NAVIGATING 360° Rolland Vincent Associates, LLC May 2009

INSIGHTS

Welcome to our first issue of NAVIGATING 360°. The purpose of this newsletter is to provide insights into key trends, opportunities and performance indicators in the aviation industry. Our approach is fact-based and analytical – our objective is to help business leaders and innovators navigate the complexities of this global industry.

In this issue, we take a closer look at business aircraft, a market that transitioned quickly from white-hot to 40° Below. More details are available in a presentation I gave at the recent 34th Annual FAA Forecast Conference in Washington, D.C., which can be downloaded at www.rollandvincent.com.

Challenging times can open minds to the need for change - and the opportunity to innovate. Is today’s ‘buyers market’ a challenge for product and service providers, or a window of opportunity to update product lines and business models? Ladies and gentlemen – start your innovation engines - and I hope you enjoy the newsletter.

Rolland Vincent President

Rolland Vincent Associates, LLC

Fractional Jet Ownership & Jet Cards:

What’s Next? U.S. fractional operators face

unprecedented headwinds in 2009. As an industry, Q1 sales were down 69% and repurchases were up 23% versus the same period last year, driving net sales deep into negative territory.

Flying hours (flown with paying customers on board) were down 28% in February 2009 year-over-year, pressuring margins and forcing operators to deal with idled assets (planes, pilots, and non-flying personnel). Compounding the slowdown in activity, mark-to-market accounting regulations require operators to write-down unsold asset values. With ballooning used jet inventories and plummeting hull values, market leader NetJets alone took a $54 million write-down on inventory values in 2008.

Pink and white

The ‘Big 4’ U.S. operators – NetJets, Flexjet, Flight Options, and CitationShares - took delivery of 90 new aircraft in 2008, down slightly from 2007 but consistent with the past 3 years. Ninety-one percent (91%) of these new deliveries were made to NetJets and Flexjet. Since then, intake of new aircraft

has essentially stopped, with operators having ‘done the math’, and walked away from delivery slots and deposits. With a wave of retirements underway across ‘Big 4’ fleets, the results are plastered across the business jet OEMs in various shades of pink and white – pink slips in employee hands and white tails on the ramp.

Fractional jet cards – the 2nd growth wave

U.S. real corporate profits grew at a sizzling 13.4% CAGR over a sustained 7-year period from Q3 2001 (i.e. the 9/11 shock) through Q3 2008, reflecting a white-hot business jet market and internationalization of demand. At the same time, the U.S. market for fractional share sales declined at a rate of 3.6% CAGR while the ‘Big 4’ fleet grew at 1.5% annually. Masked inside these fleet numbers was a large-scale restructuring of demand from shares to fractional jet

cards. These cards provide access to fractional fleets in pre-paid timeblocks (typically 25 hours) without ownership responsibilities or contracts. Although only limited data are available, it appears that fractional jet card sales surpassed fractional share sales for the first time in 2007 and then again in 2008.

Recovery: 2012 ….or later

Based on the assumption that the U.S. economy will remain in recession at least through the end of 2009, we expect

2

the fractional industry to begin a recovery in 2012 at the earliest. By that time, business jet OEMs will have sold off their ownership stakes in fractional operators. We believe that that the industry has entered an era of consolidation, that one or more new entrants will fail and others will team up with one of the smaller players in the ‘Big 4’ to serve both North American and European markets. More importantly, we look for a restructuring of the industry and a shift towards serving on-demand customers – not ‘25 hours at a time’ but rather ‘one hour at a time’. This will be a major challenge for fractional operators who will need to adjust their systems, processes and business models to meet this changing market requirement.

“… but rather ‘one hour at a time’. This will be a major challenge…”

Window of opportunity

The growth in demand for fractional jet cards thrrough the last seven years – including Marquis Jet, Flexjet 25, Vector, and JetPASS – can be attributed to quality and consistency of service, convenience, simplicity and limited up-front commitment. Clearly, customers have valued these considerations more than the costs per hour, which extract premiums of 40-50% over fractional ownership based on discounted cash flows. (see chart)

With an estimated 80% of jet cards

for personal use coupled with a 40% year-over-year drop in wealth portfolios, 2009 is proving to be a tough year for card sales.

