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Presented By:Shannon AckertVice President, Commercial OperationsJackson Square AviationOctober 20, 2011

Maintenance Status & Asset ValuesA Lessor’s Perspective

Maintenance Cost Conference

Agenda

1. Factors Influencing Aircraft Values2. Maintenance Status3. Aircraft Values from an Appraiser’s Perspective4. Age and Value Performance5. Market Conditions and Value Performance6. Conclusions

IATA Maintenance Cost Conference, Singapore October 20th, 2011 2

1. Factors Influencing Aircraft Values

Broadly speaking, the factors that influence aircraft values be assigned into the following categories:

A. ManufactureB. MarketC. Regulatory JurisdictionD. Aircraft Specific



A. Manufacturei. Pricing Strategy ; if OEM deep discounts persists, values

will not return to their historical levels.

ii. Production Rate ; high production rates can potentially create an oversupply & impair current values.

iii. Manufacture Status ; demise of an OEM often contribute to ailing values of existing aircraft.



B. Market Conditionsi. Market Outlook ; forecast of air traffic volumes and

airplane demand ‐ strong conditions translate into higher traffic growth and vice‐versa.

ii. Airline Profits ; strong correlation between profits & aircraft values (Profits values )

C. Regulatory Jurisdictioni. Age Curfew ; many countries now have regulations on the

maximum age an aircraft can have, which can have a negative impact on aircraft values.



D. Aircraft Specifici. Age ; less stable as aircraft agesii. Liquidity ; customer base & geographical distributioniii. Production Cycle ; long production runs are good, and early &

late stages cycles are worseiv. Specification ; weight, thrust, cabin configuration, winglets,

and technology featuresv. Family Variants ; aircraft families (737NG & A320) provide fleet

& capacity planning flexibility.vi. Operating Economics ; payload, range, fuel burn, etc.vii. Secondary Market ; freighter conversions & part‐outsviii. Maintenance Status


2. Maintenance Status : User Context

The context in which maintenance status is used depends on whom the constituents are. There are two:

A. TechnicalB. Financial



A. To technical constituents, maintenance status generally denotes an interval reference (i.e. FH, FC, calendar months, etc.) that is used to quantify where an event is in its maintenance cycle.

Example interval reference:an engine’s maintenance status is stated as having :

30,000 FH TSN / 15,000 FC TSN 10,000 FH TSLSV / 5,000 FC CSLSV



B. To financial constituents, maintenance status generally denotes a value reference that is directly correlated to the life remaining of certain high cost maintenance events.

Example value reference:an aircraft’s maintenance status is stated as being at :

Half‐life Above or Below half‐life Full‐life


2. Maintenance Status : Maintenance Events

Aircraft market values are adjusted for deviations in the maintenance status of high cost maintenance events consisting of:

i. Airframe Heavy Structural Inspectionsii. Landing Gear Overhaulsiii. Engine Performance Restorationiv. Engine LLP Replacementv. APU Performance Restoration


2. Maintenance Status : Maintenance Utility

Maintenance status is used to quantify, in whole of part, the value of maintenance utility remaining.

The key to quantifying maintenance status lies in making accurate assessment as to:

A. Where each maintenance event is relative to their last and next shop visit, and

B. What percentage of its next / upcoming shop visit cost is remaining.


2. Maintenance Status : Utility Profiles

A. Hard‐time – maintenance events that generally have 100% of their values decline to zero & subsequently recapitalized to full value after each check.

1 ‐ Hard‐Time ‐Maintenance Utility Profile

100%

50%

EIS 1st SV 2nd SV 3rd SV

Full‐life

Half‐life

0%

Hart‐time Utility Curve

Calendar Based Events:

i. Airframe HSIii. LG Overhaul



B. Quasi Hard‐time ‐ applicable to engine LLPs whereby a portion of their hard‐time lives are discarded, i.e. generally 5% ‐15% depending on the engine type.

1 ‐ Hard‐Time ‐Maintenance Utility Profile

100%

50%

EIS 1st SV 2nd SV 3rd SV

Full‐life

Half‐life

0%

Hart‐time Utility Curve

LLP Green Time

Exception:

i. Engine LLPs

LLPs are replaced with stub lives remaining



C. Condition‐monitor – maintenance events that rarely have 100% of maintenance consumed, and the event’s workscope often only partially restores the value lost.

EIS FirstSV

SecondSV

ThirdSV

Full‐life

Half‐life

100%

50%

0%

Condition‐Monitor Utility Curve

OC / CM Based Events:

i. Engine PRii. APR PR


2. Maintenance Status : Financier Terms

Aircraft appraisers use, as a baseline reference, two industry‐standard terms to represent an aircraft’s maintenance status:

A. Full‐life – the full‐life status implies each major maintenance event has just been fully restored to zero‐time condition.

