Fundamentals of Aircraft Valuations

Airline Economics School | Seoul, Korea 2019

Anne Correa, Vice President | Airline & Airport Services
 mba helps leaders in all areas of the aviation industry
solve some of their toughest problems and capture their greatest opportunity

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Valuation Modeling & Technical Safety &

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Platform
§ REDBOOK Values Investor Due
§ STAR Fleet Diligence

Expert Witness

2
 Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

3
 The commercial aircraft fleet is valued at ~US$840 billion

450

2018 Saw Tremendous Growth

400

§ Over 1,500 aircraft were delivered across the globe,

350
adding just over US$95 billion of value
300 § Asian region led with 695 aircraft delivered, valued
Turboprop
at US$43 billion, followed by Europe with an
Regional
250
additional 330, valued at US$18 billion
US$ Billion

Narrowbody
Widebody
200

150

100

50

-
< 5 Years 5-10 Years 10-15 Years 15-20 Years > 20 Years

Age of Aircraft

Source: mba REDBOOK STAR Fleet, March 2019

4
The principal types of values are Base, Market & Distress

Criteria Base Value Market Value Distress Value

Time Status (if not new) Usually mid-time, mid life Mid life / as found Usually as found

Aircraft
Physical Condition (if not Usually average,
Average or as found Usually as found
new) considering type and age

Highest, best use valuation

Parties

Willing & able

Lack of pressure

Open, unrestricted
Market

State of market balance Equilibrium As perceived at the time As perceived at the time

Arm’s-length
Transaction

Sale for cash or equivalent

Adequate time for effective

marketing

Single – unit sale Usually Maybe

Notes: Definitions per the International Society of Transport Aircraft Trading (ISTAT) handbook
5
 Base vs. Market vs. Distress Values
The A320-200 market value is
above the base value, implying Airbus A320-200 Five Year Build
more demand than supply

40.0

35.0

30.0
$M USD

25.0

20.0
The A320-200 market value is
below the base value, implying
more supply than demand

15.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

BV MV Distress

Source: mba REDBOOK

6
An aircraft’s value means different things to different people
Appraisers are asked for a specific type of value depending on the situation

Securitized Value or
Salvage or Part-Out
Lease- Encumbered Scrap Value Value-In-Use
Value
Value

§ When an aircraft § Usually when § When estimated § When an aircraft

has a lease disassembly will value is based has a unique
Used attached or a sale- yield more value solely on metal or attribute specific to
leaseback than the aircraft as other recyclable a situation
a whole materials

§ Net Present Value § Estimated selling § Essentially the § Examples are:

of lease payment price of marketable value to meltdown Updated Interior,
stream parts and the parts Entertainment
components that Systems, Bars
§ Estimated Future
could be salvaged
Valuation Residual Value at § Other operators
for re-use
Methodology lease termination may not value it the
same, but it is
important for current
owner’s brand

7
 Why does the aviation industry need appraisers?

How do you determine a market value when there is a lack of visibility?

The Aviation Market is not an open market like

Transaction Data comes from a variety of sources
shipping or real estate

§ Since 1990, USA market transaction information is § Remarketing

no longer available or obtainable. Major U.S.
Carriers and the Boeing Commercial Airplane § Portfolio Analysis
Company succeeded in having the U.S. Department § Asset Management
of Transportation withhold Form 41 transactional
information. § Fleet Planning

§ Market information is developed, but is acquired § Leasing Companies

through an appraiser's network of airline and
§ Manufacturers
industry sources
§ Financiers / Brokers
§ Due to nature of the information, strict confidentiality
is assured and honored
§ Appraisers provide an unbiased 3rd party value

8
 An aircraft valuation is more than just a number
§ A Valuation Report should provide these ten essential items:
1) Date of the Report
2) Identification of the Client
3) Description of the Property
4) Statement of the Type and Objectives of the Appraisal
5) Definitions
6) Statement of Contingent and Limiting Conditions to which the
Appraisal Findings are Subject
7) Description and Explanation of the Appraisal Method Used
8) Statement of the Appraiser’s Independence and Disinterest
9) Signatures to Appraisal Reports
10) Disclaimers

