% remains a key driver for regional and global economic growth. Despite a slowing economy air travel remains strong.

Weakness in cargo markets impacting airline revenues and profitability (Asian carriers account for 40% of air freight market)

LCC penetration is high and a key growth driver for the region.

Asia-Pacific

Double-digit traffic growth in the Middle East driven by regional economic growth, capacity expansion and success of the “global hub” model. Region is split between strong Gulf “hub” airlines and regionally-focused airlines impacted by lower oil revenues and political conflict.

Despite its great potential, Africa remains the weakest region, with profits barely positive. Carriers subject to political instability in N. Africa, weak economies and stiff competition on international markets. Longer term above average economic growth rates should improve carrier performance.

European carriers achieving second highest load factor and solid growth. However combination of strong competition, low yields and high regulatory costs is impacting financial performance of some legacy carriers.

EMEA

Strongest regional financial performance by US carriers due strong US economy, appreciating US dollar, lower oil prices and a restructured industry in recent years.

US Airline net profit forecast of USD19.2Bn (net margin 9.5% vs. 5.1% globally) supported by high load factors of c.84%.

Latin American airlines performance weak due to deepening economic crisis in Brazil, weak commodity prices and adverse currency fluctuations. Region expected to see a modest net profit of USD0.4Bn in 2016 (1.1% net margin).

AMERICAS

Regional Perspective

5

Demand For Aircraft

6

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7.5

10.0

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

% g

row

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PK's

)

% g

row

th ra

te (G

DP)

GDP Growth Traffic Growth

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RPK

's (t

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Demand for air traffic is closely linked with the global economy, following a similar cyclical pattern.

Historically passenger traffic (RPK’s) has grown at around 1.5 to

2.0 x the trend of long-term growth rate in GDP.

Air traffic doubles every 15 years

World GDP and Passenger Traffic (RPK*) Growth

Source: IMF, ICAO, IATA

*RPK – Revenue Passenger Kilometre – (a measure of passenger demand, representing each kilometre each passenger is carried)

World Airline Traffic Forecast (RPK’s)

Long-term Growth 2014-2034

Global GDP =3.1% pa

Passenger traffic = 4.9% pa

(Cargo = 4.7% pa) Growth 5.1% pa

Historical Forecast

Source: Airline Monitor, Boeing CMO 2015

20 year traffic growth forecast of 4.9% p.a. driven by long

term global economic growth of 3.1% p.a. Key drivers:

• Globalisation of economies, • global tourism, • deregulation of air travel markets, • growth of low cost / low fare carriers.

Aviation is a long-term growth industry

7

0

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14,000

21,000

28,000

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7,000

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Jet

Airc

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Num

ber o

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illio

ns)

RPK's Aircraft

Air traffic growth is subject to event risk but has shown resilience, even in difficult economic times.

The industry has only experienced three years of negative growth since 1970.

In each case negative growth was due to a severe external shock event, with the subsequent traffic recovery being rapid.

Demand for aircraft closely follows traffic growth.

Air travel demand is resilient to external shocks

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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Oil Crisis

Oil Crisis

Gulf Crisis

9/11 and aftermath

Financial Crisis

SARS

Annual World Airline Passenger Traffic (RPK’s billions)

Growth 5.1% pa

Source: Airline Monitor

World Passenger Traffic and Commercial Jet Aircraft

Source: Airline Monitor

8

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2014 20340

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2014 2034

Worldwide Aircraft Fleet (Number of Aircraft)

43,560

21,600

Long term demand for new aircraft remains strong

Projected Commercial Aircraft Fleet Growth: OEMs 20 Year Forecasts

Airplanes for

Growth

Airplanes for

Replacement

Retained fleet

Current fleet

38,050 New

Aircraft Deliveries

c. $5,570 billion

Source: Boeing Current Market Outlook 2015

Airplanes for

Growth

Airplanes for

Replacement

Retained fleet

Current fleet

38,500

19,000

32,585 New

Aircraft Deliveries

c. $4,900 billion

Worldwide Aircraft Fleet (Number of Aircraft)

Boeing Airbus

Source: Airbus Global Market Forecast 2015

9

Key Demand Drivers

Demographics.

