Strategic Planning for Single

Aircraft or Fleet Replacement

May 1, 2013

NBAA Maintenance

Management Conference

Presented by Barry Justice

Current Market

Pre-Owned Prices Versus Intrinsic Value

Welcome to Historic Fort Worth

2

The Fort Worth STC

3

4

Impossible

Fly to Sun

5

Seems Impossible

Kennedy Vision

Vision

6

Apollo 11 Lunar Landing

Kennedy Vision

7

Space Shuttle

STS – 78 Launch

8

Space Shuttle

Commander Tom Henricks

Currently: Vice President of Marketing at CAAP

STS – 44 (Atlantis): Pilot

STS – 55 (Columbia): Pilot

STS – 70 (Discovery): Commander

STS – 78 (Columbia): Commander

9

Piggyback

Space Shuttle

Lessons

Strategic planning is long range

• Twenty years from identified need until operational vehicle

Although Shuttles are designed to last 40 years, mission

needs, threats and technology will change

• Plan for follow on vehicle before current one is operational

• Designed for upgrades

A method to flight test the orbiter for landing and then

getting them from CA to FL was almost a show stopper

• The guy who thought of putting it on a 747 was laughed at

• He built a scale model and proved it could fly

• The 747 was modified with a split vertical stab to accommodate the

aerodynamics of carrying and releasing the orbiter

11

Dilbert

5 Year Plan

Current Market

Pre-Owned Prices Versus Intrinsic Value

Developing a Strategic Plan

How do we

begin?

Current Market

Pre-Owned Prices Versus Intrinsic Value

Stephen Covey

The Seven Habits of Highly Effective People

Rule # 2

“Begin with the

end in mind”

Current Market

Pre-Owned Prices Versus Intrinsic Value

Flight Department Aircraft Replacement

How We’ve Done It In The Past

•Reactive

•Tactical

Versus

Current Market

Pre-Owned Prices Versus Intrinsic Value

Flight Department Aircraft Replacement

How We’ve Done It In The Past

•Proactive

•Strategic

Which leads us to

Current Market

Pre-Owned Prices Versus Intrinsic Value

Rule #1

“Be proactive”

Stephen Covey

The Seven Habits of Highly Effective People

17

Why This Is Important

Gretzky Strategy

Question: How did you score so

many goals?

Answer: “A good hockey player

plays where the puck is. A great

hockey player plays where the

puck is going to be.”

Commentary: We believe the

same strategy applies to

understanding aircraft values. It’s

important to understand not just

where they are today but where

they are going to be.

18

Aircraft Replacement Strategy

Primary Objectives

Strategic Objectives Should:

• Align aviation assets with needs with the core

business

• Have a process to keep aircraft assets

modernized with input and approval from:

• Executive senior leadership

• Finance

• Tax

• Legal

19

Aircraft Replacement Strategic Objectives

Supporting Goals

Have a plan that supports the following goals:

• Aircraft that are either new or relatively new with

the latest technology

• Well defined process to keep the plan current

• Aircraft must meet the operating mission

• Aircraft must meet the capital budget

• Meets the operating budget

• Mitigates market risk

20

How Do We Begin

Outlining the Process

There are a number of elements that should be

considered as begin:

• What’s the overall objective?

• What are the constraints, capital, technical and

other?

• What happens if you do nothing?

• What’s the time line?

• Develop a team and define the respective roles

and responsibility of the various team members.

21

Process Details

Company Size and Culture Drive Process Details

While company or organization size and management

styles will effect the process…

Regardless of size or management culture these

competencies are usually represented in the aircraft

replacement process.

• Executive - CEO

• Finance – CFO

• Legal – Internal and External Legal Counsel

• Tax – Tax department

• Aviation – Director of Aviation, Director of Maintenance

• Outside Advisor or Consultants

22

Planning Template

Work Process Flow

Develop Aircraft Analysis Planning Model for Aviation Department

Strategy And Business Plan

Phase I – Current State

Phase II – Customer Needs Assessment

Phase III – Alternative Aircraft & Financial Analysis

Phase IV – Plan Implementation

23

Current State Assessment

• What’s driving the change?

• Forecast utilization / geographic profile

• What’s the history been with the aircraft or fleet?

• Develop a baseline budget for comparison to

future aircraft for capital and operations cost.

• Identifying the management style of the company

and how that effects the process

24

Customer Needs Assessment

Mapping the Desired Future State

• Defining the objectives

• Deciding what will be required to

achieve the desired outcome

• Alignment of wants and needs

– Be careful they are usually different

25

Alternative Aircraft & Financial Analysis

Alternative Aircraft Considerations

• What aircraft types and manufacturers to include?

• Supply chain sourcing options should be considered?

• Aircraft are being considered for replacement.

– Timing considerations?

