Risk Management for Airlines – Financial Risks

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Aspects of Aircraft Leasing and Financing (LAW 2013) – London City Airport, UK - June 27, 2015

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  • Nicely explained facts about risk managments.Studying the Aircraft Leasing market from various sources like http://www.decisiondatabases.com/ip/195-aircraft-leasing-market-research-report , it can be inferred that the growing Airlines industry will benefit the aircaft leasing companies like Aercap, AALFC and others in a big way.
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Risk Management for Airlines – Financial Risks

  1. 1. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 0© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 ‘JOIN THE DEBATE’ Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK RISK MANAGEMENT FOR AIRLINES FINANCIAL RISKS: FASTEN YOUR SEATBELTS June 2015        We generate 1Blu eHorizon® out of the Rough... www.1bluehorizon.com
  2. 2. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 1© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 ‘Air transportation is a fast growing sector of most emerging economy…’ ‘The global air traffic is expected to double every 15 years…’ D i l e m m a s O 2014 marked the hundredth year of regular scheduled airline operations. In the last century, we will have served over 65 billion passengers and opened up new forms of family connections, friendship and business… O The air transport industry supports 58.1 million jobs and US$2.4 trillion in global gross domestic product (GDP) according to a recent study… O Of the 58.1 million jobs, 8.7 million are within the sector itself, working for airlines, at airports, in air traffic management organizations and for the makers of aircraft and engines... O international tourists travelling by air, over 35 million tourism jobs rely on air transport... O Based on current rates of aviation growth, the industry is set to support 103 million jobs and $5.8 trillion in GDP in 20 years, while security and risk management top the list of challenge… TODAY AIM IS TO ENHANCE OUR KNOWLEDGE Financial Risks and how to mitigate it within the Airline Industry… Source: © 1BlueHorizon Group Research & Analysis 2015
  3. 3. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 2© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Source: © 1BlueHorizon Group Research & Analysis 2015 STATE OF THE AEROSPACE INDUSTRY O The future of the aerospace industry appears bright and will be characterized by strong aircraft demand for the foreseeable future... O The worldwide commercial passenger and cargo aircraft fleet, as well as the annual number of passengers, are forecast to double over the next two decades… O Over the next 20 years passenger and freight traffic are expected to grow at an average annual growth rate of 4.6 % and 4.4 % respectively, contributing to increases in aircraft production… Airbus & Boeing’ Global Market Forecast for 2015- 2034 projects a demand for approximately 35,000 new passenger and freighter aircraft at a value of around US$ 4.9 trillion… O The need for improvements in fuel burning, lower maintenance costs, and reduced noise and emissions will drive aircraft manufacturers to optimize further aircraft design solutions,… and convince operators to purchase those new aircraft with an option for the aircraft retirement. As per today Corporate Social Responsibility, civil aircraft graveyard are not anymore an option… O Current orders for new aircraft are at unprecedented levels, driven by the replacement of ageing fleets in North America, demand for fuel efficient aircraft and market growth in the emerging markets. Airbus Group and Boeing had a combined order book of over 12,400 aircraft at of the end of 2015, which represents an estimated nine years of current annual production… O In any case, increased demand for air travel requires not only additional aircraft and infrastructure investment to support the operation of those aircraft, including airport expansions and efficiency- based improvements to air traffic control (ATC). This leads to increased demand from the aerospace industry for financing with associated risks…
  4. 4. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 3© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Source: 1BlueHorizon Group | Research & Analysis 2015 FORECASTING THE AVIATION MARKET As any economist will tell you, forecasting is difficult especially if it is about the future. With both the air traffic cycle and the financial cycle experiencing a very strong “high”, the technology cycle could be a potential risk factor for many investors and/or financiers with the imminent generation-change virtually across the entire spectrum of commercial jets. In the regional jet market, the CRJ’s, ERJ’s and E-Jets will be replaced by a new generation of MRJ’s, E2’s and CSeries aircraft. In the mainstream single aisle segment, the current A320 and 737 will be replaced by their more efficient successors, the NEO and MAX. In the twin aisle segment, both the 787 and A350-900 are alternatives to the 767, A330 and 777-200, with the A330NEO not too far behind. Although still a few years away, the A350-1000 and 777X for the majority of operators seem excellent alternatives for the 777-300ER and even for the big twin-aisle “quads”, such as the 747 and A380.  As any economist will tell you, forecasting is difficult especially if it is about the future... 1BHG® generally looks at three different “macro” level cycles plus a “micro” cycle to analyze transactions, as well as the state of the air-finance market : 1. The first macro cycle we look at is the state of the air transport market (IATA traffic reports, macro- economic indicators as well as relevant cost-indicators, such as the price of jet-fuel); 2. The second macro cycle is what we call the technology cycle. For how long will the aircraft to be financed or invested in meet the highest operational standards, such as fuel efficiency, environmental impact or a payload-range performance that is in line with today’s airline requirements? 3. The third macro cycle that is often overlooked is the financial cycle. What is the cost of capital, interest rates and how balanced are demand and supply of different sources of liquidity; 4. The fourth cycle, the “micro”-level aircraft maintenance cycle, is extremely relevant for individual deals, especially involving mid-life aircraft or part-out projects.
