ICF Residual Value Model

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The ICF Residual Value Model

October 21, 2015 – New York, NY

Presented by:

Stuart RubinPrincipal ICF [email protected]


Today’s Objectives:

founded 2001, joined ICF in 2011

founded 1963, joined ICF in 2007May 2010–May 2014

Residual Value

Current Methodologies

ICF’s Approach to Residual Values

ICF’s Residual Value Model – Features


Residual Value


Aircraft Values Typically Decline with Age

Aircraft, like most physical assets, exhibit a depreciation profile whereby its current market value depreciates to an end of life residual value over time due to…

• Aging structures that require increasing maintenance spend

• Growing obsolescence resulting from new technologies and improvements in fuel efficiency

An aircraft reaches the end of its economic life when it can no longer generate a positive cash flow

• At this point, it is more economic to replace or scrap the aircraft, rather than to continue operating it

THE ICF RESIDUAL VALUE MODEL



What are the drivers of residual values?

Market drivers- Aircraft financing environment- Regulatory environment- Market penetration (market mass)- Strength of Secondary market

Aircraft performance also impacts residual values. These factors are:- Aircraft specification- Aircraft economics - Aircraft technology, and more importantly, proximity

to replacement technology


High Levels of Accuracy in Residual Value Forecasts is Key for Industry Stakeholders


Realized aircraft residual values determine the difference between profit and loss in aircraft ownership and financing transactions

For the investor, rigorous and accurate residual value forecasts ensure that…

• The correct price is paid for the aircraft

• Financing is obtained at the least cost in a liquid market

• Overall financing risk is minimized

• The opportunity is presented for upside returns

Successful investments require accurate forecasts of these future values



In 1997, some 737-300 residual value forecasts were bullish – Even though the 737NG was about to replace the 737 Classic

1997 737-300 YOM Residual Value Forecast (@ 2.0%)

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ Millions


1997 737-300 YOM Residual Value Forecast (@ 2.0%)

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Reality did not align with the expectations at the time

1997 RV Forecast

Actual CMVs

$ Millions


Two decades later, it is not clear many residual value forecasts have incorporated lessons that should have been learned


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737-800 Residual Value Forecast, 2015 Build (@ 2.0%)

Age in Years

1997 737-300 YOM Actual CMV

1997 737-300 YOM RV Forecast

2015 737-800 YOM RV Forecast

% of New CMV


Other disconnects exist in some of the residual value forecasting observed by ICF


737-600/CFM56-7B20 Residual Value Forecast (@ 2.0%)

$0

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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

2X CFM56-7B20Bare Engine RV Forecast

1X 1998 YOM737-600

RV ForecastWith the 737-600, the current and

future base values of two bare CFM56-7B20 engines are forecast to be higher than the

value of the whole aircraft

$ Millions



Some shortfalls are likely the result of utilizing traditional methodology to project aircraft residual values

Simply assign aircraft models into one of various “demand bands”, which in turn is associated with a statistical residual value curve

Each demand band is fixed, so the residual value forecast is solely dependent upon the forecaster’s qualitative assignment of the aircraft to a demand band

They are not necessarily adjusted to take into account the timing of the replacement cycle, nor do they consider the dynamics of the components that drive residual values


ICF’s Approach – A New Methodology


Unlike other models, ICF’s model accounts for the value behavior of an aircraft’s constituent components

ICF’S APPROACH

Schematic of Half-Life Aircraft and Engine Value Trends

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Depreciating assets,

typically over 25 years

Materially different value

between 5 and 25 year old

assets

Note:Half-life engines valued as standalone engines in the market; cost of installed engines purchased new frequently less than value of spare engine.

Age in Years

% of ValueAirframes

With maintenance, can

repeatedly restored to

like-new condition

No influence of engine age

on value

5 or 25 year old engine in

same maintenance status

can have the same value

Engines

Airframe

Aircraft

Engine


As a result, by considering the values of the constituent components, more precise residuals can be determined


Indicative Schematic of Aircraft Residual Values (Airframe vs. Engine)% of Original

Aircraft Value

Age in Years

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Engine share of total aircraft value increases over time

as airframe loses value

Maintenance share of total engine value increases over time as core value declines

Half-Life Airframe Value

Half-Life Engine Maintenance Values

Half-Life Engine Cores



Important contrasts can be drawn between ICF’s residual value model and more traditional approaches

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777-300ER Residual Value ForecastAircraft Half-Life CMV$ Millions

Age in Years

Aircraft Premium

Airframe Mx

Airframe Core

Engine Mx

Engine Core + Premium

“Traditional” 777-300ER RV Curve



ICF’s model easily allows one to evaluate aircraft in conditions other than half-life

