AIRBUS SAS

A Market Analysis and Outlook

Produced by

Analysts:

Ernest Arvai and Addison Schonland

August 2009

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Contents

AIRBUS – A Comprehensive Review and Outlook ......................................................................................... 3

1. How is Airbus positioned vis-à-vis Boeing? ........................................................................................... 3

2. What are Airbus’ financial prospects? .................................................................................................. 5

3. How sound is its “parity position” with Boeing? .................................................................................. 6

4. Will Airbus succeed with the A350XWB? .............................................................................................. 6

5. What will happen with the WTO Dispute? ........................................................................................... 6

6. Production: to cut or not to cut? .......................................................................................................... 8

7. Key Risk Factors ..................................................................................................................................... 9

Strategic Risks ......................................................................................................................................... 11

CONCLUSION ............................................................................................................................................... 12

A320 FAMILY ............................................................................................................................................... 13

A318 ........................................................................................................................................................ 14

A319 ........................................................................................................................................................ 15

A320 ........................................................................................................................................................ 16

A321 ........................................................................................................................................................ 17

A330/A340 .................................................................................................................................................. 22

A330 ........................................................................................................................................................ 22

A340 ........................................................................................................................................................ 25

A350 ............................................................................................................................................................ 29

A380 ............................................................................................................................................................ 36

Airbus Military Programs ............................................................................................................................ 42

A400M ..................................................................................................................................................... 43

KC-330/KC-30 MRTT Multi-Role Tanker Transport ................................................................................. 47

A319 MPA ............................................................................................................................................... 53

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AIRBUS – A Comprehensive Review and Outlook This report is a comprehensive review of Airbus SAS, the primary component of EADS and a leading

manufacturer of commercial airlines and defense technologies. Our assessment of Airbus centers on its

competitive position in the global aerospace industry, particularly in commercial aircraft, where it

competes in a duopoly with The Boeing Co. for the “mainline” jet market, and how it is competitively

and strategically positioned for both the near- and long-term.

Rather than provide a traditional report, we have chosen to answer several key bottom-line questions

that address the critical issues impacting the future of Airbus and EADS.

How is Airbus positioned vis-à-vis Boeing?

What are Airbus financial prospects?

How Sound is its parity position with Boeing?

Will Airbus succeed with the A350XWB?

What will be the outcome of the WTO complaints?

Production: To Cut or Not to Cut?

What are the Key Risk Factors for Airbus?

We also provide a detailed program-by-program analysis of current and planned Airbus products, along

with our assessments of the viability of those programs, their competitive position, and likelihood for

future success.

1. How is Airbus positioned vis-à-vis Boeing? The answer is quite well in commercial programs, but poorly on military programs. Airbus gained parity

with Boeing in commercial aviation over the last decade, and is poised to seize a leadership position

should Boeing‘s performance continue to deteriorate with the 787 and Airbus succeeds with the

A350XWB.

Narrow-body Airliners

Airbus is the industry leader in narrow-body airliners, with a 52% market share versus 48% for Boeing.

The A320 family is quite competitive with the Boeing 737NG, and overall holds a slight advantage over

its rival third generation variants from Boeing. With planned incremental improvements, Airbus should

be able to maintain its lead in narrow-body airliners until the replacement airplanes, now projected to

enter service around 2020.

Medium-to-Large Wide-Body Aircraft

In medium-to-large wide-body aircraft, Boeing is currently in the lead, but Airbus has been gaining

strength, with the A330 and A350XWB programs improving their competitive position against the

Boeing 787 and 777 offerings.

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Boeing squandered an opportunity to deliver a crippling blow to Airbus with the new technology 787

Dreamliner program by letting a five-year lead over the A350XWB shrink to only two to three years with

a series of program delays. With a filled order book at Boeing, Airbus will now able to deliver A350

aircraft in the same timeframe or sooner than new 787 orders, leveling the playing field.

The A350XWB strategy appears to be quite sound, competing with two Boeing programs by positioning

three variants to compete with both the 787 and 777. Airbus claims that the A350 will be slightly better

than the 787 and a generation better than the 777, while providing commonality is an attractive

message to airlines, particularly operators of other Airbus aircraft. This makes a second 787 production

line imperative for Boeing, and sooner, rather than later.

We expect Airbus to narrow Boeing’s market leadership to perhaps a 50/50 split in market share over

the next decade. However, we are concerned that Airbus has completely ceded the 210-250 seat market

to the 787-8.

Very Large Aircraft

The A380 remains a troubled program. Late arriving on the market after several delays, Airbus delivered

its first A380s into an oncoming economic recession, and has to date been unable to build its production

rate, nor reduce high costs, in producing this airplane. It will be another three years before Airbus can

meet its production goal of four A380s a month. Given the current global economy, this isn’t all bad—

but neither does it speak well of production.

With 200 orders for the program, the A380 is far from its break-even point, which is easily a decade or

two away, and which was exacerbated by additional development expenses during the delays prior to its

introduction.

We believe the A380 program is about five years ahead of its time with respect to market demand,

congestion, and other factors favoring a Very Large Aircraft (VLA). Because of route dispersion and

longer-range capability for smaller aircraft provide alternatives to VLAs, the A380 marketplace may not

be as large as Airbus forecasts, nor as small as forecast by Boeing. We believe this program may break

even over the next decade, but not generate substantial profits for Airbus—and everything has to “go

right” for Airbus during this period (not the least of which is global economic recovery and recovery of

the premium traffic segment) to achieve this.

Similarly, Boeing’s latest version of the smaller 747, the -8i, has gained limited traction in the market,

with only one customer for the passenger version. Today’s recessionary economy precludes any

additional airline orders for VLA, as airlines continue to reduce capacity. However, the opportunity to

replace two frequencies of smaller wide bodies with one A380 operating at much lower costs may, as

traffic returns, provide additional impetus to an aircraft that today is too large for many markets.

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Military

In the military markets, Airbus has not fared as well as it has on the commercial side. The A400M four-

engine turboprop military transport is a debacle, with multiple delays, and could cost Airbus billions

should its fixed-price contract not be re-negotiated. Fortunately for Airbus, the EU cannot politically

afford a financial failure for Airbus, and as a result, re-negotiation is likely. This should mitigate much of

the potential loss Airbus would otherwise experience on the A400M program.

Airbus is also competing against Boeing on a military tanker program using the A330-200. The success

of this KC-330/KC-30 MRTT program depends on winning all or part of the USAF aerial tanker contract,

as the tanker market in the remainder of the world is insufficient in size to enable financial success. At

this writing the Airbus MRTT has won every competition that it has had against Boeing’s 767 tanker, and

appears to be the superior of the two.

For the US competition, Boeing now is prepared to offer a medium-small and a medium-large tanker based on the 767 and the 777 in an attempt to bracket the Northrop Grumman/EADS/Airbus medium-medium KC-30 tanker. The US Defense Department expects to issue a Draft Request for Proposals in September 2009, the first step in restarting the competition for what is now Round Three.

2. What are Airbus’ financial prospects? Airbus is currently bleeding cash from two troubled programs, the A380 and the A400M, the former in

service and the latter generating continuing losses from extended delays. The good news is that two

cash cows, the A320 and A330 are providing profitability, have 3-4 year backlogs, and can sustain the

operation in the near term.

Nonetheless, an additional $15 billion is needed to develop the A350XWB program. The UK is prepared

to offer traditional loans. France, Germany and Spain are considering additional “launch aid” for the

new program.

As the EU cannot afford Airbus not to be competitive, the A350 will be funded. Of course, there will be

protests from Boeing to the WTO regarding state investment that will be counter-protested by EADS

regarding defense subsidies.1 No quick or easy resolution is likely to that dispute.

The keys to Airbus future are equally political as market based, and the EU needs to maintain a strong

Airbus. As a result, Airbus, and the A350XWB program will be funded.

1 By “defense subsidies” we mean defense R&D that may have flow-through application to commercial programs,

as provided under GATT. Defense programs, whether for EADS, Airbus or Boeing, are exempt from subsidy issues.

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3. How sound is its “parity position” with Boeing?

Airbus, over the last decade, has gained parity with Boeing in both orders and deliveries. Airbus is the

market leader in narrow-bodies, is gaining strength in medium-to-large wide-bodies, and is capitalizing

on delays in the Boeing 787 program to close the technology gap. Boeing was in a position to gain a

tremendous competitive advantage over Airbus, but this has been squandered by the repeated program

delays. Boeing’s failures are just what the doctor ordered for Airbus, which was reeling after the A380

delays.

Airbus and Boeing today are relatively even in orders, production and backlog. While their financing

structures are different, and Boeing has a significant advantage in defense through its acquisition of

McDonnell Douglas, Airbus has gained parity in civil programs.

4. Will Airbus succeed with the A350XWB? The strategy of the A350 family is to compete with both the 787 and 777 with a single family of new technology aircraft. With a message that the A350XWB is “slightly ahead of the 787 and a generation ahead of the 777,” it provides a compelling case to customers who would consider both 787 and 777. The projected economics of the A350XWB versus the 777 are quite attractive with fuel burn about 25% lower on a seat-mile basis. The key for Airbus is whether it can deliver the A350XWB on time and on budget. Airbus has learned a number of lessons from both its A380 failure and Boeing’s 787 failures with composite structures. Airbus currently plans a forecast market entry of 2013, but Teal Group and several analysts are projecting a delay to 2015. We believe the jury remains out at this point. To date, the program appears to be on target for a 2013 introduction, but given the histories of the A380, A400M, 787 and 747-8 programs, there are ample grounds to be skeptical that Airbus will be able to meet its 2013 EIS target. The success, or failure, to deliver this program on time is a strategic game changer for Airbus. An on-time entry will force Boeing to redesign its 777 at nearly the same time as a narrow-body replacement will be required. Airbus is in a position to force Boeing to develop two aircraft simultaneously while it will need to develop only one. With success, Airbus will have the upper hand, but with delays, Boeing will regain competitive advantage.

5. What will happen with the WTO Dispute? In 2004, the US Trade Representative (USTR), acting on behalf of Boeing, renounced the 1992 GATT

agreement that the US, Europe, Airbus, Boeing and McDonnell Douglas Corp. agreed to which governed

government participation in Large Sector Aircraft Undertakings, or LASU. This agreement is the

underpinning for Airbus relying on up to 33% launch aid for a new airplane program, and the terms and

conditions related thereto. The GATT agreement also made provisions for the aid that Boeing (and at

the time, MDC) could receive via NASA and the US Defense Department.

Subsequent to the GATT, the World Trade Organization was formed. Rules under WTO provide further

restrictions about aid, and it is these restrictions upon which the USTR and Boeing rely upon when

asserting that Airbus has “illegally” received launch aid and other improper benefits, or has undertaken

actions that the USTR and Boeing believe to violate WTO rules.

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The motives for renouncing the GATT agreement and filing a complaint with the WTO are widely

believed to be rooted in several factors:

At the time, this diverted attention from Boeing’s own scandal, then at its peak, over the

improper award to Boeing by the USAF of the first aerial tanker contract for the KC-767. Airbus

had complained, and evidence proved, that the USAF had not considered its proposal and had

improperly shared with Boeing proprietary Airbus pricing;

Airbus was encountering major delays with its A380 program, resulting in the deferral of billions

of dollars in revenue and the addition of billions of dollars in costs;

Simultaneously with the A380 issues, Airbus was trying to settle on a response to the Boeing

787, and would be required to expend billions of dollars in R&D (currently pegged at $15 billion)

for the A350; and

Last but not least, Boeing truly believes Airbus unfairly benefits from launch aid, low-interest

loans and other European concessions not available to Boeing.

