News and Perspectives from Embraer Sales Finance & Leasing

• ISSUE 1, 2013 •

• AIRCRAFT FINANCING IN CAPITAL MARKETS• FOCUS ON THE E175• NEW E-JETS CUSTOMERS

IN THIS ISSUE

VALUESVALUES

John SlatterySr. Vice PresidentHead of Sales Finance, Lessors and Asset Management

The Valueof SharingKnowledge

MORE E-JETS.MORE CUSTOMERS.Embraer added eleven new customers last year to its list of E-Jet operators. There are now 63 airlines from 43 countries that are flying or will soon take delivery of Embraer E-Jets.

The aircraft are joining the fleets of airlines in Myanmar, the Ukraine, Europe, Latin America and Central Asia. For the first time, a scheduled charter carrier, TUI Jetairfly of Belgium, has acquired E190s to access more nonstop and seasonal markets.

E-Jets have a particularly strong presence in the Latin America/Caribbean region where the aircraft account for one in every ten departures, or 14% of the fleets of domestic carriers. That number will grow as Conviasa of Venezuela, Embraer’s newest customer in South America, takes delivery of more E190s in 2013.

Leasing companies are playing an important role in financing aircraft for carriers in emerging markets who are not able to purchase new equipment or who prefer lease transactions.

The deepening sovereign crisis in Europe and the more stringent rules of Basel III made 2012 a diffi cult year for fi nancial markets that, in turn, reduced the liquidity element of aircraft fi nancing. In times like these, having good information is critical to making sound investment decisions.

Sharing knowledge is the cornerstone of our Embraer Investors Forum program, the fi rst of which was held in Singapore last year. Since then, we’ve hosted two more events around the world that have attracted over 250 senior industry executives.

The venues have allowed a rich exchange of perspectives on aircraft fi nancing requirements and opportunities from distinguished experts. As the host of these events, the focus has been on fi nancing Embraer E-Jets and what lies ahead as more aircraft are needed in both mature and emerging markets.

Over the next two years, the development of innovative fi nancing structures will be critical to meeting the demand for new aircraft. From plain vanilla operating leases to complex capital market structures, it’s essential that we keep on top of developments in the industry. That’s why we’re planning more of our popular forums this year to share the knowledge of experts so that you can make more informed decisions.

We’ll be announcing the 2013 dates and cities in the coming weeks for this year’s forums. I hope to meet you at one of our events.

The need for fi nancing aircraft is expected to grow substantially in the next few years not only as ageing jets are replaced but also as carriers acquire a sizable number of new airplanes in the 70 to 120-seat capacity segment, especially in the USA.

That demand will put even more pressure on fi nancing capabilities given the current environment. The shortage of US Dollar liquidity, the more stringent conditions associated with ECA funding imposed by the new ASU, the Eurozone and sovereign debt crises and new regulatory policies such as those of Basel III and the Dodd Frank Act are all affecting liquidity in the banking sector.

The European commercial banks, the main source of fi nancing for commercial aircraft for the past twenty years, are also facing severe liquidity constraints. Moreover, several major fi nancial institutions are leaving the aviation business while others continue to deleverage their balance sheets of aircraft assets.

A fraction of the demand for fi nancing was satisfi ed by Asian banks which tapped into the market in 2012 by offering debt solutions to airlines around the world. Local banks also fi nanced their domestic

THE LIQUIDITY CRUNCH

Values is produced by Embraer’s Finance team in São José dos Campos.

We welcome your comments and contributions. Please contact:

Vagner Proenca Ricardo

Lessors Market Strategy Manager

vagner.ricardo@embraer.com.br

TEL +55 (12) 3927 7744

Irish-based international aircraft lessor Aldus Aviation recently signed an agreement for 20 more E-Jets to supplement its current fleet of 21 E-Jets that it has leased to seven airlines. Régional, LOT Polish, Royal Jordanian, Flybe, Azul, AeroMexico and Virgin Australia are among the lessor’s E-Jet customers.

After purchasing a number of E-Jets from GECAS when it was established in 2008, Aldus has built a portfolio comprised exclusively of E-Jets. The number of aircraft has grown through Sale and Leaseback transactions that are supporting Embraer commercial customers around the world.

