IATA Fleet & Network Planning Conference...IATA Fleet & Network Planning Conference Madrid - September 2002 “So you‘ve decided to fly aircraft for a living?” Clifford A Brown,

IATA Fleet & Network PlanningIATA Fleet & Network PlanningConferenceConference

Madrid Madrid -- September 2002September 2002

“So you‘ve decided to fly aircraft for a “So you‘ve decided to fly aircraft for a living?”living?”

Clifford A Brown, Managing DirectorClifford A Brown, Managing Director

International Aviation Services GroupInternational Aviation Services Group

INTRODUCTIONINTRODUCTION

VALUES OVER THE LAST 24 MONTHSVALUES OVER THE LAST 24 MONTHSCURRENT MARKETCURRENT MARKET

AIRBUSAIRBUSBOEINGBOEINGREGIONAL JETSREGIONAL JETS

CONCLUSIONSCONCLUSIONS

WHAT’S SO IMPORTANT ABOUT WHAT’S SO IMPORTANT ABOUT VALUES?VALUES?

Aircraft Price / Value is the biggest driver ofAircraft Price / Value is the biggest driver of DOCsDOCsDOC SensitivityDOC Sensitivity

Fuel 13% Fuel 13% -- 18%18%Maintenance & Crew 15% Maintenance & Crew 15% -- 20%20%Landing and Navigation 18% Landing and Navigation 18% -- 23%23%Aircraft Price / Lease Rate 40% Aircraft Price / Lease Rate 40% -- 50%50%

VALUES OVER THE LAST 24 MONTHSVALUES OVER THE LAST 24 MONTHS

Late 2000 slow down in aircraft utilisationLate 2000 slow down in aircraft utilisationPeak rates of deliveries from manufacturersPeak rates of deliveries from manufacturersEarly 2001 reduced summer liftEarly 2001 reduced summer liftLessor redeliveries but no deliveriesLessor redeliveries but no deliveriesSeptember 11September 11thth

Insurance premiumsInsurance premiumsFuel costsFuel costs

VALUES OVER THE LAST 24 MONTHS VALUES OVER THE LAST 24 MONTHS cont/d cont/d

Lessor armLessor arm--twistingtwistingManufacturer wrestlingManufacturer wrestlingNorth AmericaNorth AmericaOperator performanceOperator performanceEuropeEuropeFar East, Asia and PacificFar East, Asia and Pacific

GENERAL CURRENT MARKET VALUE GENERAL CURRENT MARKET VALUE DECREASESDECREASES

A300B4-200 32% B717 23% BAe146-100 25%A300-600 41% B737-200HADV 38% BAe146-300 23%A310-200 33% B737-300 29-33% CRJ100ER 14%A310-300 22% B737-400 19-22% CRJ700 14%A319 17% B737-500 17-24% ERJ145 13%A320-100 23% B737-600 19% DC10-10 29%A320-200 17% B737-700 2% DC10-30 24-34%A321-100 20% B737-800 5% DC9-30H 39%A321-200 17% B747-400 23-28% F28-4000 39%A330-300 23% B757 23-27% Fokker 100 33%A340-200 23% B767-200 18% MD11 23%A340-300 24% B767-300ER 28% MD81 23%-26%

B777-200ER 14% MD82 23%-26%B777-300 16%

AIRBUS CURRENT MARKETAIRBUS CURRENT MARKET

Stable production rates Stable production rates Sales through a structured S&M campaignSales through a structured S&M campaignSome discounting Some discounting –– not muchnot muchBalance between leased and owned stable for most Balance between leased and owned stable for most modelsmodelsOperating economics in mature aircraft goodOperating economics in mature aircraft good

AIRBUS AIRCRAFTAIRBUS AIRCRAFT

ModelModel Flying Flying Stored Stored BacklogBacklog TotalTotalA300A300 365365 7070 6969 504504A310A310 215215 3131 55 251251A318 / A319A318 / A319 444444 1818 370370 832832A320A320 1,0321,032 4242 522522 1,5961,596A321A321 233233 1212 175175 420420A330A330 216216 1111 182182 409409A340A340 205205 1616 107107 328328

TotalTotal 2,7102,710 200200 1,4301,430 4,3404,340

AIRBUS SHORT/MEDIUM TERM AIRBUS SHORT/MEDIUM TERM FORECASTSFORECASTS

Model Model VintageVintage CMV CMV Base Value in 2000 dollar termsBase Value in 2000 dollar terms20062006 20102010