B. Half‐life – the half‐life status implies that each major maintenance event is half‐way between overhaul / restoration.


2. Maintenance Status : Valuation Concepts

Example : 737‐800 Full & Half‐life ValuationsPhase : First‐Run

737‐800 ‐ CFM56‐7B26/3 26,300 lbs ‐ First‐Run Full & Half‐Life ValuesFull‐Life Half‐Life

Equipment Event Units Value $ Value $ Mo FH FC Mo FH FCAirframe 8YR SI 1 780,000 390,000 96 48Landing Gear Gear Ovhl 1 350,000 175,000 120 18,000 60APU APU Rest 1 250,000 125,000 7,500 3,750Eng Modules Eng Rest 2 4,470,000 2,235,000 23,625 13,500 11,813 6,750Eng LLPs Eng LLP 2 4,400,000 2,200,000 23,000 11,500Totals 10,250,000 5,125,000

‐‐‐‐‐‐‐‐‐‐‐ Full‐life Intervals ‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐ Half‐life Intervals ‐‐‐‐‐‐‐‐‐‐‐



Adjustment from half‐life reflects deviations from half‐life. The deviations ($) are either positive or negativedepending on the status of the maintenance event.

Example A : Half‐life Calculation ‐ 737‐800 / 8‐Yr SI Check

Adjustment from Half‐life ($) = (% Life Remaining ‐ 50%) * (Mtx Event Cost)

8‐Year Interval = 96 months

8‐Year SI Cost = $780,000 8‐Year Life Remaining= 24 months

Adjustment from Half‐life ($) = (25% ‐ 50%) * $780,000 = ($195,000)



Example A : Adjustment from half‐life graphical Illustration:

50%

96 Mo

Half‐life

0%

25% ($195,000)

100%

75% $195,000

72 Mo48 Mo24 Mo

Factored as a notional credit if above half‐life

Factored as a notionaloffset if below half‐life

Deviations from Half‐life

Assumes no $Adjustment

Consumption Rate = $8,125 / Mo


AIRCRAFT MAINTENANCE STATUS AS OF : 15‐Jul‐11Aircraft : 737‐800 TSN CSNDate Mfg : 15‐Jul‐05 Aircraft: 21,000 FH 12,000 FC

Eng Pos 1: 21,000 FH 12,000 FCUtilization: 3,500 FH 2,000 FC Eng Pos 2: 21,000 FH 12,000 FC

ADJUSTMENT FROM HALF TIME CALCULATIONMtx Mtx Mtx Mtx Mtx Interval Adjust FromEquipment Event Phase Cost $ Interval Remain % Total % 1/2 Time 1/2 Time $Airframe 8YR SI First‐Run 780,000 96 Mo 24 Mo 25.0% ‐25.0% (195,000)Landing Gear Overhaul 350,000 120 Mo 72 Mo 40.0% ‐10.0% (35,000)APU Perf Rest 250,000 7,500 APU FH 3,750 APU FH 50.0% 0.0% 0Engine Position 1 Perf Rest First‐Run 2,235,000 13,500 FC 1,500 FC 11.1% ‐38.9% (869,167)Engine Position 1 LLP Replace 2,200,000 Limiter 47.4% ‐2.6% (58,000)Engine Position 2 Perf Rest First‐Run 2,235,000 13,500 FC 1,500 FC 11.1% ‐38.9% (869,167)Engine Position 2 LLP Replace 2,200,000 Limiter 47.4% ‐2.6% (58,000)Half‐Life Adjustment : 10,250,000 (2,084,333)

Life Remaining


Example B : Half‐life Calculation ‐ 2006 Build 737‐800 Aircraft



Example B : Adjustment from half‐life graphical Illustration:Aircraft : B737‐800 Operation : 3,500 FH

2,000 FC1.7 FH:FC

Engine : CFM56‐7B26Derate : 10%

Deviation from Half‐life

( $2,084,333 )

APU SV1 APU SV2

ENG SV 1

50%

0%

25%

100%

75%

0 10 20 30 40 50 60 70 80

Consumption Rate = $125,000 / Mo


2. Maintenance Status : Valuation Perspective

In the real world it is common to make financialadjustments to account for both an aircraft’s conditionand maintenance status.

Condition tends to be a judgment call ‐ if an aircraft hasscab patches, is dirty, dripping fluids, and has a lot ofdeferred maintenance items, it is not uncommon toassign a lower value to this aircraft.

In most cases however, an aircraft’s condition, asopposed to its maintenance status, would not warranta significant change in an appraiser’s standard valueopinion.


3. Aircraft Values : Appraisal Terms & Concepts

The standard aircraft value terms used by investors & appraisers are defined by the International Society of Transport Aircraft Trading (ISTAT). Key values are :

A. Base Market ValueB. Current Market ValueC. Adjusted Market ValueD. Future Base Value

A. Base Market Value – represents the opinion of the value of a single aircraft in a single arms‐length transaction in a balanced market, unaffected by short‐term events. Base value assumes an aircraft’s maintenance status is at half‐life.



