3rd Annual Aviation &

Asset Management in
the Middle East
Managing the Aircraft Assets – Sustaining Value Retention

Dubai, November, 2011

Content

1. Lufthansa Consulting at a Glance

2. The strategic fleet perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -2-
Our background makes us different 1

Independent management consulting subsidiary within the Lufthansa Group

Our affiliation with the Lufthansa Aviation Group with one of the world’s leading air carriers and
founder of the StarAlliance network provides us with in-depth aviation business knowledge.

Aviation know-how combined with extensive methodological expertise

Lufthansa Consulting combines operational experience and methodological skills
to develop and implement concepts that work.

Global experience
Since 1988 more than 1,500 projects were successfully completed for clients worldwide.

Multicultural organization
We employ consultants from many different nations and cultures which enable us
to better understand our clients’ language and culture.

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -3-
Your advantage – our internal and external experts’ network 1
Our Client

Lufthansa Academic
Airline Network

Lufthansa Partner-
Technik ships

Lufthansa
Lufthansa Consulting Institutions
Cargo

Lufthansa
Systems Agencies

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -4-
 Our clients are distributed all over the world 1
Europe Russia/CIS

Berlin-Brandenburg
International

Government
of Burkina
Faso
Government
of Abu Dhabi
Dubai
Cargo
Government
Village
of the Republic
Congo
Government
of Belize

Government
of Uruguay

Americas Africa Middle East Asia/Pacific

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -5-
Content

1. Lufthansa Consulting at a Glance

2. Acquiring aircraft – the strategic perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -6-
Fleet decision making has changed to a “consensus driven
approach” and clear business case 2
The decision framework

1950‘s: Pilots

1960/70‘s:
Engineers

1980‘s: Commercial
(marketing)

Today: Bean
counters
Today’s World:
Linkage to company value proposition
Concise risk assessment $$$
CAPEX & CVA – clear value added

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -7-
Acquiring capacity therefore begins with ones requirement
and to link the options to a clear value proposition 2
Fleet Strategy OPS Reality

Don‘t buy a Porsche if you (can) only drive it in first gear!

Old saying from Southern Germany

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -8-
Decisions are driven by the strategy: asset management and
values are key to reducing long term CAPEX exposure 2
The decision „process driven“ framework

Process orientated – systematic – focus on the future – engage risk – maximize value

Corporate Strategy Max. Value (CVA, NPV)

Vision,. Shareholder, investment, constraints, growth,
market, risk, finance Optimized Risk

Fleet Strategy

Situation
Gap analysis, OTP, available cash, capital, required new
capacity, replacement, strengths and weaknesses
Evaluation, benchmark,
CAPEX

Quantitative
Scenarios
Timeline (rollover, growth…), procurement options &
targets, scope, opportunity and threats
Qualitative

3rd Annual Aviation & Asset Management in the Middle East – November 2011 -9-
Asset Management needs a holistic plan & KPI’s integrated
into the process to achieve the value proposition

The Cornerstones of Asset Management

Strategy Acquisi-
Delivery Fly Return
Plan tion

Define the Manage the Manage the delivery Asset Management: Manage the
requirements procurement process process life cycle
Set the objectives, Steer the negotiation Operations & technical Airline operations and technical
framework fleet process until contract experts to support the experts assigned to ensure
strategy: signature: EIS process Safety
Business model Document the Spec/ quality Efficiency
requirements
Capacity, product MRO, crews Low cost
Tender procedures
Aircraft market Other support Risk management
Financial modelling structures (e.g.
The time line Rollover planning
dispatch, flight
Contract drafting
The constraints planning, air Manage contract obligations
(e.g. budget, ..) … worthiness…)
Condition management
…

Asset Strategy Asset Planning

Asset Provision Asset Performance Analysis

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 10 -
Balancing different Stakeholder interests to create a win-win
situation for all

Asset Management Interests and parties

Customer satisfaction High yield OPS

Safe and reliable OPS Flexibility
Lessee
Minimal downtimes Low asset cost
Operator

Keep highest KPIs Full knowledge of

residual value the AC
Com OPS
Minimized Acceptable
transition time downtime
Internal
On time delivery Support over
after transitions
knowledge lifetime
checks
Customer
MRO
Lessor
Supplier

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 11 -
Content

1. Lufthansa Consulting at a Glance

2. Acquiring aircraft – the strategic perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 12 -
Reducing CAPEX requirements and supporting the company
value proposition needs an integrated approach 2
Factors for decision making

Volatility/ transparency
Target Competition/ fragmentation
market Yields
Fuel, xrate
Opportunity
Market liquidity
& Threat
Aircraft
supply chain Value & lease trends
OEM (program, p.rates)
CAPEX
Shareholder
Business
Strategy
model
Risk preferences
Skills & focus
Constraints
Balance sheet
Taxation
Finance
Reporting
Cash