B4B4--200200 19801980 $3m $3m $2m$2m $0$0A310A310--300300 19921992 $18.2m$18.2m $20.1m$20.1m $15.1m$15.1mA318A318 20032003 $27.1m$27.1m $26.5m $26.5m $22.3m$22.3mA319A319 20002000 $31.1m$31.1m $30.1m $30.1m $24.3m$24.3mA320A320--200200 19951995 $26.2m$26.2m $24.4m $24.4m $17.5m$17.5mA321A321--200200 20002000 $41.8m$41.8m $39.6m $39.6m $32.6m$32.6mA330A330--300300 20002000 $64.7m$64.7m $68.5m $68.5m $59.3m$59.3mA340A340--300 300 20002000 $83.7m$83.7m $91m $91m $76.8m$76.8m

ISTAT DEFINITIONS OF CMV AND BVISTAT DEFINITIONS OF CMV AND BV

BOEING CURRENT MARKETBOEING CURRENT MARKET

Significant price elasticity evidentSignificant price elasticity evidentProduction rate changesProduction rate changesHigh lessor takeHigh lessor take--upup% assigned lessor aircraft% assigned lessor aircraftProgressive move to AI aircraftProgressive move to AI aircraftHigh availability of used aircraftHigh availability of used aircraftHigh availability of nearly newHigh availability of nearly newBoeing the largest salesman of A340 aircraftBoeing the largest salesman of A340 aircraft

BOEING AIRCRAFTBOEING AIRCRAFT

ModelModel Flying Flying Stored Stored BacklogBacklog TotalTotal

B717B717 8989 2626 5858 173173B727B727 800800 447447 00 1,2471,247B737 FGB737 FG 656656 227227 00 883883B737 CGB737 CG 1,8791,879 8989 00 1,9681,968B737 NGB737 NG 1,1331,133 2626 828828 1,9871,987B747B747 1,1231,123 178178 4949 1,3501,350B757B757 1,0091,009 7171 00 1,0801,080B767B767 873873 4040 5252 965965B777B777 412412 33 191191 606606

TotalTotal 7,9747,974 1,1071,107 1,1781,178 10,25910,259

BOEING SHORT/MEDIUM TERM BOEING SHORT/MEDIUM TERM FORECASTSFORECASTS


B717B717 20002000 $18.7m $18.7m $19.3 $19.3 $15.9$15.9B737B737--300300 19901990 $11.0m$11.0m $11.9 $11.9 $8.1m$8.1mB737B737--700700 20002000 $31.1m$31.1m $28.2m$28.2m $22.2m$22.2mB747B747--400400 19901990 $46.1m$46.1m $49.5m $49.5m $37.9m$37.9mB757B757--200200 19901990 $17.6m$17.6m $17.5m $17.5m $12.5m$12.5mB767B767--300ER300ER 19991999 $50.0m$50.0m $55.6m $55.6m $46.7m$46.7mB777B777--300ER300ER 19991999 $104.0m$104.0m $100.8m $100.8m $85.4m$85.4m


REGIONAL CURRENT MARKETREGIONAL CURRENT MARKET

The 30The 30--SeatersSeaters




Fairchild DornierFairchild Dornier

BAE SYSTEMSBAE SYSTEMS

REGIONAL AIRCRAFT REGIONAL AIRCRAFT

ModelModel Flying Flying Stored Stored BacklogBacklog TotalTotal

ERJERJ--135135 102102 33 113113 218218ERJERJ--145145 438438 55 160160 603603ERJERJ--170170 55 00 00 55CRJCRJ--100/200100/200 625625 2424 253253 902902CRJCRJ--700/900700/900 4343 99 179179 231231F100/F70F100/F70 190190 132132 00 322322BAE146BAE146 328328 5454 00 382382

TotalTotal 1,7311,731 227227 705705 2,6632,663

REGIONAL SHORT/MEDIUM TERM REGIONAL SHORT/MEDIUM TERM FORECASTSFORECASTS


ERJERJ-- 135135 20002000 $11.3m $11.3m $10.5m $10.5m $7.8m$7.8mERJERJ--145145 20002000 $13.7m$13.7m $12.4m$12.4m $9.3m$9.3mERJERJ--170170 20002000 $20.7m$20.7m $18.6m$18.6m $14.8m$14.8mCRJ200CRJ200 20002000 $12.6m$12.6m $13.9m $13.9m $10.6m$10.6mCRJ700CRJ700 20022002 $18.9m$18.9m $20.1m $20.1m $16.0m$16.0mF100F100 19921992 $3.5m$3.5m $6.3m $6.3m $4.2m$4.2m146146--300300 19921992 $7.4m$7.4m $7.9m $7.9m $6.0m$6.0m


