Scenario Analysis of Aircraft Leasing Business

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Scenario Analysis Details (by Process)
Assess materiality of climate-related risks
Climate Change Risks and Opportunities in the Aviation and Leasing Industries
Only items assessed and identified as having a significant impact on business are shown below.
Items (Risks andOpportunities)

Expected Impact on BusinessRisks

Timeline
Aviation Industry
Mediumterm(2030)―
Carbonemission targets
and policies of• Potential prohibition of landing andeach country Long term departing for older aircraft due to theOpportunities
Leasing Industry

Aviation Industry

Leasing Industry• Decline in asset value of older aircraft
due to lower demand for leasing• Countries with stringent airport entry
regulations may set higher barriers toentry into domestic routes. Owning Next
Generation Aircraft*1 will be a competitive
advantage―• Leasing demand impacted by the• Owning many New Generation Aircraft*2
decline in passengers traffic caused bysuch as electric aircraft will be acarbon emission regulations in eachtravelers choosing alternative means of(2050)
competitive advantage
countrytransport• CORSIA*3 regulations started in 2021
• Earnings opportunities may decrease(1) Improve fuel efficiency by an annual unless a sufficient number of Next
Mediumaverage of 2% to 2050
Generation Aircraft*1 is secured―term(2) Cap CO2 emissions at 2019 level
Aviation• Companies would require a(2030)
industry
restructuringonits
portfolio,
whilethe• Requires a shift to bio-jet and otherasset value of older aircraft decline
regulations
fuels to comply with the regulations(CORSIA)• Potential restrictions on3• Potential future CORSIA* revisions• Owning more New Generation Aircraft*2Long term
financing/lending and leasing to airline
resulting in a more stringent reduction
such as electric aircraft will be acompanies that do not meet the(2050)
targetscompetitive advantage
standards• Earnings opportunities may decrease
as competitors rapidly introduce Next
MediumGeneration Aircraft*1 and New
Spread of Next―
Generation Aircraft*2―
term
Generation• The spread of Next Generation(2030)
Aircraft*1 will result in a decline in asset
Aircraft*1 andvalue of older aircraft owned
New Generation• Many emerging manufacturers begin
Aircraft*2• Demand for a rapid shift towards NewLong term
• Potential rapid decline in value of
producing small electric aircraft, resulting
Generation Aircraft*2 will result in acurrent Next Generation Aircraft*1
in lower prices for competing traditional(2050)
large financial burden
aircraft

Change in
evaluation byinvestors

Mediumterm(2030)―Long term • Possibility that the aviation industry will
become a divestment target(2050)• Possibility that it may become difficult to
procure funds from investors for older
aircraft―• Lower ESG ratings may lead todifficulties in procuring financings―*1: Next Generation Aircraft: Low-carbon aircraft based on improved fuel efficiency, lighter body, and other features*2: New Generation Aircraft: Blended Wing Body (BWB) passenger aircraft, alternative fuel aircraft, electric aircraft, hydrogen-powered aircraft, etc.
*3: CORSIA: Carbon Offsetting and Reduction Scheme for International Aviation

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2―• Securing a sufficient number of Next
Generation Aircraft*1 will increase
earnings opportunities――• Potential increase in earnings andasset value from an owned portfoliowith a sizable number of New
Generation Aircraft*2• Preferential interest rates (tighterspreads) offered for Next Generation
Aircraft*1 and New Generation
Aircraft*2―

Identify and define range of scenarios
Our analysis is based on the following scenarios adopted by the Intergovernmental Panel on Climate Change(IPCC) and International Energy Agency (IEA).
Climate Change Scenario

4°C Scenario

Well Below 2°C or 1.5°C Scenario

Reference Scenario

SSP5 adopted by IPCC*1

SDS adopted by IEA (ETP 2020)*2

Scenario World View
(Image of Future Society)

Transportation needs of people and goods
rise, leading to an expanded demand inairline operations and an increase in thenumber of leased aircraft

Stricter regulations such as carbon taxes andemissions trading requirements imposed,increased number of leased New Generation
Aircraft, while the shift to alternative means oftransportation may reduce demand

Main Parameters

GDP growth rate and rate of increase in thenumber of aircraft

Growth rate of passenger transport volume, andrate of increase in the number of aircraft*1: IPCC Shared Socio-economic Pathways (SSP)
Different socio-economic assumptions (such as population, GDP growth rate, level of education) are designated for each scenario from SSP1 to SSP5 todetermine the feasibility of climate policies and degree of temperature rise under each scenario.
SSP5 (fossil-fueled development) is a scenario based on the following socio-economic assumptions.
Economic and social development is driven by placing greater faith in rapid technological progress, competitive markets, innovation, and participatory
societies. Growth under this scenario is tied to developing fossil fuels and choosing a lifestyle that consumes massive amounts of resources and energy.
*2: Sustainable Development Scenario (SDS) for a temperature rise of up to 1.5°C adopted by the IEA’s Energy Technology Perspective (ETP) 2020
Definition:An integrated scenario that clearly expresses the policies and measures necessary for achieving three of the 17 Sustainable Development Goals(SDGs) of ensuring healthy lives and promoting well-being for all at all ages (SDG 3); ensuring access to affordable, reliable, sustainable, andmodern energy for all (SDG 7); and taking urgent action to combat climate change and its impacts (SDG 13).
Objectives: To demonstrate a plausible path to concurrently achieve universal energy access, set a path toward meeting the objectives of the Paris
Agreement on climate change and significantly reduce air pollution.