§ A Valuation Report may also provide:

§ Incident / Accident History
§ Recent Availability and Transactions
§ Value Trending

9
 Agenda

What is the Value of an Aircraft

What Factors May Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

10
Different types of exposure have an impact on the volatility and liquidity of an asset

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance & Environment
Liquidity

11
Different types of exposure have an impact on the volatility and liquidity of an asset

Aircraft Performance Considerations are:

§ Specifications
§ Engines – Manufacturer & Thrust
§ Operating Weights
§ Cabin & Buyer-furnished equipment (BFE)
§ Technology
§ Family Affiliation
§ Regulation

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Liquidity
12
Different types of exposure have an impact on the volatility and liquidity of an asset

Market Prospects to Keep In Mind are:

§ Order-books
§ Aircraft Placements
§ Operator Base
§ Geographic Penetration
§ Convertibility
§ Competitors

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Liquidity
13
Different types of exposure have an impact on the volatility and liquidity of an asset

Production Cycle Considerations are:

§ Place in the Cycle

§ First off the line
§ Last off the line
§ Somewhere in between
§ Production Rate

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Liquidity
14
737-400 Last Production Cycle Comparison

120%

100%

80%
Residual Value

60%

40%

20%

0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Production
Cycle
First Year (1988) Mid Year (1993) Last Year (1999)
Market Financing
Prospects Environment
Age of Aircraft

Volatility
Aircraft External
Performance
& Environment
Liquidity
15
2019 Welcomes a Strong Aircraft Financing Environment

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Source: Boeing’s Current Aircraft Finance Market Outlook 2019 Liquidity
16
We are seeing more lessors and increased fragmentation over time

Number of
Lessors

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Source: Boeing’s Current Aircraft Finance Market Outlook 2019 Liquidity
17
 Slower travel growth is expected, but still above trend

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Source: IATA’s statistics, IATA’s own forecast Liquidity
18
Airlines continue to see stable growth in the 10th consecutive year of profit

Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
Performance
& Environment
Source: ICAO, IATA Statistics, IATA forecasts Liquidity
19
 Operator performance and profit margins can have an impact

§ Airline financials year on year with key financial ratios to

gauge financial health
§ Overview of routes and competitors to understand
strategic position in markets served
§ Network performance compared to industry averages to
benchmark operational efficiency
§ Aircraft ownership information to show lessors servicing
the airline and owned aircraft
§ Fleet orders, deliveries and deferrals information
§ Incidents and accidents to monitor safety risk
§ SWOT analysis detailing competitive advantages, growth
opportunities, and risks
§ News and events related to the airline and its operating
region for historical and current developments
Production
Cycle
Market Financing
Prospects Environment

Volatility
Aircraft External
&
Airline Analysis Report is an mba product bringing together data sourced from STAR Fleet, Performance
Liquidity
Environment
Company Financials, Industry Reports, OAG (source list not exhaustive) 20
 Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

21
I want to optimize my return on
invested capital. Can I manage
my exposure to minimize risk?

22
 Aircraft Value vs. Lease Value
Maintenance can constitute 30% of an aircraft’s value depending on where it is in the life cycle
Full-Life
100% $15.00
Lease End Compensation
90%
$10.00
80%

70%
$5.00

Maintenace Cost
Life Remaining

60%
Half-Life
50% $0.00

40%
Lease Return
Minimum Return Conditions -$5.00
30%

20%
-$10.00
10%

0% -$15.00
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Dec-19
Jun-20
Dec-20
Jun-21
Dec-21
Jun-22
Dec-22
Jun-23
Dec-23
Jun-24
Dec-24
Jun-25
Dec-25
Jun-26
Dec-26
Jun-27
Dec-27
Jun-28
Dec-28
Jun-29
23
 What effect can maintenance have on value?