Emergence of middle class consumers with increasing propensity to travel as economy develops.

Transport infrastructure and geographic challenges make air transport essential for growth, particularly in more remote regions.

Global economic growth rates.

Increasing urbanization in emerging markets.

Increasing regional co-operation and progressive air deregulation.

Fast developing low cost carrier (LCC) market segment

Increasing tourism traffic both domestic and international.

High fuel prices drives replacement of older

aircraft for more fuel efficient types.

Emissions / regulatory changes.

Aircraft reaching end of their economic useful lives.

Freighter conversions, driving replacement demand of passenger aircraft.

Aircraft For Growth Aircraft For Replacement

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Demographic and Economic Drivers

Air travel market penetration still low in emerging markets: 85% of population, but only 40% of trips.

PRC and Indian sub-continent will become drivers of long-term growth in Asia. China GDP growth of 5.6% pa forecast (6.6% traffic growth), India GDP 6.6%, traffic 8.3%.

Propensity to travel set to increase as income levels rise and

household consumption increases in emerging markets.

China’s potential will reach current European levels by 2034 at around 1.09 trips per capita. India will be at current Chinese levels (0.3 trips per capita).

Increasing middle class: India set to treble from 66 million today to 180 million by 2030. China to increase from 90 million to over 300 million by 2024.

Increasing urbanisation: Immigration within Asia-Pacific has grown rapidly with labour moving towards fast-growing newly industrialising countries.

Asia to account for more than 50% of world urban population growth to 2050.

Liberalisation of visa policies in China and adoption of ASEAN single aviation market helping to support industry growth.

Traffic and Propensity to fly

Middle Class to grow, doubling in emerging countries

2014 Trips per capita – Log Scale

425 444 471 480247 259 263 264

1,1202,001

2,9363,977

0

1,000

2,000

3,000

4,000

5,000

2004 2014 2024 2034

Middle Class*, millions of people History Forecast

1,792

2,703

3,671

4,721

Emerging

countries

N. America Europe

28%

37%

46%

55%

6,400

7,200

8,000

8,600 World Population

% of World Population

11

LCC Market Share 2015 (% annual seats within region)

Low–Cost Carrier (LCC) business model has grown significantly over the last two decades. Accounts for 25% of industry capacity. Lack of “legacy” costs and infrastructure means LCC model can generate 25-50% lower unit costs relative to full service carriers. Low costs allows LCCs to reduce fares and stimulate traffic. Key driver of industry growth. Successful and robust business model producing some of the highest returns in the industry. Significant opportunity for LCC growth in China. Authorities starting to open the market to LCC competition.

LCC Global Market Share (2001-2015) (% annual seats)

Low Cost Carrier (LCCs) model driving growth

7%

9%

10%

20%

25%

31%

36%

39%

54%

56%

China

Africa

NE Asia

Middle East

N. America

Asia-Pacific

L. America

Europe

S. Asia

SE Asia

8.0%9.5%

12.2%13.1%

14.2%15.7%

17.5%19.2%

20.3%21.4%

22.8% 23.4%25.0%

25.9% 25.4%

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

12

0 5,000 10,000 15,000

Africa

CIS

Middle East

L. America

Europe

N. America

Asia

Aircraft fleet size

20342104

+139%

+46%

+176%

+146%

+70%

+40%

+177%

Air Traffic Growth Centred On Emerging Markets

Expanding air travel in emerging regions is driving significant demand for aircraft. Strong regional economic growth Demographic changes and increased urbanisation Market liberalisation and deregulation Growth of LCCs / new business models

Asia forecast to need 14,300 new aircraft in next 20

years (38% of total deliveries)

Asia-Pacific market of 1 billion passengers, forecast to increase by 100 million annually in foreseeable future.

