Industry Update Airlines and Aerospace 22 July 2020 Doug Taylor, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.867.6101 Neil Bakshi | Associate | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.867.2366 Company Rating Price Target Aerospace ESG themes Airlines AC-TSX Buy C$16.98 C$25.00 Key themes impacting the sector CHR-TSX Buy C$2.55 C$5.00 Private Equity Social: The aerospace industry faces a potential near-term challenge as airlines resume EIF-TSX Buy C$26.72 C$35.00 full-cabin bookings. We note a recent poll conducted by Leger and the Association for Priced as of close of business 20 July 2020 Canadian Studies found that 72% of Canadians surveyed were not comfortable flying if seated next to another passenger. It remains to be seen how quickly passenger uptake will resume and the extent to which it could create knock-on effects through to aerospace manufacturing and training services. Environmental: The second, longer-term trend comes from the United Nations’ CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) initiative. From 2021 to 2026 (and mandatory from 2027 onward), participating countries’ airlines will buy carbon offsets for emissions produced above a specific baseline, which over the next three years will be based on 2019 emissions as opposed to the lower expected 2020 levels. Using 2019 as the baseline will provide some short-term relief to internationally focused airlines (CORSIA does not apply to domestic flights). However, as the industry has not traditionally been viewed as environmentally friendly, governments may face intensifying political pressure to implement more stringent carbon regulations or attach other ESG conditions to airlines and the broader aerospace sector, particularly on companies receiving taxpayer assistance. How do we measure company performance? We look to various airlines’ ESG initiatives as they comply with or exceed measures undertaken by the International Air Transport Association (IATA) industry group, the UN, and other government initiatives and regulations. We believe investors are seeking out companies which surpass government regulations and industry best practices and offer a high degree of transparency on the progress of achieving their ESG goals in areas such as community involvement and fleet retirements. Which companies are doing it best? Social: Air Canada received the Best Airline Cabin Cleanliness in North America at the 2019 Skytrax World Airline Awards, and recently launched its CleanCare+ initiative to ensure cabin sanitation. In March, the company was named one of Canada’s Best Diversity Employers for the fifth consecutive year, driven by its partnerships, including Indspire, which provides financial support for Indigenous students in an aviation-related program; a program with Jazz Aviation, operated by Chorus Aviation, to create a First Nations Technical Institute to help Aboriginal students become pilots; and Ready, Willing, and Able, which helps match candidates with intellectual disabilities on the Autism Spectrum Disorder with specific roles. Exchange Income’s airline operations include initiatives focused on First Nations groups: a pilot program with one community to fund a fish processing plant and discounted flight rates to southern markets; a chaperoned program which brings First Nations children to Winnipeg CFL and NHL games; and its Life in Flight pilot training program, which focuses on recruiting from First Nations communities. Environment: Air Canada’s Leave Less targets have endorsed industry-wide goals, including a 1.5% average improvement in fuel efficiency per year from 2009 to 2020, a cap on net aviation CO emissions from 2020, and a 50% reduction in net aviation CO 2 2 emissions by 2050 relative to 2005 levels. The company has also recently accelerated the retirement of 79 older aircraft, reducing its carbon footprint. Air Canada and Jazz are both participants in CORSIA. Governance: Air Canada’s board of directors is 91% independent, with women holding four of 12 seats and a third of executive committee positions. Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. 22 July 2020 2