February 22, 2011

PRIVATE AVIATION SOLUTIONS FOR COMPANIES

PRIVATE AVIATION SOLUTIONS

FOR COMPANIES

Prepared for:

2011 U.S. Corporate Aviation Summit

Prepared for:

2011 U.S. Corporate Aviation Summit

Comments on Aircraft Ownership & Operating ModelsComments on Aircraft Ownership & Operating Models

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1. Brief Introduction to SH&E

2. Overview of Aircraft Ownership & Operating Options

3. Determining the Appropriate Aircraft Ownership & Operating Model

4. General Comparisons of Aircraft Ownership & Operating Models

TopicsTopics

Section 1Section 1

BRIEF INTRODUCTION TO SH&EBRIEF INTRODUCTION TO SH&E

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SH&E is a unique consultancy serving clients with many forms of aviation expertiseSH&E is a unique consultancy serving clients with many forms of aviation expertise

� Specialty consulting firm of 80+ staff dedicated exclusively to aviation

� In business 48 years since our founding in 1963, performing over 8,000 engagements worldwide

� Organized into five practice areas mirroring client needs

– Management and Strategy Consulting

– Financial & Technical Services

– Decision Support

– Airport Services

– Safety, Security & Operations

� Full-service offices in London, New York, Boston, and Washington

� Professionals recruited from airlines, airports, academia, finance, government agencies, manufacturers, and IT

� Acquired by ICF International in December 2007

Unparalleled Expertise · Independent OpinionConsulting Experience · Client Service

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� Fleet Evaluation / Planning

� Aircraft Sourcing

� Aircraft Re-Marketing

� Contract Negotiation

� Management of Completions, Refurbishment, and Modifications

� Asset Management

� Aircraft Financing

� Selection of Ownership & Operating Models

� Design of Organizational Structure, Processes, and Staffing

� Manual Preparation

� Operator Certification

� Safety Evaluations & Audits

� Operational Evaluations

� Commercial & Operational Due Diligence

� Market Research

� Operational & Financial Forecasting

� Valuation of Businesses & Assets

� Business Plan Development

� Expert Witness Testimony

Types of Assignments SH&E Performs in Private AviationTypes of Assignments SH&E Performs in Private Aviation

SH&E has deep expertise in many aspects of private aviationSH&E has deep expertise in many aspects of private aviation

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� Charter Operators

� Fractional Ownership Programs

� Corporate Flight Departments

� Head-of-State & Royal Family Flight

Departments

Areas of the Private Aviation Industry Covered by SH&EAreas of the Private Aviation Industry Covered by SH&E

� Aircraft Manufacturers

� Engine Manufacturers

� Component Suppliers

� Completion, Refurbishment, and

Modification Centers

� Maintenance, Repair, and Overhaul (MRO)

Providers

� Fixed Base Operators (FBOs)

� International Flight Support Service

Providers

� Aircraft Lessors and Lenders

OperatorsOperatorsManufacturers & SuppliersManufacturers & Suppliers

Service ProvidersService Providers

SH&E has worked with organizations in nearly every segment of the private aviation industrySH&E has worked with organizations in nearly every segment of the private aviation industry

SH&E’s private aviation experience includes assignments in the U.S., Middle East, Europe, and Asia

SH&E’s private aviation experience includes assignments in the U.S., Middle East, Europe, and Asia

Section 2Section 2

AIRCRAFT OWNERSHIP & OPERATING OPTIONSAIRCRAFT OWNERSHIP & OPERATING OPTIONS

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Companies have a variety of ownership and operating options for fulfilling their business aviation needsCompanies have a variety of ownership and operating options for fulfilling their business aviation needs

Ownership & Operating Options for Business AviationOwnership & Operating Options for Business Aviation

Aircraft Operations

Company Operates Third-Party Operates

Full Ownership 1. Full Ownership of Aircraft - with 2. Full Ownership of Aircraft - Using a