  5. 5. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 4© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Under a direct purchase arrangement the airline purchases the plane direct from the manufacturer or vendor, using a secured mortgage loan or structured finance lease. The amount of the advance for the aircraft can vary up to 90% depending on the airline and its available capital. These loans are generally structured with a term up to 12 years with mortgage style amortization and either fixed or floating interest rates. It’s quite common for several lenders to work in a syndicate to provide larger loan packages.  There are several advantages and disadvantages with direct purchase of an aircraft, they include: Main Advantages:  Airline builds up equity in the aircraft as it pays down the mortgage or finance lease  The airline is the owner of the aircraft and so can modify it to its own exact requirements  As the owner of the aircraft the airline is able to gain significant taxation benefits in most countries Main Disadvantages:  The is subject to residual value risk at the end of the term  Less flexible method of ownership when compared to an operating lease  Heavily weighs down a company’s balance sheet which may affect other banking covenants Source: 1BlueHorizon Group | Research FINANCING THROUGH DIRECT PURCHASE… Obviously, the most common methods of financing the purchase of an aircraft are through Direct Purchase or through an Operating Lease
  6. 6. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 5© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  When acquiring an aircraft on an operating lease the airline signs a contract which allows it use of the aircraft for a specified period, for a set specified payment. This payment is known the 'rental'. Payment of this rental grants the airline the use of the aircraft, not the ownership. The entity that leases the aircraft to the airline is the owner of the unit retains title to it after purchasing it from the manufacturer. Leases are usually put in place for shorter terms than a finance contract, generally 3-7 years for narrow body aircraft and possibly longer for wide body units. At the end of the lease the airline simply returns the aircraft to the owner or can make an offer to purchase it (also lease purchase agreement).  In most cases the airline will be required to provide 3 months rental as a security deposit, which is returned to the airline once the lease is complete, provided the aircraft is returned in proper order. Monthly rental costs vary depending on market demand for aircraft though average approximately 1% of the new purchase cost of the unit. Main Advantages:  Reduction in initial capital requirements  Residual value risk is eliminated as it stays with the owner of the aircraft  The liability stays off balance sheet, having less impact of banking restrictions Main Disadvantages:  All equity built up in the unit is retained by the Lessee owner  Generally smaller tax advantages are available  Owner of the aircraft may impose onerous restrictions on its use … OR FINANCING THROUGH AN OPERATING LEASE Obviously, the most common methods of financing the purchase of an aircraft are through Direct Purchase or through an Operating Lease (Cont’d) Source: 1BlueHorizon Group | Research
  7. 7. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 6© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  The general requirements to finance an aircraft include your companies last 3 years accountant prepared financials, evidence of capital and detailed business profile. If you’re attempting to start an airline the most important item you require is a fully detailed business plan and corresponding financial model. Without this you’re business won’t get off the ground.  As with any major financial decision the choice to lease or finance an aircraft should be made with the help of your professional accounting adviser. Once you've decided on the best option for your business situation contact an experienced, competent aircraft finance broker that can assist you further. Financiers will not only focus as mentioned above fully detailed business plan and corresponding financial model, they will conduct a full Risk Management Assessment of the airline (new venture or not) with a particular attention on the financial risks… What are we talking about? – ‘Fasten your seatbelts…’ RISK MANAGEMENT ASSESSMENT - WHAT FOR? For sure, it is too late to consider Risk management when you require aircraft funding, finance for airline start-up or airline expansion Source: 1BlueHorizon Group | Research