Asia-Pacific set to become the dominant region, with 39% traffic share by 2034. Domestic China to be the largest single air travel market

According to Boeing forecasts, Asia traffic is expected to grow by 6.1% pa over the next 20 years on the back of regional economic growth of 4.3%.

LCCs successful in Asia – average annual growth rate of 24% over the last 10 years. Currently accounts for 62% of India domestic traffic and 56% in SE Asia.

NE Asia and China LCC market penetration low – significant growth opportunity.

Asia-Pacific becoming the dominant region…

…and driving future demand for aircraft

0 1000 2000 3000 4000 5000 6000 7000

Africa

CIS

Middle East

Latin America

N. America

Europe

Asia

RPK's (billions)

2014-2034 Passenger Traffic Growth by Region

2014 2034 6.1%

3.9%

3.1%

5.9%

6.2%

3.9%

6.1%

% of 2014 RPKs

% of 2034 RPKs

31% 39%

23% 19%

25% 18%

7% 9%

6% 8%

5% 4%

3% 4%

Source: Boeing 2015 CMO, company analysis

Aircraft Fleet (number of aircraft) New Aircraft Deliveries (2015-2034)

Region NumberValue ($Bn)

2014 list

Asia/Pacific 14,330 $2,200

N. America 7,890 $940

Europe 7,310 $1,050

Middle East 3,180 $730

Latin America 3,020 $350

CIS 1,150 $140

Africa 1,170 $160

TOTAL 38,050 $5,570

13

Near Term Outlook

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Source: ICAO, IATA

Airline Profitability and Aircraft Value Cycle

Cycle Troughs • Economic slowdown • Limited Liquidity and asset trading • Airlines heavily loss-making • Lease rates & values below base

Cycle Recovery • Economies Improving • Airlines loss-making, but restructuring / reducing costs • Lease rates, values and trading recovering • Slow return to market for aviation banks

Cycle Weakening • Slow global growth • Airline profits decline • Lease rates at base levels • Liquidity available but on tight terms • Asset trading / orders slow • Asset values below base • External shock weakens demand

Cycle Peaks • Strong global economy • Airlines profitable • Lease rates above base levels • Excess liquidity, margin compression • Active orders / asset trading market • Asset values generally above bases

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Op.

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Net R

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Bn)

Net profitOp. Margin

Airline Industry Profitability (1981-2016F) Typical Aircraft Value Cycle

Industry profitability cycle follows a consistent pattern, although margins rarely exceed 5%. Current cycle – 5 years of consecutive net profits, forecast to grow from USD33Bn in 2015 to USD36Bn this year – supported by lower fuel prices and traffic growth. US airlines leading the industry’s performance – expected to generate USD21.4Bn in 2016 on the back of load factor and yield improvements. Asian carriers forecast to grow from USD5.8Bn last year to USD6.6Bn in 2016, as lower fuel costs and strong traffic growth continues.

Air traffic, airline profits, aircraft orders, aircraft deliveries and other industry factors evolve in a cyclic and familiar pattern over time – The Aircraft Value Cycle. Typically the industry cycle lasts between 7 – 11 years. Current indicators suggest that the present cycle is approaching / at the peak. Key determinants of the position in and longevity of the industry cycle are global economic growth (air traffic demand) and resultant airline industry profitability.

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% G

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World ASEAN China MENA Europe US

GDP Growth (2000-2018F)

Economic Growth - GDP Growth Forecasts

Source: SCB Global Research Source: IMF World Economic Outlook Nov 2015

Global economic growth is slow, staying around 3% in 2015 and 2016. Two speed growth driven by Emerging Market economies, despite a slowing in growth rates in some key markets – notably China, although still relatively high at 6.9% for 2015. Mature markets – US and Europe growing at 2.4% and 1.5% respectively for 2015.