Own Flight Department Third-Party Aircraft Management Firm

Operating Lease 3. Lease Aircraft - with

Own Flight Department

Partial Ownership 4. Co-Ownership Aircraft - with 5. Co-Ownership Aircraft - Using a

Own/Shared Flight Department Third-Party Aircraft Management Firm

6. Fractional Ownership Program

No Ownership 7. Card Program

8. Charter - Block Agreement

9. Charter - Ad Hoc

10. Air Taxi (an emerging industry)

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Section 3Section 3

DETERMINING THE APPROPRIATE AIRCRAFT

OWNERSHIP & OPERATING

MODEL

DETERMINING THE APPROPRIATE AIRCRAFT

OWNERSHIP & OPERATING

MODEL

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Given the substantial investment/cost typically associated with private

aviation, decisions about whether and how to use this tool should be

subject to the same scrutiny as any other major expenditure

Given the substantial investment/cost typically associated with private

aviation, decisions about whether and how to use this tool should be

subject to the same scrutiny as any other major expenditure

� Determining the most appropriate ownership & operating model should involve a rigorous financial and qualitative assessment of the relevant options available to the company

1. Develop a profile of the company’s expected travel using private aviation (volume and trip

characteristics)

2. Develop a private aviation activity profile

3. Estimate the net cost of the private aviation activity profile under each ownership &

operating model

4. Evaluate each ownership & operating model in terms of qualitative factors important to the

company

Determining the most appropriate ownership & operating model for a

company should not be a one-time exercise once – it should be re-

assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.

Determining the most appropriate ownership & operating model for a

company should not be a one-time exercise once – it should be re-

assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.

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Volume CharacteristicsVolume Characteristics

� the number of annual passenger trips (in aggregate, by employee group, by

trip type, by employee group & trip type)

� the number of annual trips (in

aggregate, by employee group, by trip

type, by employee group & trip type)

� the average number of passengers per trip (in aggregate, by employee

group, by trip type, by employee group

& trip type)

Financial and qualitative assessments should be based on a profile of the company’s expected travel to be accomplished using private aviation

Financial and qualitative assessments should be based on a profile of the company’s expected travel to be accomplished using private aviation

� frequency of travel between city pairs – based on the number of passengers

and the number of trips

� distribution of trips and passengers by distance band (e.g., less than 500

miles, 500-1,000 miles, etc.)

Trip CharacteristicsTrip Characteristics

1. Developing a Profile of the Company’s

Expected Travel Using Private Aviation

1. Developing a Profile of the Company’s

Expected Travel Using Private Aviation

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Based on the profile of the company’s expected travel using private

aviation, an activity profile is developed

Based on the profile of the company’s expected travel using private

aviation, an activity profile is developed

� The company’s expected volume & trip characteristics are “fitted” to one or more aircraft categories (based on passenger

capacity and range)

� Trip volume is converted into an activity profile for the company (i.e., annual flights and flight hours by aircraft category)

2. Developing a Private Aviation Activity Profile

for the Company

2. Developing a Private Aviation Activity Profile

for the Company

Each ownership & operating model alternative should be assessed

using the same activity profile

Each ownership & operating model alternative should be assessed

using the same activity profile

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The net financial cost should be estimated for each ownership &

operating model under consideration

The net financial cost should be estimated for each ownership &

operating model under consideration

3. Estimating the Net Cost of the Private Aviation Activity Profile

Under Each Ownership & Operating Model

3. Estimating the Net Cost of the Private Aviation Activity Profile

Under Each Ownership & Operating Model

� The most appropriate financial basis for comparing ownership & operating models is the present value of net costs to the company over a multi-year period (e.g., 5 years)

� Factors considered in the financial assessment may include (as applicable):

– All Variable and Fixed Operating Costs

– Net Profits from Third-Party Charter Operations

– Excise, Sales, and Income Taxes (including income tax shields due to

interest and depreciation)

– Depreciation in the Market Value of the Aircraft

– Capital Charge for Funds Invested in the Aircraft, Flight Department,

Spares, etc.

