March 9, 2015 Keynote Address John E. Luth · 2015 Average 7.4x 2015 Average 10.8x 2010 Average:...

Keynote Address John E. Luth Chairman & CEO

March 9, 2015

1 SEABURYSEABURYGROUP.COM

 AIRLINES  OEMs & MROs

 LESSORS & BANKS

 ADVISORS

ISTAT Americas – A Call for Action Prosperity is not globally shared and therefore complacency should be avoided – there is a need to fundamentally change How and When we engage in collaboration


Strong Airline Mkt. Capitalization Rates For Most Regions Equity markets are open for good performing airlines – unlike much of the past 25 years – but as a group, European carriers are significant laggard

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

3x

6x

9x

12x

1/1/15 1/1/14 1/1/13 1/1/12 1/1/11 1/1/10

15x

12x

9x

6x

3x

1/1/15 1/1/14 1/1/13 1/1/12 1/1/11 1/1/10

0x

5x

10x

15x

20x

25x

30x

1/1/15 1/1/14 1/1/13 1/1/12 1/1/11 1/1/10

LatAm

Regional LCC

Asia/Pacific Europe

North America

1/1/15 1/1/14 1/1/13 1/1/12 1/1/11 1/1/10

2010 Average: 5.7x 2015 Average 7.4x



2010 Average: 7.0x 2015 Average 8.3x TEV / Total Revenue

 Adj. TEV / EBITDAR

TEV / EBITDA

P / E

Source: Capital IQ as of February 3rd, 2015 Monthly median multiples, as of 03/03/2015


Aircraft Lessors’ Share Prices

7/1/2011 7/1/2012 7/1/2013 7/1/2014 7/1/2015

$50

7/1/2010

$45

1/1/2014 1/1/2013

$20

1/1/2010 $5

1/1/2015

$25 $30

1/1/2011 1/1/2012

$35

$15

$40

$10

Airframe & Engine OEM’s Share Prices

7/1/2013 7/1/2012 7/1/2011 7/1/2010 7/1/2014 7/1/2015 $0

1/1/2012 1/1/2013

$60

1/1/2010

$160

$20

$40

$100

1/1/2014

$120

$140

1/1/2011

$80

1/1/2015

AerCap Holdings N.V.

Aircastle LTD

Air Lease Corporation

Airbus Group N.V.

The Boeing Company

Bombardier Inc.

Embraer SA

Rolls Royce Holdings plc

United Technologies Corporation

General Electric Company

409%

143%

39%

149% 215%

65% -56%

91%

81%

62%

Announcement of ILFC Deal

Source: Capital IQ

Lessors and OEMs Have Also Enjoyed Strong Equity Growth Stronger airline performance drives higher valuations for OEMs and lessors


  United States   Eurozone

 Brazil

  United Kingdom

 India

  Japan

 China

2.5

3.0

-5-4-3-2-101234

18 16 14 12 10 08 06 04

2.5

-4-202468

10

18 16 14 12 10 08 06 04 -0.2

7.07.3

5.0

5.5

6.0

6.5

7.0

7.5

8.0

18 16 14 12 10 08 06 04

1.51.0

-6

-4

-2

0

2

4

18 16 14 12 10 08 06 04

2.72.8

-6

-4

-2

0

2

4

6

18 16 14 12 10 08 06 04

6.4

5.3

4.5

5.0

5.5

6.0

6.5

18 16 14 12 10 08 06 04

1.3

-1.2

-10-8-6-4-2

0246

18 16 14 12 10 08 06 04

-2.6

0.7

-5

-4

-3

-2

-1

0

1

2

18 16 14 12 10 08 06 04

Russia

But Real Warning Signs Are Flashing GDP recovery is faltering in many regions except China, India, and the US Real GDP trend analysis (as of March 3, 2015)

“Eurozone” – an economic and monetary union of 16 European Union member states which have adopted the Euro currency as their sole legal tender Source: S&P Capital IQ & Bloomberg; % change YoY


U.S. International Trade / Domestic US Industrial Production

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

110

120

130

140

90

100 Inde

x, 1

00 e

qual

to 1

997

Is this the start of a new trend?

Globalization Has Driven Demand, But Is There A Pause? If so, what are its implications for passenger and cargo demand growth?