  8. 8. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 7© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Islamic finance is broadly perceived as a way of managing money by taking into account Islamic religious requirements – Namely the Shariah. Shariah generally refers to the laws derived from the Qur’an and the Sunnah and provides guidance to Muslims in the way that they conduct themselves in their daily lives.  One of the most important tenets of Islamic finance is the prohibition of ’riba’, which in simple terms, means ‘extra’ or ‘excess’. This prohibition against excesses has been interpreted by Islamic scholars to mean a prohibition against the charging or receipt of any interest. As a result, interest is banned in all types of Islamic transactions.  Islamic Aircraft Financing in Practice – The Ijarah  An Ijarah refers to an arrangement where the owner/lessor enters into an agreement to transfer the right to use a certain asset to another person in consideration for prescribed rental payments. An Ijarah contract is equivalent to a conventional lease agreement and is therefore a popular choice in Islamic aircraft financing.  Some of the basic principles in an Ijarah contract are, amongst others, that the asset has to be of valuable use, that all risk of ownership is borne by the lessor and all liabilities arising from the use of the asset is borne by the lessee. Source: © 1BlueHorizon Group Research & Analysis ABOUT ISLAMIC AIRCRAFT FINANCING Before to talk about Risks, a quick appendix for people involved in the Middle East with Islamic Aircraft Financing
  9. 9. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 8© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 3. SPV 1 will then enter into an Ijarah arrangement with the airline in which SPV 1 will execute a lease agreement with the airline to lease back the aircraft to the airline and the airline will pay lease rentals to SPV 1. The lease rentals will be equivalent to the principal and interest on the ‘loan’ obtained by the airline from Islamic financiers to purchase the aircraft. 4. In order to finance the purchase of the beneficial interest in the aircraft, SPV 1 can enter into a Mudharabah arrangement with another special purpose vehicle ("SPV 2"). Under the Mudharabah arrangement, SPV 1 and SPV 2 can agree to share the profits derived from the purchase and leaseback of the aircraft at certain agreed ratios. Essentially, the profits to be shared will be the “interest” portion of the “loan” extended to the airline from the Islamic financiers to purchase the aircraft. 5. SPV 2 will then enter into an investment agency agreement with the Islamic financiers wherein the Islamic financiers will appoint SPV 2 as the investment agent in the Mudharabah arrangement. SPV 1 SPV 2 Islamic Financiers Mudharabah Arrangement Dividends Investment Agency Agreement Dividends Airline Manufacturer Lease rentals Sell That illustration of the aircraft transaction may be described as follows: 1. The airline will normally enter into a sale and purchase agreement with the manufacturer for the purchase of a new aircraft at an agreed purchase price (the "Purchase Price"). 2. The airline will then enter into a lessor purchase agreement with a special purpose vehicle for the purposes of the financing structure (‘SPV 1’). Under such lessor purchase agreement, the airline will transfer the beneficial interest in the aircraft to SPV 1 for an amount which is equivalent to the Purchase Price. Source: © 1BlueHorizon Group Research ABOUT ISLAMIC AIRCRAFT FINANCING Shariah principles are the cornerstone of Islamic finance practices and using Islamic finance techniques for aircraft is a natural move
  10. 10. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 9© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Business Risk  Financial Risk – market risk – credit risk – liquidity risk  Operational Risk  Legal Risk RISK IS THE POTENTIAL OF LOSING VALUE As per it definition, Risk is the potential of losing something of value, weighed against the potential to gain something of value Source: 1BlueHorizon Group | Research
  11. 11. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 10© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Airlines are doing everything to reduce costs  Some of the risks stem from complex industry structure  Necessary to reduce the risk  Much of this risk, however, could be identified and managed  Effective strategies, adopted by other sectors  In general, the financial markets do not trust airlines RISK MANAGEMENT IN THE AIRLINE INDUSTRY Risk management in the airline: Good or Bad risk management is NOT the same as profits and losses Source: 1BlueHorizon Group | Research
  12. 12. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 11© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Aviation encompasses a full spectrum of risk factors: International airline is exposed general entrepreneurial risks and industry-specific risks.  Key areas of exposure are capacity and utilization risks, strategy-related risks, political risks, operational risks, procurement risks, labor agreement risks, financial and treasury management risks. Four categories: - Hazard, - Strategic, - Financial, and - Operational RISK MANAGEMENT IN THE AIRLINE INDUSTRY For the last decade, failure to manage the risks within the airline industry resulted in the evaporation of $46 billion US$ in shareholder value Source: 1BlueHorizon Group | Research
  13. 13. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 12© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 EXTERNALLY VERSUS INTERNALLY DRIVEN RISK Two main category of Risks: those Externally driven and those Internally
  14. 14. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 13© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Hazard events safety, liability, and war were the least  Strategic and financial risks were much more prevalent Strategic Financial Operational Hazard 49% 22% 18% 11% STRATEGIC RISKS ARE BUSINESS CHOICES Strategic risks are defined by business choices