Airbus Operator Presentation – December 2011 - 13 -

Asset management should deliver capacity to the airline in
the most efficient manner linked to the value proposition

The asset management tool box

Core aspects of asset management

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 14 -
Asset value retention plays a central role to support the
company strengthen its ability to grow or defend its turf

Values matter Comments

• Aircraft stakeholders (owners:
airline, lessor, bank, ECA, OEM,
Balance etc) all have an interest to
Sheet maximize the value of their
business model
Asset
values • Asset values matter:
Liabilities • Strengthen the balance sheet
• Reduce CAPEX exposure –
Risks Shareholders underpin other investments
a/c Marketability Dividend • Maintain cash and cash flows
Raise attractivity Share price • Underpin Shareholder
WACC requirements
• Reduce financial risks:
• deploy attractive assets
Liquidity
• Increase operator
Cash flow attractiveness to potential
CAPEX lessors & lenders
• Cap your risk premium –
underpin lower financing
costs and WACC

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 15 -
 Take a long term perspective: Manage macro and micro
factors to achieve long term value retention 4
Asset value projection and depreciation Comments
The key questions to ask:
Acquisition How to achieved low
price acquisitions prices?
100 %
What is the residual risk?
What are the tax benefits?

Book value = Function What period of time are we

of depreciation policy looking at?
What flexibility do we want?
Sale Do we have asset
Tax price managements skills in place?
impacts
apply XX% to manage the acquisition
Delivery & disposal process
Sales
Residual value to optimize the
– market driven Book profit maintenance program &
enhance the value s

Book value Book keeping is critical

0 Operating time (years) 12-18?

Source: Lufthansa Consulting

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 16 -
Values matter to maximize opportunities to strengthen the
balance sheet, raise cash, fund future orders … 2
The evolving financial cycle

Order - procurement EIS Airline operation Phase out - return

? ?
Owned: On balance sheet
Leased: Off balance sheet

?
Values matter:
Need cash?
Strengthen balance sheet
Balance Sheet?
Enhance opportunities for cash
Values? Improve credit ratings
Taxation? Access to credit (low cost
credit)
Supply Chain?
Attract investors (lessors,
Risks (market volatility, business maturity, …) ECA’s, …)

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 17 -
Content

1. Lufthansa Consulting at a Glance

2. Acquiring aircraft – the strategic perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 18 -
 A high level of poor quality old equipment undermines future
financing: some regions have more exposure than others 4
Fleet growth (by backlog) (%new capacity by operator region)

Est (Cum. Seat backlog 2010-2012/

Current Seats Available)*100
40% -Risk:
Over capacity
Economic recession (stationary assets)
35% Residuals
Indian S.Cont
M. East
30% China
Australasia
E. Africa Risk:
25% S.E.Asia Future CAPEX volume
E. Europe Under capacity
Fuel cost/ volatility/ emissions
20% W. Europe C. America
Maintenance costs
S. America
15% S. Europe
N. Africa CIS W. Africa
F.East
10% Near. East N. America

5%
C. Caribbean
S. Africa
0%
0% 10% 20% 30% 40% 50% 60% 70%
Percentage fleet >20 years age
Source: Lufthansa Consulting research, ACAS

CIS Growth Opportunities: Moscow March 2011 - 19 -

 Fleet strategies will influence the importance of value
retention – know your environment and tailor your strategy 4
Access to finance for aircraft – change over
Comparative fleet strategies
a 6 month period (H1 – H2 2010)

Fleet strategies (by region) Financing for new aircraft

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%

+ cap. acquire new a/c + cap. acquire used a/c

Increase cap. (lease) Prolong current contracts
Deteriorating Stabilizing Improving
Defer phase out No change
Return capacity Decrease cap. & park a/c

Notes:
1. Survey of Merrill Lynch - reflects the views of 48 airlines.
Source: Bank of America Merrill Lynch

Airbus Operator Presentation – December 2011 - 20 -

 Lease rates & values react differently: some aircraft perform
better: know your risk, know your asset, know the trends 4
Sample: Change to aircraft values and lease rates Comments

