Aviation Market Overview Martin Sutton, Executive Director Standard - PowerPoint PPT Presentation

School of Aviation Finance Aviation Market Overview Martin Sutton, Executive Director Standard Chartered Bank

Aviation Market Overview January 2016 Martin Sutton Standard Chartered Bank

Industry Overview AIRCRAFT DEMAND DRIVEN BY GDP AIRCRAFT LEASING INDUSTRY  Increased demand for aircraft and  Global GDP growth expected to be financing from Lessors, who are set around c.3.0% in 2016, rising to 3.1% to account for 50% of the market. in 2017 (source: SCB Research).  Established platforms being  Forecast long term global economic Leasing challenged by new entrants from growth of 3.1% pa . (source: IHS Industry China. Economics). Demand Strong Fundamentals will PASSENGER TRAFFIC GROWTH MANUFACTURER STRATEGY continue to drive Industry Growth  Passenger traffic growth to continue  Effective duopoly, with high barriers OEM Traffic and Aircraft above long-term trend of 5% p.a to entry. Strategy Demand Growth  Traffic growth of 6.9% expected for  Airbus and Boeing continually 2016, up from 6.7% in 2015 and 5.9% monitor production rates and supply in 2014. (source: IATA) . of in-demand aircraft. Airline Oil Profitabilit Prices y LOWER OIL HIGHER AIRLINE PROFITABILITY  Lower fuel costs expected to result in  Improved profitability and credit higher traffic growth and greater quality driven by lower oil prices and aircraft demand. stronger worldwide GDP growth.  Higher oil prices would see a shift in  Record industry net profits of $33Bn demand towards more fuel-efficient forecast for 2015, rising to $36Bn in types popular with operating lessors. 2016. 3

Regional Perspective Asia-Pacific EMEA AMERICAS    Asia-Pacific airlines expected to Double-digit traffic growth in the Strongest regional financial achieve a 3.2% net profit margin, Middle East driven by regional performance by US carriers due driven primarily by lower fuel prices economic growth, capacity expansion strong US economy, appreciating US and traffic growth of 8.0%. and success of the “global hub” dollar, lower oil prices and a model. Region is split between strong restructured industry in recent years. Gulf “hub” airlines and regionally-  China economy slowing, but at c. 7% focused airlines impacted by lower oil  remains a key driver for regional and US Airline net profit forecast of revenues and political conflict. global economic growth. Despite a USD19.2Bn (net margin 9.5% vs. slowing economy air travel remains 5.1% globally) supported by high load  Despite its great potential, Africa strong. factors of c.84%. remains the weakest region, with profits barely positive. Carriers subject to political instability in N.   Weakness in cargo markets impacting Latin American airlines performance Africa, weak economies and stiff airline revenues and profitability weak due to deepening economic competition on international markets. (Asian carriers account for 40% of air crisis in Brazil, weak commodity Longer term above average economic freight market) prices and adverse currency growth rates should improve carrier fluctuations. Region expected to see performance. a modest net profit of USD0.4Bn in  LCC penetration is high and a key 2016 (1.1% net margin). growth driver for the region.  European carriers achieving second highest load factor and solid growth. However combination of strong competition, low yields and high regulatory costs is impacting financial performance of some legacy carriers. 4

Demand For Aircraft 5

Aviation is a long-term growth industry World GDP and Passenger Traffic (RPK*) Growth World Airline Traffic Forecast (RPK’s) 10.0 20 18 Historical Forecast 16 7.5 15 14 % growth rate (RPK's) 5.0 10 12 % growth rate (GDP) RPK's (trillions) 10 2.5 5 8 Long-term Growth 6 0.0 0 2014-2034 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Global GDP =3.1% pa 4 Passenger traffic = 4.9% pa -2.5 -5 2 GDP Growth Traffic Growth (Cargo = 4.7% pa) Growth 5.1% pa 0 -5.0 -10 Source: IMF, ICAO, IATA Source: Airline Monitor, Boeing CMO 2015 Demand for air traffic is closely linked with the global economy, 20 year traffic growth forecast of 4.9% p.a. driven by long   following a similar cyclical pattern. term global economic growth of 3.1% p.a.  Historically passenger traffic (RPK’s) has grown at around 1.5 to  Key drivers: 2.0 x the trend of long-term growth rate in GDP. Globalisation of economies, • global tourism, •  Air traffic doubles every 15 years deregulation of air travel markets, • growth of low cost / low fare carriers. • *RPK – Revenue Passenger Kilometre – (a measure of passenger demand, representing each kilometre each passenger is carried) 6