Conclusion? From a customer’s

perspective, the time to buy is NOW! With a growing choice of alternatives, new products on the horizon, and the shift to a buyer’s market, purchasing terms will be extremely attractive for the savvy entrepreneur.

Speed – The Next Frontier

It has been more than

45 years since the first flight of the Lear Jet 23, an aircraft that revolutionized private travel. Powered by twin GE CJ610-4 engines, the Lear 23 was an innovative design that spawned an entirely new industry of light business jets.

Many said that there was no demand for such a product – that customers would not choose a fast, smaller cabin jet over a larger-cabin design, despite a speed advantage of more than 50%. By the late 1960’s, however, the market had already spoken, and business turboprops such as the 300-knot Grumman G-159 Gulfstream I were out of production.

Since 1964, customers have taken

delivery of more than 7,300 new light business jets, accounting for 41% of industry production worldwide.

Speed sells

Today’s speed

benchmark is the Citation X, which achieves Mach 0.92 (505 knots). The aircraft commands a 30% price premium over its sibling, the Sovereign, which has comparable cabin accommodations and range performance. Popular amongst fractional owners and jet

card members, the Citation X fleet at NetJets is twice as large as that of the Sovereign.

The Aerion SBJ - the next frontier

One of the most promising new

designs to appear in years is the Aerion Supersonic Business Jet (SBJ). Combining the wisdom of proven

powerplant technology with a patented laminar flow wing, the aircraft will literally manufacture time for its customers - thrusting the business jet market into the 21st century. In the comfort of a stand-up double-club cabin, with 4,000 nm+ range, the Aerion SBJ will fly at Mach 1.6, 80% faster than today’s fastest business jets.

Aerion and its aircraft manufacturing

partners will benefit from their foresight in recognizing that speed is truly the next frontier in business jet design.

40° Below

Despite the return of the cherry blossoms in Washington, D.C. and the promise of warmer weather, business aviation is facing a long, cold winter. Worse than a Canadian arctic air mass descending from the Great White North, the cold winds of the recession reached gale force late in 2008, silencing credit

3

markets – and airplane salesmen’s telephones.

The deep freeze in the broader credit markets is contributing to the ocean of inventory (more than 3,000 used business jets) flooding dealer lots. With supply up 70% year-over-year, demand has virtually evaporated, prices can’t find a floor, and there are reports of unheard-of deals being written (can you believe a gently flown Challenger 604 for $11M?). Lending institutions, under pressure to improve margins, no longer have the back-stop of secondary capital markets, and ‘Just Say No!’ is the order of the day amongst loan underwriters.

Consumer confidence has been

shaken by sharp increases in unemployment rates (up 40% since August 2008) coincidental with a 40% drop in the value of most people’s investment and retirement portfolios. With the exception of China and India (where economic growth has slowed with reduced demand for exports and outsourced services), all major world economies have slid into recession, and expect to remain there at least through the end of 2009.

We look for entrepreneurial leaders and innovators, employing precision tools like business aviation, to be front-and-center at the table, making the decisions and implementing the changes needed to re-energize our economies.

Aerospace Industry Financial Highlights

Sources: Reuters, Forbes, ADVFN – April 17, 2009. (‘Industry’ includes both civil and defense companies.)

Rolland Vincent Associates, LLC is an aviation consulting firm. Drawing from over 25 years of aviation experience, we deliver trusted insights in market research, strategy, business and product development, industry analysis and financial modeling. We are here to help you understand customer needs and preferences, design products and services to delight your customers, and discover and seize business opportunities. We provide you with practical, intelligent solutions to unleash the power of your business and navigate for global aviation leadership.

Rolland Vincent Associates, LLC 7000 Independence Parkway, Suite 160-3, Plano, Texas 75025 USA

Tel: 972-439-2069 (U.S. Central Time) www.rollandvincent.com