LAS VEGAS, NEVADA

OCTOBER 28, 2010

Prepared for:

MARPA 2010 ANNUALCONFERENCE

Prepared for:

MARPA 2010 ANNUALCONFERENCE

LESSOR PERSPECTIVES& PMA OPPORTUNITIESLESSOR PERSPECTIVES& PMA OPPORTUNITIES

Presented by:

John J. MowryVice President, JMOWRY@SH-E.COM

Presented by:

John J. MowryVice President, JMOWRY@SH-E.COM

1

Today’s DiscussionToday’s Discussion

1. About SH&E

2. Lessor Perspectives

3. Acceleration of PMA Adoption

Section 1Section 1

ABOUT SH&EABOUT SH&E

3

AirportsAirports

Management Consulting

Management Consulting

Decision SupportDecision Support

Financial & Technical Services

Financial & Technical Services

Safety & SecuritySafety & Security

46 year history of delivering value to our clients

More than 6,000 assignments for a global client base of airlines, airports, governments, investors, lenders, lessors, MROs, OEMs, etc.

Aviation professionals with in-depth experience and aviation expertise in 5 major practices

Proven strength in the Aviation Maintenance & Engineering and MRO industry

Unmatched resources, including proprietary databases and intellectual capital

Primary Offices in New York, Boston & London

SH&E is an ICF International company; ICF is a global leader in transportation policy and climate change consulting services

SH&E is one of the world’s largest and most experienced aviation and aerospace consulting firmsSH&E is one of the world’s largest and most experienced aviation and aerospace consulting firms

4

SH&E’s Financial & Technical Services (FTS) Practice – Major Products and ServicesSH&E’s Financial & Technical Services (FTS) Practice – Major Products and Services

Technical ConsultingMRO market research & analysisFleet maintenance planning & forecasting Supply Chain Management & Strategic SourcingPerformance benchmarking & operational improvement

Appraisal ServicesTangible asset valuationsResidual value forecastingLease analysis

Asset ManagementSale or lease of assetsLease managementMaintenance managementTechnical inspections

Investment SupportBusiness Plan DevelopmentM&A commercial due diligenceEnterprise valuationSecuritization support

Section 2Section 2

LESSOR PERSPECTIVESLESSOR PERSPECTIVES

6

SH&E recently surveyed lessors, operators, and appraisers to understand the different views toward PMA partsSH&E recently surveyed lessors, operators, and appraisers to understand the different views toward PMA parts

Lessors– Respondents represented a diverse group with regard to fleet size,

asset type focus, business model, and geographic reach, to identify differences in views on alternate parts

– Respondents cumulatively own/manage 2,500 aircraft, or approximately 33% of the world’s leased fleet

Operators– Respondents included those from multiple divisions within the airlines

(technical, procurement, finance, quality, etc.) to understand the different views on alternate parts

– Respondent set included 15 airlines, operating in 12 countries including both network and low cost carriers with differing levels of internal maintenance and engineering capabilities

Appraisers– Respondents included four appraisers from three different countries – Respondents ranged from individual ISTAT appraisers to larger firms

7

Many operators expressed a desire for increased use of PMA parts, but identified a number of concerns or limitations Many operators expressed a desire for increased use of PMA parts, but identified a number of concerns or limitations

Airlines agree that safety, reliability, or ‘bogus parts’ are not an issue

– Few have safety/technical concerns, but few want to be early adopters of engine hot section / critical PMA parts

Lessor contract restrictions are cited by operators to be major factors limiting the use of PMA partsOther factors limiting PMA use:

– Existing OEM agreements / restrictions– OEM technical support / warranty issues– Asset value concerns– Technical staff to evaluate the parts– Configuration management complexity 2.5

2.5

2.8

4.0

4.6

5.0

5.0

1 1.5 2 2.5 3 3.5 4 4.5 5

TechnicalPerception

InsignificantSavings

RegulatoryIssues

Asset ValueConcerns

WarrantyConcerns

OEMAgreement

LessorResrictions

Operator Top Concerns with Use of PMA Parts

Operator Top Concerns with Use of PMA Parts

Note: Weighted average response of all lessor respondents. Rank 1 (not important) - 5 (very important).Source: SH&E Survey

Operators

8

Percentage of Active Fleet on Operating Lease

Lessors own 39% of the worldwide fleet of active commercial jet aircraft; and as such, play a large role in setting PMA policiesLessors own 39% of the worldwide fleet of active commercial jet aircraft; and as such, play a large role in setting PMA policies