• Lead time for new or pre-owned

• Forward or reverse 1031 Like Kind Exchange

• Timing for selling relinquished asset

• Sometimes timing drives the decision (if order backlogs are

too long)

• Trade or sell relinquished asset

26

Alternative Aircraft & Financial Analysis

Financial Analysis

• Capital costs

• Operating costs

– Fixed

– Variable

• Cash flow analysis

• Residual Values

– Historical and Forecast

• Net Present Value

Case Study - #1

Organization

•Large Multinational Corporation

•Several Multi billion dollar companies

•Multiple bases of operation

Situation

•Nine aircraft, seven different types with aging issues

•$85 million aircraft on order placed by various subsidiaries

•Disconnect between business units

•No flight department input

•Acquiring company with two additional aircraft

Case Study - #1

Key Objectives

•Assemble strategic planning team and plan

•Assess & align aviation needs with core business

•Replace fleet with newer aircraft with less types

•Mitigate market value risk

Outcome

•Developed strategic plan with input from senior executives, flight

department, tax, HR, legal and finance

•Reduced aircraft types

•Reduced capital

•Newer aircraft

•Lower operating budget

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

341234123412341234123412341234123412341234123412341234123412341234123412341234123412341234123412341234123412341

19851986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Pri

ce

GIII Residual Value by Year/Quarter

1985

Case Study - #1

Timing can be Critical

Executed sale

in anticipation

of market

decline

In five years

the aircraft

lost $7M in

value

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

Pri

ce

G IV Residual Value by Year/Quarter

1990

Case Study - #2 - The $10 Million Galley

Timing can be Critical

Recommend

sale at

appraised

value of

$16M

Actual sale

at $6M

Why the Gretzky Strategy Matters

Question:

What is the greatest cost of owning

and operating an aircraft?

Answer:

Market Depreciation!

Question – What’s the Greatest Cost of Aircraft Ownership

Historic Residual Value – All Business Jets

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Age (Years)

Aircraft Specific Residual Value History

Historic Residual Value – CL604 vs. GIVSP

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

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G IVSP Residual Value by Year/Quarter

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2001

2002

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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CHALLENGER 604 Residual Value by Year/Quarter

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

1996 - 2001:

Up market

2003

Market

Bottoms

2004 - 2008:

Up market

2008

Market

Crashes

34

Macro Market Cycle

Aircraft Prices vs. the Stock Market

Aircraft prices have historically followed an 8 - 9 year cycle and are

correlated with the performance of the stock market

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Avg RV - 5 Yr Old Aircraft DJIA

Moving

average

divergence

35

Price Sensitivities Considerations

•Price sensitivity is inverse to price

•Markets reward “risk removal” and

technology

Aircraft Specific Residual Value History

Historic Residual Value – G550 vs. Global XRS

0%

20%

40%

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140%

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

20022003 2004 2005 2006 2007 2008 2009 2010 2011 20122013

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G550 Residual Value by Year/Quarter

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2013

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4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2005 2006 2007 2008 2009 2010 2011 2012 2013

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GLOBAL EXPRESS XRS Residual Value by Year/Quarter

2005

2006

2007

2008

2009

2010

2011

2012

Current Market

Pre-Owned Prices Versus Intrinsic Value

Current Market (Presented Aug. 2007)

Pre-Owned Prices Versus Intrinsic Value

Gulfstream

Bombardier

Dassault

List Price ($M) Intrinsic Value ($M)

Estimated Purchase Price

0

1

2

3

4

25 30 35 40 45 50 55

G500 G550

GEX-XRS

F7X

Current Market

Pre-Owned Prices Versus Intrinsic Value

Current Market (Presented Aug. 2007)

Pre-Owned Prices Versus Intrinsic Value

0

1

2

3

4

15 20 25 30 35 40 45 50 55 60

Gulfstream

Bombardier

Dassault

Estimated

Purchase Price ($M)

Intrinsic Value ($M)

CL 604

G-IV SP

F900EX

I Know This Stuff Can Get a Little Dry…And Probably

What You’re Thinking Right About Now…???

•Meee Too!

• I promise to

wrap up soon!

Case Study - #3

From NBAA Maintenance Air Mail Post

Question1: Should we upgrade our Challenger 601 3R to meet CPDLC,

FANS 1/A requirements

Question 2: Where is the threshold ($$$) that you stop doing upgrades and

how do you substantiate that threshold

Answer: 1. If the aircraft is currently meeting the mission

2. The owner is happy with it

3. There are no other major maintenance considerations

4. If there is not an alternative aircraft with the technology

without a major capital outlay

Then upgrade the aircraft

Commentary: Upon resale expect to recover only 25% of the investment

Try to keep aircraft consistent with others in the fleet

Aircraft Specific Residual Value History

Historic Residual Value – Challenger 601 3R

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123412341234123412341234123412341234123412341234123412341234123412341234123412341

199319941995199619971998199920002001200220032004200520062007200820092010201120122013

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CHALLENGER 601-3R Residual Value by Year/Quarter

1993

1994

1995

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120%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

2008 2009 2010 2011 2012 2013

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CHALLENGER 601-3R Residual Value by Year/Quarter

1993

1994

1995

Plan Implementation

When the internal team has completed it’s analysis and a

decision is made for action plan, then:

• Socialize plan

• Narrow choices to top two

• Compete the available choices

• Finalize and execute

Fun Quiz

The Devil’s in the Details

• How many know how old you are?

• How many know how old you are in:

• Years

• Months

• And days

• How many know how old you are in days?

• I’m 24,618 days old today!

Thank You

Thank you!

Q & A

Questions?