Finnair Treasury & How aircraft are financed Mika Stirkkinen, Group Treasurer

Treasury’s tasks In every company, the key tasks of a treasury are the following: Liquidity Solvency Financial Risk Management Cash Management

Big cash balance: >500 M€ Sizable derivatives book – Jet Fuel – Currency – Interest rates Capital structure includes various components – Hybrid capital – Operating leases – Mortgage loans – Simple finance leases – Structured finance leases (JOLCOs) Corporate Pension fund – Assets: >400 m€ – Two set of liabilities, IFRS & national Finnair specific treasury topics 4

How aircraft are financed? Order & Cash FinancedLease

How aircraft are financed? Order & Loan FinanceOrder & Sale and Leaseback

The right question? A) Lease versus buy B) Lease versus borrow

Characteristics of (aircraft) operating lease and secured debt Secured Debt / Finance lease Collateral: aircraft Owner of aircraft – Debt: Airline – Finance lease: special purpose company owned by a bank Accounting treatment: debt Loan-to-value: 60-85% Tenor: y Amortization: to 0 or balloon Interest: fixed or floating Operating lease and leaseback The asset is sold to the lessor The sale price: ~ Current Market Value Lease rental: typically fixed, monthly payment, 0.75 – 1.5% per month Lessor lowers its credit risk vis-a- vis airline by – Security deposits, 1-6 months – Rental paid beginning of the month – Maintenance reserve payments: a big portion (millions of dollars) of aircraft value depends on maintenance status of the A/C

Cash flows of (aircraft) operating lease and secured debt Secured Debt / Finance leaseOperating lease and leaseback IRR: 2,50% IRR: 2,25%

Lease vs debt How to compare lease vs debt cash flows? Just a discounting excercise? Do we have enough data?

Residual value is the key missing input

Opportunity cost calculation: residual value of USD 50 million included Secured Debt / Finance leaseOperating lease and leaseback IRR: 2,50% IRR: 6,76%, not 2,25%

Implicit cost of aircraft financing equity? Definition: Equity in aircraft financing Airlines are often very geared For a leveraged company, IRR of 6,76% sounds reasonable. Or does it?

Cost of equity Equity cash flowsGross vs equity flows Gross flows of a lease – IRR: 6.76% – Amount: 100 mio Debt flows – IRR: 2.50% – Amount: 75 mio Equity flows – IRR: 12.50% – Amount 25 million

Leases are always a bad choice? No. It depends. 100% financing. There is not always supply of available aircraft. If used the right way, leases add flexibility. Residual value risk hedge. Additional source of financing. Adds diversification.

Appendices

Derivatives

Sizable assets & Two liabilities Liabilities Finnair Pension Fund (Finnairin Eläkesäätiö) is a separate legal entity. Its reporting is prepared according to Finnish Accounting Standards and pension liabilities calculated according to Finnish standards. FAS-pension liabilities are discounted with fixed, regulatory discount rate of 3.5% In Group accounting, IFRS standards are applied. IFRS-pension liabilities are based on market rates, currently 2.1%. Funding ratio – FAS 411 vs 317 = 129% * – IRFS 411 vs 436 = 94% Assets & two different liabilities

Cash and marketable securities 532 M€

Capital structure includes various components – Hybrid capital, 120 M€ – Operating lease, commitment 775 M€ – Unsecured debt, 39 M€ – Unsecured bond, 150 M€ – Mortgage loans, 62 M€ – Simple finance leases, 3 * export credit, 114 M€ – Less simple finance leases (JOLCOs), in the future