#1Establishment of An Aviation Leasing Company in Nigeria UNITY AND FAITH PEACE AND PROGRESS FEDERAL MINISTRY OF TRANSPORTATION (AVIATION) Aviation Roadshow Presentation 19th July 2018 ARUP RDC CATAMARAN Aviation Economics QIAWOYIN OLAWOYIN LEGAL PRACTITIONERS & CONSULTANTS#2Contents • ● ● Introduction Project objectives Business Analysis . Market opportunity • • ● . Financial results Commercial Structure Government incentives Implementation • Conclusion#3Introduction: Government's aims The Federal Government of Nigeria, through the Federal Ministry of Transportation (Aviation) (FMOT(A)) is keen to provide a framework for the establishment of an Aviation Leasing Company (ALC) which can also be referred to as an African Leasing Company (ALC). To this end, the Federal Government seeks to partner with a private partner consortium in a Joint Venture, with the Government owning a minority stake which will be supported by Government guarantee for either the aircraft or lease payments. The ALC will provide leasing opportunities for African airlines in order to boost fleet size, alleviate the problem of aircraft leasing and play a significant role in modernizing the aircraft fleet in Africa.#4Introduction: Need analysis International Aircraft Leasing companies are not currently addressing the West and Central African market due to their perceived risks, namely: • • Revenue risks Legal risks Maintenance risks#5Introduction: Need analysis Two (2) business options were considered and assessed . Option I: Sub-lease Only The ALC will lease aircraft from International lessors and subsequently sub-lease them to African airlines. Option II: Sub-lease and Purchase The ALC starts by sub-leasing aircraft but from the 6th year of operation, buys 25% of the aircraft required for the leasing market. Whatever option is preferred, the initial start-off will be to lease 10-15 year-old aircraft, with the option of adopting a more modern fleet over time, thereby reducing the average age of aircraft in Africa. Option I was analyzed for this presentation.#6Introduction: Transaction Advisers Consulting Firm Arup UK Role Technical Advisory Catamaran Nigeria Technical & Commercial Advisory; Project Management & Administration Financial & Economic Advisory Aubert Business Consulting (ABC) UK RDC Aviation Economics Market Analysis UK Olawoyin & Olawoyin Legal Advisory#7• Project Objectives: Set up an ALC At present there is no Aviation Leasing Company in Africa The average age of the African aircraft fleet has been traditionally high compared to the rest of the world, however this situation has been improving dramatically with 45% of the fleet now less than 10 years old. Aircraft acquisition is an expensive proposition for most African airlines, resulting in high financing cost. It has been estimated that about 70% of commercial aircraft in Nigeria are financed with the attendant high financing costs having a negative impact on profitability. Aircraft leases are not easily available as most of the major international lessors are reluctant to lease aircraft to small/medium airlines in Africa due to perceived risks. Thus airlines in Nigeria generally cannot afford modern aircraft, with the average age of aircraft in operation being 20 years old.#8Market Analysis: Average Age of African Aircraft Number in Fleet Large Turboprop Regional Jet Narrowbody Jet ■ Widebody Jet Jumbo 200 150 100 50 0 0 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30 Aircraft Age Range 30+ Source: RDC Analysis The average age of the African aircraft fleet has been improving, with 45% of the fleet now less than 10 years old, however 33% are over 20 years old. The mean aircraft age for an African airline is 12.6 years.#9300m 250m '200m Total Annual Passengers Om 150m 100m 50m 2016 2017 2018 2019 2020 2021 Market Analysis: Aviation Industry Projected Passenger Growth 2022 2023 Nigeria v Africa Total Forecast Passengers 2016-2035 Source: IATA 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2% 4% 6% 8% 12% 10% Annual Growth Nigeria Passengers Africa Passengers --Nigeria Growth Africa Growth In the long term (2016-2035), Nigeria passenger growth will outperform overall Africa passenger growth, at CAGR 7.5% and CAGR 5.1% respectively. Nigerian passenger traffic will increase from 8.5m in 2016 to 33.7m by 2035 with domestic traffic dominating that growth - increasing from 4.4m in 2016 to 23.8m by 2035. 0% Source: IATA#1025,000 Airline passenger/freight fleet in service 5,000 147 10,000 5,622 15,000 6,607 386 20.000 T 8,663 1,306 2,151 3,390 10,929 30,000 5,497 35,000 13,865 Market Analysis: Trend in Aircraft Ownership. 