This new acquisition will give Aldus strategic access to more delivery slots and enhance its E-Jet offerings to prospective customers. The purchase agreement is for five E175s and 15 E190s for deliveries running out until the spring of 2017.

airlines and lessors have been increasing their participation, a trend that is expected to continue.

The liquidity crunch has meant that both airlines and lessors have turned to capital markets to fi nance their operations and aircraft acquisitions via both secured and unsecured bonds.

According to a North American investment bank, institutional demand for high quality assets in capital markets is growing rapidly. Transactions have been oversubscribed three to four times and compression in coupon values remains in line with the interest rate environment, all of which helps to increase the competitiveness of this source of fi nancing.

European bank executives still see a need for different fi nancing vehicles. The growing interest from capital markets is a welcome addition to the portfolio of fi nancing solutions and EETCs, widely used to fi nance US airlines, started appearing outside the USA in 2012.

North American airlines will be shopping for hundreds of new airplanes in the 70 to 100-seat category over the next two years, creating demand for fi nancing from a range of structures. Since capital markets tend to absorb more fi nance capacity than the banking industry, there should be good opportunities for investors.

ALDUS INCREASES ITS EXCLUSIVE E-JET PORTFOLIO

FINANCING IN CAPITAL MARKETS

Carriers in the coveted USA market have started confirming orders for new 70 to 80-seat equipment to replace their smaller 50-seat regional jets as pilot scope clauses are redefined. The E175 is ideally positioned to capture many of those orders from the major airlines over the next 18 months. There are more than 300 E-Jets flying with six North American customers.

For immediate delivery positions, the CRJ900 is the main competitor to the E175 although Mitsubishi’s MRJ is a contender for later deliveries. Embraer is continually investing in its family of E-Jets to ensure the aircraft remain as the leaders in the capacity segment. The recently-announced program of technical improvements will widen the performance and operating cost differences between the E175 and the CRJ900.

The E175 is optimized for the 76-seat configuration that the US carriers have identified. It presents a considerable cabin passenger advantage and a sizeable overhead bin volume in comparison to its main competitor. Field performance is superior and the aircraft is fly-by-wire.

The first package of improvements that lower fuel burn is already incorporated on the production line. A second package of modifications will generate significantly greater savings than the first package.

Other enhancements include an upgrade to the flight management system, the introduction of smart technology to improve approach and landing advisories, better aerodynamics, and reduced noise on several of the E-Jet models.

When most of the improvements are integrated by 2014, the E175 will have an appreciably lower cash operating cost compared to the CRJ900 resulting from a 4% fuel burn advantage and a 5% lower maintenance cost. The overall comparative cash operating cost savings will be 4% and a 250 nm range advantage will mean airlines can fly to more markets. Over ten years, that operating cost advantage is equivalent to US$2.0 million in present value.

As a financeable asset, the E175 is a member of Embraer’s family of four E-Jets that are in service with some 60 airlines around the world. More than 150 E175s are flying with airlines in North America, Europe, Japan, Brazil and the Middle East. Strong residual values have prompted 28 lessors to add E-Jets to their portfolios. Those lessors, collectively, own over 30% of the world E-Jets fleet.

EMBRAER 175SET TO TAKE A BIG SLICE OF AMERICAN PIE

The global success of Embraer E-Jets is noteworthy given the competitive landscape and is even more significant considering that until 2007 the aircraft were delivered without support from Brazil’s ECA. In fact, since the first E-Jet entered revenue service in 2004, only 18% of all purchase transactions have been made with ECA support.

ECA participation for E-Jets peaked during the 2009 world financial crisis however the aircraft continue to stand on their own. Twenty percent of E-Jet transactions had ECA backing in 2012. That number is consistent with the level of support for both Boeing and Airbus from their respective ECAs. Yet some of Embraer’s competitors rely a lot more on their ECAs, as much as 80%, a statistic that speaks volumes about the investment grade of the airplanes.

Compared to other aircraft in their category, average commercial market values for the E-Jets family have increased. For the 18 months ended June 2012, “Blue Book” values for new E-Jets from a sample of several aircraft appraisers are an average of 6% higher than published estimates in 2010. The E175 registered the highest increase, 7% more than its previous value.

Whether measured on operating performance, cash operating cost or attractiveness of financing an asset, the E175 is the ideal aircraft for the North American market.

Air Canada’s Sky Regional has a fleet of 15 E175s.