Real GDP Growth (%)Country / Region 2013 2014 2015 2016 2017

Global 2.7 3.0 3.0 3.0 3.1

Asia 6.5 6.4 6.0 6.1 6.2

China 7.7 7.3 6.9 6.8 6.7

India 6.9 7.3 7.4 7.6 7.8

Indonesia 5.6 5.0 4.7 5.2 5.4

Singapore 3.9 2.9 1.8 2.1 2.2

Africa 5.3 4.7 2.4 3.2 4.0

MENA 3.8 3.4 3.5 3.4 3.9

US 1.5 2.4 2.4 1.6 1.3

Europe -0.4 0.9 1.5 1.9 1.9

Japan 1.6 0.0 0.6 1.0 0.4

GDP Forecasts (2013-2017)

Forecast Historical

16 …. outlook for air passenger demand remains broadly positive Source: IATA

Current Traffic Demand and Capacity remain in balance

Global air traffic growth remains above long-term trend, with 6.7% increase in traffic expected for 2015. Recovery in air freight market in 2H 2014. Growth slowed in 2H 2015, with YTD traffic growth of 2.6% on a capacity increase of 5.8%. Capacity (ASKs) discipline by airlines leading to sustained record load factors – globally 80.7% YTD (to end Oct). ASK growth projected to rise by 6.2% in 2015.

0%

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% c

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-on-

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Air Passenger Traffic And Capacity Growth (% y-o-y)

Traffic (RPKs)Capacity (ASKs)

(10%)

0%

10%

20%

% c

hang

e yr

-on-

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Air Freight Traffic and Capacity Growth (% y-o-y)

Traffic (FTK)Capacity (AFTK)

68.9%

78.8%82.4%

80.0%77.6%

84.2%

60%

70%

80%

90%

100%

Africa Asia Europe L.America Middle East North America

Passenger Load Factor (%)

2013 2014 2015YTD

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Traffic Growth and Profitability by Region

-5%

0%

5%

10%

15%

20%

2011 2012 2013 2014 9M 2015

Passenger Traffic (RPK) % Annual Growth

Asia Middle East Latin America Africa Europe North America

5.8

1.9

-0.3 -0.3

19.4

6.9

-2.5

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7.5

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12.5

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Asia Middle East Africa Latin America

N. America Europe

US$

Bill

ions

Airline Net Profits by Region (US$ Bn's)

2013 2014 2015F

Traffic growth being driven emerging markets. Strong growth in Middle East (+12%), Asia (+9%).

Industry financial performance being driven by North American carriers.

Six years of consecutive net profits, forecast to grow to $33Bn in

2015 – supported by lower fuel prices and strong traffic growth.

US Airlines delivering the strongest financial performance due to consolidation delivering load factor and yield improvements.

Asian carriers forecast to make USD5.8Bn due to lower fuel costs and strong traffic growth. Overall revenues and financial returns being impacted by weakness in the freight market.

Middle East carriers expected to make USD1.9Bn on the back of strong traffic (+12%), although capacity growing faster at c.14%.

European airlines forecast to have the second highest profitability of any region, despite sluggish but improving economic growth, driven by LCC sector.

Africa remains the weakest region with African airlines under pressure from international carriers, low yields and slowing economic performance in some parts of the region.

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Fuel accounts for approx. 30% of industry operating costs. Crude oil prices down 35% year-on-year as of 1 Jan 16. Trading at 11 year low. Jet fuel prices back at 2004 levels - trading at $45/bbl (Jan), 35% down y-o-y. Airlines now benefiting from lower fuel costs as hedges run off. IATA forecast around $90Bn in fuel cost savings in 2015. Potential stimulation of economic growth and air travel demand. Positive for aircraft demand and values - particularly mid-life aircraft. Latest SCB Research Forecasts:

- Brent crude 2016: $48/bbl; 2016: $63/bbl

Source: US Government Energy Information Administration (EIA)

Data for weekly Brent Crude and US Gulf Coast jet fuel spot.

