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Newsletter, Spring 2013

Aircraft Finance

In this Spring 2013 issue, we present an aviation market update based, in part, on views presented by industry experts at the National Aircraft Finance Association (NAFA) annual conference in Miami. In addition, this issue’s Model Highlight Synopsis is on the Gulfstream G550.

Business Aviation Market UpdateAs one of the most important events of the year in the business aviation community, NAFA guest speakers brought valuable insights to the conference. They shared their expertise on the state of the overall economy, relative health of the climate for lending on aircraft, governmental attitudes toward the business aviation community, as well as perspectives of select major aircraft manufacturers. Among others, this year’s speakers included: Citi Private Bank’s Michael Brandes, Global Head of Fixed Income Strategy; Paul Feldman, Vice President, Government Affairs, General Aviation Manufacturing Association (GAMA); Richard Aboulafia, Vice President, Analysis, Teal Group Corporation; and representatives of four major manufacturers (Bombardier, Gulfstream, Dassault and Embraer).

The general consensus as to the state of the business aviation industry was characterized by Mr. Aboulafia in his introduction as, “a long, slow walk out of the trough.” We agree completely. While overall conditions are improving, the pace of the recovery is slower than most anticipated. In addition, unlike the 2001 – 2003 downturn after which models of all ages and sizes recovered together, this still-nascent

recovery shows strong signs of bifurcation in that the top half of the market is expected to eventually thrive, but the bottom half will continue to languish.

A worldwide survey taken in Q4 2012 by JETNET iQ illustrates the sentiments of different regions with respect to the state of business aviation. As shown below, North America is the most optimistic and must be counted on to continue to lead the way out of the doldrums.

JETNET iQ Survey Respondents’ Sentiment

0%

10%

20%

30%

40%

50%

60%

NorthAmerica

LatinAmerica Europe Middle and

Far East All

Respondents

Past low point At low point Not reached low point

Source: JETNET iQ, Q4 2012 Survey

2 Aircraft Finance Newsletter | Spring 2013

Another interesting aspect of the JETNET iQ survey gives insight as to what factors, out of dozens to choose from, the respondents felt were most important in the purchase of an aircraft. Depending on the size of the plane being considered, the results are quite different for large/long-range aircraft buyers versus medium and small models.

In short, this has been an exceptionally severe downturn. However, in our opinion, brighter days appear to be ahead as business jet leading market indicators such as corporate profits and cash buildup are strong. These factors, combined with the pent-up need for fleet modernization in many major corporations, indicate a modest up-tick in 2013 followed by true recovery in 2014 and several years thereafter.

JETNET iQ Survey Purchase Decision Criteria

0%

5%

10%

15%

20%

25%

30%

35%

40%

Range

Capaci

ty

Comfort Pric

e Pric

e

Range

Capaci

ty

Oper. C

ost Pric

e

Oper. C

ost

Range

Capaci

ty

Large Jets Medium Jets Small Jets

Source: JETNET iQ, Q4 2012 Survey

Model Highlight SynopsisGulfstream G550 The Gulfstream G550 is the most successful ultra-long-range business jet ever produced. Since its introduction in 2003, over 420 have been built and orders are firmly in place for several dozen more over the next couple of years. Add to that the 188 earlier model GV’s still flying and the total slightly exceeds 600 aircraft.

The Gulfstream G550 has a range of approximately 6,700 nautical miles (NM) with eight passengers. With the lone exception of its recently introduced “big brother,” the G650, this is the longest range of any in-production business jet capable, for example, of non-stop flights from New York to Tokyo or Los Angeles to Auckland or London to Singapore or Moscow to Honolulu.

Gulfstream G550 Maximum Range from New York (85% Boeing Annual Wind Reliability)

Sao Paulo

Santiago

Honolulu

Tahiti

Moscow

DelhiDubai

Nairobi

Cape Town

Beijing

Tokyo

New York

3Aircraft Finance Newsletter | Spring 2013

Power is provided by two Rolls-Royce BR700-710C4-11 turbofan engines, each providing 15,385 pounds of takeoff thrust at Sea Level up to 86°F. Standard avionics includes the Honeywell Primus Epic PlaneView (PlaneView II on newer models) suite with both Heads-Up Guidance System (HGS) and Enhanced Vision System (EVS) as standard equipment.

Typical G550 cabin arrangements provide seating for 12, 14 or 16 passengers with either forward or aft galley and most are outfitted with a crew rest area to better accommodate 12 to 14 hour flights. The best-in-class baggage compartment allows for 226 cubic feet of volume and 2,500 pounds of weight. Cabin altitude is an impressive 6,000ft at maximum cruise altitude of 51,000ft.

As of early May, there were 18 G550s listed for sale or 4.3% of the fleet. While availability has crept upward slightly over the past several months, it has not nearly approached the levels predicted by many industry “experts,” who mistook the G650 order book as being comprised mostly of G550 owners who would look to sell their old aircraft upon delivery of the new one. While some new G650 owners have, indeed, placed their G550s up for sale, the majority of sales have come at the expense of other manufacturers’ products. According to the latest Aircraft Bluebook, pricing for a pre-owned G550 can range from $30MM for a 2003 to the low $50MM’s for a mint 2012. Advertised list price for a brand new G550 is $56.25MM, but Gulfstream, like most OEMs in this market, is discounting fairly aggressively.

Even after the recent downturn, G550 residuals are comparatively strong. The chart below presents the current average retail price of both a Gulfstream G550 and its closest competitor, the Bombardier Global Express XRS, as a percentage of the aircraft’s average purchase price when new.

Gulfstream G550 Residual Value Comparison

60%

65%

70%

75%

80%

85%

90%

95%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Curr

ent A

vera

ge R

etai

l Pric

e/Av

erag

e Ne

w Pr

ice

Year of Manufacture

Gulfstream G550 Global Express XRS

Source: Aircraft Bluebook Price Digest, March 2013 (Vol. 13-1)

For more information regarding Citi Private Bank Aircraft Finance, please contact your Private Banker.

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