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Aviation Industry Perspective Future Impact of New Lease Accounting Guidance Bill Solomon Senior Manager – Technical Accounting 1 BOEING CAPITAL CORPORATION.

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Presentation on theme: "Aviation Industry Perspective Future Impact of New Lease Accounting Guidance Bill Solomon Senior Manager – Technical Accounting 1 BOEING CAPITAL CORPORATION."— Presentation transcript:

1 Aviation Industry Perspective Future Impact of New Lease Accounting Guidance Bill Solomon Senior Manager – Technical Accounting 1 BOEING CAPITAL CORPORATION LEASEUROPE PRESENTATION

2 B OEING C APITAL C ORPORATION 2 LeasEurope – November 5, 2007 Aviation Industry Perspective Business and Accounting Considerations Perspective on aircraft lessors role in aviation industry Business considerations for aircraft lessors −Earnings profile −Fair value measurement for lease assets Business considerations for airlines −Leasing decisions by airlines −Earnings and balance sheet profile Other considerations Consider business and economic ramifications

3 B OEING C APITAL C ORPORATION 3 LeasEurope – November 5, 2007 Aircraft Lessors Role in Aviation Industry Aircraft Lessors Role in Aviation Industry

4 B OEING C APITAL C ORPORATION 4 LeasEurope – November 5, 2007 Aircraft Lessors Role in Aviation Industry Profitable business for stakeholders Support overall aircraft demand by providing new and used aircraft to airlines that otherwise could not purchase Flexible and responsive ability to meet airline fleet needs Lease to wide range of airlines Take aircraft placement risks that many not be taken by independent lenders or manufacturers Aircraft lessors provide solutions airlines need

5 B OEING C APITAL C ORPORATION 5 LeasEurope – November 5, 2007 Asian Economic Slump Aviation Industry has Volatile History Aircraft Lessors Provide Stability Fuel Prices Aviation downturnsWorld Real GDP GrowthOperating Margin Gulf War Global economic slowdown & 9/11 Fuel Prices Energy Prices, GM Strike Excess Inventories

6 B OEING C APITAL C ORPORATION 6 LeasEurope – November 5, 2007 Airlines Landscape Changing Lessors Adaptable to Changing Customers New airline entrants lead to aircraft demand Airline exits increase used aircraft supply Airlines per Year Total Number of Airlines Airlines Entrants Exits Data source: Airclaims

7 B OEING C APITAL C ORPORATION 7 LeasEurope – November 5, 2007 Units 18,200 Growth 18,200 Growth 10,400 Replacement 10,400 Replacement 7,800 Retained Fleet 18,200 36,400 28, Long-term Demand for New Airplanes Lessors Offer Flexible Financing Choice

8 B OEING C APITAL C ORPORATION 8 LeasEurope – November 5, ,149 Aircraft ,687 Aircraft ,469 Aircraft 274 Leased (3%) 662 Leased (7%) 2195 Leased (16%) ,491 Aircraft 3319 Leased (20%) World Airline Fleet: 1981 to ,213 Aircraft 6102 Leased (30%) Airclaims through 7/13/07 Operating Leases Are Playing a Larger Role Will New Standard Affect Aircraft Leasing?

9 B OEING C APITAL C ORPORATION 9 LeasEurope – November 5, 2007 Business Considerations For Aircraft Lessors Business Considerations For Aircraft Lessors

10 B OEING C APITAL C ORPORATION 10 LeasEurope – November 5, 2007 Using a Simple Lease Example Illustrate Effect on Lessor Operating Results Compare current operating lease with expected new lease accounting (assumed equivalent to finance lease) – simple leases Assume that the contractual leases are operating leases $100M aircraft with 25 year life and 15% residual value Four sequential leases with the following lease rental payments −Years 1 to 10 - $1M per month −Years 11 to 15 - $700K per month −Years 16 to 20 - $550K per month −Years 21 to 25 - $400K per month No downtime or maintenance reserves – simple example Compare reported income and asset values For this illustration assuming no fair value accounting and no impairment of lease assets Earnings profile will be substantially affected

11 B OEING C APITAL C ORPORATION 11 LeasEurope – November 5, 2007

12 B OEING C APITAL C ORPORATION 12 LeasEurope – November 5, 2007

13 B OEING C APITAL C ORPORATION 13 LeasEurope – November 5, 2007 Business and Economic Considerations Effect on Aircraft Lessors Earnings profile will change significantly for current operating leases −Revenues will be lower −Revenue and margin will not be constant during lease term −Geography of operating results will change −Effect on future EPS and stock price Reporting operating results −Messaging will be necessary for analysts and stakeholders −Prospective change or retrospective restatement Cash flow will not be affected Carrying value will change but not significantly −Excluding effects of fair value (if elected) or asset impairment Will lessor business model change?

