Global Aviation Sector Overview 21 st February 2017 Rob Morris, Global Head of Consultancy flightglobal.com/consultancy 1
FlightGlobal: Pioneering aviation insight and analytics business Part of a leading data solutions group RELX Group: London, Amsterdam and New York Stock Exchange listed 28,500 employees Market Capital $36.87bn FlightGlobal: 370+ staff 11 offices across the world flightglobal.com/consultancy 2
Flight Ascend’s unique Value proposition as an appraiser Independent Global team – fully objective We do not invest in aircraft and we are not brokers – NO conflicts of interest Global perspective with offices in London, New York and Hong Kong Instant access to vast data for research The only Appraiser with globally recognized Fleets, schedules and values databases used by our clients on a day to day basis Unparalleled Historical values data Historical Market values from 1965 Access to industry Tier 1 participants Clients are Airlines, all the top lessors, the major banks involved in aviation finance, MROs, OEMs, regulatory bodies flightglobal.com/consultancy 3
Global Aviation Sector Overview and Outlook Aviation Asset Value Risk Twin-Aisle Aircraft Markets Some Final Thoughts on Operating Leasing flightglobal.com/consultancy 4
Global Aviation Sector Overview and Outlook flightglobal.com/consultancy 5
But first, why invest in commercial aircraft? Despite volatility in the aviation market over the past 20 years, investment in aircraft leasing has shown remarkably stable returns The Ascend Aircraft Investment Index measures this return and volatility On a risk reward basis, investment in aircraft has outperformed many other asset classes including shipping and precious metals Aircraft leasing has shown low correlation with indices that reflect the general economy such as the S&P500 flightglobal.com/consultancy 6
Returns from investing in aircraft are stable and uncorrelated to other alternative investments 1,200 Aircraft Investment Index 1,000 S&P 500 Index MSCI World Index 800 Dow Jones Transportation Index 600 S&P 500 Airlines Index 400 200 0 Source: Ascend Aircraft Investment Index flightglobal.com/consultancy 7
Commercial aviation is a long-term growth sector 20% 15% 10% Year-on-Year Change 5% 0% -5% -10% Traffic (RPK) Capacity (ASK) Source: Ascend Analysis of IATA Data flightglobal.com/consultancy 8
2016 opened with a strong demand outlook….. Demand side looks very strong (“as good as it gets”?) Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations flightglobal.com/consultancy 9
…..but closed in a very different place Demand side weakening, trends suggest may be past cyclical peak Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations flightglobal.com/consultancy 10
Oil prices stabilised after falls that commenced in 2014 IATA’s 2017 base case fuel scenario is now $64.90 per barrel Jet Fuel 140 350 (=$1.54 per USG) Crude oil price trajectory 120 300 has considerable Crude Oil $ per Barrel uncertainty at present Jet Fuel Cents per US Gallon 100 250 80 200 60 150 40 100 20 50 0 0 Oil Price Jet Fuel Source: US EIA / IATA flightglobal.com/consultancy 11
Airline profits at record levels over past two years 40 30 Global Airline Net Profit ($bn) 20 10 0 -10 -20 -30 Source: IATA flightglobal.com/consultancy 12
Supply side indicators suggest a different story Fewer concerns in supply side but watching for evolving capacity surplus if demand weakens Indicator Current level Trend Aircraft deliveries Deliveries for replacement/growth Deliveries as percentage of fleet Stored aircraft Used aircraft availability Aircraft economic life Aircraft utilisation flightglobal.com/consultancy 13
So where are we in the cycle? Mixed messages from the global economic cycle Economic recovery remains weak for such a long cycle Aviation demand cycle remains strong but trends suggest we are now past the peak Fuel prices previously helped on the cost / yield side but now expecting cost headwinds from increasing fuel and labour costs Watching closely for signs of evolving capacity surplus Expect to see retirement volumes tick up and potentially utilisation tick down Some amber / red indicators in aviation supply cycle which may be getting ahead of demand? Deliveries trending towards higher % of installed fleet Average age of retirement continues to decline Concerns over OEMs increasing production rates, particularly in single-aisle flightglobal.com/consultancy 14