CONCLUSIONSCONCLUSIONS

FundamentalsFundamentalsFurther ConflictFurther ConflictLow Cost Low Cost -- Low Fare GrowthLow Fare Growth

ShortShort--HaulHaulLongLong--HaulHaul

US Majors Fleet DecisionsUS Majors Fleet DecisionsB727, B737 FG, DC9, L1011, DC10, BAC1B727, B737 FG, DC9, L1011, DC10, BAC1--11, F100, 11, F100, F28 and A300B4 CMV unlikely to recoverF28 and A300B4 CMV unlikely to recoverA320, A330, A340, B737 NG, B777, CRJ, and ERJ A320, A330, A340, B737 NG, B777, CRJ, and ERJ CMV stable and will recoverCMV stable and will recover

QUESTIONSQUESTIONS

International Aviation Services Group

Module D, Jenner Road, Gatwick Airport, West Sussex, RH10 9GA, UK

Tel: +44 (0) 1293 456105 / 6Fax: +44 (0) 1293 456107Email: [email protected]

International Society Transport Aircraft International Society Transport Aircraft Trading Value DefinitionsTrading Value Definitions

Base ValueBase Value

Fair Market ValueFair Market Value

Distress ValueDistress Value

Securitised ValueSecuritised Value

Value DefinitionsValue Definitions

As an established industry source for aviation related valuationAs an established industry source for aviation related valuations to a wide s to a wide variety of clients in the field of aviation, IASG is concerned tvariety of clients in the field of aviation, IASG is concerned that the hat the valuations it performs are clearly understood within the contextvaluations it performs are clearly understood within the context of the of the necessary vocabulary of aircraft appraisers, aircraft investors necessary vocabulary of aircraft appraisers, aircraft investors and all and all parties that are reliant upon the value provided. For this reasparties that are reliant upon the value provided. For this reason it falls to on it falls to us to clearly define the nature of the values which are containeus to clearly define the nature of the values which are contained within d within this work.this work.

The following definition is clearly consistent with the fundamenThe following definition is clearly consistent with the fundamental tal concepts of aircraft valuation promoted by International Societyconcepts of aircraft valuation promoted by International Society of of Transport Aircraft Trading (ISTAT) of which IASG are corporate mTransport Aircraft Trading (ISTAT) of which IASG are corporate members. embers.

Base Value DefinitionBase Value Definition

This is the appraiser’s opinion of the underlying economic valueThis is the appraiser’s opinion of the underlying economic value of an aircraft in an open of an aircraft in an open unrestricted stable market environment with a reasonable balanceunrestricted stable market environment with a reasonable balance of supply and demand, of supply and demand, and assumes full consideration of its “highest and best use”. Aand assumes full consideration of its “highest and best use”. An aircraft’s Base Value is n aircraft’s Base Value is founded in the historical trend of values and in the projection founded in the historical trend of values and in the projection of value trends and presumes of value trends and presumes an armsan arms--length, cash transaction between willing, able and knowledgeablelength, cash transaction between willing, able and knowledgeable parties, acting parties, acting prudently, with an absence of duress and with a reasonable perioprudently, with an absence of duress and with a reasonable period of time available for d of time available for marketing. marketing.

In most cases the Base Value of an aircraft assumes its physicalIn most cases the Base Value of an aircraft assumes its physical condition is average for an condition is average for an aircraft of its type and age, and its maintenance time status isaircraft of its type and age, and its maintenance time status is at midlife, midat midlife, mid--time (or time (or benefiting from an abovebenefiting from an above--average maintenance status if it is new or nearly new, as the caaverage maintenance status if it is new or nearly new, as the case se may be).may be).

Since Base Value pertains to a somewhat idealised aircraft and mSince Base Value pertains to a somewhat idealised aircraft and market combination, it arket combination, it usually does not necessarily reflect the actual value of the airusually does not necessarily reflect the actual value of the aircraft in question at a given craft in question at a given time, but is a nominal starting value to which adjustments may btime, but is a nominal starting value to which adjustments may be applied to determine an e applied to determine an actual value.actual value.

Base Value DefinitionBase Value Definition

Because it is related to longBecause it is related to long--term market trends, the Base Value definition is term market trends, the Base Value definition is commonly applied to analyses of historical values and projectioncommonly applied to analyses of historical values and projections of future s of future values. values.

In certain appraisal assignments, the appraiser may deem it moreIn certain appraisal assignments, the appraiser may deem it more appropriate to appropriate to determine an aircraft’s value using alternative methodologies sudetermine an aircraft’s value using alternative methodologies such as those ch as those relating to discounted rental streams or projected future profitrelating to discounted rental streams or projected future profits, rather than the s, rather than the longlong--term market trends referred to above. term market trends referred to above.