38% 42%51%

39%26%

59%

0%

10%

20%

30%

40%

50%

60%

Africa Asia /Pacific

Europe Middle East NorthAmerica

SouthAmerica

Source: ACAS June 2009

Note: Only widebody, regional, and narrowbody aircraft were considered in the analysisSource: ACAS, Jun-10

World Average % of Fleet on Operating

Lease: 39%

Operators

9

SH&E’s survey confirmed lessor resistance to PMA parts, primarily due to concerns about remarketabilitySH&E’s survey confirmed lessor resistance to PMA parts, primarily due to concerns about remarketability

2.1

2.8

3.5

3.8

4.5

4.8

0 1 2 3 4 5

OperatorPolicies

GovernmentRegulation

TechnicalPerception

MarketPerception

ValueDegredation

Remarketability

Lessor Top Concernswith Use of PMA Parts

Lessors

Remarketability (both lease and sale) concerns are the leading factor that drives the leasing community’s aversion to PMA parts

Residual value impacts, regulatory concerns, and operator restrictions were also cited as being important, but mostly in respect to how they potentially affect the ability of the lessor to place or sell their aircraft

Note: Weighted average response of all lessor respondents. Rank 1 (not important) - 5 (very important).Source: SH&E Survey

10

Most lessor’s default policy (formal or informal) is to not permit PMA parts Most lessor’s default policy (formal or informal) is to not permit PMA parts

Approximately 40% of lessors surveyed had an actual formal policy toward PMA parts; however most respondents have an informal policy precluding the use of PMAs

The majority of formal policies distinguish between airframe and engine parts

Formal | No PMA

6%

No Policy33%

Formal | Airframe

PMA Allowed

11%

Informal | Try Not to

Allow28%

Formal | No Engine

PMA22%

LessorsLessor Policies

Regarding PMA Parts

11

With the default policy being to not permit PMA parts, only airlines that ask for relief will be granted reliefWith the default policy being to not permit PMA parts, only airlines that ask for relief will be granted relief

Lessors

North American legacy airlines

European legacy airlines

Operators of older passenger aircraft

Operators of cargo aircraft

Smaller network airlines

Low cost carriers

Airlines the outsource their MRO activities

Frequent Requestors ofPMA Usage Consent

Infrequent Requestorsof PMA Usage Consent

12

Lessors will engage in transactions involving assets with PMA parts, if the overall transaction makes financial senseLessors will engage in transactions involving assets with PMA parts, if the overall transaction makes financial sense

Finance Leases:

– The lessor does not take possession of the asset for a finance lease, nor under normal circumstances have remarketing concerns

Sale-Leasebacks:

– The sale-leaseback market can be competitive at times, and in such times, airlines hold significant leverage

Long-Term Operating Leases:

– The economics of long-term operating leases are such that the lessor is less dependent upon remarketing or residual values

Older Aircraft:

– Leasing older aircraft can be challenging; lessees seeking to lease such assets may have leverage to negotiate the usage of PMA parts

Selected Examples of Leases Most Likely to Permit Usage of PMA Parts

Lessors

13

A wide range of clauses exist in actual aircraft leasesA wide range of clauses exist in actual aircraft leases

1. Explicit Exclusion of PMA Parts“No DER parts or PMA parts shall be installed…”

2. Explicit Exclusion of PMA Parts, Unless with Specific Lessor Consent“No PMA replacement or DER repaired parts shall be installed unless Lessee has obtained Lessor’s prior written consent”

3. Explicit Exclusion of PMA Parts, Except for Consumables“No DER parts or PMA parts shall be installed … except for consumable parts or as otherwise agreed by Lessor”

4. Explicit Exclusion of PMA Parts, Except to Replace Existing PMA“...if the Part being replaced is a PMA Part, then Lessee may replace such Part with a PMA Part without the prior consent of Lessor”

Many older leases are silent as to PMA usage. Specific reference to PMA parts has become more common, and evolved with greater industry awareness and the development of more critical parts.

Lessors

14

Many lessors are open to exploring PMA parts through alternate business models, though with caveats and practicality concernsMany lessors are open to exploring PMA parts through alternate business models, though with caveats and practicality concerns

Nearly 90% of the lessors indicated they would consider allowing some PMA parts if the lessee would remove them before aircraft redelivery

– Lessors mostly concerned with aircraft upon return

– Lessee credit quality is the essential issue

Lessors

Explore use of PMA

parts if removedat expiry?

