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Geoffrey Horton 11/15/2013

Aircastle Limited (AYR)

OverviewAircastle Ltd. purchases, leases, and sells commercial aircraft to a variety of airline companies in over 30different countries. The company primarily purchases passenger aircraft with an age less than 10 yearsand then leases them to airliners, either through an operating or finance lease, who are then required to

pay the operational, maintenance, and insurance costs associated with each aircraft. At the end of thelease term, Aircastle will attempt to renew the lease with the airline, re-lease the aircraft to anothercustomer, sell the aircraft if there is an available buyer and an expected gain on the sale, or is written offdue to lack of demand or uneconomical repair costs.

As of September 30 th 2013, the company leased 161 aircraft with an average age of 10 years to 68different lessees. A majority of the leasing business is performed overseas, with 38% of customers basedin the Asia and Pacific region and 33% based in Europe. At the end of the 2012 fiscal year, the companyhad EBITDA of $648mm and a net book value for aircraft of $4.8bn.

IndustryLeasing companies has become a substantial player in the market for aircraft over the past few decades,where lessors now own roughly 40% of the world s passenger jets. This is mainly due to lessors beingable to fund purchases of aircraft more cheaply, while also better managing the value of each aircraft over

the period of its life. By leasing instead of owning, airlines are also given more flexibility in managingtheir expenses and assets. Because of such benefits, the competition in the industry has greatly increased.Airliners now have more of a choice since each leasing company is able to provide different dates ofavailability, unique sets of new and used models, as well as different financing rates. Recently,international growth in airline travel, as shown in Figure 1, and cheaper financing rates have been

providing a healthy area of growth for the entire industry, though overleveraging has become a concern.

Figure 1: International airline passenger growth

Source: International Air Transport Association (IATA)

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FinancialsDue to the flexibility of being a smaller lender, conservative lending practices and a focused ability tomanage their portfolio of aircraft efficiently, Aircastle was able to weather 2008 as earnings began todeteriorate due to the macroeconomic downturn. The company was able to regain traction in 2010 asinvestments in more efficient aircraft took place to improve the overall makeup of their aircraft portfolio.

As shown in Figure 2, capital expenditures have increased dramatically giving the company the ability tolease a greater number of aircraft for a longer period of time. The number of total aircraft owned hasincreased at a CAGR of 6% since 2008, with the total quantity growing 9% over the last two years.

Figure 2: Aircastle earnings, 2008-2012

Source: Company Reports

For a company dependent on leases as the primary source of revenue, it also important to monitor whenleases are expiring and how many of them are able to be re-leased to a customer. Since 2009, the averagenumber of lease terminations per year (both unscheduled and scheduled) have accounted for roughly 20%of total leases outstanding. Despite the high turnover, management has done a consistently efficient jobwith handling these assets and deciding what can be re-leased or sold to ensure constant cash flows overtime. Figure 3 shows how the improvement in aircraft has started to shape the portfolio for a moresustainable long term view. In the short term, however, charge-offs for older aircraft is a concern. Whilethe average gain on sale of an asset over the past five years has been $12mm, the impairment charge for2012 was nearly $100mm. An increase in write-downs over the next four years could be expected as theolder assets are slowly removed from the balance sheet.

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2008 2009 2010 2011 2012

Depreciation Interest EBITDA Acquisition and improvement of flight equipment

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Figure 3: Average remaining lease terms versus aircraft age, 2006-2012

Source: Company Reports

ConclusionThe airline leasing business has grown tremendously over the past two decades due to airlines looking formore efficient ways to manage their costs. As competition has increased in the industry, constant re-investment into repairing older assets and buying larger, more efficient aircraft has become top priority tokeep pace with the growing demand. This has become the focus of Aircastle over the past three years as itforced to recycle its portfolio to ensure cash flows have the ability to become more stable in the future. It

is still unclear, though, as to whether the increase in investments will be compensated with greaterreturns. If not, then the company will begin to have major issues servicing its debt and will not be able tore-invest the necessary funds to thrive, or in many cases, survive.

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Average Remaining Lease Term (years)

Average Age of Aircraft (years)

The information set forth therein has been obtained or derived from sources available to the public and believed by the author to bereliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. Theinformation is not intended to be used as the basis of any investment decisions by any person or entity. This information does notconstitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. Opinions, estimates and

projections in the report constitute the current judgment of the author as of the date of the report and are subject to change withoutnotice. I have no obligation to update, modify or amend any report or to otherwise notify a reader thereof in the event that any matterstated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Opinionsand recommendations in the report do not take into account individual investor circumstances, objectives, or needs and are not intendedas recommendations of particular securities or strategies to particular investors. The recipients of this report must make their owninde endent decisions re ardin an securities mentioned in this re ort. I hold no ositions in the securities mentioned in this re ort.