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The difference in valued between a mature 777-300ER

in half-life and a full-life condition is over $12 million

777-300ER Residual Value ForecastAircraft Half-Life CMV

Aircraft Premium

Airframe Mx

Airframe Core

Engine Mx

Engine Core + Premium

“Traditional” 777-300ER RV Curve

$ Millions

Age in Years


Output of the ICF Residual Value Model permits a “look under the hood” of what is driving the overall aircraft value


Aircraft Spec Data

• Aircraft Type• Engine Type• Vintage

Engine Value Data

• Engine Core Value• Shop Visit Status Adj• LLP Status Adj• Engine Premium

Airframe Value Data

• AF Core Value• APU Core Value• AF Check Status Adj• LG Overhaul Status Adj

Final Value• Aircraft Premium• Half Life Base Value• Full Life Base Value

AIRCRAFT Engine APU VINTAGE Vin_Month Year Age EngCore ESVMx LLPMx EngPremium EngMx Engsubtotal AFCore Ccheck_Mx HeavyCheck_Mx LG_Mx APU_Mx TR_Mx AirframeMX AFSubTotal ACPremium EXP_HLBV FLBV

777-300ER GE90-115BL2 GTCP331-500 2015 6 2015 0 $14.1 $6.3 $3.2 $17.0 $9.5 $40.5 $8.4 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $11.7 $95.7 $160.7 $160.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2016 1 $13.5 $6.4 $3.2 $18.1 $9.6 $41.2 $7.6 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $10.9 $84.3 $145.1 $149.2

777-300ER GE90-115BL2 GTCP331-500 2015 6 2017 2 $13.0 $6.5 $3.2 $18.9 $9.7 $41.6 $6.8 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $10.0 $74.3 $130.7 $138.8

777-300ER GE90-115BL2 GTCP331-500 2015 6 2018 3 $12.5 $6.6 $3.2 $19.5 $9.8 $41.9 $5.9 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $9.2 $65.4 $119.5 $129.4

777-300ER GE90-115BL2 GTCP331-500 2015 6 2019 4 $12.1 $6.7 $3.2 $20.0 $9.9 $41.9 $5.1 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $8.3 $57.6 $109.9 $121.0

777-300ER GE90-115BL2 GTCP331-500 2015 6 2020 5 $11.6 $6.8 $3.2 $20.3 $10.0 $41.8 $4.2 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $7.5 $50.9 $101.7 $113.4

777-300ER GE90-115BL2 GTCP331-500 2015 6 2021 6 $11.2 $6.9 $3.2 $20.3 $10.1 $41.6 $3.4 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $6.6 $45.1 $94.5 $106.6

777-300ER GE90-115BL2 GTCP331-500 2015 6 2022 7 $10.7 $7.0 $3.2 $20.3 $10.2 $41.2 $2.5 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $5.8 $40.1 $87.9 $100.5

777-300ER GE90-115BL2 GTCP331-500 2015 6 2023 8 $10.3 $7.1 $3.2 $20.1 $10.3 $40.7 $2.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $5.6 $35.8 $82.7 $95.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2024 9 $9.9 $7.2 $2.7 $20.3 $9.9 $40.1 $2.1 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $5.4 $32.2 $77.9 $90.9

777-300ER GE90-115BL2 GTCP331-500 2015 6 2025 10 $9.6 $7.3 $2.0 $20.6 $9.3 $39.4 $1.9 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $5.2 $29.2 $73.8 $86.3

777-300ER GE90-115BL2 GTCP331-500 2015 6 2026 11 $9.2 $7.3 $1.4 $20.8 $8.7 $38.6 $1.7 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $5.0 $26.6 $70.2 $82.1

777-300ER GE90-115BL2 GTCP331-500 2015 6 2027 12 $8.9 $7.3 $1.3 $20.4 $8.6 $37.8 $1.5 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $4.8 $24.3 $66.9 $78.8

777-300ER GE90-115BL2 GTCP331-500 2015 6 2028 13 $8.5 $7.2 $1.3 $20.1 $8.4 $37.1 $1.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $4.6 $22.4 $64.0 $75.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2029 14 $8.2 $7.1 $1.2 $19.9 $8.3 $36.3 $1.1 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $4.4 $20.6 $61.3 $72.8

777-300ER GE90-115BL2 GTCP331-500 2015 6 2030 15 $7.9 $7.0 $1.1 $19.3 $8.1 $35.2 $0.9 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $4.2 $18.9 $58.3 $69.6

777-300ER GE90-115BL2 GTCP331-500 2015 6 2031 16 $7.6 $6.9 $1.0 $18.4 $7.9 $33.9 $0.7 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $4.0 $17.2 $55.0 $66.2

777-300ER GE90-115BL2 GTCP331-500 2015 6 2032 17 $7.3 $6.8 $1.0 $17.3 $7.7 $32.3 $0.5 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.8 $15.4 $51.4 $62.4