Base Values also typically rely upon an assumed ½ Life maintenanBase Values also typically rely upon an assumed ½ Life maintenance status. ce status. However, where an aircraft or portfolio of aircraft has a defineHowever, where an aircraft or portfolio of aircraft has a defined maintenance d maintenance status above ½ Life Base Values can be determined on based upon status above ½ Life Base Values can be determined on based upon another another assumed maintenance status.assumed maintenance status.

Base Value Definition cont/dBase Value Definition cont/d

Because it is related to longBecause it is related to long--term market trends, the Base Value definition is term market trends, the Base Value definition is commonly applied to analyses of historical values and projectioncommonly applied to analyses of historical values and projections of future s of future values. values.

In certain appraisal assignments, the appraiser may deem it moreIn certain appraisal assignments, the appraiser may deem it more appropriate to appropriate to determine an aircraft’s value using alternative methodologies sudetermine an aircraft’s value using alternative methodologies such as those ch as those relating to discounted rental streams or projected future profitrelating to discounted rental streams or projected future profits, rather than the s, rather than the longlong--term market trends referred to above. term market trends referred to above.

Base Values also typically rely upon an assumed ½ Life maintenanBase Values also typically rely upon an assumed ½ Life maintenance status. ce status. However, where an aircraft or portfolio of aircraft has a defineHowever, where an aircraft or portfolio of aircraft has a defined maintenance d maintenance status above ½ Life Base Values can be determined on based upon status above ½ Life Base Values can be determined on based upon another another assumed maintenance status.assumed maintenance status.

Fair Market ValueFair Market Value

Fair Market Value (or Current Market Value if the value pertainsFair Market Value (or Current Market Value if the value pertains to the to the time of the analysis) is the Appraiser’s opinion of the most liktime of the analysis) is the Appraiser’s opinion of the most likely trading ely trading price that may be generated for an aircraft under the market price that may be generated for an aircraft under the market circumstances that are perceived to exist at the time in questiocircumstances that are perceived to exist at the time in question. n.

Fair market Value assumes that the aircraft is valued for its “hFair market Value assumes that the aircraft is valued for its “highest, ighest, best use”, that the parties to the hypothetical sale transactionbest use”, that the parties to the hypothetical sale transaction are willing, are willing, able, prudent and knowledgeable, and under no unusual pressure fable, prudent and knowledgeable, and under no unusual pressure for a or a prompt sale, and that the transaction would be negotiated in an prompt sale, and that the transaction would be negotiated in an open and open and unrestricted market on an armsunrestricted market on an arms--length basis, for cash or equivalent length basis, for cash or equivalent consideration, and given an adequate amount of time for effectivconsideration, and given an adequate amount of time for effective e exposure to prospective buyers. exposure to prospective buyers.

Fair Market Value Definition Cont/dFair Market Value Definition Cont/d

The Fair Market Value of a specific aircraft will tend to be somThe Fair Market Value of a specific aircraft will tend to be somewhat ewhat consistent with its Base Value in a stable market environment, bconsistent with its Base Value in a stable market environment, but, where a ut, where a reasonable equilibrium between supply and demand does not exist,reasonable equilibrium between supply and demand does not exist,trading prices, and therefore Fair Market Values, are likely to trading prices, and therefore Fair Market Values, are likely to be at variance be at variance with the Base Value of that aircraft. with the Base Value of that aircraft.

Fair Market Value may be based upon either the actual (or specifFair Market Value may be based upon either the actual (or specified) ied) physical condition and maintenance time status of the aircraft, physical condition and maintenance time status of the aircraft, or or alternatively upon an assumed average physical condition and midalternatively upon an assumed average physical condition and mid--life, life, midmid--time maintenance time status, depending on the nature of the time maintenance time status, depending on the nature of the appraisal assignment. appraisal assignment.

Distress ValueDistress Value

Distress Value is the Appraiser’s opinion of the price at which Distress Value is the Appraiser’s opinion of the price at which an aircraft could be an aircraft could be sold under abnormal conditions, such as an artificially limited sold under abnormal conditions, such as an artificially limited marketing time marketing time period, the perception of the seller being under duress to sell,period, the perception of the seller being under duress to sell, an auction, a an auction, a liquidation, commercial restrictions, legal complications, or otliquidation, commercial restrictions, legal complications, or other such factors that her such factors that significantly reduce the bargaining leverage of the seller and gsignificantly reduce the bargaining leverage of the seller and give the buyer a ive the buyer a significant advantage that can translate into heavily discountedsignificant advantage that can translate into heavily discounted actual trading actual trading prices. Apart from the fact a parties to the transaction are otprices. Apart from the fact a parties to the transaction are otherwise assumed to herwise assumed to be willing, able, prudent and knowledgeable, negotiating at armsbe willing, able, prudent and knowledgeable, negotiating at arms--length, normally length, normally under the market conditions that are perceived to exist at the tunder the market conditions that are perceived to exist at the time, not an idealized ime, not an idealized balanced market.balanced market.