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World View of the 4˚C Scenario

Transportation needs of people and goods rise, leading to expanded demand in airline
operations and an increase in the number of leased aircraft
Formulation of new regulations
and strengthening of existing
regulations remain limited

Rise in costs of reinforcing and upgrading
facilities against possible damage to bases andequipment caused by torrential rain and typhoons

Subsidies foralternative fuels
maintained

Proceed in compliance withCORSIA regulations driven byreputational concerns
Government

Aircraft and fuelmanufacturers

Aircraft leasingcompanies

Aircraft hangars

Increase in leased aircraft inresponse to expanded demand in
the aviation industry

Production and development of New
Generation Aircraft and alternative fuels
are limited to specific manufacturers

Next Generation
Aircraft

New Generation
Aircraft

Gradual increase in New Generation Aircraftin response to carbon reduction regulations

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Aviation industryExpanded demand forpassenger and freighttransportWorld View of the Well Below 2˚C or 1.5˚C Scenario
Stricter regulations such as carbon taxes and emissions trading requirements imposed, increased number ofleased New Generation Aircraft , while the shift to alternative means of transportation may reduce demand

Advances in theintroduction of carbon taxesand emissions trading

Expansion in part-out
market for retired aircraft

Greater incentives and subsidies for
shifting to alternative fuels

Aircraft hangars

Government
Aircraft leasing company

Possible decrease in leasing
opportunities for old generationaircraft and decline in asset
value due to reduced demand forthese aircraft

Aircraft and fuel manufacturers
Next Generation Aircraft

Old generation aircraft
Progress indevelopment of New
Generation Aircraft andalternative fuels

Possible increase in the number of countries
and airports that do not permit arrival anddeparture of old generation aircraft

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Airline AAirline B

Intensified competition among airline companies
to procure New Generation Aircraft and bio-jet
fuel. Deterioration in the financial
performance of airline companies that fallbehind in decarbonization

New Generation Aircraft
Increase in leased new generation
aircraft due to compliance withCORSIA regulations and interest indecarbonization

5Advances in modal shift due
to interest in decarbonization

Evaluate business impacts
To assess the impact of climate change on the aircraft leasing business, we adopted the IPCC’s SSP scenario and the IEA’s SDS(ETP 2020) to calculate the impact on business profit (ordinary income) in 2050. Our 2050 pro-forma pre-scenario-based businessprofit (ordinary income) has been estimated taking into account our business plan as well as GDP growth rate and other factors.
4˚C Scenario
Under the IPCC’s SSP5/fossil-fueled development scenario, which is equivalent to the 4˚C Scenario, the expansion in demand foraircraft brought significant positive impact on leasing income, while the impact of impairment losses due to, among other things, thecreditworthiness of airlines remained immaterial. The calculation result showed greater business profit (ordinary income) from theaircraft leasing business compared to that of pre-scenario-based business.

Well Below 2˚C or 1.5˚C Scenario
Under the IEA’s SDS, which is equivalent to the Well Below 2˚C (preferably to 1.5˚C) Scenario, air passenger transport volume isexpected to grow by an annual rate of 2.8% (from 2019 to 2050) despite the underlying stricter assumption on energy regulations.
Impact from the introduction of carbon taxes and stricter regulations on CO2 emissions is expected to reduce leasing income and raise
the impairment rate and therefore the result showed a decrease in business profit (ordinary income) from the aircraft leasing businesscompared to that of pre-scenario-based business. However, we view that it is possible to maintain a reasonable level of profit owing tothe rise in air passenger transport volume.

The result of the scenario analyses showed that climate change will have a limited impact on the aircraft leasingbusiness. Nevertheless, based on these analyses, we will continue to strengthen our resilience against climatechange and capture business opportunities therein toward achieving sustainable growth.

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6

Identify potential responses
Given the results of analysis for our aircraft leasing business, we will pursue the following initiatives (countermeasures).
IssuesMajor Ongoing Initiatives

Initiatives (Countermeasures) for Future Consideration

Contraction ofdemand• Capture opportunities for expanding assets that are inhigh demand through orderbook and other sources(orderbook delivery slots available through 2028)• Expand part-out and P to F conversion businesses• Restructure portfolio by addressing asset risk (focus on
narrow-body aircraft with low average age and highliquidity, diversify expiration dates, and other measures)
Rise inimpairment rate

• Conduct periodic monitoring of asset value volatility
through Value at Risk (VAR) model on a consolidated
basis• Setting the ratio of Next Generation Aircraft (fuel-efficientaircraft) in the portfolio as a KPI (FY2020 result: 41%)

All Rights Reserved, Copyright © Tokyo Century Corporation7• Invest in new assets related to bio-jet fuel, hydrogenpowered aircraft, electric aircraft, and other assets andparticipate in related businesses• Reduce portfolio risk by diversifying and expanding
lessee base and shifting towards Next Generation
Aircraft• Enhance the asset turnover business to realize the earlysale of owned aircraft and improve profitability• Expand asset management business extended to thirdparties post sale of aircraft