Lower fuel prices is a net positive for the industry, if sustained

Jet Fuel Prices Staying Low

$0

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Jet Fuel - Average Spot Price ($/barrel)

Brent Crude Jet Fuel

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Aviation Demand Cycle

Indicator Current level Trend

Passenger Traffic Above trend growth for last six years. Strong growth in Asia, Latin America and W. Europe. Middle East capacity running ahead of traffic YTD.

Year-year growth rate expected to be around 6.7% for 2015, increasing to 6.9% in 2016.

Freight Traffic Traffic reached consistent 5% y-o-y growth in 1H 2015, for first time since 2010. Has since stalled to <1.0% since.

Growth recovery has slowed since Q1 2015. Capacity exceeding demand, consistent with weaker manufacturing data from China

Yields US yields only readily available source. Remaining high by historic standards

Yields have been falling since Dec 2014, with August 2015 data down 8%. However, costs are falling faster >10% as a result of falling oil prices.

Load Factors Remaining at industry record high >80% YTD. Africa remains weakest region and emerging evidence of overcapacity in some regions?

Signs of overcapacity in Middle East. Africa remains weak. Capacity set to increase in Asia and N. America in 2016.

New Aircraft orders Orders slowed in 2015 (down c. 40%) but still being placed in high numbers. Net orders for commercial jets driving book-to-bill ratio of 1.23x

Net orders down on levels of 2011-2014. New programmes sold out for several years, with limited slots now available.

Deferrals & Cancellations Deferrals are at a low level compared to ten year average, and cancellations around average although lower as a % of growing fleet. There is also a high level of model switching as transition to new t

Declining, after a large number of cancellations (c. 500 aircraft) in 2014.

Most measures of demand remain positive, although early signs of slowing

20

OEM Orders and Deliveries

Most products sold out to the end of the decade

Orders to deliveries ratio (“book to bill) average 1.8x over the last 10 years. Order backlog has increased to over 13,400 aircraft (60% of the in-service fleet and 9 years current production levels) Manufacturers protect delivery rates by deliberately overbooking orders. Production is up to 15% lower than current orders. Most products sold out to the end of the decade. Narrowbody customers are significantly under-ordered.

65% of A320 direct customers have no NEO backlog. 74% of B737 direct customers have no MAX backlog.

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Backlog Orders Deliveries Backlog (yrs)

Commercial Aircraft Order Backlog (Airbus and Boeing 2001 – 2015E)

21

Large number of Narrowbody Programs to reach the market in the next 5 years

2014 2015 2016 2017 2018 2019 2020 2021

A320neo

A319neo

A321neo 737MAX-8

737MAX-9

737MAX-7

E190-E2

CS100

CS300

E195-E2 E175-E2

MC21-300

MRJ-90

Airbus

Boeing

Bombardier Embraer

COMAC

Irkut

Mitsubishi

Legend

Scheduled EIS date for In-development narrowbody aircraft

C919

22

New generation of mid-size twin aisle aircraft

2014 2015 2016 2017 2018 2019 2020 2021 2022

A350-800 A350-1000

B787-10 B777-9X B777-8X

Scheduled EIS date for In-development widebody aircraft

Airbus

Boeing

Legend

A330neo

23

Aircraft Production Rates

Manufacturers planning to increase narrow body production rates as a result of the large order backlog and

introduction of new re-engined models.

Airbus is planning to raise production to “rate” 50 by 2017 and rate 60 by 2019. Boeing is planning to raise production to “rate” 52 by 2018 and is already considering a further increase to 60 pm.

Boeing is increasing production on B787 to 12pm in 2016 and 14pm by end of the decade. Production levels on the B777 are being maintained at current rates pre-transition to the B777X. Airbus plans to reduce A330 production to 6 pm as the A350 program deliveries start to ramp up.

42 4142 4246 44

5047

50 52

60

52

0

10

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30

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60

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A320 B737

Mon

thly

Pro

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ion

rate

s

2014 2015 2016F 2017F 2018F 2019F

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10

12

6

2

8

14

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A330 A380 B777 B787

Mon

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Pro

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2014 2015 2016F 2017F 2018F 2019F

Narrow body Production Rates (number of aircraft per month)

Wide body Production Rates (number of aircraft per month)

24

Lead times are longer this cycle…. Deliveries are expected to represent between 6% and 7% of in-service fleet...

