Constructing Strong Letters of Intent (LOI) China Aviation Summit

Constructing Strong Letters of Intent (LOI) China Aviation Summit 2012 April 26, 2012 – Beijing, China Presented By: Shannon Ackert Vice President, Commercial Operations Jackson Square Aviation

Agenda 1. LOI - Delivery Condition Perspective 2. LOI – Redelivery Condition Language 3. LOI – Maintenance Reserve Topics China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 2

LOI - Delivery Condition Perspective Delivery Condition – From Lessee’s Perspective Delivery Lessor Delivers Lessee Requires Aircraft with major maintenance events cleared for pre-defined intervals consistent with standard CCheck interval (i.e. 20 Mo / 6,000 FH / 3,000 FC). China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 3

LOI - Delivery Condition Perspective Delivery Condition – From Lessor’s Perspective Delivery Redelivery Lessee 1 Returns Lessor Requires Specify minimum return conditions below which lessee is obliged to perform mx before returning aircraft. China Aviation Summit 2012, Beijing, China - Lessee 2 Requires Specify minimum delivery conditions below which lessor is obliged to perform mx before delivering aircraft. April 26 th , 2012 Page 4

LOI - Redelivery Condition Language Redelivery Conditions LOI Delivery Conditions Aircraft Inspection & Documentation Review Aircraft Inspection & Documentation Review General Condition of Aircraft at Redelivery Check & Part Lives at Redelivery General Condition of Aircraft at Delivery Check and Part Lives At Delivery The status of Redelivery Conditions are generally used to establish LOI Delivery Conditions China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 5

LOI - Redelivery Condition Language Redelivery Conditions Aircraft Inspection & Documentation Review General Condition of Aircraft at Redelivery Check & Part Lives Therefore - Structuring Strong Redelivery Conditions is key to Constructing Strong LOIs China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 6

LOI - Redelivery Condition Language Aircraft Inspection & Documentation Review Redelivery check workscope review : 3-6 months prior to lease expiry Full documentation review : 1-3 months prior to lease expiry At redelivery check : Ability to observe functional & operational checks, and perform visual inspections. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 7

LOI - Redelivery Condition Language General Condition of Aircraft at Redelivery Trend Monitoring Data : EGT Margin and approximation of EGT Margin erosion rate Power Assurance Run: In accordance with OEM’s maintenance manual. Engine Borescope : A full hot & cold section videotape borescope in accordance with OEM’s maintenance manual. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 8

LOI - Redelivery Condition Language General Condition of Aircraft at Redelivery Thrust Reverser, Nacelles & Nose Cowlings : Detail external inspection for damage, delamination, corrosion in accordance with the OEM’s AMM & SRM Airframe Repairs : No temporary, timelimited or interim repairs. No external doublers unless recommended by OEM. All repairs per the SRM or per data supported by FAA/EASA. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 9

LOI - Redelivery Condition Language Check & Part Lives Airframe Engine APU Landing Gear While it is important to establish appropriate minimum performance intervals (i.e. FH, FC, Months), it is equally important to understand how to frame the redelivery conditions Components China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 10

LOI - Redelivery Condition Language Check & Part Lives - Airframe The Airframe shall be returned fresh out of Redelivery Check that would be due under: Option 1 OEM’s Current MPD OR Option 2 Lessee's Approved Maintenance Program China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 11

LOI - Redelivery Condition Language Check & Part Lives - Airframe Option 1 Simplifies transition given tasks are in phase with the OEM recommended intervals. Easier to bridge to another lessee’s mx program Option 2 If operator deviated from MPD, potentially can lead to a higher level of bridging work. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 12

LOI - Redelivery Condition Language Check & Part Lives - Airframe Airplane : 737 Airline Model A B Airframe Mx Schedule C D/SI 700 800 7,500 FH 8 Years 700 800 4,000 FH 10 Years Option 2 China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Delivery from Airline A mx program to Airline B can be expensive. One can minimize/avoid this by having Airline A return per the MPD. Page 13

LOI - Redelivery Condition Language Check & Part Lives - Airframe Example Airframe Redelivery Language The Airframe shall be returned to Lessor fresh out of the Redelivery Check that would be due and owing under the current MPD sufficient to clear the Aircraft for a period not less than 20 months, 6,000 Flight Hours and 3,000 Cycles. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 14

LOI - Redelivery Condition Language Check & Part Lives – Engines & APU At Redelivery, no individual Engine shall have: Option 1 OR Option 2 Operating time since last engine shop visit (TSLSV) Operating time remaining till next engine shop visit (TRTSV) China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 15

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 1) Pro Easier to administer; by quantifying minimum TSLSV there is a greater statistical likelihood of meeting contractual minimums. Con Can be difficult to predict how much time remaining exist on the engines. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 16

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 1) Example 1 – Consistent use of TSLSV Current Lessee Contractual TSLSV 6,000 FH Next Lessee Contractual TSLSV 6,000 FH Redelivery Lessee 1 6,000 FH TSLSV Delivery Lessor 6,000 FH TSLSV China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Lessee 2 6,000 FH TSLSV Page 17

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 1) Example 2 – Combining TSLSV & TRTSV Current Lessee Contractual TSLSV 6,000 FH Next Lessee Contractual TRTSV 6,000 FH Trend Data Time Remain 2,000 FH Redelivery Lessee 1 6,000 FH TSLSV Delivery Lessor 6,000 FH TSLSV China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Lessee 2 2,000 FH TRTSV Page 18

