EFTA01461869.pdf

Deutsche Bank Markets Research North America United States 27 June 2014 Industrials The View (from Airlines 35,000 feet) Equity Weekly views & valuations moth.4 1 to.nbego Research Analyst 1+11212 250-9254 mIchael.linenbacedb.com Allegiant purchases new and currently on lease Airbus aircraft Allegiant announced earlier this month that the company is purchasing 14 tick], Takvat additional Airbus A320 family aircraft. The first of these aircraft will be inducted in to the company's fleet in 2015, the second in 2016, and the Research Associate remaining 12 in 2018. The 12 aircraft delivering in 2018 are currently on lease 1+1 1 212 250-9469 to a European carrier, but will be purchased by Allegiant at the end of this richa.talwarOdb.com month. Consequently, the company expects to book $30 million in annual rental income beginning at the deal's close and will assume $142 million of C3ItrNift0 &M0O secured debt. Additionally, Allegiant plans to purchase eight aircraft it had Research Associate previously entered into lease agreements for, two of which the company is 1+11212 250-8949 currently operating, with the remaining six to be delivered in late 2014 through calherine-mo-brlene4b.com 2015. As such, Allegiant raised its 2014 CAPEX guidance to $315 million from its previous range of $75 to $85 million and introduced 2015 CAPEX guidance Fixed Income of $220 million. The company plans to finance these purchases via cash and debt financing, including $300 million of unsecured debt the company raised ()out) Rtmt,), CPA last week (due in 2019 with a 5.5% coupon). Management indicated that Research Analyst Allegiant will continue to be active in the used Airbus market and "hope to add (+ft 212 250-9319 more aircraft...during 2016 and 2017". [email protected] Recent speech by Richard Anderson highlights some of the issues with Open Skies agreements liproin.wa rvientc Earlier in the week, Delta's CEO Richard Anderson presented at the Aero Club in Washington, D.C. and highlighted some of the industry's OB Aircraft Finance a Leming Conference concerns/challenges which could ultimately undermine the sector's recent September 2- 3 2014 financial success. He stated that the lack of a well-defined US aviation policy OBAetirro lxi Conference September 4, 2014 is a major concern especially since airlines are one of the country's largest contributors to the economy (third after energy and agriculture in terms of GDP DB GEMS ?xi Conference contribution). Another challenge highlighted by Anderson relates to the September 3- 5, 2014 enforcement of Open Skies agreements in which the US government per the official policy statement "must ensure that competition is fair and the playing field is level by eliminating marketplace distortions such as government subsidies." We are of the view that this could become a much bigger issue sooner than people realize given recent press reports that some beneficiaries of US Open Skies agreements have access to sizeable, interest free, government loans (or have benefited from significant debt forgiveness by their government stakeholders). More often than not, these funds are then used to procure aircraft that are placed in markets, which, in many cases, are already well-supplied. Furthermore, Anderson stated that our own government has exacerbated the situation by giving the competition a boost via lower interest costs on aircraft financings guaranteed by the US Export-Import Bank. This negatively impacts US airline profitability and employment. Amenesan inSong progress on the lebot integration front American recently reached tentative, three year, labor deals with the Intl Association of Machinists (IAM) covering three separate work groups (primarily 11,000 mechanics and airport ground agents) at US Airways. If approved, then the company can start negotiations on a joint contract covering 30,000 employees which includes 19,000 American employees represented by the Transport Workers Union (TWU). Thus far, unions for the pilots, flight attendants, and service agents have started the process with the National Mediation Board to determine which union will represent them. Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0124143 CONFIDENTIAL SDNY_GM_00270327 EFTA01461869