By filing the complaint against Airbus, Boeing hoped to create a cash flow squeeze at Airbus and

complicate, if not eliminate, launch aid for the A350. The strategy so far has met with success.

The European Union (EU) and Airbus pursued a counter-complaint with Boeing over “illegal” subsidies

for the 787, also citing previous programs in its complaint (as did the USTR and Boeing vis-à-vis Airbus).

While the USTR/Boeing complaint clearly was an offensive strategic move, the EU/Airbus response was

defensive.

A preliminary report by the WTO on the USTR/Boeing complaint is expected in September 2009, with a

staff preliminary report on the EU/Airbus complaint to follow by about six months. We expect Airbus

and Boeing to both be found in violation of WTO rules. However, such findings won’t be the end of the

issue by any means.

All parties will have the opportunity to respond to the preliminary report, which will be followed by a

final report. The final report then has to be approved by the WTO. Decisions may be appealed. The

process could take years before a “final-final” decision is issued.

Although the preliminary report is supposed to remain confidential, a Boeing official predicted it will

leak “within seconds.” If so, and if Airbus is determined to have benefitted from subsidies or aid in

violation of WTO rules, then this will be used by Boeing supporters in the tanker competition to

undercut the Northrop Grumman-EADS competing program. In a coincidence in timing, the Draft RFP

for Round Three of the tanker competition is expected within weeks of the WTO preliminary report.

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6. Production: to cut or not to cut?

The financial market meltdown in September 2008 and the resulting global recession have adversely and

dramatically impacted commercial aviation. Airlines and lessors are finding it difficult to obtain financing

for the billions of dollars of aircraft to be delivered in 2009 and 2010. Although many predicted a

“funding gap” of $10 billion to $26 billion for 2009, Airbus and Boeing—in rare agreement—believed the

gap to be at worst $5 billion, a figure deemed by the OEMs to be “manageable.” It turns out that for

2009, they are correct. Airbus predicted it would be faced with about 1 billion Euros of customer

financing; Boeing predicted it would have to step up for about $1 billion. At the half-way point, Airbus

had financed for its customers somewhat more than US$400 million and Boeing somewhat more than

$500 million. Each company sticks to its 2009 forecast; Boeing predicts about the same obligation for

2010, while Airbus has yet to make a forecast for next year.

Given the continuing capital market challenges and the continued declines in traffic and yields, there has

been and continues to be great debate about production rate cuts. Airbus previously announced a rate

reduction for the A320 line from a planned 40 per month (a figure never achieved, but planned) from

the current 36 per month to 34 a month beginning in October.2 Airbus also announced that it would

freeze A330/A340 rates at 8.5 per month from a plan to eventually produce 12 per month (one A340,

the balance A330s).

Although Airbus has yet to reach the October milestone of rate reductions, the company in May

announced that it was already considering returning to previously planned A320 rate of 40 a month.

Airbus suppliers, on the other hand, believe Airbus will adjust the A320 rate to 26-28 a month in 2010

and that Boeing will follow.

Boeing produces the 737 at the rate of 31 per month and has steadfastly said it will not change this rate

in 2009. Although the company also for most of 2009 also forecast its 2010 737 rate to remain constant,

Commercial Airplanes President Scott Carson did say during the Paris Air Show in June that suppliers

should be prepared to adjust 737 rates up or down by 10%.

Boeing previously announced that it will adjust the 777 rate from seven per month to five per month in

June 2010. Previously planned rate increases for the 767 and 747-8 lines from one per month to 2.5 and

2 per month respectively were cancelled.

We do not believe that either company will adjust 2010 single-aisle rate production. Cash requirements

brought about by the delays in the A380, A400M, 787 and 747-8 programs; and, for Airbus, R&D for the

A350, require a steady cash flow from the legacy cash-cow programs (the single-aisle aircraft). Although

the A330/340 and 777 programs may see further softness, the single-aisle aircraft are easier to move

2 Airbus production rates are a bit fuzzy. The company effectively works only 11 months a year because of

European holidays and mathematically the deliveries do not match the announced rates.

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about in a recession and with strong multi-year backlogs, we believe Airbus and Boeing will find ways to

maintain the production rates and cash flows for these aircraft.

7. Key Risk Factors

A number of risk factors must be taken into account when looking at the next 25 years for Airbus. These

include the normal execution and financing risks discussed above, but also customer and strategic risks.

Customer Risks

Airbus’ risks also revolve around the quality of its customer base. Boeing has argued that its customer

base is of better quality than Airbus’, a view echoed by many analysts. We concur. An examination of

Airbus backlog, ranking its top 15 customers at June 30, the midpoint of this year, shows the following:

Airbus Top 15 Customers

Rank Airline A319 A320 A321 A330 A350 A380 Total

1 US Airways 9 51 25 23 22 130

2 Emirates 70 53 123

3 CASGC (China) 118 118

4 AirAsia 115 115

5 DAE Capital 70 30 100

6 easyJet 63 17 80

7 CIT Aerospace 21 40 10 7 78

8 AWAS 75 75

8 TAM 9 31 9 4 22 75

10 IndiGo 44 30 74

11 Aircraft Purchase Fleet 49 12 12 73

12 Aviation Capital 68 68

13 Qantas 50 17 67

13 AerCap & Affiliates 6 33 3 25 67

15 Lufthansa 11 14 26 15 66

Source: Airbus Orders and Deliveries, June 30, 2009

Of this list:

US Airways is often cited by US airline analysts as being one of the most endangered US

companies, although the Management has shown remarkable resilience and creativity in

maintaining liquidity. Airbus has also provided loans and worked with the company to

reschedule deliveries.

Emirates is hardly a troubled carrier and, being state-owned, won’t go out of business even if it

should become troubled. But the Airbus concentration of A380 and A350 orders poses a risk,

however slight, that should Emirates become troubled and/or decide to cancel or defer these

orders significantly, the impact to these programs will be substantial. There are similar

concentrations of these orders by carriers who do not make the Top 15 list.

DAE Capital is a start-up, with a solid management team, but it is “junk” credit, which could

make access to capital challenging.

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CIT Aerospace is a solid performer but is being dragged down by its parent, CIT Group and a

potential bankruptcy by the Group could have an adverse impact on Airbus.

AWAS, another lessor, is owned by a hedge fund; access to capital may be an issue.

TAM of Brazil, like many airlines, has a challenging financial environment.

AerCap has been a reasonably solid performer but acknowledges that the capital markets are a

challenge.

Contrast this list with the backlog of Boeing’s Top 15 Customers:

Boeing Top 15 Customers

Rank Airline 737 747 767 777 787 Total

1 Lion Air 158 158

2 DAE Capital 70 15 16 15 116

2 Ryanair 116 116

4 Air Berlin 76 25 101

5 GECAS 82 18 100

6 American 86 7 93

7 Southwest 93 93

7 GOL 89 89

9 ILFC 11 1 74 86

10 ANA 21 4 4 55 84

10 Aviation Capital 79 5 84

12 Qantas 31 50 81

13 Continental 48 7 25 80

14 Air China 42 15 15 72

15 China Southern 48 7 10 65

Source: Boeing Unfilled Orders, June 30, 2009

Of this list:

DAE Capital (see Airbus comments).

GECAS is affected by troubles at parent GE but nobody doubts GECAS will take delivery of its

orders, and it is modestly engaged in financing orders for other Boeing customers.

American Airlines is identified as a financially endangered airline but it has proved capable of

raising financing (including sale/leasebacks of 737-800s with GECAS); American is the only US

legacy airline never to have filed for bankruptcy, though it has come close on at least two or

three occasions.

ILFC performs well but is sinking with its parent, AIG. The largest customer for the 787, the

program delays work in ILFC’s favor, relieving capital requirements and progress payments. If

ILFC were pushed into bankruptcy by the problems of its parent, the 787 orders could be

canceled, but in reality these are a tremendous asset of the company, whether in Chapter 11 or

not.

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Thus, we conclude that the Top 15 customers at Boeing are of better quality than those at Airbus with

respect to customer risk. However, airlines tend to take a long time to die, as evidenced by the deaths

of Eastern, Pan Am, TWA and others, often with consolidation providing a stronger eventual customer.

The advantage to Boeing with financially stronger customers is that they are more likely to acquire a

failing competitor than be acquired, and thereby influence future orders in their favor. Southwest’s bid

for Frontier, and its intention to replace A319s with 737NGs, provides an example of how customer

strength influences the marketplace.

Strategic Risks

Airbus faces a number of strategic risks with its programs and competitive position. We have

summarized the upside and downside risks for each key program.

Airbus faces program risks—and rewards

Program Upside Risk (or Reward) Downside Risk

A320 Family

Continues to be cash-cow. Solid performer. If

Aviation Partner winglet program proves

successful, it will give the A320 an advantage

over the 737.

Adaptation of the GTF on the A320 will spur Boeing to

proceed at full speed for a 737 replacement; neither

companies can afford the cash requirements for this

given current challenges.

Boeing brings out a 737RS several years before Airbus,

cutting into the A320 cash-cow.

A330 Family

Successful adaptation of the A330-200HGW

mutes the 787-8. Continued production of

the standard A330-200/300 fills 4,000-

6,000nm range segment for which the 787-8

and A350-800 are “too much airplane.”

Northrop/EADS/Airbus wins the KC-X tanker

contract.

A330’s older technology vis-à-vis 787 and A350 can’t

keep up despite HGW version and middle-range niche.

A330F is too pricey to be a success.

A340 Family None. Continued production diverts resources from better

programs.

A350 Family

Performs as promised. Takes out 777, mutes

787-9.

Gives away <250 seat market to Boeing. It misses 2013

EIS by substantial margin. Development issues with

composite skeleton structural approach. Boeing

develops 777RS that is substantially better than A350.

A380

Global economy and premium yield

recovers, market forecast proves more

accurate than Boeing’s.

Just flat-out getting it wrong.

Continued cost issues. Customer concentration.

A400M Contracts successfully renegotiated. Airplane

performs as promised.

Engines prove a dud. Software proves a dud. Customers

cancel.

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Conclusion Airbus will need, and receive, EU funding, and will remain a parity competitor with Boeing over the long

term. Airlines want two competitive suppliers, the EU needs a vital aerospace sector, and Airbus builds

excellent airplanes. The company is here to stay.

Our forecast for Airbus:

Airbus will maintain parity or near parity with Boeing in the commercial sector

Airbus will receive contract modifications on the A400M program, but that program will still be a

cash drain on EADS

The A350XWB will be funded and successfully launched

Airbus will win a share of the USAF tanker program

WTO actions will find both Airbus and Boeing violations, with appeals extending legal actions for

an extended period, with little impact on business as usual

Airbus will continue strong performance with the A320 and A330 families, which provide the

cash necessary to sustain the operations while the A380 continues to flounder thru 2015

The duopoly in large civil aircraft will continue, with Airbus remaining a formidable and competitive

equal to Boeing.

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A320 Family

Key Points

The A320 Family is the market leader in the single-aisle, “mainline” aircraft category by a small

margin.

Airbus and Boeing will not replace the A320 and 737 families before 2020.

Both companies will continue to “tweak” the aircraft for minor improvements.

Neither company will re-engine the current products.

The 737-800 tends to have higher residual values than th A320.

The A320 family is the market leader in the single-aisle narrow body segment. The A320, introduced in

1988, offered superior economics against the 737 Classic (-300/400/500) series, which was replaced by

the more competitive 737NG series in 1998. Today, the types are very comparable in terms of operating

economics, with a slight edge to the Boeing product. This decade, from January 1, 2000, through June

30, 2009, Airbus holds a 53.4% market share in deliveries (2,789) to Boeing’s 46.6% (2,434) and a 53.2%

market share in orders (4,312) to Boeing’s 46.8% (3,795). Market advantage: Airbus

Production Rate

Airbus projects a production rate of 34 aircraft per month during working months (European holidays

excluded) and projects deliveries of 384 units in 2009. Boeing plans production of 31 aircraft per month,

or 372 deliveries, maintaining a slight production advantage for Airbus.