Source: U.S. Census Bureau, Bureau of Economic Analysis


WTI – Historical Prices & Futures

Historical Swap Rate Curve

$/bbl

%

2.622.52

2.56

2.46

1.761.28

3.463.273.203.032.792.22

2.99

2.562.29

2.011.44

0.950.0

1.0

2.0

3.0

4.0

30 Year

3.60

20 Year

2.81

15 Year 14 Year 13 Year 12 Year

2.36

11 Year 10 Year

2.25

9 Year 8 Year 7 Year

2.03

6 Year 5 Year

1.61

4 Year 3 Year

0.54

0.82

2 Year 1 Year

66635954

20

40

60

80

100

120

2018 2017 2016 2015 2014 2013 2012 2011

Lower Oil/ Low Interest Rates Have Benefited Industry Sheltering our industry – airlines, OEMs and lessors – from what could have been a more difficult period – but for how long will these dual trends continue?

Source: Capital lQ

Mar 2014 Feb 2015

Mar 2015


Global Industry Profitability Aggregate net income, US$ Billions

2010-2015E Aggregate Net Income US$ Billions

-48

62

24

2010-2015E 2000-2009

2015E

2010-2014

27

24

5

5

2

13

4

5

2

1

Europe

M. East

N. Amer

APAC

0 Africa

Lat. Am.

2010-2014

2015E

Over 75% of Profits Earned by North Am, Asia/Pac Carriers Profit performance is subpar in Europe, ME and Latin America, but 2015 outlook for Asia /Pacific is troubling


45% 46% 47%

+2 pts

2014 2004 2009

+22 pts

2009 2004 2014

19% 31% 40%

+9 pts

2004 2009 2014

19% 27% 32%

+5 pts

2004 2014 2009

ASM share Top Four

(%)

North America Europe Asia

32% 30% 27%

2014

-5 pts

2009 2004

4% 13% 19%

2004

+6 pts

2014 2009

LCC Share ASMs (%)

Strong consolidation

Modest LCC growth

Weak consolidation

Strong LCC growth

No consolidation

Modest LCC growth

Consolidation, Post-Restructuring Boosted NA Carriers ~79% controlled by Top Four, with LCC penetration slowing vs. European market, Asia/ Pacific also has troubling signs

57% 62% 79%


Seasonally Adjusted Index of Monthly ASMs by Airline Registration Region

2015 2012 2008 2010

100

2014

90

80

140

130

110

120

150

2009 2013 2011

Inde

x, 1

00 e

qual

to 2

008

Capacity Discipline: Key Driver For NA Carriers’ Profits Asia’s ASM growth is largely tied to GDP growth, which is not true for Europe

Source: Diio Mi, Seabury analysis

46% Asia

23% Europe

5% North America


Growth in Real GDP and ASMs by Region CAGR %

North America Europe Asia

2.0% 1.0%

2.2% 1.6%

2004-08 2008-14

GDP growth

ASM growth

2.9%

0.3%

7.3%

2.8%

2004-08 2008-14

5.2%

3.6%

6.8% 6.5%

2008-14 2004-08

Europe/Asia Look Very Exposed To Excess Capacity Europe, and to a lesser extent Asia, look very exposed to a correction


Global Consolidation Is Happening At Faster Pace Capacity discipline globally is being driven by top American & European airlines through JVs – but at the expense of medium/small airlines


North Atlantic Asia - Europe North Pacific Global alliance ASK share JV ASK share 75%

85% 34%* 82%

32% 92%

JVs Are Supplanting Global Alliances In Importance With the North Atlantic JVs setting the “template” for future global consolidation of capacity

Access to the USA for many European airlines has now come via interline/SPA agreements instead of codeshare

Source: IATA Pax IS 12 months to March 2015 *Excludes Middle East JV’s


Western NB Production

Aircraft count

Rec

essi

on, o

il sp

ike,

& in

flatio

n

Rec

essi

on a

nd o

il cr

isis

Gul

f war

& re

cess

ion

Tech

bub

ble,

9/1

1

0

200

400

600

800

1000

1200

2010 2015 2005 2000 1995 1980 1985 1990 1975 1970

Rec

essi

on

3 yrs 7 yrs

Retirements

13 yrs and counting

New Aircraft Delivery Cycle: 13 Years And Counting The confluence of slow down in global GDP growth and consolidation of capacity will have an impact ultimately on the strength of OEMs’ substantial order caches