2010 Boeing 737-700 with CFM56-7B22 Engines

Maintenance Event Cost Value

30.0

Millions
(2) Engine Shop Visit (ESV) 1st Run ~ $3.2M
25.0
(2) LLP Replacements ~ $3.5M
Current
Landing Gear ~ $0.3M 20.0 Market Value
Half-Life

Intermediate Check ~ $0.3M

15.0
Heavy Checks ~ $1.1M

10.0
Maintenance Effect ~ $15.2M

Delta from Half-Life ~ $7.6M 5.0

2019
Source: REDBOOK, mba analysis
24
Notes: Data as of Q1 2019
Where an asset’s value comes from will change over its lifetime

25
mba offers a user-friendly system for investors and airlines to see values and critical industry data

REDBOOK strives to be the principal source of aircraft and

engine intelligence for aviation industry professionals as they
make key decisions for their businesses

Base and Market Values for most

STAR Fleet provides access Maintenance Forecasting
commonly traded aircraft (Fixed
owner, operator and utilization contains powerful insights and
wing and Rotorcraft). Find
data for the global fleet with statistics derived from STAR Fleet
Lease Rates, Aircraft Ranking
updates daily. and mba’s trusted values
and key statistics here

Compare historical asset values

Track and manage assets by
Engine Values for over 75 types back to the 1980s with economic
model or MSN in your Portfolio
indicators to see Market Trends

Unlimited Clicks, Unlimited Queries and Unlimited Value Requests

26
Find the latest news and information on all commercial aircraft

27
Check out values at half-life, full-life and in a distressed market

28
Adjust values and find lease rates

29
Analyze the global fleet, its operators, owners and utilization

30
 Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

31
Industry Hot Topics Affecting Value

Number of Parked Aircraft

Supplier Production Issues

Production Gaps

Short Term decline of Economic Life

Increased percent of Leased Aircraft

Entry of New Technology v. Last Off-The-Line

Aftermarket for Engines

32
 Current Generation Availability

120

100

80
Available Aircraft

60

40

20

NB Total WB Total

33
Source: Airfax
 Average Retirement Age
35.0

30.0
Average Age of Retirement
2009 – 2018

25.0 Narrowbody: 26.1

Widebody: 24.1
20.0 Regional Jet: 10.8
Age at Retirement

Turboprop: 24.7
15.0
Change in Retirement Age
Since 2009
10.0
Narrowbody: -34.7%
Widebody: -29.9%
5.0
Regional Jet: -21.7%
Turboprop: -22.2%
0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Narrowbody Regional Jet Turboprop Widebody

Source: mba STAR Fleet, mba analysis

34
Notes: Data as of Q1 2019
 737-800 Backlog and Deliveries

4500

$54.00
4000

$52.00
3500

$50.00
3000

$48.00
2500
Peak 737-8MAX Backlog

$46.00
2000
1,150+
$44.00
1500 Peak 737-800 Backlog

1000 $42.00

500 $40.00

0 $38.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Backlog Deliveries Backlog 737 MAX Market Value of New Aircraft

35
 A320 Backlog and Deliveries

5,000 50.0

4,500

45.0
4,000

Peak A320NEO Backlog

3,500
40.0
Number of Aircraft

3,000

US $M
2,500 35.0

2,000

30.0
1,500

1,000
25.0

500

0 20.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

A320-200 Backlog A320-200 Deliveries A320N Backlog A320N Deliveries Market Value of New Aircraft (A320-200)

36
 Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

37
737-800 Future Base Value Accuracy (2002 Build)

$50.00

$45.00

$40.00

$35.00

$30.00

$25.00
Effect of 9/11
$20.00 on Aviation
Industry
$15.00
The Great
Recession
$10.00

$5.00

$0.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2002 2006 2010 2014 Actual