Advantages over 737

Deliveries by

Model

2000 2001 2002 2003 2004 2005 2006 2007 2008 FH 2009 TOTAL

A318 - - - 9 10 9 8 17 13 2 68

A319 112 89 85 72 87 142 137 105 98 52 979

A320 101 119 116 119 101 121 164 194 209 113 1,357

A321 28 49 35 33 35 17 30 51 66 41 385

Total Airbus 241 257 236 233 233 289 339 367 386 208 2,789

B737-600 6 4 5 6 5 3 10 - - - 39

B737-700 78 88 73 80 109 94 108 107 66 25 828

B737-800 185 168 126 69 79 104 172 214 193 149 1,459

B737-900 - 21 8 11 6 6 - 9 31 16 108

Total Boeing 269 281 212 166 199 207 290 330 290 190 2,434

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The A320 has several advantages over the 737NG, including fuselage width and cockpit commonality

with other Airbus aircraft. The A320 fuselage cross section is 7 inches wider than the Boeing 737,

allowing an additional 1 inch of seat with in an economy row of 6, and a 1 inch wider center aisle. The

additional room has proven popular with passengers. However, the new Boeing Sky Interior similar to

that developed for the 787, with sculpted sidewalls, window reveals and improved lighting will be

introduced beginning in 2011 by FlyDubai, Continental, Norwegian Air Shuttle, Malaysian Airlines, TUI

Travel, GOL, and Lion Air, and could provide a competitive advantage for Boeing if popular with

customers. The A320 interior make-over in 2007 is more traditional in its look.

The cockpit commonality of the A320 family with the A330/340 and A380 families provides operators of

multiple Airbus types an advantage in transition training for pilots, a significant cost savings. While

Airbus has a slight advantage, this segment is essentially equal.

A318

The A318, smallest of the A320 family, is essentially dead in the market, as is its counterpart, the Boeing

737-600, with only 68 and 39 delivered since January 1, 2000, respectively. A double-shrink from the

base model, these airliners are structurally too heavy for the number of passengers they carry, and do

not compete well with the Embraer 190 series or the forthcoming CSeries from Bombardier.

In the following chart we illustrate the concentration of the smallest of the Airbus fleet, the A318.

A318 Order Delivery Operate

Air France (Groupe) 18 21.7% 18 26.5% 18 26.5%

LAN Airlines 15 18.1% 15 22.1% 15 22.1%

Airbus Executive & Private Jets 23 27.7% 10 14.7% 10 14.7%

Frontier Airlines 9 10.8% 9 13.2% 10 14.7%

Mexicana 10 14.7%

Tarom 4 4.8% 4 5.9% 4 5.9%

Undisclosed 1 1.5%

British Airways 2 2.4%

GECAS 12 14.5% 12 17.6%

TOTALS 83 68 68

Concentration 67.5% 63.2% 92.6%

The top three customers for the airplane account for between 63% and 93% of fleet activity. This

demonstrates a high level of concentration and consequently risk.

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A319

The A319 and 737-700 are slightly smaller than the base A320 and 737-800 series and have proven quite

popular. Since January 1, 2000, Airbus has delivered 979 A319 and Boeing 828 737-700 series aircraft.

The next chart illustrates the concentration of the A319 fleet. There are 91 operators of the A319, but

for simplicity, we have listed the Top 20 in the chart. Among the Top 20, concentration levels are

considerably lower that the A318.

The Top Five orders account for 32.8% of the total. Among deliveries, the Top Five account for 29.4% of

total fleet. Among operators, the Top Five account for 34.2% of total fleet. The merger between Delta

Air Lines and Northwest does not appear to threaten Airbus’ future within the combined new Delta. The

airline has stated its intent to buy from either supplier.

A319

Order Delivered Operate

easyJet 202 13.9% 139 12.2% 139 12.2%

US Airways 75 5.2% 66 5.8% 93 8.2%

Northwest Airlines 82 5.7% 77 6.8% 57 5.0%

United Airlines 78 5.4% 55 4.8% 55 4.8%

Air France (Groupe) 19 1.3% 19 45 4.0%

Frontier Airlines 19 1.3% 19 38 3.3%

China Southern Airlines 14 1.0% 10 37 3.3%

Air Canada 37 2.5% 37 3.3% 36 3.2%

British Airways 33 2.3% 33 2.9% 33 2.9%

Air China 30 2.1% 30 2.6% 33 2.9%

Germanwings 23 1.6% 19 1.7% 27 2.4%

Spirit Airlines 20 1.4% 7 26 2.3%

Lufthansa 31 2.1% 20 1.8% 24 2.1%

Iberia 20 1.4% 20 1.8% 24 2.1%

Mexicana 21 1.9%

LAN Airlines 26 1.8% 20 1.8% 20 1.8%

TAM - Linhas Aereas 25 1.7% 16 1.4% 20 1.8%

Volaris 29 2.0% 11 1.0% 19 1.7%

TAP-Portugal 13 0.9% 13 19 1.7%

Indian Airlines (NACIL) 19 1.3% 13 18 1.6%

1,451

1,138

1,135

Concentration 32.8% 29.4% 34.2%

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A320

The A320 and 737-800 are the heart of the market, in the 150-seat range that effectively replaced the

venerable Boeing 727 and McDonnell Douglas MD-80 models. Since January 1, 2000, Airbus has

delivered 1,357 and Boeing 1,459 of these models.

The following chart illustrates the concentration levels of the A320. Since is by far the most popular as

well as the original member of this family, its concentration levels are lowest. Once again we have listed

the Top 20 out a total of 225 customers. Within orders, the Top Five account for 12.8% of the total.

Among deliveries, the Top Five account for 19.5% and among operators the Top Five account for 20.7%

of the total.

Even though this model is not highly concentrated, the Top Five ordering airlines are also the Top Five

operators. The Northwest fleet looks safe for now in the new Delta fleet plan. But as this airplane is the

backbone of the Northwest narrow body fleet, it is important to see what these planes are replaced with

as they are retired. Airbus will have to monitor this closely as Delta may well decide to standardize on

the 737NG, or wait for the intense competitions that will development between the two OEMs on the

replacement airplanes.

A320

Order Delivered Operate jetBlue Airways 173 4.3% 118 5.5% 110 5.2% United Airlines 117 2.9% 98 4.5% 97 4.6% TAM - Linhas Aereas 75 1.9% 45 2.1% 84 4.0% China Eastern Airlines 74 1.8% 44 2.0% 77 3.7% Northwest Airlines 80 2.0% 78 3.6% 69 3.3% US Airways 75 1.9% 24 1.1% 69 3.3% Air France (Groupe) 42 1.0% 31 1.4% 65 3.1% AirAsia 175 4.3% 61 2.8% 60 2.8% Iberia 76 1.9% 66 3.1% 48 2.3% China Southern Airlines 60 1.5% 38 1.8% 48 2.3% Indian Airlines (NACIL) 35 0.9% 31 1.4% 45 2.1% Air Canada 28 0.7% 28 1.3% 41 1.9% Undisclosed 25 0.6% 0 0.0% 39 1.8% British Airways 51 1.3% 42 1.9% 37 1.8% Lufthansa 51 1.3% 37 1.7% 36 1.7% Vueling 35 1.7% Jetstar Airways 33 1.6% Aeroflot 1 0.0% 1 0.0% 31 1.5% Aer Lingus 17 0.4% 13 0.6% 30 1.4% All Nippon Airways (ANA) 31 0.8% 31 1.4% 29 1.4%

4,043

2,162

2,109

Concentration 12.8% 19.5% 20.7%

17

A321

The A321 and 737-900 represent a 180 seat stretch model for markets with higher traffic. Airbus has

delivered 385 A321 this decade versus 108 Boeing 737-900 models.

The final chart of narrow bodies illustrates the concentration levels of the A321. This is the largest of the

A320 family aircraft. Its concentration levels are similar to that of the A319. Close to one third of the

fleet is in the hands of the Top Five; 30.1% among orders, 26.3% among deliveries and 31% among

operators. Interestingly, the Top Five operators are not the same as the Top Five in the other two

columns. As is the case with the A320, lessors play a large role in the order category but don’t show in

the chart as they do not operate any of the aircraft. Fortunately for Airbus, many of the biggest

operators have orders yet to be delivered.

A321 Order Delivered Operate

US Airways 65 8.5% 44 8.2% 45 8.4%

China Southern Airlines 37 4.8% 20 3.7% 40 7.4%

Lufthansa 61 7.9% 36 6.7% 36 6.7%

Alitalia 23 3.0% 23 4.3% 23 4.3%

Air France (Groupe) 10 1.3% 5 0.9% 23 4.3%

Turkish Airlines 16 2.1% 16 3.0% 20 3.7%

Iberia 19 2.5% 19 3.5% 19 3.5%

Monarch Airlines 7 0.9% 7 1.3% 16 3.0%

Vietnam Airlines 41 5.3% 14 2.6% 15 2.8%

China Eastern Airlines 15 2.0% 15 2.8% 15 2.8%

Air China 27 3.5% 14 2.6% 14 2.6%

Indian Airlines (NACIL) 20 2.6% 13 2.4% 13 2.4%

Asiana Airlines 8 1.0% 8 1.5% 13 2.4%

British Airways 16 2.1% 16 3.0% 11 2.0%

Aeroflot 26 3.4% 10 1.9% 10 1.9%

Sichuan Airlines 11 1.4% 6 1.1% 10 1.9%

Air Canada 10 1.3% 10 1.9% 10 1.9%

bmi - british midland 11 1.4% 8 1.5% 9 1.7%

Scandinavian Airlines System 8 1.0% 8 1.5% 8 1.5%

Kingfisher Airlines 6 0.8% 6 1.1% 8 1.5%

768 539 538

Concentration 30.1% 26.3% 31.0%

With the leading single-aisle aircraft family, Airbus is well positioned in the short-term. The following

graphs illustrate cumulative deliveries for Airbus A320 family and Boeing 737NG family aircraft this

decade.

18

New engine technology will define the next generation narrow-body aircraft, and Airbus and Boeing

each have studies underway for new aircraft that will replace current models in the next decade.

Airlines have been pressuring the manufacturers to introduce new models with a 20% improvement in

operating economics, but because of the expense of developing a new program and the state of current

programs, development of new models have been deferred to the 2020 time frame.

In the interim, the introduction of the Bombardier CSeries in 2013 will provide the first application of the

new technology Pratt & Whitney Pure Power geared turbofan engine, and provide a more cost-effective

130 seat class alternative to A319 and 737-700 models. We expect demand for the smaller models in

each series to drop once the Bombardier program reaches the market.

Projected Aircraft Residual Values:

We expect values for the A320 family to retain their value quite well over the next decade, as over 75%

of current demand is for narrow-body aircraft, and the A320 family is the market-share leader.

The A320 and A321 will retain values well in both the intermediate and longer-terms, falling only after

the introduction of narrow-body replacements from Airbus and Boeing in 2020. Values for the A318,

which is an unsuccessful niche aircraft, and the A319, will be impacted by the introduction of the

Bombardier CSeries, which will be comparable in seating capacity with approximately 20% lower

operating costs. With a projected introduction in 2013, the CSeries could negatively impact future

values for the two smaller models, as the differential in operating economics alone will result in several

million dollars of annual savings, which will be reflected in lower residuals for the smaller aircraft.

