1. © HKAC | Hong Kong | 3 Nov 15 | 1 SOME FUNDAMENTALS of the Aircraft Leasing industry Donal Boylan, CEO Hong Kong, 3 November

2. © HKAC | Hong Kong | 3 Nov 15 | 2 Commercial Airline aircraft market overview Commercial Airline aircraft market overview Developments in the airline sector Developments in the airline sector Operating Leasing – how important overall and in China Operating Leasing – how important overall and in China Agenda

3. © HKAC | Hong Kong | 3 Nov 15 | 3 Traditionally Forecasted by looking at GDP Growth Airline traffic (= RPK) growth has correlated quite well with GDP change; In recent years, especially supported by emerging and LCC markets, traffic growth exceeds GDP growth

4. © HKAC | Hong Kong | 3 Nov 15 | 4 20 year Global Fleet Forecast according to OEMs and “Experts” Source: Boeing CMO 2015 38,000 new aircraft deliveries expected over the next 20 years 58% for growth; 42% for replacement of existing fleet

5. © HKAC | Hong Kong | 3 Nov 15 | 5 A key driver of growth viewed regionally Private consumption, in particular by the “Middle class” is a key driver The Middle Class with discretionary disposable income growing 3 to 4 times at the rate of world population No surprise that growth depends on Asia Pacific

6. © HKAC | Hong Kong | 3 Nov 15 | 6 Recent Fleet Retirement Trends Retirements as a percentage of installed fleet has grown from 0.5% in 1990 to 3% in 2014, but note the significantly larger amount of annual deliveries as well as the reducing average age at economic retirement This high rate had been largely driven by aircraft fuel burn and correlated with jet fuel price; consequently we now see more lease extensions of current generation aircraft pending introduction of next generation aircraft Source: Boeing Capital 2015 Source: Ascend, October 2015

7. © HKAC | Hong Kong | 3 Nov 15 | 7 And a new phenomena: a record long backlog The significant order backlog of more than eight years implies long and thus high escalation for future aircraft deliveries, affecting final “real” Purchase Prices, the drag from PDP payments and ultimately Lease Rentals

8. © HKAC | Hong Kong | 3 Nov 15 | 8 Airline sector developments

9. © HKAC | Hong Kong | 3 Nov 15 | 9 Overall global Airline profits Recent data shows that airline return on invested capital for the first time exceeds cost of capital: Yet the return on invested capital is still below airlines operating unit cost:

10. © HKAC | Hong Kong | 3 Nov 15 | 10 Key developments: oil prices & the USD$ Trade Weighted Index

11. © HKAC | Hong Kong | 3 Nov 15 | 11 Exchange rate / FX as a near term issue? Currency volatility will temper the current benefit of low fuel prices It can also affect international traffic volumes and revenues due to changes in traveler purchasing power

12. © HKAC | Hong Kong | 3 Nov 15 | 12 Emerging markets supposed to drive growth – true ? China is key to growth yet has cooled off quite significantly

13. © HKAC | Hong Kong | 3 Nov 15 | 13 Dynamics of Interest rates – profile and reaction Expectation is for a ‘manageable’ increase in interest rates – yet the market reaction could be quite adverse before it stabilizes. Either way, 2016-2017 are key years

14. © HKAC | Hong Kong | 3 Nov 15 | 14 Sweet spots of airline traffic growth, but profitability?

15. © HKAC | Hong Kong | 3 Nov 15 | 15 More profit: increase load factor AND lower break-even Airlines have become better at managing to fill the aircraft well above their break even load factor, as well as increasing the gap to the break even load factor, through combining networks, code-sharing and improved sale distribution Source: Ascend, October 2015

16. © HKAC | Hong Kong | 3 Nov 15 | 16 More profit: diversify yield sources Some airlines are very good in finding ways to extract more revenue from passengers above a regular ticket price – e.g. bag charges, aisle/emergency seats reservation, food & drinks, priority check-in

17. © HKAC | Hong Kong | 3 Nov 15 | 17 Operating Leasing – how important overall and in China

18. © HKAC | Hong Kong | 3 Nov 15 | 18 Finance sources supporting growth and replacement Source: Boeing Capital May 2015 7.8% flat !

19. © HKAC | Hong Kong | 3 Nov 15 | 19 Continuous role of operating lessors Source: Boeing Capital May 2015

20. © HKAC | Hong Kong | 3 Nov 15 | 20 Finance vs. Operating leasing Finance lease The operator takes a loan and repays the loan with interest such that after repayment of the loan, the ownership of the asset moves from lender to operator; Risk for finance lessor merely the credit risk of the operator; Operating lease The operator takes a lease for use without ownership rights at the end of the lease; A lessor owns the asset by procuring the asset using its equity, leveraging with a loan amortizing over a fixed period of 8 – 12 years, ideally in line with the term of the first lease; Risk for operating lessor both airline credit risk as well as residual value risk

21. © HKAC | Hong Kong | 3 Nov 15 | 21 Operating leasing / Sale & Leasebacks Lessors take an important role in financing aircraft – on a global average 38% of the aircraft fleet – both by speculative orders as well as by purchase and lease backs from airlines at delivery Source: Boeing Capital May 2015

22. © HKAC | Hong Kong | 3 Nov 15 | 22 China passenger traffic = fleet growth Passenger throughput in China in millions Source: Airbus China [May 2015] Significant in the past …..

23. © HKAC | Hong Kong | 3 Nov 15 | 23 China expected 20 year fleet growth Source: Boeing CMO [July 2015] Significant in the future …..

24. © HKAC | Hong Kong | 3 Nov 15 | 24 So, where is the problem? Fleet 2014: 2,570 + Deliveries:6,330 Equals:8,900 Fleet 2034:7,210 Exiting:1,690 aircraft or 27% being replaced (global average is 42%) Source: Boeing CMO [July 2015]

25. © HKAC | Hong Kong | 3 Nov 15 | 25 Ingredients to growing operating leasing [in China] Money Availability of equity Availability of debt Structuring Tax optimised structuring / FTZ’s Availability of double tax treaties Allows for easiness of trading aircraft Expertise Value management – Commercial Value management – Technical Availability of assets Sourcing from, AND into the market Buying from manufacturer –aircraft AND engines

26. © HKAC | Hong Kong | 3 Nov 15 | 26 Aircraft values Aircraft are physically mobile assets and can be deployed to other regions and airlines where the value can be maximized; Aircraft are financially liquid US$ assets and can be traded through their lifetime to investors with different risk and reward appetites; Typically after their 25 year economic life the “scrap value” is largely determined by the value of the aircraft engines, whose value remains high as long as engines and parts are needed and tradeable; Scrap values are typically at 20 – 25% of the value when new; Compared to Ship Values, aircraft tend to retain their values longer as well as with less volatility. VLCC or Capesize bulker

27. © HKAC | Hong Kong | 3 Nov 15 | 27 Managing values – through cycles Monthly GDP Market over base value Aircraft values are subject to market circumstances and thus a “current market value” is derived Compared to Base Values (which are independent of that), a market cyclicality can be illustrated Source: Ascend, October 2015

28. © HKAC | Hong Kong | 3 Nov 15 | 28 Equity at risk over term of lease Operating lessors have a core competence in being able to manage residual risk; New lessors may not have as strong a technical expertise as established lessors tend to have; This may be significant both during and at end of lease

29. © HKAC | Hong Kong | 3 Nov 15 | 29 Thank you for your kind attention © 2015 Hong Kong Aviation Capital. Whilst best efforts have been used to verify correctness of data contained in this presentation, no liability for potential errors is accepted.