Source: Ascend Source: Ascend

Future Delivery Forecasts

Planned deliveries appear to be in line with historic norm

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2.0%

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8.0%

0

200

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800

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

as % fleetNumber of

aircraft

In-Prod. As % in-prod fleet

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

0

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as % fleetNumber of

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Out-Prod. In-Prod. as % fleet

Aircraft Storage Trends

Post 9/11 aircraft storage levels doubled, going from 6.6% of the total fleet to 12.6% in 2001, remaining above 10% until 2006.

The impact of the 2008 crisis was less marked, with storage rates increasing to 10.7%. Current levels are at 9.3% of the total fleet.

The majority of parked aircraft are out-of production models, accounting for 78% and 87% of the total in 2001 and 2008 respectively

Total Parked Fleet In-Production Parked Fleet

Storage rates for in-production models remain low, even during periods of disruption, averaging c. 2%-2.5% of the total in-production fleet.

Post 2001, this “spiked “ to 5% , coming back to 2.4% after three years. Currently parked aircraft represent 2.3% of the in-production fleet.

26

80%

85%

90%

95%

100%

105%

4Q 12

1Q 13

Q2 13

Q3 13

Q4 13

Q1 14

Q2 14

Q3 14

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

CMV

/ Bas

e va

lue

ratio

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75%

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90%

95%

100%

4Q 12

1Q 13

Q2 13

Q3 13

Q4 13

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Q2 14

Q3 14

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

CMV

/ Bas

e va

lue

ratio

B737-800 A320 A319 A321 B737-700

New Delivery Aircraft Values (CMV /Base ratio)

Used (10 yrs) Aircraft Values (CMV /Base ratio)

Source: IBA Source: IBA

B737-800 A320 A319

A321

B737-700

Asset Value Trends – Narrowbody Aircraft

Successful lessors need to identify and acquire aircraft which make good investments. Lessors must also determine the optimum timing of investment and disposal of assets to:

enhance economic returns manage the risk profile of the portfolio generate attractive returns throughout the cycle

Current market value (CMV*) to base value* ratio is a useful measure for deciding at what point to invest and divest in the aviation cycle, particularly for in-production types. The CMV / BV relationship for new popular and liquid narrowbody aircraft continues to exhibit positive trends with comparatively low volatility compared to out-of production types. Similar relationship exists for used (10 year old) in-production types, with in values for in demand models trending toward long term base values. *Current Market Value (CMV) – spot trading price given current market conditions, assumes open sale with no distress pricing.

*Base Value (BV) - long term underlying economic value of the asset. Based on historic trends and future expectations assuming balanced market conditions.

27

Aviation Supply Cycle

Indicator Current level Trend

Aircraft deliveries 2014 had record commercial jet deliveries, 2015 expected to be up c. 4%. Both NB and WB rates at record levels

Production rates set to increase for A320, B737, B787 and A350. A330 reducing and B777 yet to be adjusted.

Deliveries for replacement / growth

Past 5 years, deliveries for replacement made up around 50% of total, around ten points higher than long-run average.

Decline since 2008. 2015 has seen share for replacement falling significantly, towards numbers consistent with peak years of cycles

Deliveries as percentage of fleet

7.3% in 2014, expectation of 7.2% in 2015. The average over the past 25 years has been 7%.

Delivery trend is for 6-7% of in-service fleet ( due to longer delivery lead time), consistent with historical average.

Stored aircraft Absolute levels of stored commercial jets remain close to historic high, though declining as a % of the in-service fleet

Narrow body aircraft declining, small increase in wide bodies. RJs increasing rapidly driven by 50 seat jets ex-US market

Used aircraft availability Commercial aircraft offered for sale / lease currently at lowest point since 2010. Limited availability of in-production types.