Cumulative Deliveries 1 Jan 2000-30 Jun 2009

0

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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1997 Airbus A320-200

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Year

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US

Robust Positive Normal Negative Recessionary

Detailed value forecasts prepared by the Arvai Group, including projections of base values as well as

forecasts by economic scenarios, are available for purchase at www.iag-inc.com/store.html.

Boeing promotes statistical data and forecasts from a variety of appraisers that the 737 holds its value

better than the A320. With respect to the 737-800 vs. the A320, it must be noted that the -800 typically

carries 12 more passengers; and all 737s are powered by a sole-source, the CFM-56, while the A320

Family offers the CFM-56 and the International Aero Engines V2500 power plants. Both factors affect

A320 values.

A320F

Late in 2007, Airbus announced that Airbus Freighter Conversion GmbH, located in Dresden, Germany

was operational and preparing for the start of A320 freighter conversion activities at facilities in Dresden

and Lukhovitsy, near Moscow, Russia. The company anticipates about 400 Airbus Single Aisle aircraft

conversions from 2010 to 2025. Following the initial ramp up, an average of 30 A320 family aircraft

conversions are planned annually. This seems ambitious. The Precisions Conversions Boeing 757P2F

program envisions a rate of 12-16 a year or perhaps a little more, using two lines. The 757F and A320F

compete for the same market, and we are not convinced that the demand will be such as to support the

Airbus ambitions. One major customer to replace 727Fs, Federal Express, has already selected the 757

as its replacement aircraft. This conversion program was awarded to ST Aerospace, which has had

program difficulties.

20

Conversion of first A320 is expected to take five months, with the following conversions taking three

months. The cost of each conversion is estimated at $4.5 million for an A320 and $5.05 million for an

A321, to which must be added the price of the pre-owned aircraft ($10-20 million). The foundation of

the Joint Venture (UAC 25%, Irkut 25%, EADS EFW 32% and Airbus 18%) follows a Letter Of Intent signed

at the ILA Airshow in Berlin, in May 2006.

A challenge for the A320F program in our view centers on the advantage the A320 offers over the 737 in

the passenger arena: the extra seven inches width of the fuselage. The 727/737/757 all have the same

fuselage cross-section, and cargo pallets were designed for this application. The A320 is wider and the

obvious question is what to do with this extra seven inches. Will an A320-specific cargo pallet be

designed for this? The prospect raises questions for supporting a new cargo infrastructure and its

associated costs. If an economic solution isn’t found to this issue, the A320F could be at a distinct

disadvantage on operating costs.

There has been a paucity of information on this program. Airbus clearly has fallen behind Boeing in the

freighter market, as Airbus focused on the A300F and conversions of A310s through 2007. Both these

programs ended after completing 160 conversions. To put that number in perspective, Ascend in 2008

expected approximately 1,100 passenger aircraft to be converted to freighters over the next decade.

The conversion program achieved a major milestone in February 2009 when the technical definition

phase of the passenger-to-cargo conversions for A320s was completed. The launch customer for the P2F

program is Netherlands-based AerCap leasing company, which signed to convert 30 A320/A321

passenger aircraft in its portfolio to freighters. Airbus plans to maintain its relationship with Irkut/UAC in

Russia.

A320 Enhancements

Airbus has been engaged in an “Enhancement” program for the A320 family for several years, providing

minor aerodynamic improvements, weight reduction, the aforementioned 2007 interior upgrade and

working with engine suppliers CFM International and International Aero Engines for fuel burn

improvements of about 1%. Airbus has been researching blended winglets for several years but has

been challenged by the offset of additional weight added for wing structure requirements to the fuel

burn improvements of the winglets tested. In its third try, Aviation Partners and Airbus completed

testing in December 2008 of an AP design. Results and research continue.

Airbus hopes to achieve a 3%-4% fuel burn improvement from the winglets, and when coupled with

aerodynamic and engine improvements, an all-in gain of 5%.

Boeing announced improvements to the 737 in April 2009, the most evident being the adoption of the

Sky Interior. This is optional for current 737 customers and mandatory for new customers. Less evident

are minor aerodynamic improvements providing a 1% fuel burn improvement and tweaks to the CFM-

56-7B engine, called “Evolution,” that provide another 1% fuel burn improvement. The production

changes will, of course, be standard. The Sky Interior and production changes are available from 2011.

21

A320GTF – A Possibility?

Much speculation has arisen over whether Airbus will re-engine the A320 with the Pratt & Whitney

PW1000 PurePower (GTF). This engine is designed for the Bombardier CSeries 100-149 passenger and

Mitsubishi MRJ 70-90 passenger jets. It promises a fuel burn improvement of 12%-15% by 2013, with

projections of 20% plus by 2018. Airbus has installed the engine on its A340-600 test bed in a joint

program with Pratt & Whitney and continues to evaluate test results. Initial results have both Pratt &

Whitney and Bombardier confident. We have been advised by a Pratt & Whitney executive that a 22%

improvement in fuel burn over current engines is less than five years away.

A larger version of the GTF would have to be developed for the A320-size airplane, which Pratt &

Whitney has planned for the next generation narrow-body programs. The A320, which sits taller on its

landing gear than does the Boeing 737, could accommodate the GTF much easier than the 737, which

would require a new wing, landing gear box and other major structural changes. The current PW1000G

has a fan diameter of 72 inches, which is larger than current engines on the A320 or 737. Re-engining

the A320 with the GTF as early as 2014 could give Airbus a distinct advantage over the 737. Such a

move would also obviate a much more expensive complete redesign which Boeing would have to

consider.

But will Airbus do this? Company officials today say “no,” although we know there is an internal debate

at Airbus over this. The downside risk is that if Airbus were to do so, Boeing would be forced to respond,

either by a major rework of the 737 to accommodate either the GTF or CFM International’s LEAP-X

engine, now in development or simply by-pass a “737RG” (Re-Generation) and go straight to a new

airplane design. A totally new design would put the A320 at a major disadvantage and force Airbus to

launch an A320 replacement program. Airbus and Boeing have publicly stated the next generation single

aisle designs are being driven by engine technologies. Both firms want to see at least 20% improvements

in fuel burn. The Pratt & Whitney solution is tantalizingly close and may influence the OEMs.

Neither Airbus nor Boeing can afford a new airplane program today. The cash requirements of the A380,

A400M, 787 and 747-8, as well as the R&D costs for Airbus on the A350, are straining finances at both

companies. (Boeing also has an $8 billion pension fund liability, with $2 billion-$3 billion due in the 2010-

2011 period.) Further, Boeing’s larger near-term problem is what to do about the 777 to meet the A350

threat.

It is our view that Airbus and Boeing are content with the status quo on the A320 and 737 programs, and

will continue with tweaks—but not major developments that could force one or the other into a

replacement program until cash flows and cash positions improve.

Outlook

In our view Airbus will maintain market leadership, and at worst parity, with Boeing in this market

segment. The A320, first introduced in 1989, had a 22 year technology lead on the Boeing 737, first

introduced in 1967. Boeing has undertaken three major upgrades of the original 737-100/200: the -200

22

Advanced, the Classic and the NG. The NG made the 737 far more competitive with the A320, and both

manufacturers are now reduced to “tweaks” and minor upgrades.

A330/A340 Key Points:

The A330 has a longer life ahead of it than was expected.

More orders have been placed for the airplane since the launch of the 787 than before the

launch, and reports of continuing delays with the Boeing 787 program benefit A330 sales.

Some A330F orders have switched to the Passenger model.

The soft freighter market will delay success of the program.

The A340 is dead and residual values are weak.

The Airbus A330/A340 family was introduced into service in 1993 to compete with the Boeing 767 and

777 for long-haul medium capacity wide-body service. The A330 series, with two engines, has proven

quite successful while the A340 series, with four engines, has been essentially a market failure. Sharing

the same cockpit, fuselage, interiors and basic design, this family has clearly demonstrated the strong

preference of airlines for twin-engine aircraft.

The A330 is offered in two models, the -200 and -300, which are positioned between the Boeing 767 and

777 in size. The A340 has been offered in four models, the -200, -300, -500 and -600 ranging from

medium- to very large capacities, with the current -500 and -600 models offering very long range and

very high capacity, respectively.

A330

Airbus has achieved considerable market success with its A330 family, having delivered more than 626

of the aircraft in two variants. The A340 series, in four variants, has delivered only 366 aircraft, an

average of fewer than 100 per type, and is considered a market failure as only 18 A340 aircraft remain in

backlog as of 30 June 2009 (versus 397 for the more successful A330).3

The A330 offers both extended range with the -200 and long-range with higher capacity with the -300.

Since introduction, the product has been upgraded with continuous product improvements in engines,

interiors, aerodynamics and avionics to remain competitive with current models. The A330 was

originally scheduled for replacement by the A350XWB, which will compete with the Boeing 787 and 777

programs. However, with the continued sales success, Airbus believes the A330 can be sold for many

years as a complementary aircraft to the A350, filling the medium-range 4,000-6,000 nm market to the

A350’s ultra-long range capability. The A330 High Gross Weight has an advertised 7,200 nm range,

3 The A330/A340 share the fuselage and wing, reducing R&D for the A340 overall. While certain variants clearly

don’t produce a return, it’s unclear whether the A340 program in total was a cash contributor to Airbus or a cash

drain.

23

which is comparable to the low-end advertised range of the Boeing 787-8. Airbus believes the higher

passenger and cargo capacity of the A330-200 vs. the 787-8 provides greater revenue opportunities

offsetting the 787-8’s advertised lower operating costs, thus giving a longer life to the A330 than was

originally anticipated with the forthcoming composite airplanes.

The A330 outclasses the Boeing 767, offering better seat-mile and operating economics with a decade

more recent design. With delays in the introduction of the Boeing 787, the A330 has sold more than

500 aircraft since the 787 launch, a better performance than in its pre-787 days, as the 250-290 seat

range aircraft of choice. At the higher end of the market, between 320-390 seats, the Boeing 777 has

outsold its competing A340-600 model by a wide margin, maintaining market leadership at the high end

of the market.

The A330 has achieved market success, and the total program, if aircraft currently in backlog are

delivered, will top 1,000 aircraft. Boeing’s delays with the 787 have given the A330 a second wind in the

marketplace.

The following chart illustrates the concentration of the various A330 models. The table includes the

A330-200, A330F and A330-300 models combined. This aircraft has proven to be the most successful of

Airbus’ wide body aircraft. It won over customers from Boeing’s 767 and of late, with the 787 delays,

continues to win customers. The aircraft is not concentrated to the same extent as some of the narrow

body Airbus aircraft. Note there is a consistency in the Top Five for each column. Special mention must

go to AirAsiaX, which only has three A330s operating, but has 25 on order and is growing as fast as

Airbus can deliver the aircraft. With those aircraft in operation, AirAsiaX would be the fifth biggest

operator, but as of this writing does not show in the Top 20.

Even though the general expectation is that once the A350XWB starts flying, A330 orders will start to

decline, Airbus has a robust order book for the aircraft. There are 1,022 on order and 626 have been

delivered. This aircraft has proven popular in the Asia market, where seven of the Top 20 operators

make use of it. As an intra-regional aircraft, it is popular and has good operating economics.

