1. Finnair Treasury & How aircraft are financed Mika Stirkkinen, Group Treasurer

2. Treasury’s tasks In every company, the key tasks of a treasury are the following: Liquidity Solvency Financial Risk Management Cash Management

4. Big cash balance: >500 M€ Sizable derivatives book – Jet Fuel – Currency – Interest rates Capital structure includes various components – Hybrid capital – Operating leases – Mortgage loans – Simple finance leases – Structured finance leases (JOLCOs) Corporate Pension fund – Assets: >400 m€ – Two set of liabilities, IFRS & national Finnair specific treasury topics 4

6. How aircraft are financed? Order & Cash FinancedLease

7. How aircraft are financed? Order & Loan FinanceOrder & Sale and Leaseback

8. The right question? A) Lease versus buy B) Lease versus borrow

9. Characteristics of (aircraft) operating lease and secured debt Secured Debt / Finance lease Collateral: aircraft Owner of aircraft – Debt: Airline – Finance lease: special purpose company owned by a bank Accounting treatment: debt Loan-to-value: 60-85% Tenor: 10-15 y Amortization: to 0 or balloon Interest: fixed or floating Operating lease and leaseback The asset is sold to the lessor The sale price: ~ Current Market Value Lease rental: typically fixed, monthly payment, 0.75 – 1.5% per month Lessor lowers its credit risk vis-a- vis airline by – Security deposits, 1-6 months – Rental paid beginning of the month – Maintenance reserve payments: a big portion (millions of dollars) of aircraft value depends on maintenance status of the A/C

10. Cash flows of (aircraft) operating lease and secured debt Secured Debt / Finance leaseOperating lease and leaseback IRR: 2,50% IRR: 2,25%

11. Lease vs debt How to compare lease vs debt cash flows? Just a discounting excercise? Do we have enough data?

12. Residual value is the key missing input

13. Opportunity cost calculation: residual value of USD 50 million included Secured Debt / Finance leaseOperating lease and leaseback IRR: 2,50% IRR: 6,76%, not 2,25%

14. Implicit cost of aircraft financing equity? Definition: Equity in aircraft financing Airlines are often very geared For a leveraged company, IRR of 6,76% sounds reasonable. Or does it?

15. Cost of equity Equity cash flowsGross vs equity flows Gross flows of a lease – IRR: 6.76% – Amount: 100 mio Debt flows – IRR: 2.50% – Amount: 75 mio Equity flows – IRR: 12.50% – Amount 25 million

16. Leases are always a bad choice? No. It depends. 100% financing. There is not always supply of available aircraft. If used the right way, leases add flexibility. Residual value risk hedge. Additional source of financing. Adds diversification.

17. Appendices

18. Derivatives 30.6.2015

20. Sizable assets & Two liabilities Liabilities Finnair Pension Fund (Finnairin Eläkesäätiö) is a separate legal entity. Its reporting is prepared according to Finnish Accounting Standards and pension liabilities calculated according to Finnish standards. FAS-pension liabilities are discounted with fixed, regulatory discount rate of 3.5% In Group accounting, IFRS standards are applied. IFRS-pension liabilities are based on market rates, currently 2.1%. Funding ratio – FAS 411 vs 317 = 129% * – IRFS 411 vs 436 = 94% Assets & two different liabilities

21. Cash and marketable securities 532 M€ 30.6.2015

22. Capital structure includes various components – Hybrid capital, 120 M€ – Operating lease, commitment 775 M€ – Unsecured debt, 39 M€ – Unsecured bond, 150 M€ – Mortgage loans, 62 M€ – Simple finance leases, 3 * export credit, 114 M€ – Less simple finance leases (JOLCOs), in the future