6,992 7,604 16,151 8,364 0 0% 1980 1985 1990 1995 2000 2005 2010 2013 2014 2015 2016 2023E Total fleet Operating fleet Lessor share The trend towards aircraft ownership by lessors has grown steadily since the early 1980s. It is estimated that by 2023, about 50% of the global fleet will be owned by lessors. 18.582 660'6 20,527 10,254 10% 20,910 22,510 14,700 30% 23,500 40% 29,400 50% % of fleet managed by operating lessors 20% 60%#11Number of Aircrafts Leased 90 80 70 60 50 40 30 20 10 Market Analysis: ALC Projected Aircraft Portfolio 1 1 1 1 2 3 3 DHC Q Series 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 - 4 4 5 5 6 6 6 6 6 6 6 6 ATR 42/72 ■B737 1 2 2 3 4 5 6 6 6 6 7 7 7 7 7 7 7 7 7 7 - 1 5 6 7 9 11 14 17 20 22 25 28 31 33 35 37 39 42 45 48 A320 Series - 1 2 2 3 3 4 5 6 8 9 10 11 12 13 14 15 16 17 18 19 The ALC's portfolio is projected to reach eighty aircraft by 2038. The fleet would be renewed every ten years, either by returning the aircraft to the international aircraft leasing company or selling the old aircraft at the estimated residual value and replaced with new aircraft (If aircraft is bought).#12Financial Analysis: Assumptions . • Operations commence in 2019 First Year of revenues - 2019 • First Year of Profit - 2019 · • • • Period analyzed for Cash flow 50 years Currency US$(000) Inflation US$ 2% pa Corporate tax 0% Depreciation 10% • WACC 12% • Funding structure debt to equity ratio 60:40 Interest rates on debt 12% p.a (nominal terms) in US$ currency denominated loan#13US$ (M) Financial Analysis: CAPEX Required Investment (Per Annum) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 2018 2019 2020 2021 2022 2023 2024 The CAPEX is calculated by multiplying the number of the aircraft required to lease over a period of six months (a reserve account). This lease rate depends on the type and age of aircraft. 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038#14Financial Analysis: Investment & Returns Investment Investment Years No of Aircraft Cumulative Investment Portfolio Required 1-5 17 17 US$ 21m 6-10 24 41 US$ 31m 11-15 21 62 US$ 28m 16-20 18 80 US$ 25m TOTAL INVESTMENT IN 20 YEARS US$ 105m Returns (50-year Period) Project IRR 15.5% Project NPV (US$ 000's) 12,653 Project Payback Period (years) 16 Equity IRR 16.4% Equity NPV(US$000's) 12,171 Equity Payback Period (years) 19 Equity Loan Ratio 40%#15Commercial Structure Nigerian Government Improved Aviation Sector Guarantees & FX Fixtures Regulations & Certification Nigerian Civil Aviation Authority (NCAA) Improved Aviation Sector Lease Fees Capital International Aircraft Lessor(s) African Leasing Company Investors Aircraft Returns Aircraft African Airlines Lease Fees Maintenance Guaranteed Business & Payment Nigerian MRO Provider#16Government Incentives The Federal Government is willing to provide incentives to support the ALC, some of which are: Establishment of Free Zone at the airports which qualifies the ALC for the following: . . Stamp Duty exemption 0% Value Added Tax 0% Withholding Tax Custom Duty and Import Tax waivers on aircraft and spares Availability of FOREX and futures support Granting of pioneer status#17Project Implementation Milestone Procurement Process Submission of Full Business Case (FBC) Approval of ALC by Government Period Aug-Nov 2018 Nov 2018 Nov 2018 Contract award & Signing of Contractual Agreements Dec 2018 Project Commences Jan 2019 The Government is working with the institutional stakeholders to remove all bottlenecks in order to ensure seamless delivery and implementation of the project.#18Conclusion • · • The establishment of an ALC is one of the many initiatives being supported by the Federal Government of Nigeria in accordance with the Roadmap and plans to develop the country's aviation sector. There is a huge potential in the Nigerian aviation sector, with an estimated population of circa 190 million people, ranking 7th in the world's most populous nation and the most populous in Africa [United Nations]. The African Development Bank (AfDB) is keen to participate in the establishment of the ALC as a promoter and shareholder. This will make the ALC a Pan-African company.#19● ● Conclusion There is presently no leasing company in Africa. Taking opportunity of this, the ALC can be implemented to propel Nigeria to an enviable position as a leasing hub in Africa. The conceptualized business model will effectively enable the investor to recoup its investment, operating/financing costs and profit over this period. Given the significant growth trend, limited competition, and government incentives, the proposed ALC provides a great opportunity for investment in the Nigerian Aviation market.