  15. 15. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 14© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  This is an overall approach to reduce the risk impact severity and/or probability of occurrence. It could affect a number of risks and include, for example, increasing staffing or reducing scope. Identify actions and steps needed to implement the mitigation strategy.  attracts customers in good times and in bad because it is simple operationally and, therefore, cost effective…  use of secondary airports insulates from competitive pressure…  low debt levels make the company less vulnerable to interest rate fluctuations…  profit sharing and fun culture reduce the chance of labor difficulties… Source: © 1BlueHorizon Group Research & Analysis HIGH-LEVEL MITIGATION STRATEGY Many risks can be lessened through the selection of the business design, Southwest Airlines has designed a business to overcome major risks
  16. 16. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 15© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Financial risks involve:  the management of capital and cash  including exogenous factors  affect the predictability of revenue and cash  Financial solutions may include the design of financial transactions:  structured finance  derivatives  insurance  contingent financing  debt equity offerings Source: © 1BlueHorizon Group Research & Analysis UNDERSTANDING FINANCIAL RISKS Airlines are continuing to develop risk management strategies, but a better understanding of the financial implications of a crisis is necessary
  17. 17. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 16© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Operational risks arise from the more tactical aspects:  crew scheduling,  accounting and information systems,  e-commerce activities.  Operational risks can be mitigated through organizational solutions:  process redesign  organization structural changes  improved communication  contingency planning  performance measurement and reward systems  capital allocation and pricing Source: © 1BlueHorizon Group Research & Analysis UNDERSTANDING OPERATIONAL RISKS Kay Operational Risks have also to be very carefully considered even they are not inherent in financial, systematic or market-wide risk
  18. 18. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 17© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Mitigating strategic risk:  Lufthansa’s diversification in 1994 by creating four companies (subsidiaries)  Lufthansa Technique  Lufthansa Cargo  Lufthansa Service  Lufthansa Systems.  Revenue growth has been highest 70 percent in 1996  Not all of the divisions have been successful.  Swissair known as a ‘flying bank’ due to its financial stability pursued a similar strategy but they couldn't succeed (October 2001). RISKS MITIGATION THROUGH DIVERSIFICATION To mitigate Risks, in the nineties the airlines explore diversification into non-flying businesses - successful for a period of time Source: © 1BlueHorizon Group Research & Analysis
  19. 19. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 18© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  During the 2001 crisis following the September 11 attacks:  low-cost airline Ryanair an order for 100 Boeing 737s with 50 options, during a time when most airlines are deferring orders  They were able to negotiate a low unit price.  During the Asian financial crisis:  Singapore Airlines upgrades to their onboard product, for entrenching their leadership position during the later economic upturn. RISKS MITIGATION THROUGH CASH MANAGEMENT To mitigate Risks, some other airlines have contained strategic risk through aggressive cash management Source: © 1BlueHorizon Group Research & Analysis
  20. 20. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 19© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Source: BMI Freight Transport Report 2015, 1BlueHorizon Group Analysis RISKS MITIGATION BY HEDGING JET FUEL One of the main concern is to mitigate Risks related to jet fuel by hedging it, the largest portion of airlines’ operating expenses 85 80 114 128127 80 85 90 95 100 105 110 115 120 125 130 2010 2011 2012 2013 2014 2015 2016 119 92 Jet Fuel Price ?  Three main components - aircraft ownership, fuel and maintenance - account for more than half of an airline’s operating expenses. While they are not entirely controllable, it is essential to factor them in the risk management...  Airlines have tried to pass on fuel price increases to consumers, but unless all airlines do this simultaneously, those that did it were at a competitive disadvantage  To minimize the impact of fuel price increases, airlines may cancel low-capacity routes, consolidate routes, and use one- engine taxiing at airports.  Proactively, most airlines engage in financial hedging to protect against fuel cost increases, and may buy newer planes and engines that are more fuel-efficient for a particular type of service.  Fuel consumption of aircraft varies widely: an Airbus 319 that carries 122 may burn 758 gallons of fuel per hour, while a Boeing 747-400 that carries 369 may burn 3,500 gallons per hour. Because of high fuel costs, newer planes and engines have been designed to be as efficient as possible for a particular type of service.  However, jet fuel prices are expected to stabilize for the coming at around USD 85/bbl and will thus relieve further airlines from increasing cost pressures (low oil prices are good news for airlines!)