24

Total A330

Order Delivery Operator

Cathay Pacific Airways 34 3.3% 26 4.1% 32 5.1%

Northwest Airlines 32 3.1% 32 5.1% 32 5.1%

Emirates 28 2.7% 28 4.4% 29 4.6%

Qatar Airways 26 2.5% 26 4.1% 29 4.6%

Air China 40 3.9% 20 3.2% 20 3.2%

China Eastern Airlines 20 2.0% 20 3.2% 20 3.2%

Korean Air 25 2.4% 19 3.0% 19 3.0%

China Airlines 14 1.4% 14 2.2% 17 2.7%

Etihad Airways 20 2.0% 12 1.9% 16 2.6%

QANTAS Airways 20 2.0% 20 3.2% 16 2.6%

TAM - Linhas Aereas 15 1.5% 11 1.7% 16 2.6%

Thai Airways Int'l 20 2.0% 15 2.4% 15 2.4%

Lufthansa 15 1.5% 15 2.4% 15 2.4%

Air France (Groupe) 8 0.8% 8 1.3% 15 2.4%

Dragonair 5 0.5% 5 0.8% 15 2.4%

China Southern Airlines 24 2.3% 14 2.2% 14 2.2%

Malaysia Airlines 10 1.0% 10 1.6% 14 2.2%

LTU 5 0.5% 5 0.8% 13 2.1%

Jet Airways 15 1.5% 10 1.6% 12 1.9%

TAP-Portugal 5 0.5% 5 0.8% 12 1.9%

1,022 630 626

Concentration 15.7% 27.3% 25.9%

A330F

In January 2007 Airbus gave the go ahead for

the A330F program. Based on the A330-200,

the aircraft filled a gap in the company’s

offering. Boeing has long been seen as the

premier freighter company. Airbus has lagged

in this sector. Although it had some success

with the A300/310 freighters, these aircraft

were not nearly as popular as their Boeing

competitors. Boeing has been developing

freighters from its passenger planes since the

creation of the 707.

Selecting the A330-200 was a very smart decision as this aircraft has proven to be the most popular

widebody aircraft made by Airbus. Moreover, it is the right size to compete with Boeing’s 767 – which is

not only a good freighter, but also the base of Boeing’s tanker program. By June 2007 Airbus had

25

acquired 65 firm orders for this freighter. For Airbus this was a highly successful launch. As of July 2009

final assembly of Airbus' first A330-200F was underway and readied for its maiden flight in November.

Certification of the A330-200F is planned for spring 2010 by the European and U.S. airworthiness

authorities, with Etihad Airways scheduled to receive the first aircraft. However, it should be noted that

some the initial interest in the freighter has faded because of the rapid decline in air freight tonnage and

also because of demand for passenger versions of this plane due to delays in the 787. The program has

seen a handful of F orders converted to P orders as a result of the 787-induced demand, and there have

been deferrals of other orders.

A340

By contrast, the A340 program has been less than successful. When introduced, ETOPS limits for two

engine airplanes were typically 120 minutes rather than the 180 or even 240 minutes applicable today.

As a result, for some long-range routes, a four-engine aircraft was needed. The initial A340-200, with the

longest range of any airliner when first introduced, but since superseded by several models, was a

market failure, with only 29 of that variant delivered. Its larger A340-300 sibling proved more

successful, with 218 delivered. Unfortunately the maintenance costs for four engines versus two proved

to be the undoing of this model as competing twins gained longer ETOPS capability.

The A340-500 was introduced in 2003 and only 29 of this variant have been delivered. An ultra long

range aircraft, this aircraft is operated by Singapore Airlines on Singapore-New York non-stop flights of

approximately 18 hours duration. Unfortunately, the competing Boeing 777-200LR variant now offers

slightly longer range capability with similar capacity and only two engines, resulting in 11% lower

operating costs. As a result, the A340-500 is a modern, but economically obsolete aircraft.

The A340-600, also introduced in 2003, provides high capacity at near 400 seats and currently holds the

distinction of being the longest aircraft from nose to tail currently in production. While this variant has

better seat-mile economics than the -500 model, it cannot effectively compete with the 777-300ER, and

also suffers from a double-digit operating cost deficit. As a result, market reception has been poor, with

only 91 of this model delivered to date.

Boeing holds the lead in market share this decade with its 767 and 777 models delivering 754 aircraft

versus 689 for the A330/340 family. The exclusive arrangement between GE Aircraft Engines and Boeing

for its GE-90 engine forced Airbus to utilize four Rolls Royce engines on the A340, which has been unable

to economically compete with the 777. At the lower end of the market, the A330 competes quite well

with the 767, with a strong economic advantage.

The following chart illustrates the concentration of the A340 series. This list offers some really

interesting data points. For example, note that non-commercial users of the A340 (private users) list

among the Top 20. Furthermore, note that the concentration levels on this model are very high. The Top

Five customers represent 44.3% of orders, 37.3% of deliveries and 41.7% of operators.

Airbus’ biggest customer for the aircraft is Lufthansa. If lessors were included on this list, we would see

ILFC with 29 ordered showing. Of ILFC’s 29 ordered, 16 were of the smaller -200 and -300 variety and 13

26

were of the -600 variety. In addition it is worth noting that while 384 A340s have been ordered, only 362

have been delivered. Given the sharp move towards twin engine aircraft for long haul use, it is possible

that few of the remaining orders will be delivered. Fr example, Virgin Atlantic is unlikely to take the last

two of its A340s. The relatively underpowered -200 and -300 models were eclipsed by the larger and

more powerfully engine -500 and -600 models. However, the larger models have relatively high fuel

burn per seat compared to the competing 777 models.

Total A340 Order Delivery Operator

Lufthansa 59 15.4% 59 16.1% 51 14.1%

Iberia 34 8.9% 31 8.4% 35 9.7%

Virgin Atlantic Airways 27 7.0% 21 5.7% 25 6.9%

South African Airways 12 3.1% 12 3.3% 21 5.8%

Air France (Groupe) 14 3.6% 14 3.8% 19 5.2%

Emirates 10 2.6% 10 2.7% 18 5.0%

Airbus Executive & Private Jets 14 3.6% 11 3.0% 16 4.4%

Cathay Pacific Airways 11 2.9% 11 3.0% 15 4.1%

Swiss International Air Lines 9 2.3% 9 2.5% 15 4.1%

China Eastern Airlines 10 2.6% 10 2.7% 10 2.8%

Thai Airways International 10 2.6% 10 2.7% 10 2.8%

Etihad Airways 11 2.9% 9 2.5% 9 2.5%

Turkish Airlines 7 1.8% 7 1.9% 9 2.5%

Gulf Air 6 1.6% 6 1.6% 9 2.5%

Scandinavian Airlines System 7 1.8% 7 1.9% 7 1.9%

Air Mauritius 5 1.3% 5 1.4% 7 1.9%

China Airlines 6 1.6% 6 1.6% 6 1.7%

Air China 3 0.8% 3 0.8% 6 1.7%

Aerolineas Argentinas 0 0.0% 0 0.0% 6 1.7%

Singapore Airlines 22 5.7% 22 6.0% 5 1.4%

384 367 362

Concentration 44.3% 37.3% 41.7%

27

Cumulative Aircraft Deliveries from 1 January 2000 thru 30 June 2009

99

200

282

371

450

500

577

672

743754

62

119

177

241

316

396

482

561

646

689

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Boeing 767 and 777 Airbus A-330 and A-340

With the current A340 family scheduled for replacement by the three-member A350XWB family in 2013,

and the 787 competing with the A330, the future order book will be dominated by new technology

variants. With four years until the new technology offerings reach the market from Airbus, the A330

backlog of 397 aircraft remains strong.

Cumulative Wide-Body Orders Excluding VLAs 1 January 2000 thru 30 June 2009

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Boeing 767-777-787 Airbus 330-340-350

28

Early in the decade, orders were fairly even between manufacturers. Boeing’s launch of the 787

generated a spike of orders beginning in 2004 that was matched by Airbus launch of the A350XWB in

2006, with the difference between manufacturers reflected in the earlier launch of the 787. Both

manufacturers have a healthy order-book for their new technology models, with 850 Boeing 787 and

493 A350XWB on order.

Projected residual values for the A340 family are quite weak, reflecting the limited production and

limited market for these aircraft, which are economically obsolete. The differential in operating costs

vis-à-vis competing aircraft has a dramatic impact on values, causing a significant reduction.

The A330, by contrast, should hold its values reasonably well, as it will remain economically competitive

for the next decade, although a generation behind the 787 and A350,.

29

A350 Key Points:

This program will be highly successful.

The Europeans will fund the program.

The A350 is the beneficiary of continuing delays with the troubled Boeing 787 program.

Airbus forfeited a huge market in the 210-250 seat category by choosing to seek the 270-350

seat market.

There is a risk Boeing will launch an entirely new 777 replacement that will be better than the

A350.

Airbus’ A350 program probably has been its most difficult in terms of gestation. Shortly after Boeing

announced its 787, Airbus reacted with its first A350. This aircraft was seen as a “warmed up” A330 –

which was not a bad idea, as the A330 thoroughly trumped Boeing’s 767. Indeed, the 787’s primary

mission is to take back the 767 market that Airbus captured.

First Variant

XWB Variant

30

Market Reaction

But the reaction from the market, and in particular ILFC’s CEO, Steven Udvar-Hazy, was stinging. The first iteration of the A350 was then withdrawn and Airbus went back to rework its design. This led ultimately to the A350XWB which is the version that is currently on sale. It was received with fanfare – Hazy responded with a much warmer words expressing his confidence in the XWB version. The following table illustrates the level of concentration in the A350 program to date. Nearly half the orders come from the Top Five customers, four of which are in the Middle East. This indicates a highly concentrated program. Chart on following page.

31

A350-800

A350-900

A350-1000

Total A350

Qatar Airways 20 40 20 80 16.2%

Emirates 50 20 70 14.2%

Asiana Airlines 10 10 10 30 6.1%

DAE Capital 30 30 6.1%

Etihad Airways 25 25 5.1%

Aeroflot 18 4 22 4.5%

TAM - Linhas Aereas 12 10 22 4.5%

US Airways 18 4 22 4.5%

ILFC 12 8 20 4.1%

Singapore Airlines 20 20 4.1%

China Airlines 14 14 2.8%

Aircraft Purchase Fleet 12 12 2.4%

Alafco 12 12 2.4%

TAP-Portugal 12 12 2.4%

Finnair 11 11 2.2%

AirAsia X 10 10 2.0%

Synergy Aerospace 10 10 2.0%

Vietnam Airlines 10 10 2.0%

Yemenia-Yemen Airways 10 10 2.0%

Airbus Executive & Private Jets 1 7 8 1.6%

CIT Leasing 5 2 7 1.4%

Aer Lingus 6 6 1.2%

Afriqiyah Airways 6 6 1.2%

Hawaiian Airlines 6 6 1.2%

Kingfisher Airlines 5 5 1.0%

Bangkok Airways 4 4 0.8%

Libyan Airlines 4 4 0.8%

Tunis Air 3 3 0.6%

Pegasus Aviation 2 2 0.4%

182 236 75 493

Concentration 47.7%

Program Funding

Commitments have been received by Airbus for launch-aid funding from France, Germany and the UK,

with the UK funding at about half the level requested by Airbus. EADS and Airbus believe that the

“launch aid” funding process that was ratified under GATT will comply with WTO rules and therefore

continue to be allowed for future program.

32

As of June 30, Airbus had a cash position of more than $9 billion, and Boeing more than $5 billion. While

both companies are bleeding cash with the A380 and A400M at Airbus and the 787 and 747-8 at Boeing,

each company has adequate cash to continue to withstand an industry downturn and in the short-term

maintain investment in new programs.

Airbus and EADS have each complained that their “launch-aid” process has resulted in the company

repaying more than 140%, with royalties. Our viewpoint is that if this process is perceived to be too

expensive, Airbus should, as Boeing must, seek funding from the capital markets. While Europe is noted

for “corporate welfare,” funding through the capital markets is long overdue for Airbus.