Passenger jet fleet forecast to increase by 10,600 units in next ten years 40000 35000 Commercial Passenger Jets in 30000 25000 20000 Service 15000 10000 5000 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Single-Aisle Twin-Aisle Source: Flight Fleets Analyzer, Flight Fleet Forecast flightglobal.com/consultancy 15
Record backlog driving increased production rates 2500 Planned Annual Production 2000 1500 1000 500 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Regional Jet Single-Aisle Twin-Aisle Source: Flight Ascend Analysis of Announced OEM Production Rates flightglobal.com/consultancy 16
Airbus and Boeing each expected to deliver around 820-830 aircraft in 2018 worth around $60 billion each 160 140 Estimated Delivery Value (2017$) 120 100 80 60 40 20 0 2016 2017 2018 2019 2020 Airbus Boeing Bombardier Embraer Sukhoi COMAC Mitsubishi Irkut Source: Flight Fleets Analyzer, Flight Values from Ascend (delivery value assumed to be 2017 FLBV) flightglobal.com/consultancy 17
Aviation Asset Value Risk flightglobal.com/consultancy 18
How should investors select their assets? Investors should favour assets that have liquidity The aircraft most preferred by investors today are single-aisles A320 and 737 families Business model drives portfolio strategy, can differentiate on Age Aircraft category (Regional, Single-aisle, Twin-aisle, Turboprop, Helicopter) Volatility of values must be considered in hand with depreciation Ratings estimate downside risk on future base value flightglobal.com/consultancy 19
The Herfindahl-Hirschman Index (HHI) is a recognised measure of liquidity 2,000 1,800 1,600 HHI 1,400 1,200 1,000 800 600 400 200 0 Source: Flight Ascend Consultancy analysis flightglobal.com/consultancy 20
Values move in relation to supply and demand driven by macroeconomic events Historical CMV (US$ Mn) – Generic aircraft example Older aircraft 35 more Out of production exposed to oil 30 “marginal lift” benefits 25 from upturn Liquidity 20 Crisis 15 10 Gulf War and Early 90s 5 Oil Recession 9/11 Spike 0 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: Flight Ascend Values flightglobal.com/consultancy 21
Ratings use historical volatility to forecast a downside risk envelope 160 140 120 Value, US$ Mn 100 80 60 40 20 0 Downside Volatility BV CMV Source: Ascend Values & Ratings, 2005 build 777-300ER, 2% future inflation flightglobal.com/consultancy 22
Twin-Aisle Markets flightglobal.com/consultancy 23
4,100 passenger and 1,000 cargo twin-aisles in service today 6,000 Stored Cargo In-Service Twin-aisle Jet Fleet 5,000 Passenger 4,000 3,000 2,000 1,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Flight Fleets Analyzer flightglobal.com/consultancy 24
Twin-aisle deliveries increased significantly over past few years but paused in 2016….. 450 400 Twin-aisle Aircraft Deliveries 350 300 250 200 150 100 50 0 747 767 777 787 A300 A310 A330 A340 A350 A380 MD-11 Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only flightglobal.com/consultancy 25
…..before heading upwards marginally again? 500 450 Twin-aisle Aircraft Deliveries / 400 350 300 Backlog 250 200 150 100 50 0 747 767 777 787 A330 A340 A350 A380 Scheduled Production Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only flightglobal.com/consultancy 26
Deliveries normalised for fleet have increased significantly 450 10% Twin-aisle Deliveries as Share of 400 9% Twin-aisle Aircraft Deliveries 350 8% 300 7% 250 6% Fleet 200 5% 150 4% 100 3% 50 2% 0 1% Twin-aisle Deliveries As Share of Fleet Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only flightglobal.com/consultancy 27
530 twin-aisles in store, but 75% of these are more than 15-years old 400 passenger aircraft, ~10% have known future placements, 35 ~10% scheduled for part-out Other 30 A380 Stored Twin-aisle Fleet A350 25 A330 20 787 777 15 767 10 747 5 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 Aircraft Age (Years) Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only flightglobal.com/consultancy 28
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