  21. 21. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 20© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Source: © 1BlueHorizon Group | Operating Costs Framework 2015, *Research on Norwegian Air Shuttle ASA, trading as Norwegian, the third largest low-cost carrier in Europe Labour Fuel Aircraft Ownership Aircraft Maintenance Other 30.3 % 31.6 % 21.7 % 9.5 % 6.9 % ‘Modern aircraft are somewhat more fuel efficient, but they still suck jet fuel like a Hoover sucks dirt…’ O As per 1BlueHorizon Group Analysis, the cost of flying a B787-9 Dreamliner from New York to London is roughly $90,000 one way. That includes Fuel, Crew, Maintenance, Navigation and Landing fees, Ground Handling and Ownership or Lease costs — but not sales, marketing, distribution, back office, other overheads or profit margin. Taxes and non-fuel charges are passed directly to the passenger. O If that aircraft had 354 seats like the B787-9 and typical load factors — a measure of how full planes are — for low-cost airlines, a year-round average one-way airfare, including passenger ancillaries such as food and drink, would need to be about $340-$380 to earn a margin of about 4 per cent. O Seat mile costs, another standard industry measure, on the smaller B787-8 are slightly higher, requiring an estimate of about 5 per cent more revenue. O The Dreamliners each bring a 20 to 30 per cent fuel cost saving — close to $10m a year each — but the planes need to be put to work for up to 18 hours a day to make the operation viable. O With Norwegian pricing its transatlantic airfares out of London at around $450 return, compared with the $750 - $950 offered by rivals, the scale of its low-cost ambition is so daring many doubt it can pull it off. O Norwegian’s LCLH strategy to target the tourist market! Norwegian* making the Routes pay… OTHER RISKS MITIGATION TO CONSIDER It appear useful to keep in mind the pie chart that illustrates the operating costs of an aircraft or running an airline along an illustrative example
  22. 22. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 21© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  There is a natural balance in the foreign currency risk  Foreign currency sensitivity:  The sensitivity of any currency* against 10 % change in USD (similar for EURO and British Pound Sterling) exchange rates  Negative amount demonstrates the such currency in the net profit for the year RISKS MITIGATION WITH CURRENCY EXCHANGE The other one is to mitigate Risks related to the changes in the exchange rate and interest rate due to its operations based on USD$ Source: © 1BlueHorizon Group Research & Analysis
  23. 23. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 22© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  While many airlines were able to maintain profits in the face of price increases, more aggressive strategies could have been used to further improve results.  There is a large third-party market dedicated to the effort:  including banks  credit specialists  derivative markets and others  Hedging is a common way to manage the financial risk:  no airline input is more volatile than fuel  hedging is not a core competency, and  as long as competitors are not hedged, it will be a level playing field  When fuel prices rise dramatically, airlines cannot pass all of the cost on to their customers RISKS MITIGATION BUT STILL VULNERABLE Even Techniques to mitigate financial risks are the most advanced, if such tools are not further leveraged, earnings will continue to be vulnerable Source: © 1BlueHorizon Group Research & Analysis
  24. 24. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 23© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  In the new arrangement, a guarantor ‘insures’ the refunds to the bank, which then releases the cash in the escrow account Customers Bank Escrow Account Guarantor Airline Credit card payments Refunds Payments Refunds Guarantor provides financial guarantee to the bank Airline receives from the escrow account, a lump sum equal to the guarantee amount Funds released as customers use tickets RISKS MITIGATION INVOLVING GUARANTEES One of the other well established technique for financial risk management involves guarantees for credit card transactions Source: © 1BlueHorizon Group Research & Analysis
  25. 25. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 24© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  60% could have been avoided using the types of approaches discussed above.  15% could have been mitigated through traditional means such as insurance or financial derivatives.  20% events could have been mitigated by more consistent and in-depth customer analysis, combined with scenario planning and game theory exercises.  5% of the events could have been mitigated through improved merger integration planning and improved execution. Source: © 1BlueHorizon Group Research & Analysis, RISK MANAGEMENT TRENDS Over a broad risk events analyzed over a period of fifteen years (2000 – 2015), four main risk management trends emerged