Yes35%

No10%

Yes | Credit Quality

40%

Yes, | Part Type5%Yes |

Aircraft Age10%

Explore use of PMA parts

if Lessee shares

cost savings?

Yes44%

Yes | Aircraft

Age11%

Yes, | Part Type6%

Yes | Credit Quality

11%

No28%

Approximately 60% of lessors said they would entertain sharing the savings from PMA parts

Section 3Section 3

ACCELERATION OF PMA ADOPTIONACCELERATION OF PMA ADOPTION

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The survey findings make clear that the resistance to PMA parts is a self-fulfilling cycleThe survey findings make clear that the resistance to PMA parts is a self-fulfilling cycle

Lack of regulatory clarity across jurisdictions, operator resistance, and uncertainty over residual value impact creates a restricted market;

In turn, lessors are reacting to the reality of market – unless they have full flexibility to place (or sell) assets with PMA parts with any airline, in any country, they will continue to restricttheir use wherever possible;

Ultimately, without explicit participation of this large and growing source of aircraft financing, operator resistance and perceived value degradation will continue.

While airlines are going to have to drive further demand for PMAparts, if a number of areas are addressed by industry, the

adoption of PMA parts may be accelerated…

While airlines are going to have to drive further demand for PMAparts, if a number of areas are addressed by industry, the

adoption of PMA parts may be accelerated…

17

A number of strategies exist that may be explored with the lessors to accelerate the adoption of PMA partsA number of strategies exist that may be explored with the lessors to accelerate the adoption of PMA parts

LESSORS Regulatory Operators Aftermarket

Communicate to lessors the specific scenarios where PMA parts can result in notable reduced maintenance costs for the operator, and/or relatively less risk for the lessor (financial leases, long term operating leases, older aircraft, etc.)

Develop financial incentives for lessors:– Cost sharing (lessee lessor)

– Incentive payments (PMA manufacturer lessor)

– Etc.

Educate lessors on ease of transition and regulatory acceptance– How big is the market for aircraft which have PMA parts?

18

To accelerate adoption of PMA parts, the industry must expand beyond the lessors, to include regulatory issuesTo accelerate adoption of PMA parts, the industry must expand beyond the lessors, to include regulatory issues

Increase industry visibility into, and clarify the current policies towards PMA in each jurisdiction so that all stakeholders (lessors, operators appraisers, MROs, industry trade groups) have a proper understanding

Facilitate the acceptance of PMA programs for regulators without extensive knowledge or capabilities

Create regulatory harmony across jurisdictions to allow for seamless transition of aircraft and engines that utilize PMA parts

Lessors REGULATORY Operators Aftermarket

19

Demand for PMA parts by operators must continue to be stimulated, and the operators must be supported by the industryDemand for PMA parts by operators must continue to be stimulated, and the operators must be supported by the industry

Lessors Regulatory OPERATORS Aftermarket

Foster the development of PMA parts through:– Airline alliances (Oneworld, SkyTeam, Star Alliance)

– Airline associations (ATA, ALTA, AACO, AEA, etc.)

Facilitate the acceptance of PMA programs for operators without extensive engineering capabilities

Encourage enhanced interaction between airline technical and finance department when negotiating leases

Provide operators with favorable lease contract language

20

Finally, an aftermarket for non-consumable PMA parts must be developed so as to support asset residual valuesFinally, an aftermarket for non-consumable PMA parts must be developed so as to support asset residual values

Lessors Regulatory Operators AFTERMARKET

By developing an outlet for secondary material, the residual values of assets with PMA parts would be supported:– Part-out companies would pay more for the assets

– Companies that sell their assets to the part-out companies would realize value for the PMA parts

– Appraisers would no longer decrease value of assets with PMA parts

PMA manufacturers could address this market need through guaranteed buy back programs– PMA manufacturers would then have the option of repairing

unserviceable parts, and then re-selling the used serviceable parts

21

In summary, while airlines will need to drive further demand forPMAs, industry can take action to facilitate the growthIn summary, while airlines will need to drive further demand forPMAs, industry can take action to facilitate the growth

Aircraft remarketability is the primary concern of lessors regarding PMA parts

If lessors could remarket aircraft with PMA parts as easily as those without, and for the same sale price or lease rate, they would permit them

As lessors are reacting to the reality of the market as they see it…

Industry efforts will need to be made in many areas to accelerate the adoption of PMA parts

– Lessors

– Regulatory

– Operators

– Aftermarket

Lessor Perspectives Industry Strategies

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