Delta Lease Rate vs and seats (2008-09) In the regional airline

25 30 35 40 45 50 55
0% segment, average jet
-5% ATR 42-300 values have fallen twice as
-10%
fast as props
Saab 2000
EMB 120ER Q300
ATR 42-500
-15% Lease rates are falling 50%
-20% Dornier 328
Q200
ERJ-145 CRJ200 faster than values
-25% Q100
Saab 340B CRJ100 Understand the risk of the
ERJ-135 ERJ-140
-30% particular asset in question
Regional Jet
-35% Turboprop
Products who’s economics
Delta CMV and seats (2008-2009) fit the market perform better
25 30 35 40 45 50 55
0%
The same rules fit other
-5% Q300
EMB 120ER Q100 ATR 42-500
CRJ100
aircraft market segments
-10% Q200
ATR 42-300
Dornier 328
-15% Saab 2000 CRJ200
-20% ERJ-140
ERJ-135
-25% Saab 340B
Not necessarily the “worst” asset –
-30% Regional Jet just playing catch up?
ERJ-145
Turboprop
-35%
Source: Aircraft Value News

Airbus Operator Presentation – December 2011 - 21 -

Content

1. Lufthansa Consulting at a Glance

2. Acquiring aircraft – the strategic perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 22 -
 Competitive advantage is where strategy meets reality –
bankable results need foresight – best in class predictions 5
Efficiency
The multi facets of asset management
Parameters
Asset Management is more than Plan – Buy – Fly – Sell Sustainable On Time
• To be ahead, track and understand: Excellence Performance
• Supply chain trends (asset risk exposure)
• Market portfolio trends (potential capacity flash points) Customer
Satisfaction
• Company liquidity and CAPEX requirements
• Apply risk management techniques to prioritize decision making Liquidity
•…

CAPEX

5 Years 6 months 28 days 72 h

Production
Commercial Tactical Operational Reporting
Planning Planning Planning OCC / MCC
BI
Off-Block On-Block
Production
Asset Strategy Asset Planning
Framework Flight Asset – Analysis
Ops

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 23 -
Managing operational and residual aircraft value risks is a
challenge 5
The multi facets of asset management

??
What are
Maintenance Cost
concept
todays’
Cutting leverages ??
?
Flexibility Asset
Profitability Management
Fleet
Reliability commonality

CAPEX
Cash &
liquidity Contractual
Efficiency
Obligations
Punctuality Aircraft
Safety &
Utilization
Security

- 24 -
3rd Annual Aviation & Asset Management in the Middle East – November 2011
Good BI sustains competitive advantage: Achieve best
practice to manage performance and CAPEX planning 5
4

Balancing choices and strategic direction The BI solution must

• Predict future cost based on

planned flight schedules /
residual values
• Monitor and schedule all
operational tasks (e.g. routes,
flights, checks…), fulfilled /
open maintenance tasks and
e.g. available painting / C-check
slots
• Cover all data for
documentation and planning
(e.g. FHs, remaining LLP times,
e.log, aircraft status)

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 25 -
A continuous improvement process is crucial for successful
Asset Management 54
The asset management circle: technical operations

Asset & Management by

Production objectives
Define
Corrective Framework
Reliability SLA
Actions
Analysis Strategy

Act Budget
Analyze
Asset and
PFA KPIs Check Plan CAPEX

Production
Do Plan & Targets
Resource
Planning Short and long-
Operate the
Schedule
term planning

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 26 -
 Plan – Buy – Fly – Sell
Asset Management a piece of cake? 5
4 Sell / Return

3 Fly

2 Buy

1 Plan

Complex network
airlines
(Premium services) Going Hybrid ?

Niche carriers Economic value

(Flying from A to B) (Low fares)

European Aviation Asset Management, Reykjavik April 2011 - 27 -

Content

1. Lufthansa Consulting at a Glance

2. Acquiring aircraft – the strategic perspective

3. Asset values matter

4. Regional and asset perspectives

5. Key aspects of sustaining value

6. Summary and conclusion

3rd Annual Aviation & Asset Management in the Middle East – November 2011 - 28 -
Asset management is a key activity whereby a focus on value
retention offers long term benefits 6
Conclusions

Sustaining values is a key activity to:

Reduce long term CAPEX

Enable funding to be allocated to other activities

acquisitions, growth, dividends, benefits, brand, liquidity…

Increase attractiveness to investors

Lower risk premium

WACC

Lease rates/ Leverage to negotiate better deals

Decision making to be connected to the business model, macro environment,

asset portfolio, market portfolio
All operators and lessors have different risk exposure – tailor your approach

Airbus Operator Presentation – December 2011 - 29 -

Open questions? 6

How do you address asset management?

How are your decisions connected to strategy and finance?

Aircraft are the production tool of the airline – how do ensure a

balanced approach from operations, finance and network?

What issues do you see over the next horizon – how are you
addressing this in your asset management strategy?

What are the perceived risks of the current financial crises to your
investment decisions?

What are your risks?

What process do you apply – who are your stakeholders, how do

you apply “lessons learned” to improve future decisions?

Airbus Operator Presentation – December 2011 - 30 -