Short-term increase in available WB. RJs stable with many stored 50 set jets not actively being marketed.

Aircraft utilisation Narrow body and wide body utilisations are at or near historic highs

Trend flattening. 1H 2015 showed less than 1% decline off post-recession peak.

Supply indicators largely in line with demand

28

Leasing and Aircraft Finance

29

The Need for External Financing

Profitability is highly cyclical and rarely exceeds 3%

Average annual net profit margin of 0.3% since 1980

Historical performance of just 1% net margin (since 1962)

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

US$

Bill

ions

Cash Flow

Capital Expenditure

External Capital Required

World Airline Capital Expenditure and Cash Flow (US$ Bn)

Financing Windows

Source: Airline Monitor

Airline profitability and cash flows are highly cyclical.

Generated cash flows only partially cover capital

expenditure needs (historically around 52% on average).

Airlines currently facing a financing shortfall – opportunity for external financing.

Demand for external capital is forecast to increase as new aircraft deliveries increase.

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Global Airline Net Profit Margin (1980-2016F)

30

Commercial Banks

Capital Markets

Export Credit Agencies

Operating Lessors

Airlines – cash

Manufacturers

Primary Sources of Industry Financing

Regional / Local Banks and Lessors

Islamic financing

Sovereign Wealth Funds

Pension Funds

Private Equity / Hedge Funds

Traditional Sources Developing Sources

31

Healthy Aircraft Financing Environment

Source: Boeing Capital

32

Source: Boeing Capital

Abundant availability of liquidity – new sources increasing

China

Germany

Japan

France

US

Australia Other

Financing Forecast for Global Aircraft Deliveries in 2016 Sources of Commercial Bank Debt Financing for Aircraft Deliveries

Aircraft Financing Requirements

2015 2016F 2017 2018 2019 2020

Export Credit Bank Debt Capital MarketsCash Tax Equity

13% 11%

28% 27%

34% 36%

23% 24%

$122 $127 $130$142

$161$172

Billions in USDSource: Boeing Capital

New aircraft financing remains a robust growth market, helped by historically low interest rates.

$732Bn delivery funding requirement over the next 5 years The ECAs are withdrawing to pre-financial crisis levels.

Share of commercial banks (incl. new entrants from Asia, Middle East), operating leasing and capital markets is

increasing.

33

What is an Operating Lease?

An agreement whereby the owner (Lessor) conveys to the user (Lessee) in return for a payment or series of payments the right to use an asset for an agreed period of time.

Title to the asset may or may not transfer to the lessee at the end of the lease.

Under IAS 17, a lease is defined as:

Elements that distinguish an Operating Lease from a Finance Lease

Aircraft ownership: Remains with Lessor. No transfer of ownership to Lessee Length of lease: Limited period (less than aircraft’s total life)

Operating lease as effective risk management Lessor Risks: Credit risk, Residual / Asset risk

Lessee Risks: Airline operations, Revenue income

Operating Lease means only operational risk for the Lessee – and serial redeployment for the Lessor

Key Elements of an Operating Lease

34

Growth of Operating Leasing

Operating leasing share of aircraft deliveries

(including s/lb) has increased from 6% in 1984 to c. 40% today.

Share is expected to increase to 50% by 2020.

Diverse lessor funding sources driving growth, with private equity and capital markets taking growing share.

As of December 2015, there were 8,331 aircraft on operating lease (with further 896 in lease transition/storage).