Narrowbody production is at an all-time high and rates are headed higher


Factory Built Freighter & Belly1 Capacity on Firm Order Thousand tonnes

4

6

0

2

8

10

1998 2000 1994 1996 1990 1992 2002 2004 2006 2018 2016 2010 2014 2012 2008

Freighter

Passenger

2015-2019: 78% of capacity on

order is belly

Pax Aircraft Deliveries Driving Cargo Capacity Limiting the demand for new build freighters

1Widebody passenger aircraft (incl. mixed passenger/freight combinations); only firm OEM orders considered; years represent build years Source: Ascend Fleet Database (31 December 2014); Seabury analysis

Dedicated freighter growth most likely to arise from Asian express-type airlines


2009 2008 2007

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 2016 2015 2014 2013 2012 2011 2010

United States Treasury Constant Maturity - 10 Year

Germany Government Debt - 10 Year

Fed Funds Effective Overnight Rate

Inte

rest

Rat

es (%

)

Forecast

When Rates Rise, Financing Costs & WACC Will Go Up Given tenuous nature of global GDP recovery, US interest rates may not rise very fast, but over time rates will climb – which we all need to prepare for

Source: Bloomberg


0

1

2

3

4

5

6

7

8

9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Return on capital (ROIC)

Airlines’ Avg. Cost of capital (WACC)

Industry’s ROIC Has Been Climbing For Last 13 Years Through hard work of restructuring “problem airlines” and driving towards “best practices” – but more needs to be done to secure sustained ROIC performance

Source: IATA


Network / FPS Software Upgrades Fleet / Product Upgrades

Cost Containment (labor, Mx, systems)

Pricing / Product Strategies

Increase in Profit

& ROIC

Best Practices Drive Higher Industry ROIC Performance Adoption of best practices is spotty in our experience across some 100 airline clients


Non-Judicial Restructurings Judicial Restructurings

Competitive costs Aligned to demand Reduced capacity

Match fleet obligations to capacity

Eliminate other costs

Labour

Network

Capacity

Fleet

Other Costs

Airlines That Restructured Are Driving Global Profitability Restructuring “problem airlines” with “permanent fixes” has allowed these airlines to earn the lion’s share of the industry’s global profits since 2008


 Lease obligations  Debt restructuring

Savings Lease exposure

Restructured obligations

Rents

Return cond. TV*

0

20

40

2016 H2.2013 2015 2014

Forgiveness

ER Case Study #1: Air Nostrum (2013-2014) Air Nostrum was close to liquidation – Bombardier, AN’s largest creditor, approached Seabury to design and implement a comprehensive turnaround plan

 Results: §  Consensual restructuring of liabilities

working closely with BBD and lessors

§  Saved over €100M thereby paving the way to secure new capital

§  Secured €26 million of new equity capital

§  Leading to AN securing a new long-term regional code-share with Iberia Airlines

§  Thereby avoiding liquidation which would have been catastrophic for lessors/BBD


 Results: §  We immediately crafted plan to cut ~30% of routes & capacity

that produced ~100% of losses

§  Optimized fleet, shed two fleet types and consensually restructured the aircraft portfolio

§  Achieved material labour concessions ~ 40% reduction in labour costs

§  Removed more than £700m of liabilities (principally unfunded pension plan)

§  Slashed costs by £200M p.a. driving 14-16% profit increase

§  Secured £125M of capital and liquidity facilities

§  Thereby avoiding catastrophic losses for lessors and banks Revenue initiatives

Network FY14 PBT

Labour Maintenance

Other FY16 PBT

 Turnaround plan bridge FY14-16

ER Case Study #2: Monarch Airlines Group (2014) Monarch had less than eight weeks of cash in late July 2014 – Seabury was retained to structure and implement a comprehensive turnaround plan and raised £125 million of new capital


Airline managements must adopt best practices to drive more rational decision-making

Leading to stronger ROIC performance, higher market capitalization ratios = better talent

OEMs need to manage production cycles and insist on airlines adopting “best practices” driving higher ROICs

Resulting in fewer “boom/bust cycles”, stronger aircraft residual values & ROIC performance

Lessors / banks should be “activist” in requiring airlines to adopt best practices and higher ROICs through credit process

Leading to better portfolio quality, lower WACC, stronger aircraft residual values and higher market capitalizations

Advisors should routinely deliver to clients 15-50x their fees in NPV improvements – and their references should be carefully scrutinized Driving higher ROICs for all players = better talent

A Competitive World Means Faster Change/Great Collaboration Required

March 9, 2015 Keynote Address John E. Luth · 2015 Average 7.4x 2015 Average 10.8x 2010 Average:...

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