Navigating Lease Agreement Technical Considerations for Aircraft Maintenance Reserves

1. Technical Aspects of Lease Agreements Oisín Murray - Head of Technical

2. Agenda • Lease Agreement Technical Considerations • Maintenance Reserves • Maintenance Reserves Portability • Technical Records

3. Lease Agreement Technical Considerations What you are paying for • Define Specification • Define Configuration Maintenance provisions • Lessee is approved by local CAA • Lessee MRO’s are FAA/EASA approved • No PMA parts or DER repairs • Lessor annual inspection rights • Workscopes iaw OEM recommendations • Lessor approval required for major repairs • Lessor representation during repairs requiring MR drawdown $45MM Aircraft $43MM Aircraft

4. Lease Agreement Technical Considerations Redelivery Conditions • FAA/EASA compliant • Defined Redelivery process • Engine substitution rights • Bridge maintenance to to OEM standard or next lessee requirements • Minimum condition for component conditions • LLP Back to Birth • Detailed list and format for technical documents • Non Incident/Accident statement, PMA and DER repair statements • Maintenance Compensation mechanisms Current Redelivery Conditions are the next Lessee’s Delivery Conditions

5. Lease Agreement Technical Considerations Next Lessee • Representative site access during redelivery workscope • Configuration changes for next lessee • Incorporate next lessee livery • Attend demonstration flight including cockpit access • Engine and APU borescope observation Allow for delays at redelivery

6. Maintenance Reserves Maintenance Reserves are payments made by the lessee to the lessor based on the utilisation of the aircraft to provision for the cost of significant aircraft maintenance events. Why collect Supplemental Rent • Security to protect asset value and maintain lessor exposure • Influence maintenance workscope • Means to monitor lessee contract compliance • Promote financial discipline Supplemental Rent Options: • Cash Maintenance Reserves • Letter of Credit • Lease end adjustments • Half life adjustments

7. Calculating Maintenance Reserve Rates Predicted event cost divided by the event interval. Customize for variations in • Flight profiles • Operating environment • Aircraft age Annual Escalation • Normal range 2.5% - 3.5% • Engines should be higher (OEM escalation) • LLP lease end adjustment

8. A320 Maintenance Reserve Cash Flows for a 12 year lease

9. Managing Maintenance Reserves Best Practices • Clearly define qualifying maintenance • Lessor approval for reimbursable workscopes • Modular approach to engine reimbursement • Lessor attendance at repair facilities during maintenance • Good communication to forecast timing of maintenance and reimbursement • Annual review of rates • Aircraft specific accounts and component specific sub-accounts • No co-mingling even across same lessee fleet • Annual review of accounts with reconciliation as needed End of life assets • Retain Maintenance Reserves in lieu of Return Conditions. • Engine and Component exchanges • Fly to expiration

10. OEM Maintenance Agreements OEM’s have entered maintenance market aggressively. These agreements offer: • Fixed price maintenance • Long term agreement • Peace of mind • Residual value protections Agreements can be • Term based • Event based • Cradle to grave • Paid monthly • Paid at maintenance event OEM agreements include • GE / CFMI: OnPoint • Honeywell: MCA • Rolls Royce – Total Care / OPERA • IAE: Flight Hour Agreement (FHA) • Boeing GoldCare

11. Maintenance Reserve Portability Lessor preference is to collect cash: • Influence maintenance workscope • Use to offset outstanding debts • Maintain lessor exposure at deal origination levels • Easily assign reserves for next lessee Complexity where “Power by the Hour” Agreements are in effect: • Qualifying maintenance definition and rates may differ to lease • Increase in lessor exposure • Inability to offset delinquency • Credit accrued tends to be engine and MRO specific • Administrative burden when assigning credit due to multiple parties • Not all PBH agreements are equal End of life • Ability to convert credit to cash

12. Technical Records Records • Operator required by law to maintain records • Law is enforced by local Aviation Authority • Records show Airworthiness via compliance with regulations • Protect owner operator warranties • Regulations becoming more stringent Leased fleet 50% by 2020 • Increasing number of aircraft transitions • Local regulations are inadequate for cross border transfers • Lessor standards more demanding than regulatory requirements • Disconnect between lessor and operator

13. Records Quality Aircraft values • Appraisers assume satisfactory records • Leases signed on the basis of fulfilling records requirements • Direct correlation between aircraft records and aircraft value Inadequate records • Delay redelivery acceptance • Postpone or prevent onward delivery or sale • Reduce aircraft value Operator and Lessor standards are far apart

14. RecordsHarmonisation The Future is Digital Industry working groups cooperating to harmonise standards and meet challenge of the future. Recent progress with addition of Technical Documentation definition to ICAO Airworthiness manuals • Electronic copies with search functionality • Daily back up • Secure on line access • Regular access and inspection by lessor Support from Airlines and the Aviation Authorities required.

15. Technical Records IT Systems Primary function • Collect • Index • Centralise • Search • Share • Secure Providers • AERDATA/ STREAM • FlyDocs

16. QUESTIONS?

17. Oisín Murray Head of Technical 技术总监 Hong Kong Aviation Capital Suite 6511-13, 65/F, The Center, 99 Queen’s Road, Central, HONG KONG Tel:   + 852 2568 0229 Fax:   + 852 2568 0015 Mob: + 852 9229  0920 Email: oisin.murray@hkaviation.com www.hkaviation.com