1. mperial ir Group Imperial Air Group February 28, 2002 Frank Burke Jared Lawrence Gurkan Salk David Watson Travis Young

2. mperial ir Group Agenda Case Introduction Recommendation Valuation Options Conclusion – Case Update

3. mperial ir Group Case Synopsis Lufthansa is considering an investment in Chinese airline

4. mperial ir Group Learning Objectives Cost of capital considerations Comprehensive DCF Modeling (debt restructuring, optional cash flows) Strategic Bidding Identification of Option Value

5. mperial ir Group Why the deal is happening China Aviation Industry Consolidation –CAAC effort to revitalize industry WTO Acceptance –Will boost Chinese aviation market –Need to be more cost effective –Increased competition

6. mperial ir Group Imperial Air Group Flagship Chinese international carrier Industry consolidation expands domestic presence Strategic partner would increase operational efficiencies

7. mperial ir Group Lufthansa AG German national carrier Europe’s most profitable airline in 2000 History of investing in China –Existing relationship with Imperial Air Looking to diversify international revenues – 63% in Europe

8. mperial ir Group The Deal 20% stake in Imperial Air Debt restructuring IPO in 2 years –Conditional on performance targets –Additional equity offering of 15% Multiple strategic bidders

9. mperial ir Group Recommendation Bid $483 million Competitive bid, w/ NPV = $73MM Lufthansa is best strategic fit Comps analysis not meaningful Bid

10. mperial ir Group DCF Model Comprehensive 10 year projections Main Issues –Revenue Projections –Alliance/Consolidation Benefits –Fuel Costs –Debt Paydown –IPO

11. mperial ir Group DCF Model Income Statement Balance Sheet Cash Flow Statement Debt Equity Interest Fixed Assets Assumptions NPV Calculation Supporting SchedulesPrimary Financials

12. mperial ir Group DCF Model Projecting Airline Revenues Passenger Revenue = RPM * Yield RPM highly correlated with GDP growth Yield subject to typical competitive forces (supply & demand, price wars, business cycles)

13. mperial ir Group Risk Assessment Operational Government restricts air routes Fuel Prices Financial Risk of a delayed IPO High Leverage Sovereign Risk Low expropriation risk High creeping expropriation risk Low currency risk

14. mperial ir Group Cost of Capital Assumptions: –Risk free rate: 5.5% –Market risk premium: 4% ICCRC Cost of Capital ICCRC Rate 17.8% Currency Risk (1.3%) Adjusted CoC 16.5%

15. mperial ir Group DCF NPV Results E[NPV] = 607.5MM Rmb, S.D. = 997MM, P[NPV>0] = 72%

16. mperial ir Group Multiples Analysis Acquisition Multiples – Not meaningful, due to regional and other differences Trading Multiples –P/E: Regional differences, Imperial negative earnings –EBITDAR: Best multiple for industry, but also problematic due to high leverage

17. mperial ir Group Financial –Anti-Dilution option to purchase additional shares at 25% discount in the event that Imperial Air Group conducts an IPO –Value = $6.2 million Real –Option to invite Imperial Air Group into the Star Alliance –Expansion of cargo service in China Option Value to Lufthansa

18. mperial ir Group WTO agreements did not liberalize Chinese air markets CAAC has opposed debt-to-equity conversions –Some consolidations are in jeopardy “Imperial Air” (larger) and CNAC (financially stronger) are in dispute over who should lead the consolidated “Imperial Air Group” Smaller independent airlines have formed an alliance to compete with the majors Conclusion – Case Update

19. mperial ir Group Learning Objectives Cost of capital considerations Comprehensive DCF Modeling (debt restructuring, optional cash flows) Strategic Bidding Identification of Option Value

20. mperial ir Group Cost of Capital (cont) Goldman Integrated Model –Imperial Beta: 1.3 –US bond yield(China) – US bond yield(US) = 7.16% –Cost of Capital: 17.86%

21. mperial ir Group