Market Potential

According to Airbus the twin-aisle market segment is worth close to 6,000 airframes over the next 20 years. Boeing’s view is the market is approximately 8,000 airframes. Clearly this is a huge market segment. At the center of the debate about this segment are two views on traffic fragmentation. Boeing’s view is that markets will continue to fragment, and given rising airport delays in hub cities, travelers will seek nonstop service between their local airports and points around the worlds. Airlines have bought into this thinking and over 850 787s and nearly 500 A350s are on order. Airbus buys into this argument to a degree, but also sees that major cities/hubs will remain a crucial part of travel and the market for VLA will need to grow to make optimal use of limited slots – hence its A380 program. Boeing is more sanguine of this segment and revised its venerable 747. But Boeing has no apparent interest in a new design. Airbus’ expensive decision to revise its A350 to the XWB standard essentially underscores the fact that the industry “sweet spot” is in the twin aisle twin engine segment. Airbus’ XWB is available in a family and is slightly larger than the 787 and competes with two Boeing programs, the 787 and 777. This is a bold move and if it works, Airbus will have played a master stroke. The 787 is brand new, but the 777 is aging. Boeing has the industry’s benchmark efficient twin in the 777-300ER, the aircraft that made Airbus’ A340 economically obsolete. A350 Approach

The Airbus approach to taking on the

787 and 777 is based on its belief

that Boeing made the 787 too small.

Accordingly, the smallest A350-800

competes with the currently-largest

787-9, while the A350-900 competes

with the 777-200 Series and the

A350-1000 competes with the

slightly larger 777-300 Series. This

controversial approach means Airbus

completely ceded the 210-250 seat

market to the 787-8, a decision that

may not prove to be wise. Through

33

July 31, Airbus sold 182 -800s, nearly as many as the 787-8, 236 -900s and 75 -1000s. Excluding

cancellations due to program delays, Boeing sold a gross of more than 950 787s, mostly for the -8,

where it retains a monopoly because of the Airbus approach to the market. Taking into account

cancellations, Boeing at July 31 sold 628 787-8s and 194 -9s (the balance is -3s or unselected). With an

average list price of $166.25 million, these -8s represent a backlog of more than $104 billion, a huge

market for Airbus to forfeit.

Airbus clearly has a lot riding on this program and through July 2009 its A350XWB program garnered 493

firm orders from 30 customers, approximately 100 more firm orders in the first two years since launch

than the 787 achieved in the same time period of their program. Airbus claims in another example of

how the XWB is ahead of the 787 and even a generation beyond the 777: in 2008 the XWB received 186

gross orders, in contrast to the 787 which received 94 orders, and the 777 with 54 new orders.

While we agree that the competition vs. the 777 is impressive, we don’t necessarily buy into the claims

about the 2008 orders vs. the 787. By this time, the 787 program was already experiencing one delay

after another and the backlog was already sold out toward the end of the next decade. The lack of

orders for the 787 may well have been more reflective of the paucity of order positions and program

delays than any statement about the A350.

Given that airlines like larger aircraft the decision to size the XWB between the 787 and 777 may prove

to be very clever. Airlines have voted with the orders. What is especially gratifying for Airbus is the 787

delays have driven most airlines to order A330s as stopgaps rather than 767s. Once crews are familiar

with the Airbus flight decks, it is more likely the airlines will stay with Airbus and migrate to the XWB

rather than the 787. Clearly delays cause Boeing no end of grief.

Challenges

But the XWB program is not without challenges. For a start, the revisions (analysts would say there were

a total of six) did not generate great confidence in Airbus’s thinking. Moreover, Airbus’ decision of how

to deploy composites in the XWB’s design by using panels on a frame as opposed to Boeing’s all-in-one

structure means the XWB is likely to be heavier per seats – and a concern for any operator. Moreover, it

appears that Boeing’s design has a watertight patent, so Airbus’ options are limited. However, the

panel-on-a-frame design, more conventional in nature, may not result in the difficulties that Boeing

faced in developing the 787.

The GE Issue

Boeing has cemented a very close relationship with General Electric (GE). This relationship has seen the 777-300ER and LR models exclusively use GE90 engines. This was then followed by the revised 747 also having an exclusive deal using GE’s GEnx engine. That engine is also available on the 787. GE has, despite the weak economy, deep R&D pockets. It also is the provider of the exclusive engine on the 737NG. Boeing and GE have a symbiotic and tight relationship. This relationship has caused Airbus more than a little discomfort. Airbus has openly asked GE to develop an engine for the XWB, and GE has demurred, not willing to impinge on its highly successful 777 program. GE points out that it offered a GEnx solution for the smaller XWBs but will not offer an engine for the -1000 since it will compete with the 777-300ER.

34

Giving the XWB no engine choice other than the Rolls Royce engine might have given airlines pause,

because they want a choice. Yet sales have not seemed to have suffered. Note airlines have not shown

concern when looking at single engine offerings on the 777 or even 747 programs. So the issue often

stated that Airbus really needs a GE engine option is perhaps not as big a deal as it appears.

Outlook

Airbus remains confident in its XWB, which comes in three variants. All three XWBs have long-range

capability. The A350-800 can fly 8,300nm (15,380km) with 270 passengers in a three-class configuration;

the A350-900 seats 314 and A350-1000 seats 350

with similar range. The range and capacity of the -

800/-900s make them candidates to replace 777-

200ERs and A340-300s. The –800 easily replaces

767s. Airbus sees the -1000 as a candidate to replace

747-400s given its position it as a direct competitor

to the 777-300ER. Boeing has yet to decide on a

response to the A350: whether to enhance and

improve the 777 or to replace it. If the 777 is merely

enhanced, we view the A350 as so superior to the

current product (assuming performance promises

are met) that a “777E” will still fall short. The risk to Airbus is that Boeing develops a 777 replacement

that is significantly superior to the A350. Many airlines have been replacing their 747-400s with 777-

300ERs and Boeing has valuable turf to protect.

Airbus plans to bring the XWB to market with the very latest in technologies. The plane is advertised to

have 25% reduction in CO2 emissions in cruise (compared to 777), 350 minute ETOPS, advanced avionics

with built-in real-time health monitoring and Required Navigation Precision (RNP). Clearly, compared to

current aircraft, this is a leap forward. Certainly it is, on paper, easily the equivalent of the 787 in

technology terms. Airbus has made a lot of fuss over the XWB’s eco-friendliness. Not only will it be fuel

efficient (its RR Trent XWB engines have substantial NOx margin to CAEP/6 standards and low levels of

CO, UHC and smoke), it will also be a good neighbour with low noise (~14dB under Chapter IV limits;

qualified for QC0.5 arrival and QC1 departure from London’s airports). Its advanced capabilities will

allow the XWB to fly Continuous Descent Approaches (CDA) which keep noise as well as fuel burn to a

minimum. Taking a leaf from the A380, the XWB uses revolutionary Brake-To-Vacate (BTV) technology

which optimises the braking depending on the selected exit on the runway.

35

Summary

Airbus is throwing its prodigious technology expertise at the XWB. The company is known for its forward

looking use of technology – it was the

first with fly-by-wire in commercial

aviation. After the debacle of the

A380 launch, Airbus is incredibly

focused and determined to get the

XWB flying on time in 2013.

However, given the realities of the

industry it is prudent to expect two

things – a delay in first flight and an

overweight aircraft. This is no dig at

Airbus; it has simply become the

norm in the industry. With so much

new technology being installed,

system testing is likely to take longer

than expected. Some analysts think 2015 is more realistic time frame for first flight. We are inclined to

accept 2014-2015 as a realistic timeframe.

In our view, the A350XWB is a highly credible program, provided Airbus has learned from the A380 and

A400M programs. Just as Boeing is learning from the 787 program, the next generation of aircraft is

tremendously complex. They are in many ways systems of sub-systems. The level of computerization is

at a much higher level than in previous generations, and the next generation of aircraft will use much

greater proportions of composite and advanced allow materials built with new construction methods.

For Airbus, market entry for the A350 after the introduction of the 787 may prove to be a blessing, as it

gives the firm time to work through the complexities and keep the learning curve manageable.

36

A380 Key Points:

The program continues to be in trouble.

Break-even possible for a decade or two away.

The A380 will obtain a VLA market share of 75% or greater.

Boeing’s VLA forecast is too small but the Airbus forecast is wildly optimistic.

Overview

The Airbus A380 program is in serious trouble, after a two-year delay in introduction into service and

continued difficulties in reducing costs at Airbus as the program slowly ramps up. With the delays, the

aircraft was introduced just prior to a recession, which has dampened the need for a VLA in the short

term.

Most A380 aircraft are configured in three class operations with 555 seats, but a low cost airline

customer is planning the full capacity of more than 800 passengers in a high density configuration to

offer low fare long-haul service. With the lowest seat-mile costs of any aircraft in that configuration, the

A380 could make good sense if adequate traffic is available on a route.

Today, with traffic falling, airlines are scrambling to reduce, rather than increase, capacity on key routes.

As a result, orders for the A380 have stalled. Boeing forecasts a market for more than 600 VLA

passenger aircraft over the next 20 years, while Airbus forecasts a market for slightly over 1,200 aircraft.

When comparing the A380 versus the latest revision of the Boeing 747, the -8, we believe Airbus will

maintain a market share lead in this sector with the larger capacity of the A380 as global air traffic

doubles over the next 15 years. Boeing assumes it will capture 50% of the 600 VLA-P market (the basis

on which is forecasts Airbus will sell only 300 A380s in 20 years). We believe Airbus will achieve a far

better market share of this segment, overwhelmingly capturing a 75%+ market with the A380 vs. the

747-8I, or 450+ A380s if the conservative Boeing market forecast proves correct.

At the same time, we believe the Airbus projection of 1,200 VLA-Ps in through 2026 is wildly optimistic.

It took Boeing more than 35 years to sell 1,400 747s, and this program began with a monopoly and

“closed” skies. Today Open Skies permit point-to-point traffic with a variety of twins: the A330, the 777,

the 767 and even the 757 and 737; plus the forthcoming 787 and A350.

Although A380 critics point to the continuing market fragmentation as the key reason for disputing the

viability of the A380, we acknowledge the Airbus point that hub airports such as Tokyo Narita, London

Heathrow, New York JFK and others are slot constrained and can grow only by accommodating larger

aircraft. Boeing counters that larger aircraft need a larger number of smaller aircraft to feed them

connecting traffic, which certainly is true—but as these hubs are also large O&D markets in their own

right, there will be A380 sustainable markets.

Critics also point out that many airports need to build infrastructure improvements (terminals, runways,

taxiways) to accommodate the A380 and this argues against the airplane. We remind these critics that

37

the same was true for the introduction of the 747 in 1970. Airports will make these improvements

because that’s what they do.

Finally, we note that even Boeing acknowledges airplanes are getting bigger. Its own market forecast

assumes aircraft size increases 14-16 seats (a far cry, to be sure, from the A380 leap to 555 seats or even

800). But the trend line is there. The problem for Airbus is that the A380 probably is 5-10 years ahead of

traffic demand, another parallel to the 747-100 when it entered service into a recession and piano bars

and lounges filled the floor space until traffic grew into the airplane. Many airlines that took delivery of

the 747 also stored many of them in the desert during the major recession brought about by the 1974

fuel embargo and crisis.

Just as the 747 came into its own after its in-service issues, a recession and inadequate airport facilities,

we believe the A380 will come into its own—just not quite at the level Airbus predicts but better than

the level that Boeing suggests.

We are concerned that EADS CEO Louis Gallois acknowledged during the 1H09 earnings call that

production costs of the A380 are still too high, a revelation that perhaps should not be surprising since

production is at best one a month. What is more troubling is a statement by Airbus COO John Leahy to

the trade magazine Jetrader (July/August 2009) that it will take three years to reach planned production

of four per month. Given the current global market conditions, this may not be all bad—but it speaks to

the deep-seated production issues surrounding the program.

