Keynote Address John E. Luth Chairman & CEO
March 9, 2015
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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
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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: 8.5x 2015 Average 10.8x
2010 Average: 0.63x 2015 Average 0.82x
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
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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
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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
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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
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WTI – Historical Prices & Futures
Historical Swap Rate Curve
$/bbl
%
2.622.52
2.56
2.46
1.761.28
3.463.273.203.032.792.22
2.99
2.562.29
2.011.44
0.950.0
1.0
2.0
3.0
4.0
30 Year
3.60
20 Year
2.81
15 Year 14 Year 13 Year 12 Year
2.36
11 Year 10 Year
2.25
9 Year 8 Year 7 Year
2.03
6 Year 5 Year
1.61
4 Year 3 Year
0.54
0.82
2 Year 1 Year
66635954
20
40
60
80
100
120
2018 2017 2016 2015 2014 2013 2012 2011
Lower Oil/ Low Interest Rates Have Benefited Industry Sheltering our industry – airlines, OEMs and lessors – from what could have been a more difficult period – but for how long will these dual trends continue?
Source: Capital lQ
Mar 2014 Feb 2015
Mar 2015
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Global Industry Profitability Aggregate net income, US$ 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
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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%
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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