  26. 26. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 25© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  The risk of interest of companies has two sources:  The sensitiveness of assets and the sensitiveness of debts to the interests.  If the companies want to protect themselves on natural ways from the risk of interests,  positive correlation with the changes of interest should prefer the floating interest debt and  negative correlation with the changes of interests should prefer the fixed interest debt.  Distribution of foreign money on the revenues and the expenses are care about:  If the cost is low, a part of financing can be done on EURO beside dominant money US Dollar in aircraft market  Well managed currency provide positive contribution with the matching distribution of revenues and expenses in the future cash flows. RISK MANAGEMENT VERSUS CRISIS MANAGEMENT Risk management is an ongoing process, not a one-time event and over the long- term, the only alternative to it is crisis management Source: © 1BlueHorizon Group Research & Analysis
  27. 27. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 26© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15  Airline management manages the risks through their decisions and applications:  A formally specified risk management model is still not enough implemented in particular in Africa, Middle East and Asia  Corporate risk management model have been aimed there  Enterprise Risk Management (ERM) also comprise financial, strategic risks which will give many advantage to any airline:  With formation of ERM it’s planning to  identify risk appetite  risk strategy and create risk transparency  to create a strong risk organization, to inculcate sharing risk culture and effective risk processes ENTERPRISE RISK MANAGEMENT (ERM) A formally specified risk management should be available not only for new established airlines but also for legacy carriers and business aviation Source: © 1BlueHorizon Group Research & Analysis
  28. 28. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 27© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 THANK YOU LEONARD FAVRE Partner, Group Managing Director 1BlueHorizon Group P.O. Box 34154 M +971 50 6164007 (U.A.E.) Abu Dhabi M +41 79 2080256 (Switzerland) United Arab Emirates leof007 leo@1bluehorizon.com www.1bluehorizon.com Abu Dhabi | Bern | London | Montreal | Moscow Any clarifications or questions regarding this document should be addressed to: RISK MANAGEMENT IS KEY TO FACE FINANCIERS Talking about Financial Risk Management helps also to understand why financiers are initially always skeptical to consider new airline venture… Aviation financing is a hot topic and likely to remain so over the coming years, as the demand for financing deliveries of new aircraft peaks at a time when long term financing becomes unattractive for some of the incumbent banks. There are a number of headwinds in the aircraft finance market which may make these orders more difficult to finance, and potentially, more expensive. Conversely, in tough economic times and a low interest rate environment attractive yields are harder to find. Investors are looking for hard assets with good returns.
  29. 29. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 28© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 PERSONAL NOTES © 1BlueHorizon Group®. All rights reserved. Without the prior written consent of 1BlueHorizon Group®, it is not permitted to modify this document or create derivative works. High quality global airline industry insight requires investment. Please do not cut & paste the document. Email info@1bluehorizon.com to get / buy additional rights. The information contained in this document has not been independently verified. It does not purport to be all-inclusive or to contain all the information that a prospective investor in securities of the Company may desire or require in deciding whether or not to offer to purchase such securities, or any type of legal transaction. The information and opinions contained in this presentation and any other are material discussed verbally are provided as at the date of this presentation and are subject to verification, completion and change without notice. In giving this presentation, neither the Company nor its advisers and/or agents undertakes any obligation to provide the recipient with access to any additional information or to update this presentation or any additional information or to correct any inaccuracies in any such information which may become apparent.