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Each ownership & operating model should be assessed in terms of those

qualitative factors important to the company

Each ownership & operating model should be assessed in terms of those

qualitative factors important to the company

4. Evaluating Each Ownership & Operating Model in Terms of

Qualitative Factors Important to the Company

4. Evaluating Each Ownership & Operating Model in Terms of

Qualitative Factors Important to the Company

� Factors considered in the qualitative assessment may include (as applicable):

– Lead Time

– Degree of Control over Service Type and Quality

– Degree of Control over Pilot and Mechanic Training

– Degree of Flexibility

– Degree of Control over Aircraft Interior & Exterior

– Ability to Use Different Aircraft Models for Different Missions

– Legal Liability

� The inclusion of specific factors, the weightings assigned those factors, and the overall importance of qualitative factors (relative to financial costs) will vary by company

Section 4Section 4

GENERAL COMPARISONS OF AIRCRAFT OWNERSHIP &

OPERATING MODELS

GENERAL COMPARISONS OF AIRCRAFT OWNERSHIP &

OPERATING MODELS

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General Comparison of Ownership & Operating ModelsGeneral Comparison of Ownership & Operating Models

� The next few pages provide general comparisons of the leading ownership & operating models

– Naturally, there are exceptions to these generalizations

� Determination of the appropriate ownership & operating model should be customized to the individual company, reflecting its specific needs and preferences

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On a strictly financial basis, the expected number of annual flight hours is the single-most important factor in determining the most appropriate ownership & operating model

On a strictly financial basis, the expected number of annual flight hours is the single-most important factor in determining the most appropriate ownership & operating model

General Illustration of Relative Unit Costs with Low and High Utilization

by Ownership & Operating Model

General Illustration of Relative Unit Costs with Low and High Utilization

by Ownership & Operating Model

Cost per Flight Hour

Ownership & Operating Model

Low

Utilization

High

Utilization

Full Ownership of Aircraft - with

Own Flight Department

Lease Aircraft - with Highest Lowest

Own Flight Department

Co-Ownership Aircraft - with

Own/Shared Flight Department

Full Ownership of Aircraft - Using a

Third-Party Aircraft Management Firm

Co-Ownership Aircraft - Using a

Third-Party Aircraft Management Firm

Fractional Ownership Program

Card Program

Charter - Block Agreement Lowest Highest

Charter - Ad Hoc

Air Taxi (an emerging industry)

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A general rule of thumb for determining the appropriate ownership &

operating model based solely on annual utilization…

A general rule of thumb for determining the appropriate ownership &

operating model based solely on annual utilization…

� under 25 hours Charter, Air Taxi

� 25 - 75 hours Charter (Block Agreement), Card Program

� 75 - 250 hours Fractional Ownership Program, Co-Ownership

� 250 - 750 hours Full Ownership Using a Third-Party Aircraft Management Firm

� above 750 hours Full Ownership with Own Flight Department

Annual Flight HoursAnnual Flight Hours Leading Ownership & Operating Model(s)Leading Ownership & Operating Model(s)

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General Comments on Qualitative Differences

Among Ownership & Operating Models

General Comments on Qualitative Differences

Among Ownership & Operating Models

� While most charter operators, fractional providers, and aircraft management firms adhere to stringent requirements with regard to training and operational standards, the owned & operated model provides the highest degree of control over training and standards

� However, control does not guarantee outcomes

� Under models where it owns the aircraft, the company has the freedom to:

– purchase the particular aircraft it wishes

– customize the aircraft according to its wishes

– select when to upgrade, downgrade, or sell the aircraft

� With the fractional and charter models, the company’s choices are limited to the aircraft type offered by the provider (and no customization)

� Under the fractional model, the company would have to wait until it reached a minimum calendar time requirement before being able to downgrade, sell its share, or withdraw from the program without penalties

Training & Standards for Flight Crew, Cabin Crew, and Maintenance Personnel

Training & Standards for Flight Crew, Cabin Crew, and Maintenance Personnel

Aircraft Acquisition, Customization, and Disposition

Aircraft Acquisition, Customization, and Disposition

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General Comments on Qualitative Differences

Among Ownership & Operating Models [cont.]