In the following table we illustrate the concentration of the A380. Clearly it is early days in terms of

deliveries and operators. But the program is highly concentrated. One customer, Emirates, accounts for

29% of orders. Over a third of orders come from two airlines in the Gulf. This is a high geographical

concentration.

Given the scale and cost of the program, even deferred deliveries have a serious financial impact. British

Airways has deferred its deliveries as has Virgin Atlantic. Reports suggest that ILFC has been struggling to

find lessors for its orders. Given the delays in production, ILFC is contractually able to drop these orders

between January and June 2010. Clearly losing ILFC’s order which accounts for 5% of total would be a

blow.

Another order that appears tenuous is Thai, which has deferred deliveries and might yet cancel.

Kingfisher is also an airline under tremendous financial pressure, and it is quite conceivable that it too

could defer or even cancel its orders. Kingfisher has already allowed its A340-500 orders to be picked up

by another airline.

38

A380 Order Delivery Operator

Singapore Airlines 19 9.5% 9 52.9% 9 52.9%

Emirates 58 29.0% 5 29.4% 5 29.4%

QANTAS Airways 20 10.0% 3 17.6% 3 17.6%

Lufthansa 15 7.5%

Air France (Groupe) 12 6.0%

British Airways 12 6.0%

Etihad Airways 10 5.0%

ILFC 10 5.0%

Korean Air 10 5.0%

MAS 6 3.0%

Thai Airways International 6 3.0%

Virgin Atlantic Airways 6 3.0%

China Southern Airlines 5 2.5%

Kingfisher Airlines 5 2.5%

Qatar Airways 5 2.5%

Airbus Executive & Private Jets 1 0.5%

200 17 17

Concentration 68%

Historical Comparison

Interestingly, the A380 and 747 share a similar order book if measured from the launch date of each

program, as shown in the diagram below. However, the major difference between the program is the

production ramp up, which was much more rapid for the Boeing 747. The net result was a more rapid

take-up and acceptance rate by key airlines, and the need for competing airlines to order 747s to match

the introduction of more economical and advanced technology in their markets.

Of course, the overall market for air travel was smaller in 1970, when the 747 was introduced, so an

equal number of orders for the A380 today represents a smaller segment of the market. Of course,

when the 747 was introduced, there were no wide-body competitors, and it pioneered, rather than

evolved, a new segment, making the comparison somewhat unfair.

The slow production ramp-up and limited deliveries of the A380 is a major concern, particularly with the

public statement that Airbus is still working to reduce costs on the A380 program. Accelerating the

production rate would likely result in spreading overheads over a larger number of aircraft and reducing

fixed costs, but could also establish a level of production that is unsustainable if the market rejects the

A380 in favor of the newer and nearly as efficient smaller models such as the 787 and A350XWB to

reduce risk.

39

Backlog and Outlook

The A380 program currently has a backlog of 184 aircraft, with only 16 delivered through June 30, 2009.

Airbus is ramping up the program at a very slow rate, with only 11 aircraft projected for completion in

2009. Because the early delays in the program increased the break-even point for the program from

250 aircraft to more than 400, it appears that the A380, with only two orders in the first half of 2009 and

talk of potential cancellations or deferrals by several carriers, continues to be in trouble.

We believe that the A380 will become a viable competitor in the marketplace as traffic demand grows.

However, when airlines are cutting back on traffic, the program faces difficult times in the near term. A

key factor in the A380 is that its current interior configurations are less dense than competing aircraft,

and on an available floor-space basis, the A380 has a significant advantage over competing aircraft.

Another key factor of the A380 market development is the trade-off between frequency and aircraft

size. In several markets, such as New York-Paris, one A380 will replace an A340 and 777 on that route,

dramatically decreasing operating costs. Reducing frequency and choice of times for business travelers

can be a problem, but if the reduction is of so-called “wing-tip” flying (two flights serving the same route

departing within minutes of each other), then the operational benefits are obvious and eliminating

redundancy is admirable. As airlines evaluate the economics of certain routes, they may find the A380

can replace two smaller aircraft in operation to more efficiently meet capacity needs. However, the

needs of premium business travelers, who provide a disproportionate share of yield, must be a key

factor in that equation.

Unfortunately, Airbus cancelled the proposed freighter version of the A380, which would have provided

40

a unique heavy lift capacity and competition to the Boeing 747-400F and forthcoming 747-8F. This

market could have provided additional early sales and growth for the program, but additional

development costs resulting from delays forced a change in plans.

Future Improvements

Boeing quickly implemented product improvements to its 747 program early on, moving from the -100

to the -200 program after only a couple of years production, then stretching the upper deck with the -

300 and -400 models. The A380, which has a rather stubby appearance, would be an ideal candidate for

a later stretch version, increasing capacity to very high levels while reducing seat-mile costs.

Unfortunately, both engine technology and traffic demand precludes such a stretch until the 2020

timeframe. As a result, we expect the A380 to evolve with continuous product improvements once a

critical mass of aircraft enters airline service.

Aircraft Values

Currently, values for A380 aircraft are weak, as several carriers are attempting to defer orders during a

period of slow traffic. While Airbus is illustrating the benefits of frequency consolidation from a financial

perspective, route changes must be balanced by demand, and premium business travelers tend to

prefer additional frequencies and schedule convenience to aircraft type.

As a result, there is virtually no market for the A380 in the short-term. With the current recession, fair

market values adjusted to the supply demand balance are quite low, reflecting the lack of market

demand. However, under more normal economic conditions, the A380 should retain its values well,

particularly if the aircraft is adopted by low fare carriers and can gain additional market traction through

accelerated production rates.

The following chart illustrates projected residual values for the A380-100 under varying economic

Values by

Scenario:

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Year

Valu

e in

$U

S m

illion

s

Robust Positive Normal Negative Recession

41

scenarios in millions of US dollars by year. Projections are for the current economic conditions during

the year in question, varying from Robust to Recession. We expect the industry to improve to negative

conditions in 2010, and improve to normal conditions by 2012.

42

Airbus Military Programs Key Points:

The A400M has the potential to be a financial disaster, but will be rescued by the partner governments.

The KC-30 is superior to the KC-767.

The KC-777 is too big for the KC-X competition for perfect as a KC_10 replacement.

Boeing will re-offer the KC-767.

Airbus continues to dramatically lag The Boeing Co. in the development of military aircraft as it has historically focused on airliners. Be contrast, Boeing has been involved with military programs for many years, from the B-17 in WWII to the B-52, and through its acquisition of McDonnell-Douglas, it has become the largest defense contractor.

Boeing concurrently developed military derivatives of its jetliners, beginning with the 707-based C-135/KC-135/AWACS/JSTAR aircraft. Military derivatives of various types were developed by Boeing for every 7-Series aircraft except the 727, the 777 and the current 747-8/787 programs, which are in their infancy. Although Boeing has proposed the KC-777, this derivative has not moved beyond the conceptual stage. The 737 had limited military application until the development of the current P-8 Poseidon program; the 747 serves as Air Force One and the airborne electronic warfare command center; the 757 serves as Air Force Two and other VIP government transports; the 767 has specialized military platforms and is in development as the KC-767.

Airbus entered the Military Aircraft Programs (MAP) via the addition of the Spanish manufacturer CASA to EADS, and limited conversion of the A310 into a VIP and tanker derivative. The tanker version of the A310 is operated by only two countries and serves as the flying test bed for the newly developed refueling boom for the KC-330/KC-30.

Airbus’ major push into MAP revolves around the development of the KC-330/KC-30, based on the highly successful A330-200 platform; and the development of the entirely new-design A400M, intended to be a versatile transport positioned between the Lockheed C-130 and Boeing C-17 programs.

43

Source: Airbus

We will focus on the A400M and KC-330/KC-30 programs, which represent the largest and highest potential military programs at Airbus.

A400M

Source: Airbus

The A400M is designed to provide near-jet operation performance with turbo-prop engines and have a

cargo capability between the Lockheed C-130J and the Boeing C-17. Airbus promotes the plane nearly

equally for military and humanitarian missions.

The aircraft has been in design research and development for an astounding 27 years, and is widely

viewed as a politically-driven European jobs project, regardless of the technical and operational

objectives. Although orders have been received from countries unaffiliated with EADS or the European

44

Union, fully 162 of the 192 orders come from Airbus partners German, France, Spain and the UK. Only

12 orders come from outside Europe.

Comparable Specifications

C-130J A400m C-17

Wingspan 132.7 ft 139.1 ft 169.8 ft

Length 97.9 ft 147.9 ft 174 ft

Height 38.1 ft 48.2 ft 55.1 ft

Fuselage diameter 22.5 ft

Cargo floor length 40 ft 58.1 ft 68.2 ft

Ramp length 10.8 ft 17.7 ft 21.4 ft

Loadable width 10.3 ft 13.1 ft 18 ft

Loadable height (under wing) 9 ft 12.6 ft 12.3 ft

Loadable height (aft of wing) 13.1 ft 14.8 ft

Cruise Speed Mach 0.53 Mach 0.68-0.72 Mach 0.74-0.77

Max Operating Alt.-Normal Ops 28,000 ft 37,000 ft 45,000 ft

Max Operating Alt.-Special Ops 40,000 ft

Range 2,900 nm 2,450 nm 2,400 nm

Tactical Take-Off Distance 3,050 ft 3,000 ft 7,740 ft

Tactical Landing Distance 1,500 ft 2,700 ft 3,000 ft

Payload 41,790 lbs 170,900 lbs

Sources: Companies, USAF

45

Source: EADS

The A400M has two notable technological advance designs: an all-composite wing and an entirely new

turbo-prop engine. Although Airbus has used composites on aircraft for decades, including 25% by

weight on the A380 (the aft fuselage), development of a composite wing brings valuable experience to

Airbus for the development of the A350 XWB, which will be 53% composite by weight (the fuselage and

the wings). The new engine has been particularly vexing and, with the highly complex software to

support its operation, is blamed by Airbus for the current delays that have not only prevented first flight

but which also have delayed first delivery by an estimated four years to a now-projected EIS of 2013.

The program costs Airbus/EADS $100 million a month. Failing to meet deliveries allows the customers

the right to cancel the program, in which case approximately $5.7bn by contract would have to be

repaid. The program is approximately $3 billion over budget. As of July 2009, the customers have

extended the decision whether to cancel to the end of the year. Considering the highly political

relationship between the Airbus countries, support for Airbus and European jobs, cancellation is

unlikely. Airbus and EADS officials say the original fixed-price contract was unrealistic and are striving to

renegotiate it.

Until a resolution is achieved, and highly depending on its financial terms, the A400M program has the

risk of bringing financial disaster to Airbus and by extension EADS. At June 30, 2009, EADS had

approximately $11 billion cash on hand (compared with $5 billion for Boeing). If the A400M program is

cancelled and penalties/refunds required, the damage to the EADS balance sheet will be dramatic.

Cancellation of the program will harm Airbus’ credibility to an even greater degree than it has already

been damaged by delays. Cancellation could be used against the Company’s efforts to win a $35 billion

46

US Defense contract to supply 179 KC-30s (based on the A330-200), in a competition where Past

Performance is an important criterion. Although the US Air Force has not ordered the A400M and has as

yet shown no inclinations to do so, the USAF considered Boeing’s 787 program delays in evaluating

Boeing’s past performance for the potential KC-767 contract. Delays in the commercial 787 program

required diversion of engineering resources from the KC-767, a consideration by the USAF. The A400M

program has diverted similar resources within Airbus.

If the A400M should be cancelled, Boeing’s C-17 will probably be the prime beneficiary for new orders,

with Lockheed’s C-130J the secondary beneficiary.