  30. 30. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 29© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15   SOLUTIONS PACK 1BHG® - 1BLUEHORIZON GROUP GENERATING THRUST TO PROPEL YOUR BUSINESS FURTHER... January 2014 We generate 1B l u e Horizon ® out of the Rough... www.1bluehorizon.com P R O P R I E TA R Y I N F O R M AT I O N   A s s e t M a n a g e m e n t | M a n a g e m e n t C o n s u l t i n g | I n t e r i m M a n a g e m e n t A b u D h a b i | B e r n | L o n d o n | M a d r i d | M o n t r e a l | P a r i s   
  31. 31. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 30© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Source: © 1BlueHorizon Group | Corporate profile P R O P R I E TA R Y I N F O R M AT I O N O 1BlueHorizon Group® (Asset Management | Management Consulting | Interim Management) was established in 2007 as a network of International aviation professionals, providing objective, independent, evidence-based analysis, advice and implementation support. We build on the experience of our team to help clients realize real and measurable results, quickly. Start-ups, restructuring, cost cutting, project management office, due-diligence or exploiting growth opportunities, we have experts who have faced these challenges. O Our highly competent seasoned senior professional have experience from leading companies in both management roles within their disciplines and as senior level professional advisors throughout diverse and complex locations in the Middle East, Europe, Africa, Asia Pacific and North America. O Privately owned, 1BlueHorizon Group® is independent of any financial institution, manufacturer, operator, insurance company or maintenance provider assuring our clients the benefit of truly unbiased, comprehensive and flexible provision of service. O 1BlueHorizon Group® is driving strategic innovation and believes in working closely with client staff to transfer our knowledge and experience, which means 1BHG® continues to deliver value long after the project is complete. O A unique blend of languages, age groups, cultural backgrounds and skills qualifies 1BlueHorizon Group® to provide turnkey solutions for any and all of your aviation requirements - worldwide. O 1BlueHorizon Group® range of services is continuously tailored and adapted to suit the geographical scope and needs of our customers. 1BlueHorizon Group® VALUE PROPOSITION The value proposition is simple — Going the Extra Mile by generating trust to propel your business further through a network of senior aviation executives…
  32. 32. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 31© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Interim Manage- mentAsset Management Management ConsultingThe Management Consulting (MC) Practice is our ability to strike a rapport working side by side with you and quickly understanding what you need when the margin of error is thin… Providing a highly targeted surgical strike (to-the-point) to improve de performance and going the extra mile… The Interim Management (IM) Practice help you by giving comfort and control with relevant seasoned advisors whenever and wherever they are needed… Whereas a management consultant provides an advisory role, Interim managers are directly responsible in delivering quick results, visible and measurable... The Asset Management (AM) Practice works individually with each of our clients to develop creative strategies and solutions for all types of aviation equipment, with innovative financing models.… Source: © 1BlueHorizon Group | Practices Performance improvement Quick results / Hands-on Turnkey solutions Knowledge transfer Ahead of Strategies… The 1BlueHorizon® difference P R O P R I E TA R Y I N F O R M AT I O N 1BHG® BUSINESS MODEL TO CREATE VALUE Our Business model is built around three dedicated Practices providing clients with turnkey solutions to maximize Value Creation - no matter how complex the issues are! VALUE GENERATION…
  33. 33. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 32© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 We work with clients who face major strategic discontinuities and risks to transform their business models. This transformation can take many different forms, such as a major repositioning of the customer value proposition, a move to a simpler, lower-cost operating model, or a fundamental change in the relationship with suppliers… mastering the changes required for short+long term success. P R O P R I E TA R Y I N F O R M AT I O N 1BlueHorizon Group® main focus is on the airline / aerospace industry, but not only… BUSINESS TRANSFORMATION 1BHG® provides an array of capabilities to support investment decision making, backed by deep expertise across diverse industry sectors. Our services include conducting industry market scans; designing