B. Current Market Value – represents an appraiser’s opinion of the most likely trading price that may be generated for a single asset under market conditions that exist at that time. Current market value assumes an aircraft’s maintenance status is at half‐life.

Example:

Base Value

Current Market Value

CMV = BV : market conditions arein equilibrium.

CMV > BV : market conditions aretending to support higher prices.

CMV < BV : market conditions aretending to support lower prices.



C. Adjusted Market Value – indicates that the market or base value of the aircraft has been adjusted from half‐life to account for the actual maintenance status:

Adjusted Market Value ($) = Market Value + Adjustment from Half‐life

Base Value = $31,500,000 Half‐life Adjustment = ($2,084,333) Adjusted BV = $29,415,667

Current Market Value = $32,700,000 Half‐life Adjustment = ($2,084,333) Adjusted CMV = $30,615,667



D. Future Base Value – is the appraiser’s forecast of future aircraft values from an initial starting point that is generally its base value.

Age


4. Age & Value Performance : Terms & Concepts

Age implications to maintenance status; as the aircraft ages so does it’s corresponding Direct Maintenance Costs (DMC). The aging process can be categorized into maintenance phases:

Year of Operation1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20EIS

First‐run Phase

All maintenanceevents have yetTo occasion theirfirst shop visit

Mature‐run Phase

Begins after the newness phase and runs through the first maintenance cycle.

Aging‐run Phase

Begins after the end of the first maintenance cycle when the effects of airframe age result in higher non‐routine maintenance costs.



Example : 737NG Maintenance phases : 3% annual inflation

First‐run Phase Mature‐run Phase Aging‐run Phase



Age implications to aircraft values; as the aircraft ages it’s value decreases and becomes more volatile. The aging process can be categorized into value phases:


Year of Operation

0%10%20%30%40%50%60%

‐60%‐50%‐40%‐30%‐20%‐10%

New / In‐production Aircraft Aging / Out of Production Aircraft

CMV as a % BV

Relative Volatility


Influence of Age & Maintenance Status on Aircraft Values

As an aircraft ages, maintenance accounts for a higher proportion of the aircraft’s total value



As the aircraft ages the proportion of maintenance status value tends to be largely concentrated in the engines.

Percen

tage of O

riginal Aircraft Value

0%10%20%30%40%50%60%70%80%90%100%

Time ‐ Years0 20

AIRFRAME

ENGINE


4. Age & Value Performance : General Rule

Often, if an aircraft’s overall maintenance status is determined to be:

i. Above half‐life ‐ buyers rarely pay seller dollar‐for‐dollar for the premium above half‐life

ii. Below half‐life ‐ buyers will demand dollar‐for‐dollar impairment for the value below half‐life.

And hence the importance of maintenance status forecasting



Maintenance Status Forecasting Aircraft : B737‐800 Operation : 3,500 FH

1,750 FC2.0 FH:FC




Theoretical Optimal Aircraft Trading Period Aircraft : B737‐800 Operation : 3,500 FH

1,750 FC2.0 FH:FC


OptimalTrading Period




5. Market Conditions & Value Performance

In a balanced market, an aircraft sold in half‐life assumes no profit or loss results from maintenance status.

In reality both aircraft and maintenance status values can swing dramatically depending on supply & demand.

Market Mtx Status Comments Above Half‐life Likelihood of no premium for higher levels of maintenance status Below Half‐life Likelihood of significant discount for lower levels of maintenance status Above Half‐life Likelihood of a premium but not full dollar‐for‐dollar Below Half‐life Likelihood of a discount ranging as high as full dollar‐for‐dollar Above Half‐life Likelihood of a premium but not full dollar‐for‐dollar Below Half‐life Likelihood of minimal discount for lower levels of maintenance status

Weak

Balanced

Strong


6. Conclusions

i. The value of maintenance status is rarely constant; volatility of markets inherently translates into volatility of both aircraft & maintenance status valuation.

ii. After an aircraft reaches a certain age the maindifferentiator between specific aircraft of the same vintage will often be the value in their maintenance status.

iii. Obtaining dollar‐for‐dollar premium for maintenance status is rarely achieved, therefore traders should account for an optimal trading period that considers the age of the aircraft as well as the status of major maintenance events.


6. Conclusions ‐ Continued

iv. Whereas an airframe gradually deteriorates over time, appropriate maintenance can repetitively restore an engine to a near new condition and value. Therefore, engine maintenance status needs to be carefully monitored given its influence on aircraft market values.

v. In forecasting maintenance status, the operational profile, airframe age, and inflation rate should be considered as an integral part of the methodologies used to assess the value of maintenance.


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