38
 A320-200 Future Base Value Accuracy (2002 Build)
50.0

45.0

40.0

35.0
US $M

30.0

Effect of 9/11
25.0 on Aviation
Industry

20.0 The Great

Recession

15.0

10.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2002 2006 2010 2014 2018 Actual

Source: mba REDBOOK, mba analysis

39
Market to Base Adjustment Factor Cycle (5 Year Old Aircraft)

20%

15% Market to Base Adjustment

15%

10%
Downcycle Downcycle and
Stalled Recovery
5%

0%

-5%

-10%

-15%
-15% Market to Base Adjustment

-20%
A320-200

-25% 737-800

-30%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

40
 Narrowbody Volatility Study
Year of Manufacture
Aircraft Average Future Base Value Projection Volatility
1995 2000 2005 2010

A318 a 14%

A319 a a a a 12%

Average Volatility
10%
A320-200 a a a a
8%
A321-100 a a
6%
A321-200 a a a
4%
737-300 a 2%
737-400 a 0%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
737-500 a
YOM 2000 YOM 2005 YOM 2010
737-600 a a
Year of Value
737-700 a a a
Increased accuracy can be attributed to:
737-800 a a a
737-900 a § Manufacturers building assets more as commodities
737-900ER a § Post 9-11 world sees aircraft differently as an asset
757-200 a a a class
757-300 a

Notes: Included data within one standard deviation = 68.3% of the population sample
41
 Widebody Volatility Study
Year of Manufacture
Aircraft Average Future Base Value Projection Volatility
1995 2000 2005 2010

A330-200 a a a 20%
18%
A330-300 a a a a 16%

Average Volatility
14%
767-200ER a
12%
767-300 a 10%
8%
767-300ER a a a a 6%
767-400ER a 4%
2%
777-200 a a a 0%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
777-200ER a a a
YOM 2000 YOM 2005 YOM 2010
777-200LR a
Year of Value
777-300 a a
Increased accuracy can be attributed to:
777-300ER a a
§ Manufacturers building assets more as commodities
§ Whole industry sees aircraft differently as an asset
class

Notes: Included data within one standard deviation = 68.3% of the population sample
42
 Agenda

What is the Value of an Aircraft

What Types of Exposure Impact Value

How to Manage Exposure

What are the Industry Trends

Forecasting Value

What Is the Current Market Outlook

43
 General Narrowbody Market Outlook

§ Demand for narrowbody aircraft is at an all-time high, with backlogs at record numbers
§ Both Airbus and Boeing are currently ramping up production to meet increased demand
§ Several new market entrants are attempting to challenge the Airbus – Boeing duopoly
§ The average size of narrowbody aircraft is increasing, with large narrowbody aircraft becoming increasingly
popular
§ Low oil prices are keeping previous generation aircraft in service longer than anticipated, buoying their residual
values
§ Lease rates for new technology narrowbody are lower than expected
§ Narrowbody aircraft are increasingly being utilized on international medium-haul routes
§ The secondary market for narrowbody aircraft is stronger than that of widebody aircraft
§ Concern exists about bifurcation of fleets by engine type depressing values of some aircraft and engine
combinations

44
 General Widebody Market Outlook

§ Large widebody sales have been sluggish due to the young age of in-service fleets and potential oversupply
§ Four-engine aircraft are rapidly being replaced by twin-engine aircraft
§ Strong demand for the Boeing 787 and Airbus A350, both clean-sheet designs
§ Sales of the A330neo are slower than anticipated, with the A330-800neo currently eight on order to one operator
§ Low Cost Carriers (“LCCs”) are starting to buy widebody aircraft to operate long-haul routes
§ Boom in widebody fleet growth in the Arabian Peninsula unlikely to be sustainable
§ Market is softer for widebody aircraft than narrowbody aircraft

45
Thank You
www.mba.aero
Source: Boeing’s Current Aircraft Finance Market Outlook 2019
47