14 B OEING C APITAL C ORPORATION 14 LeasEurope – November 5, 2007 Business and Economic Considerations Effect on Aircraft Lessors How will lease terms be affected if at all −Lengthen, shorten, no change Considerations if following U.S. GAAP −Lease receivable no longer subject to asset recoverability under FAS 144 −Lease receivable will be subject to allowance for lease loss (FAS 5, FAS 114 and FAS 118) −Residual interest will continue to be subject to asset recoverability If airlines have to put lease assets and obligations on their balance sheets: −How will this affect their aircraft financing decisions? −Will lessors face additional competition from other lenders Consider other business effects Will lessor business model change?

15 B OEING C APITAL C ORPORATION 15 LeasEurope – November 5, 2007 Fair Value Measurement for Lessors Key Considerations IASB and FASB – goal – common fair value measurement standards IASB addressing fair value measurement with a preliminary view document −IASB plans to issue fair value measurement standard in 2009 −Expected to be substantially similar to FAS 157 FASB issued FAS places guidance for all fair value measurements in one standard −FASB decided in September 2007 to exclude leases from FAS 157 until new lease accounting standard issued −Practical resolution of measurement of leases at inception and measurement of residual interests in leased assets Fair value measurement - required or optional −Volatility that will result in earnings and asset values Fair value measurement a key part of leasing project

16 B OEING C APITAL C ORPORATION 16 LeasEurope – November 5, 2007 Fair Value Measurement for Lessors Key Considerations Aircraft and engine values – what is best measure of “exit” sales price −Published appraiser reports may not be best measure −Based on generic model and includes only data provided to appraisers Lessor specific data and models may be better measure −Will reflect actual transaction data and specific aircraft condition and configuration −Will require more disclosure in notes about method used and source of data Fair value option election −Will lessors be able to elect fair value accounting for debt when new leasing standard issued? −Current guidance – no change in election for existing liabilities allowed Fair value measurement a key part of leasing project

17 B OEING C APITAL C ORPORATION 17 LeasEurope – November 5, 2007 Business Considerations For Airline Lessees Business Considerations For Airline Lessees

18 B OEING C APITAL C ORPORATION 18 LeasEurope – November 5, 2007 The Value of Leasing for Airlines Less up-front cash than purchase Offers financial alternative to direct purchase No ownership risk Flexibility to move fleet during uncertain markets Potential source of early delivery positions Potential source of interim lift requirements Operational and financial flexibility

19 B OEING C APITAL C ORPORATION 19 LeasEurope – November 5, 2007 Total costs the same – timing significantly changed

20 B OEING C APITAL C ORPORATION 20 LeasEurope – November 5, 2007 Business and Economic Considerations Effect on Lessees/Airlines Earnings profile will change significantly −Interest cost of debt and depreciation of capital asset replace rent expense −Geography of statement of operations items will change −Effect on balance sheet leverage – will increase significantly −Effect on future EPS and stock price −Will changes to reporting results affect business decisions on leasing? Cash flow will not be affected Operating leases now become balance sheet assets and debt Will airlines modify decision to use lease versus debt financing Terms of leases – lengthen, shorten, no change Consider other business effects Will lessee aircraft financing decisions change?

21 B OEING C APITAL C ORPORATION 21 LeasEurope – November 5, 2007 Other Considerations

22 B OEING C APITAL C ORPORATION 22 LeasEurope – November 5, 2007 Timetable – Something to Consider 4Q Board Discussions Preliminary views Exposure draft Final standard Practical Considerations During this Time Training – Your Company and Your Auditors Leasing System Changes Projections and Forecasts Communication of Financial Statement Effect to Third Parties Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

23 B OEING C APITAL C ORPORATION 23 LeasEurope – November 5, 2007 Questions


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