General Comments on Qualitative Differences

Among Ownership & Operating Models [cont.]

� Under the owned & operated model, the company has sole liability

� Under the aircraft management and fractional models, the company shares liability with the aircraft management firm / fractional provider

� Under charter models, the company has no liability

� Fractional providers offer guaranteed availability (subject to notification requirements)

� While the company is able to dictate when its aircraft will be used under the owned & operated and managed models, it would not have access to back-up capacity like fractional and charter operators do in case aircraft become non-operational

LiabilityLiability

Aircraft AvailabilityAircraft Availability

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General Comments on Qualitative Differences

Among Ownership & Operating Models [cont.]

General Comments on Qualitative Differences

Among Ownership & Operating Models [cont.]

� The owned & operated model provides the company with the highest degree of control over the type of cabin service provided and the quality of service

� In addition, the owned & operated model provides the company with the highest degree of control over security and confidentiality

� The managed model allows the company to specify the type and quality of service; however, the delivery of that service may be inconsistent

� Fractional and charter operators seek to provide a consistent experience across all flights; therefore, the company would not be able to customize its in-cabin experience

Control Over Service QualityControl Over Service Quality

Section 5Section 5

SUMMARYSUMMARY

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Companies have a variety of ownership and operating options for fulfilling their business aviation needsCompanies have a variety of ownership and operating options for fulfilling their business aviation needs

Ownership & Operating Options for Business AviationOwnership & Operating Options for Business Aviation

Aircraft Operations

Company Operates Third-Party Operates

Full Ownership 1. Full Ownership of Aircraft - with 2. Full Ownership of Aircraft - Using a

Own Flight Department Third-Party Aircraft Management Firm

Operating Lease 3. Lease Aircraft - with

Own Flight Department

Partial Ownership 4. Co-Ownership Aircraft - with 5. Co-Ownership Aircraft - Using a

Own/Shared Flight Department Third-Party Aircraft Management Firm

6. Fractional Ownership Program

No Ownership 7. Card Program

8. Charter - Block Agreement

9. Charter - Ad Hoc

10. Air Taxi (an emerging industry)

Air

cra

ft O

wn

ers

hip

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A hybrid of ownership & operating models often is often optimal –particularly for large companies with varied private aviation needsA hybrid of ownership & operating models often is often optimal –particularly for large companies with varied private aviation needs

However, many companies do not take full advantage of hybrid modelsHowever, many companies do not take full advantage of hybrid models

Hybrid Ownership & Operating ModelsHybrid Ownership & Operating Models

ExampleExample Potential BenefitsPotential Benefits

� Lower Investment & Operating Costs

– aircraft, parts, tooling, etc.

– personnel

– higher utilization (of a streamlined asset

base and flight department)

� Reduced likelihood of investing in higher-performing aircraft whose full performance capabilities are seldom required

� A company owns and operates a core fleet to perform the primary travel missions

� The company also uses supplemental lift (from fractional programs, charter operators, and/or card programs)

– for periods in which demand exceeds fleet

capacity

– when undertaking trips that are best

accomplished by aircraft types that are not

in their fleet

– when fleet aircraft are not proximate to their

passengers

– when fleet aircraft are removed from service

for maintenance

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� Given the substantial investment/cost typically associated with private aviation, decisions about whether and how to use this tool should be subject to the same scrutiny as any other major expenditure

� Determining the most appropriate ownership & operating model for a company should not be a one-time exercise once – it should be re-assessed periodically (e.g., every 5 years) or upon significant changes in usage, costs, etc.

� While there are rules of thumb, determination of the appropriate ownership & operating model should be customized to the individual company, reflecting its specific needs and preferences

� A hybrid of ownership & operating models often is often optimal – particularly for large companies with varied private aviation needs; however, many companies do not take full advantage of hybrid models

Summary of Key MessagesSummary of Key Messages