777-300ER GE90-115BL2 GTCP331-500 2015 6 2033 18 $7.0 $6.7 $0.9 $15.9 $7.6 $30.5 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.6 $13.4 $47.4 $58.2

777-300ER GE90-115BL2 GTCP331-500 2015 6 2034 19 $6.7 $6.6 $0.8 $14.3 $7.4 $28.4 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $11.1 $43.0 $53.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2035 20 $6.5 $6.5 $0.8 $12.8 $7.3 $26.5 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $8.5 $38.5 $49.0

777-300ER GE90-115BL2 GTCP331-500 2015 6 2036 21 $6.2 $6.4 $0.7 $11.4 $7.1 $24.7 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $5.3 $33.6 $43.9

777-300ER GE90-115BL2 GTCP331-500 2015 6 2037 22 $6.0 $6.3 $0.7 $10.1 $7.0 $23.1 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $1.7 $28.2 $38.5

777-300ER GE90-115BL2 GTCP331-500 2015 6 2038 23 $5.8 $6.2 $0.7 $8.8 $6.9 $21.5 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $25.0 $35.2

777-300ER GE90-115BL2 GTCP331-500 2015 6 2039 24 $5.6 $6.1 $0.7 $7.7 $6.8 $20.1 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $22.8 $32.9

777-300ER GE90-115BL2 GTCP331-500 2015 6 2040 25 $5.4 $6.0 $0.7 $6.7 $6.7 $18.7 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $20.8 $30.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2041 26 $5.1 $5.9 $0.7 $5.7 $6.6 $17.5 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $18.9 $28.8

777-300ER GE90-115BL2 GTCP331-500 2015 6 2042 27 $5.0 $5.8 $0.7 $4.8 $6.5 $16.3 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $17.2 $27.0

777-300ER GE90-115BL2 GTCP331-500 2015 6 2043 28 $4.8 $5.8 $0.7 $4.0 $6.5 $15.2 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $15.6 $25.3

777-300ER GE90-115BL2 GTCP331-500 2015 6 2044 29 $4.6 $5.7 $0.7 $3.2 $6.4 $14.2 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $14.2 $23.5

777-300ER GE90-115BL2 GTCP331-500 2015 6 2045 30 $4.4 $5.6 $0.7 $2.6 $6.3 $13.2 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $13.4 $22.1

777-300ER GE90-115BL2 GTCP331-500 2015 6 2046 31 $4.2 $5.5 $0.7 $1.9 $6.2 $12.4 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $12.7 $20.9

777-300ER GE90-115BL2 GTCP331-500 2015 6 2047 32 $4.1 $5.4 $0.7 $1.3 $6.1 $11.5 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $12.0 $19.7

777-300ER GE90-115BL2 GTCP331-500 2015 6 2048 33 $3.9 $5.3 $0.7 $0.8 $6.1 $10.8 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $11.4 $18.6

777-300ER GE90-115BL2 GTCP331-500 2015 6 2049 34 $3.8 $5.3 $0.7 $0.3 $6.0 $10.0 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $10.8 $17.6

777-300ER GE90-115BL2 GTCP331-500 2015 6 2050 35 $3.6 $5.2 $0.7 $0.0 $5.9 $9.4 $0.3 $0.2 $1.6 $0.8 $0.2 $0.4 $3.3 $3.5 $0.0 $10.3 $16.7


The ICF Residual Value Model accounts for the impact of OEM engine maintenance agreements


Since the ICF residual value model forecasts asset values on a major componentized level, it is possible to model the value impact of highly restrictive Original Equipment Manufacturer (“OEM”) engine maintenance agreements

• With a “top down” approach, the traditional residual value forecasts do not offer the same level of flexibility

By reducing the values of the engines to account for the lack of liquidity in the market for these assets a more accurate forecast of value can be generated

• This allows the aircraft owner to make more informed decisions in the face of OEM engine maintenance which have effectively closed the market to used engine material and thus have had a adverse impact on the market for used and parted out engines


The ICF Residual Value Model effectively accounts for the value penalty associated with first and last off the line aircraft


8

10

12

14

16

18

20

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

2 Years

Early build aircraft typically suffer from reduced performance and

efficiency as a result of being over weight – this results in lower

residual values

Economic Life (Years)

Representative Aircraft Economic Life

Economic Life WITH Shoulder

assumption Baseline economic Life assumption of 16 Years applies to 'Middle Year'

of production

Economic Life without Shoulder

assumption


The ICF Residual Value Model is capable of modeling the market dynamics associated with end-of-life challenges


As aircraft approach the end-of-life, engine and airframe maintenance value may not be fully valued by the market

• Especially true of engines, as operators build engines to specific cycle lives

Restrictive TCAs limit the ability of owners to extract value at the end of life

Last off the line aircraft will have a shorter economic life – the ICF Residual Value Model accounts for this impact