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 2) Pro Needs validation by trendmonitoring data , which is a better gauge to the overall health of the engine Con Trend-monitoring data can be subjective China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 19

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 2) Example 1 – Agreement on trend data Contractual Time Remaining 6,000 FH Avg EGTM & EGTM Erosion Rate 18 C & 3 C/1,000 FH Statistical Time Remain 6,000 FH [18/3 *1,000 FH] Redelivery Lessee 1 6,000 FH TR Delivery Lessor 6,000 FH TR China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Lessee 2 6,000 FH TR Page 20

LOI - Redelivery Condition Language Check & Part Lives – Engines (Option 2) Example 2 – Disagreement on trend data Contractual Time Remaining 6,000 FH Avg EGTM & EGTM Erosion Rate 18 C & 4 C/1,000 FH Statistical Time Remain 4,000 FH [18/4 *1,000 FH] Redelivery Lessee 1 6,000 FH TR Delivery Lessor 6,000 FH TR China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Lessee 2 4,000 FH TR Page 21

LOI - Maintenance Reserves Topics Factors Influencing Direct Maintenance Costs (DMC) Seek to Address these DMC factors in your LOIs Age / Maturity (Airframe & Engine) Operation (Airframe & Engine) Environment (Engine) Escalation China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 22

LOI - Maintenance Reserves Topics Airframe - Age Factor Aging 15 Years Maturity 6 – 15 Yrs Newness 6 Years Non Routine Routine Non Routine Non Routine Routine Routine A320 Airframe “SC Checks”: (a) US 11,480 per Month for the 4C/6Y SI. Following completion of the first 4C/6Y SI, this amount will be increased to US 12,800. (b) US 6,270 per Month for the 8C/12Y SI Following completion of the first 8C/12Y SI , this amount will be increased to US 7,000. China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 23

LOI - Maintenance Reserves Topics Engine - Age Factor 20,000 FH As Engine Ages Hardware Deterioration Rate Increases Higher Maintenance Costs 1st SV 16,000 FH 2nd SV Developing PR Rates for each Phase US 88/FH from delivery through first performance restoration US 130/FH as a mature engine following first performance restoration . China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 24

LOI - Maintenance Reserves Topics Engine - Operating Factor : Flight Leg Increasing Flight Leg Lowers EGT Deterioration Lowers EGT Deterioration Cost FH Cost //FH Increasing Flight Leg Greater Greater Flight Flight LegLeg Lower Lower DMC DMC Higher Time On-Wing and Lower Cost / FH Higher Time On-Wing FlightLeg Leg (Hours) (Hours) Flight For Each Operational Phase : Develop Flight Leg Severity Matrix Flight Leg 1.0 First-Run 145 Mature-Run 215 1.5 115 169 2.0 88 130 China Aviation Summit 2012, Beijing, China - 2.5 86 128 April 26 th , 2012 3.0 84 126 3.5 82 124 4.0 80 122 Page 25

LOI - Maintenance Reserves Topics Engine - Operating Factor : Derate Increasing Derate Lowers Thrust and EGT Deterioration Increasing Derate Lower Thrust 5% 10% 15% Higher Time On-Wing and Lower Cost / FH 5% Matrix 1.0 194 1.5 150 2.0 88 2.5 86 3.0 84 10% Matrix 176 136 80 78 76 15% Matrix 158 122 72 70 68 China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 26

LOI - Maintenance Reserves Topics Engine - Operating Factor: Environment Lowest Medium / Low Medium High Highest Colors highlight severity and rate of occurrence of distress Engine - Environmental Distress Chart China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 27

LOI - Maintenance Reserves Topics Engine – Severity Matrix CFM56-7B26 : Engine Restoration Matrix 10% Derate CFM56-7B26 - 26,300 lbs. thrustFirst – from Delivery throughRestoration the first Performance Restoration From Delivery Through Performance Region Temperate Desert Erosive 1.0 145 163 173 1.5 115 127 136 2.0 88 98 105 2.5 86 96 103 3.0 84 93 100 3.5 82 91 99 4.0 80 89 97 CFM56-7B26 - 26,300 lbs. thrust – as a mature following theRestoration first Performance Restoration As a Mature Engine Following Firstengine Performance Region Temperate Desert Erosive 1.0 215 240 257 1.5 169 188 202 2.0 130 145 155 China Aviation Summit 2012, Beijing, China - 2.5 128 142 152 April 26 th , 2012 3.0 126 139 149 3.5 124 136 146 4.0 122 134 144 Page 28

LOI - Maintenance Reserves Topics Escalation Target no lower than 3% for all events except LLPs LLPs escalated to current catalog prices & indexed to Ultimate life limits, or Current life limits China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 29

LOI - Maintenance Reserves Topics LLP Indexed to : Ultimate vs. Current Life Limit China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 30

LOI - Maintenance Reserves Topics If : Power-by-the-Hour Agreement in Lieu of Reserves, than Ensure Lessor has Ability to: Assign PBH program to subsequent Lessee Apply existing amounts towards cost of next mx event China Aviation Summit 2012, Beijing, China - April 26 th , 2012 Page 31