While the Distress Value normally implies that the seller is undWhile the Distress Value normally implies that the seller is under some duress, er some duress, there are occasions when buyers, not sellers are under duress orthere are occasions when buyers, not sellers are under duress or time pressures time pressures and, therefore, willing to pay a premium value. and, therefore, willing to pay a premium value.

Securitised ValueSecuritised Value

Securitised Value or LeaseSecuritised Value or Lease--Encumbered Value is the Appraiser’s opinion of the Encumbered Value is the Appraiser’s opinion of the value of an aircraft, under lease, given a specified lease paymevalue of an aircraft, under lease, given a specified lease payment stream (rents and nt stream (rents and term) and estimated future residual value at lease termination aterm) and estimated future residual value at lease termination and an appropriate nd an appropriate discount rate. discount rate.

The Securitized Value or LeaseThe Securitized Value or Lease--Encumbered Value may be more or less than the Encumbered Value may be more or less than the Appraiser’s opinion of Current Market Value. Moreover, the ApprAppraiser’s opinion of Current Market Value. Moreover, the Appraiser may not be aiser may not be fully aware of the credit risks associated with the parties invofully aware of the credit risks associated with the parties involved, nor all related lved, nor all related factors such as the timefactors such as the time--value of money to those parties, provisions of the lease value of money to those parties, provisions of the lease that may pertain to items such as security deposits, purchase opthat may pertain to items such as security deposits, purchase options at various tions at various dates, term extensions, subdates, term extensions, sub--lease rights, repossession rights, reserve payments lease rights, repossession rights, reserve payments and return conditions. and return conditions.

Replacement ValueReplacement Value

This method is sometimes employed and is particularly a factor wThis method is sometimes employed and is particularly a factor when an hen an operator seeks to replace a lost or destroyed asset. Under thesoperator seeks to replace a lost or destroyed asset. Under these e conditions the buyer tends to become a distressed purchaser, conditions the buyer tends to become a distressed purchaser, immediately needing an aircraft. In event the particular type rimmediately needing an aircraft. In event the particular type required is in equired is in short supply or unavailable, a premium price is often paid to acshort supply or unavailable, a premium price is often paid to acquire the quire the desired aircraft. Aircraft are usually insured at higher than bdesired aircraft. Aircraft are usually insured at higher than book, or ook, or amortized on stipulated value, in consideration of this factor.amortized on stipulated value, in consideration of this factor.

Value In UseValue In Use

This technique may be considered where aircraft have an earning This technique may be considered where aircraft have an earning capability largely unaffected by the buy/sell considerations. Ucapability largely unaffected by the buy/sell considerations. Under this nder this criterion it is simply more economical for an operator to contincriterion it is simply more economical for an operator to continue to fly the ue to fly the aircraft, and enjoy its ongoing earnings stream, than to sell onaircraft, and enjoy its ongoing earnings stream, than to sell on a a distressed market. The IASG Economic Model seeks to measure thedistressed market. The IASG Economic Model seeks to measure theValue in Use of all currently operating and projected new aircraValue in Use of all currently operating and projected new aircraft for the ft for the next 20 years, and to measure their costs and earning capabilitinext 20 years, and to measure their costs and earning capabilities in es in accordance with a standardized set of earnings and cost assumptiaccordance with a standardized set of earnings and cost assumptions. ons. Under conditions of market equilibrium, Value in Use and Fair MaUnder conditions of market equilibrium, Value in Use and Fair Market rket Value should be close, with the aircraft's earning power drivingValue should be close, with the aircraft's earning power driving its its transaction value.transaction value.

International Aviation Services Group

Module D, Jenner Road, Gatwick Airport, West Sussex, RH10 9GA, UK

Tel: +44 (0) 1293 456105 / 6Fax: +44 (0) 1293 456107Email: [email protected]

Documents

IATA Fleet & Network Planning Conference...IATA Fleet & Network Planning Conference Madrid - September 2002 “So you‘ve decided to fly aircraft for a living?” Clifford A Brown,