THE ICF RESIDUAL VALUE MODEL - DETAILS

ICF values each aircraft element independently and sources current data from four aviation practices

Data on the core values are gathered not only through ICF’s appraisal work but also broader engagements from all four ICF Aviation Practices

• Airframe core values are based on not only sales of whole airframes for part out but also derived from realized sales from actual teardowns

• Engine core values are based primarily on market intel from knowledgeable market sources

Maintenance cost and Life Limited Part (“LLP”) data is more transparent through the OEMs, although ICF also gathers third party data to guide our opinion of costs for airframe, landing gear and engine maintenance



Key Takeaways

The value behavior of the aircraft/airframe and engines are very different and are not accounted for in traditional residual value models

ICF has designed its aircraft residual value model to consider these various constituent components with precision

Consequently, it is capable of considering a number of important market dynamics not evaluated with more traditional methodologies, like:

• Impact of restrictive maintenance agreements on overall aircraft values

• Impact of reducing airframe/engine core values with more part-outs

• Impact of varying economic lives for aircraft produced early and late in the production cycle


About ICF


ICF is one of the world’s largest and most experienced aviation and aerospace consulting firms

Airports • Airlines • Aerospace & MRO • Aircraft

joined ICF in 2011

joined ICF in 2007

52 years in business (founded 1963)

80+ professional staff

− Dedicated exclusively to aviation and aerospace

− Blend of consulting professionals and experienced aviation executives

Specialized, focused expertise and proprietary knowledge

Broad functional capabilities

More than 10,000 private sector and public sector assignments

Backed by parent ICF International (2014 revenue: 1.05 billion USD)

Global presence –– offices around the world

New York • Boston • Ann Arbor • London • Singapore • Beijing

ABOUT ICF

joined ICF in 2012

http://www.ghkint.com/Home.aspx

http://www.ghkint.com/Home.aspx


ICF’s Aircraft Advisory & Management Practice is the leading advisor and provider of asset management services to the industry

ABOUT ICF

ICF has in-depth knowledge of the aircraft, engine, and parts financing and leasing sectors, and has advised managements, investors, and lenders on a significant number of industry opportunities and threats. ICF is a leading provider of due diligence services to investors with respect to discrete assets, portfolios, and platforms.

Led by three ISTAT-certified appraisers, ICF annually provide robust value and lease rate determinations and forecasts for $35 billion of aircraft, engines, spare parts inventories, simulators, operating leases, and other tangible and intangible assets.

ICF provides asset and lease management and technical services, ranging from assistance with risk analysis and lease contract negotiation to records management, lease compliance monitoring, annual inspections, maintenance cost forecasting, portfolio management, asset redelivery, and remarketing.

ICF provides end-to-end support to clients looking to buy, lease, and sell aircraft, covering the spectrum from corporate jet and turboprop aircraft to narrowbody and widebody commercial jet aircraft. ICF extensively supports selection, contract negotiations, due diligence, and technical services to ensure optimal outcomes.

ICF provides expert program management services for new and used aircraft. ICF’s services range from developing detailed specifications to sourcing and managing all BFE, and managingmodifications to support changes in operation or role, lease transitions, etc.

Strategic Investment

Advisory & Due Diligence

Clientele

Banks Bondholders Export credit agencies Insurance companies Investment banks Rating agencies

Established airlines Start-up airlines Corporate flight departments VVIPs

Airlines and Operators

Airlines Aircraft & Engine Lessors Aftermarket Traders Private Equity Firms Hedge Funds

Asset Owners and Equity Investors

Lenders, Creditors, and Related

Appraisals & Valuation

Aircraft Asset Management and Technical Services

Purchase, Lease, and Sale

Negotiation Support

Interior & Modification

Program Management

CapabilitiesAircraft


In addition to aviation, ICF International is one of the world’s leading policy management and technology consulting firms

Over 45 years experience – Founded 1969

Large, diversified consulting organization offering end-to-end management, technology, and policy services

Diverse client base:

• 63% government (U.S. federal, state, and local agencies; non-U.S.)

• 37% commercial

Global presence with more than 70 offices, headquartered in the Washington, DC, area

Publicly listed on NASDAQ* (“ICFI”) in 2006; mid-sized market cap

$1.05B Revenues

5,000+ Employees

ICFI NASDAQ

ICF Delivers Professional Services and Technology Solutions in Three Focus Areas

Energy, Environment,Transportation

Health, Social Programs, and Consumer/Financial

Public Safety and Defense

ABOUT ICF


Thank you!For questions regarding this presentation, please contact:

Stuart RubinPrincipal

9300 Lee HighwayFairfax, VA 22031

+1 (703) [email protected]

Date post:	14-Jan-2017
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ICF Residual Value Model

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