47

KC-330/KC-30 MRTT Multi-Role Tanker Transport

Left: The A310 MRTT; Right, the KC-330 MRTT in rendering refueling the Northrop B-2 Bomber.

Sources: EADS

Left: KC-767 for Italy, similar to the configuration desired by USAF. Right: Boeing says it is prepared to

offer a tanker based on the 777-200. Source: Boeing

Key Points:

RFP for Round Three to be issued in September;

We predict Boeing will re-offer the KC-767; KC-777 is too large to meet 7,000 ft. runway

requirement;

Boeing’s suggestion of GEnx engine offer is unlikely;

Key requirements: (1) Capacity/Capability over price; (2) War plans contingencies include trans-

Pacific focus, which we believe tilts toward KC-30;

48

DOD as opposed to USAF will run the competition and it will be run as sole-source;

Congress could still meddle in final decision and force a split buy whether DOD wants it or not.

The KC-330/KC-30 MRTT is the successor to the A310 MRTT, which is operated only by Canada and

Germany, and in such few numbers that in many respects this program may be viewed as part of the

long-term research and development and proving ground for the KC-330/KC-30 MRTT. (For simplicity,

the KC-330/KC-30 will henceforth be referred to as the KC-30.)

The KC-30 is based on the popular A330-200 commercial airliner. Its primary competitor is Boeing’s KC-

767, which is based on the 767-200ER, sold to the Italian and Japanese air forces (four each) and which

was initially proposed in 2001 to the US Air Force in a complex lease deal. The USAF awarded the 2001

deal to Boeing without seriously considering the KC-30. The ensuing scandal resulted in a new

competition in which the KC-30, by then offered with Northrop Grumman as the prime contractor and

EADS (Airbus) as a sub-contractor, won the competition. However, more competition irregularities

resulted in the award being overturned again. A third round of competition is expected to begin late this

year or early next year. The Draft RFP is anticipated in September, followed by comments, with a Final

RFP coming thereafter.

Airbus, EADS and Northrop used the time between the 2001-2004 scandal and commencement of

Round Two competition in 2005 to more fully develop the KC-30. The 2001 offering was, in our view, not

completely developed and even if a fair and open competition had been held at that time, the KC-767

may well have won on its merits. The intervening years enabled the KC-30 to become a better-designed

concept, with systems that were fully competitive with and more advanced than the original KC-767

“International” program developed for Japan and Italy (the KC-767J and KC-767I respectively).

Developmental problems with the International program were of such gravity that the “J” was delivered

late and as of August 2009 the “I” had not been delivered.

Boeing proposed to the USAF a derivative of the International Program, the KC-767 Advanced Tanker or

“AT.” This was based on a concept, the 767-200 Long Range Freighter, combining the wings of the 767-

300, the cockpit of the 767-400 (similar to the 777) and a mix of components of the three 767 sub-types.

The USAF awarded the Round Two contract to Northrop on the basis that it carried more fuel, troops

and cargo than the KC-767AT. Boeing successfully protested the award, based in part on the failure of

the specifications to include acknowledgement that credit would be given for the extra capacity of the

KC-30 over the KC-767AT.

As a result, Boeing in 2009 proposed offering either the KC-767 or a design based on the 777 in Round

Three.

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Comparable Specifications

Medium Airplane Large Airplane

KC-135

KC-

767AT KC-30 767-400 777-200LRF KC-10

Engine Thrust (lbs) 21,634 60,200* 72,000 63,300* 110,100* 52,200

Maximum Fuel Capacity (1) 200,000 >202,000 250,000 N/A N/A 356,000

Max Take Off Weight (lbs) 322,500 >400,000 507,000* 450,000* 766,000* 590,000

Maximum Range (NM) 9,732 6590* 6,750* 5,625* 4,885* 3,800

Cruise Speed (MPH) 585 530* 541* 530* 557* 550

Dimensions (ft/in)

Wing span 130’ 0” 156’ 1” 197’ 10” 170’ 4” 212’ 7” 165’ 4”

Length 136’ 3” 159’ 2” 192’ 11” 201’ 4” 209’ 1” 181’ 7”

Height 41’ 7” 52’ 57’ 1” 55’ 4” 61’ 1” 58’ 1”

Troops >53 190 226 N/A N/A 75

Pallets 6 19 32 N/A 37 27

Aeromedical Evac (litters) 18 97 120 N/A N/A N/A

Medium Airplane: up to 550,000 lbs MTOW; Large Airplane: >550,000 lbs MTOW; as defined by Rand

Corp. AOA.

N/A: Not Available; * Commercial Version; (1) for refueling other airplanes

Engines: KC-135: CFM-56; KC-767AT: PW4000; KC-30: GE CF6-80E1A4B; 767-400: PW4000;

777-200LRF: GE90-110B1L; KC-10: GE CF6-50C2

Sources: Airbus, Boeing, Northrop, USAF, Global Security

Boeing believes that by offering either the KC-767 or the KC-777, it can trump “efficiency-price” or “size”

in the forthcoming RFP vs. Northrop’s one-size-fits-all airplane. Northrop and EADS believe the KC-30 is

in the “sweet spot.”

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Source: Boeing

Boeing says a KC-777 will carry 23% more fuel than the KC-30, 44% more cargo 42% more passengers

than the KC-30. Although Boeing says that the 777 is not significantly larger dimensionally than the KC-

30, as the illustration above and the Table on the preceding page indicate, the take-off weight of the

777-200LRF is substantially greater than the KC-30. Boeing has not specified which version of the 777 an

offering could be made; the 777-200ER, while lighter than the 777-200LRF at 656,000 lbs MTOW, is still

substantially larger than the KC-30. The standard 777-200 comes in at 545,000 lbs MTOW, only 7.5%

higher than the KC-30, but leaves little room to be a “medium” aircraft as defined by the Rand Corp. in

its analysis of alternatives.

The Round Two RFP identified a maximum of 550,000 lbs MTOW as a requirement. The 777-200

standard barely falls under this weight. If the Round Three RFP contains this provision, Boeing will be

hard-pressed to achieve this requirement.

Runway take-off lengths may be an issue the 777 cannot meet. The Round Two RFP required a 7,000 ft.

take-off length; it is widely believed the 777 requires substantially more. If the Round Three RFP

maintains this requirement, the 777 would appear to be disqualified on its face. We have indications

that Boeing may be preparing a new, super-critical wing for the 777 (for use on the tanker and

commercial versions) that may mitigate this issue, but this information is sketchy at this time.

The prospect of a KC-777 is not new. Boeing floated the concept in 2006, prior to the start of the Round

Two RFP. The Seattle Post-Intelligencer contained a write-up and the following illustration.

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Source: Seattle Post-Intelligencer, Sept. 27, 2006

Boeing said at the Paris Air Show that it would consider offering the new technology GEnx engine as an

alternative. We believe this to be a red herring. The GEnx is about 8.5 ft compared with the 767’s engine

diameter of about 5 feet. Fitting the engine on the 767 will be problematic. We also don’t believe the

USAF would be willing to foot the bill for recertification on such a limited production run on either the

767 or 777-200.

Offering a KC-777 may also be problematic because Boeing acknowledged at the Paris Air Show that it

will take a longer R&D period for the 777 tanker than the 767 tanker, and this could be an issue

depending on the projected delivery date required by the USAF.

In the end, we believe Boeing will re-offer the KC-767 in Round Three. This restarts the competition with

the same players and the same equipment. Although Boeing could offer a tanker based on the 767-400,

this also presents runway performance problems if the 7,000 ft requirement is retained in the RFP.

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Boeing acknowledged at the Farnborough Air Show that the length of the 767-400 fuselage when

equipped with a refueling boom means a restricted rotation and a longer runway take-off roll.

We predict Boeing will re-offer the tanker based on the 767-200, either based on the Italian KC-767I or a

repeat of the conceptual KC-767AT. We think the KC-777 is much better suited to replace the aging

McDonnell Douglas KC-10 tankers.

This places the KC-30 in the better position, we believe, on capacity, range and performance.

Additionally, the KC-30 (A330, EIS 1994) technology is 12 years more advanced than the KC-767 (767, EIS

1982). The A330 and 777 are of the same basic technology era (1994).

The question is whether the USAF will place more importance on best-price, meeting technical

minimums, or whether best-value will rule. We believe the USAF will favor best value. Other questions:

will a Sole Source or a Split Buy. We are confident the RFP will be a Sole Source, but we also believe that

no matter who wins, Congress—which can’t resist meddling in procurement programs—will try to force

a Split Buy. We can make rational arguments for a Split Buy, but Congress will pursue one entirely for

political pork barrel reasons.

Finally, who will run the competition, USAF or DOD? We predict DOD, out of the Defense Secretary’s

office.

Northrop, EADS and Airbus place great hopes on winning the USAF tanker contract. Not only to many

other countries follow the lead of the USAF when buying arms and equipment, EADS views the tanker

contract as the major entre into the lucrative US DOD market, eclipsing previous but much smaller

successes.

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A319 MPA

Airbus has for years been working on a military derivative of the A319, called the A319 MPA, for

Maritime Patrol Aircraft. It is intended to compete with Boeing’s P-8A.

The company doesn’t like to talk about this airplane. Officials briefly made reference to it during the

2008 EADS Media Day but subsequently refused to provide any information about it. The airplane was

absent from the 2009 EADS Media Day presentation. No reference to the A319 MPA appears any more

on the EADS website. In a brochure issued in June 2007, the airplane was illustrated with the following

sensors.

Source: CASA MTAD

Airbus offered the A319 MPA to India, although it isn’t clear if it was a firm offer or a concept. Boeing

won the Indian order for the P-8I (“I” for India). European governments flying the 1950s-era Lockheed P-

3 Orion are considered natural targets for the A319 MPA but there has been little movement.

Boeing and Airbus believe the market potential for P-8/MPA type of aircraft is about 100 outside the US,

which intends to buy 108 P-8As to replace its P-3s.

Success for the MPA is likely to be limited. But the US has the need to replace 40-50 aging intelligence

aircraft, such as the JSTARs, for which the basic MPA platform could compete with the basic P-8

platform.

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ABOUT THE AUTHORS:

Ernest S. Arvai heads The Arvai Group, an aviation focused strategy consultancy based in the United

States, and has worked with aircraft manufacturers, engine manufacturers, component suppliers,

airlines, leasing companies and financial institutions for more than 30 years.

He holds an MSIA from the Tepper School at Carnegie-Mellon and a BSE from the University of

Michigan. Prior to establishing his own firm, he was Vice President and Managing Director- Technology

Management at Battelle Memorial Institute. During his career he also led the worldwide airline and

aviation industry practice at Arthur D. Little and has worked in more than 50 countries on aviation

issues.

Additional information can be found at www.arvaigroup.com.

Addison Schonland heads Innovation Analysis Group, an aviation focused market-research and

consultancy based in the United States, and has worked with aircraft manufacturers, engine

manufacturers, airlines and the air travel sector. Addison has been an innovator in new media, and

publishes a successful aviation blog and on-line information resource.

He holds degrees in Sociology, Economics and Finance for the University of Cape Town, South Africa and

a doctorate in business administration from Rushmore University. He was previously with PA Consulting

Group and has been involved with commercial aviation for over twenty years.

Additional information can be found at www.iag-inc.com

A third author, and noted industry consultant, also contributed to this report but chose to remain

unidentified at this time.

Resources

The authors prepared this report utilizing the following resources derived over the past year: discussions

with Airbus and Boeing officials (though not specifically for this report); public presentations by Airbus,

Boeing and EADS; conference calls by Boeing and EADS; briefings at Air Shows; discussions with Airbus,

Boeing and EADS suppliers and airline customers of Airbus and Boeing; discussions with aerospace

analysts and a variety of other resources, including financial reporting by Boeing and EADS.