acquisition and divestiture strategies; developing robust, analytically driven due diligence; assisting with transaction negotiations... MERGERS & ACQUISITIONS 1BHG® has developed a holistic approach to ensure companies capture the full value of transactions. This approach includes effective alignment and culture change, improving operations management and performance, customer retention, supplier/vendor integration, and intelligent rationalization, backed by detailed, step-by-step implementation support... POST-MERGERS INTEGRATION With more than a decade of experience in strategic, operational, and financial restructuring, 1BHG® offers a complete management solution and "one-stop-shop" approach to turning around companies. We act as a coordinator for restructuring processes, as an objective expert and a neutral third party who provides quantitatively supported advice to address the interests of management... RESTRUCTURING As corporate strategy consulting firms, 1BHG® helps enterprises develop, build, and operate strong businesses that deliver sustained shareholder value growth. We look at strategy from the "outside in" finding strategic insight through a robust understanding of current and future customer priorities. We harness thought leadership in the key areas below to deliver breakthrough recommendations to clients... GROWTH STRATEGY Attempts to improve performance are often incomplete and result in hard-won but ultimately unsustainable shifts in performance. 1BHG® takes a holistic perspective that recognizes and leverages the interconnectedness of your business design (starting with your assets, activities and organization) to deliver fundamental, sustainable improvement... PERFORMANCE IMPROVEMENT Effective marketing campaigns drive revenue, profit, and brand value. But the marketing landscape is becoming increasingly complex, with rapidly evolving customer needs and digital competencies are now essential to win but are risky to outsource. Businesses need new strategies to reach their target audiences... MARKETING Capacity-constrained industries, with high fixed costs and low marginal costs, require different techniques to maximize the value from their products and services. Should you discount the flight seat today or hope for a higher price tomorrow? Revenue or yield management uses analysis of demand and price sensitivity for different market segments to make optimal pricing decisions… REVENUE MANAGEMENT HIGHLIGHT ON CORE CAPABILITIES - WHAT WE DO Source: © 1BlueHorizon Group | What we do
  34. 34. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 33© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 Flydubai - CEO Mr. Ghaith Al GhaithGulf Air - Ex CEO Samer Majali H.E. Mohamed Hamad bin Azzan Al Mazrouei, Under Secretary of the Court of the Ruler's Representative in the WR (U.A.E.) Nesma Airlines (First domestic airline in KSA), Mr. Faisal S. Alturki, CEO His Highness Sheikh Ahmed Bin Saeed Al Maktoum, President of the Dubai Civil Aviation Authority, Chairman of Dubai Airports, Chairman & Chief Executive of Emirates Airline & Group P R O P R I E TA R Y I N F O R M AT I O N Note: A list of qualifications is made available separately 1BHG® IS PROUD TO HAVE THEM SATISFIED 1BlueHorizon Group® success is vested in our clients’ successes in various fields of the Aviation industry: Airliners, Airports, Aerospace, Authorities and Family Offices Minister Justin Kalumba Mwana-Ngongo - Ministry of Transport and Channels of Communication, Democratic Republic in Congo
  35. 35. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 34© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15 “1BlueHorizon Group is the only consulting firm that works successfully on all levels: Board level, middle management, implementation" “1BHG senior personnel come in with strong views but integrate perfectly in our teams" “1BHG has convinced us through it's excellent industry- and technology expertise" "The 1BHG team knows perfectly well how to push the necessary change" “1BHG guys are implementation - oriented and their cooperation with my people is very good " “1BHG Practice has very qualified people who really know a lot about our industry" "In each project step, we could clearly identify 1BHG's added value and improve the overall bottom line" P R O P R I E TA R Y I N F O R M AT I O N THE ONLY WAY TO DO GREAT WORK IS TO LOVE WHAT WE DO… A MILE OF RUNWAY WILL TAKE YOU ANYWHERE NO ONE HAS EVER COLLIDED WITH THE SKY Note: A list of qualifications is made available separately TESTIMONIALS – WHAT CUSTOMERS THINK
  36. 36. Aspects of Aircraft Leasing and Financing (LAW 2015) – London City Airport, UK 35© 2015 1BlueHorizon Group - www.1bluehorizon.com All rights reserved1BHG | Aeropodium Conference LAW London 26.06.15

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