Operating Lessor order backlog of 2,480 aircraft, representing 18% of manufacturers total backlog.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ope

ratin

g Le

ssor

Airc

raft

% o

f Wor

ld F

leet

Operating Lessor Fleet

Lessor % of Global Fleet

Growth of Operating Lease Fleet (1975-2015)

35

Aircraft Leasing is established in all Regions

Africa Asia Middle East

Latin America Europe North America

Passenger Jet Aircraft On Operating Lease by Region (2016)

Source: Ascend On-line

30%43%

50%

33%

53%25%

36

Operating Lessor Community 2015

Estimated Value ($bn) %

Number of Aircraft %

1 AerCap 36.6 15.6% 1,279 15.6%

2 GECAS 35.5 15.1% 1,608 19.6%

3 BBAM 13.6 5.8% 413 5.0%

4 SMBC Aviation Capital 12.3 5.2% 393 4.8%

5 BOC Aviation 10.4 4.4% 256 3.1%

6 CIT Aerospace 9.6 4.1% 313 3.8%

7 Air Lease Corp. 9.4 4.0% 251 3.1%

8 AWAS 8.8 3.7% 295 3.6%

9 ICBC Leasing 7.1 3.0% 173 2.1%

10 Aviation Capital Group 7.0 3.0% 273 3.3%

11 Avolon 6.9 2.9% 166 2.0%

12 Pembroke / SCB 5.0 2.1% 119 1.5%

13 Jackson Square/MUFJ 4.9 2.1% 110 1.3%

14 Aircastle 4.9 2.1% 141 1.7%

15 CDB Leasing 4.8 2.0% 120 1.5%

16 Macquarie 4.5 1.9% 176 2.2%

17 Doric 4.0 1.7% 38 0.5%

18 Orix Aviation 3.6 1.5% 148 1.8%

19 VEB Leasing 3.4 1.4% 84 1.0%

20 MC Aviation Partners 3.2 1.4% 92 1.1%

Top 21 - 50 others 39.3 16.7% 1,736 21.2%

Total Top 50 Lessors 234.8 8,184

Source: Airfinance Journal

37

Popularity of Operating Leases

shorter lease terms keep options open

keep at the leading edge of new technology

Flexibility

Availability

Funding

Credit Rating

Cash Conservation

Asset Exposure

respond quickly to market forces

lessors frequently offer earlier delivery dates than manufacturers particularly where reduced bank appetite for financing airlines

provides close to 100% financing. May benefit from lessor’s buying power

off balance sheet (at the moment). Improved debt/equity ratio

may be cheaper than own cost of funds low levels of advance payments required

preserves capital for developing the business Available to weaker credits.

Lessor focus is on the asset and credit risk not the credit

Avoids asset exposure. Lessor takes the residual risk

38

Operating Lease Debt Finance

Typical Term 5-7 yrs 10-12 yrs

Capital Requirement Low Moderate

Deposits 3-6 mths rent No

PDP’s No Moderate c. 20-30%

Repayments Rental Principal & Interest

Payments made Monthly in advance 1,3 or 6 monthly in

arrears

Credit rating Lower Moderate

Asset exposure None Some/All

On/off balance sheet Off On

Fleet Flexibility High Low

Lead time to delivery Short May be long

Finance Product Comparison

39

Executive Summary

Commercial aviation is a global business with sustainable growth driven by emerging markets. It is a cyclical but resilient industry. World fleet is set to double to 43,500 aircraft by 2033.

The industry is a voracious consumer of capital – c. USD730 billion over the next 5 years.

The leasing sector is the single largest financing channel and is set to continue to grow.

Experienced lessors have become adept at managing through the industry cycle.

OEMs have remained disciplined – carefully matching production capacity to demand.

Aircraft values for new in-production types remain robust.

The industry environment remains healthy with a positive outlook.

40

Disclaimer We, Standard Chartered Bank have prepared this document for information purpose only and for restricted circulation. We have based this document on information available to the public from sources We believe to be reliable. While We have taken all reasonable care in preparing this document, We do not represent the information contained in this document is accurate or complete and We accept no responsibility for errors of fact or for any opinion expressed in this document. Opinions, projections and estimates reflect Our assessments as of the document date and are subject to change. We have no obligation to notify You or anyone of any such change. You must make Your own independent judgment with respect to any matter contained in this document. Neither We nor any of Our affiliates or Our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this document. This document is not an offer or commitment to arrange or underwrite any form of financing and does not create any legally binding obligations on Us and/or Our affiliates.

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