Air travel demand is resilient to external shocks Annual World Airline Passenger Traffic World Passenger Traffic and Commercial Jet (RPK’s billions) Aircraft 7,000 28,000 7,000 Oil Oil Gulf Financial 9/11 and Crisis Crisis Crisis Crisis aftermath RPK's Aircraft 6,000 6,000 SARS 21,000 5,000 5,000 Number of RPKs (billions) Jet Aircraft In-service 4,000 4,000 14,000 3,000 3,000 2,000 2,000 7,000 1,000 1,000 Growth 5.1% pa 0 0 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Source: Airline Monitor Source: Airline Monitor In each case negative growth was due to a severe external   Air traffic growth is subject to event risk but has shown shock event, with the subsequent traffic recovery being rapid. resilience, even in difficult economic times. The industry has only experienced three years of negative   Demand for aircraft closely follows traffic growth. growth since 1970. 7

Long term demand for new aircraft remains strong Projected Commercial Aircraft Fleet Growth: OEMs 20 Year Forecasts Boeing Airbus Worldwide Aircraft Fleet Worldwide Aircraft Fleet (Number of Aircraft) (Number of Aircraft) 50,000 50,000 43,560 45,000 45,000 38,500 40,000 40,000 Airplanes 35,000 35,000 38,050 Airplanes for for Growth New 32,585 30,000 30,000 Growth Aircraft New 25,000 25,000 21,600 Deliveries Aircraft 19,000 Deliveries 20,000 20,000 c. $5,570 Airplanes billion c. $4,900 15,000 for 15,000 Airplanes billion Replacement for Current Current 10,000 10,000 Replacement fleet fleet 5,000 5,000 Retained Retained fleet fleet 0 0 2014 2034 2014 2034 Source: Boeing Current Market Outlook 2015 Source: Airbus Global Market Forecast 2015 8

Key Demand Drivers Aircraft For Growth Aircraft For Replacement  Demographics.  High fuel prices drives replacement of older aircraft for more fuel efficient types.  Emergence of middle class consumers with increasing propensity to travel as economy develops.  Emissions / regulatory changes.  Transport infrastructure and geographic challenges  Aircraft reaching end of their economic useful make air transport essential for growth, particularly in lives. more remote regions.  Freighter conversions, driving replacement  Global economic growth rates. demand of passenger aircraft.  Increasing urbanization in emerging markets.  Increasing regional co-operation and progressive air deregulation.  Fast developing low cost carrier (LCC) market segment  Increasing tourism traffic both domestic and international. 9

Demographic and Economic Drivers Traffic and Propensity to fly 2014 Trips per capita – Log Scale  Air travel market penetration still low in emerging markets: 85% of population, but only 40% of trips.  PRC and Indian sub-continent will become drivers of long-term growth in Asia. China GDP growth of 5.6% pa forecast (6.6% traffic growth), India GDP 6.6%, traffic 8.3%.  Propensity to travel set to increase as income levels rise and household consumption increases in emerging markets.  China’s potential will reach current European levels by 2034 at around 1.09 trips per capita. India will be at current Chinese levels (0.3 trips per capita).  Increasing middle class: India set to treble from 66 million today to 180 million by 2030. China to increase from 90 million to over Middle Class to grow, doubling in emerging countries 300 million by 2024. Middle Class*, millions of people History Forecast 4,721 5,000  Increasing urbanisation: Immigration within Asia-Pacific has grown rapidly with labour moving towards fast-growing newly 3,671 4,000 industrialising countries. 2,703 Emergin 3,000 g 3,977  Asia to account for more than 50% of world urban population countries 1,792 2,936 growth to 2050. 2,000 2,001 1,120 1,000  Liberalisation of visa policies in China and adoption of ASEAN N. 263 264 247 259 America single aviation market helping to support industry growth. 480 425 444 471 Europe 0 2004 2014 2024 2034 6,40 7,20 8,00 8,600 World Population 0 0 0 28 37 46 55 % of World % % % % Population 10