Macro Economics and Political Dynamics Hong Kong, 31 October 2017 Peter Morris, Chief Economist 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 2
Flight Ascend’s unique Value proposition as an appraiser Independent, objective, global team We do not invest in aircraft and we are not brokers – we have NO conflicts of interest We are based in London, New York and Hong Kong and travel the world bringing regional and global opinion into our research Instant access to vast database for research The only Appraiser with a globally recognized Fleets database used by our clients The only appraiser offering schedule information Unparalleled Historical values data Historical Market values from 1965 Access to top industry participants Clients are Airlines, all the top lessors, the major banks involved in aviation finance, 3 MROs, OEMs, regulatory bodies Presence at all major aviation events (Paris Airshow, ISTAT Asia / US / Europe…)
The Flight Ascend Consultancy Team Chris Wills George Dimitroff Rob Morris Joanna Lu Head of Consultancy Ops. Head of Valuations Global Head of Consultancy Head of Advisory Asia ISTAT Sr. Appraiser ISTAT Appraiser Tony Brooks Peter Morris Senior Analyst Michael Lapson Thomas Kaplan Chief Economist ISTAT Appraiser Senior Analyst Valuations Analyst ISTAT Appraiser Ben Chapman Chris Seymour Valuations Manager Head of Market Analysis ISTAT Appraiser Dennis Lau Daniel Hall Senior Analyst Aviation Analyst ASA Sr. Appraiser Eva Karagianni Henk Ombelet Valuations Analyst Senior Analyst Michael Hui David Griffin Aviation Analyst Senior Analyst Sara Dhariwal Richard Evans ISTAT Appraiser Valuations Analyst Senior Consultant Vacant Senior Consultant Oliver Ford Syed Zaidi Ryan Hammacott Valuations Analyst Aviation Analyst Risk Analyst Kevin Ng Luke Smith Lionel Olonga Aviation Analyst Valuations Analyst Valuations Analyst Valerie Bershova Valuations Analyst 4
Outline • Industry Drivers • Recent Traffic and Capacity Trends • Profitability • Political Uncertainty
The Aviation Evolutionary Cycle • GDP and population • Liberalisation • Price • Trade Blocs • Product & Information • Competition • Shock Events • Protectionism • Changing tastes Customer Regulatory Airline/ Technology Airport market Investment structure • Aircraft performance • Ownership • Distribution options • Alliances • Information flow • Route network growth • On board product • Segmentation • Actual Performance • Consolidation
Passenger traffic growth has varied, but shown robust recovery from shocks Gulf War AFC NYC GFC 7
Changes in the world’s economic centre of gravity 8
Mature markets slip down table, developing markets rise Source: PWC Feb 2017 9
A decade and a half of structural change by region 11% 2%
Changing airline shares of world seat capacity 2002-16 Source : Turkish Airlines 11
Steady growth expectations to 2021 across most regions 12
Steady Improvement in European growth expectations 13
Similarly in Asia Pacific 14
China GDP growth is expected to slow with economic maturity and demographics China GDP Growth Projection 10 9 8 7 6 5 4 3 2 1 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 15
Three major regions and OECD overall now over 100 on Composite Leading Indicators Index • USA now the major one left marginally below 100 101.0 100.5 100.0 99.5 99.0 98.5 OECD Leading Indicators, August 2017 98.0 USA Eurozone Major 5 Asian OECD Total 16
WTO Trade Indicator now highest since 2011 Source: WTO September 2017 17
Year-on-Year Change expected in early 2017 Global passenger traffic growth stronger than -15% -10% 10% 15% 20% -5% 0% 5% Jul-08 Sep-08 Nov-08 Jan-09 Source: IATA Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Traffic (RPK) Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Capacity (ASK) Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 6.2%, Traffic = 6.3% May-15 2016 Capacity = Jul-15 Sep-15 Nov-15 2017YTD Capacity = 6.5% Traffic = 7.9% Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 18
Strong growth seen in domestic markets Apr 2017 Mar 2017 7.7% Industry 7.4% 16.7% Domestic Russia 14.8% 15.3% Domestic India 14.9% 12.7% Domestic China 15.3% 6.6% Domestic Japan 8.1% 4.7% Domestic USA 3.4% 3.0% Domestic Brazil 6.0% -2.1% Dom. Australia -0.7% -5% 0% 5% 10% 15% 20% Domestic revenue passenger kilometres (% year-on-year) Source: IA T A
Year-on-Year Change -30% -20% -10% 10% 20% 30% 40% 0% Jul-08 Oct-08 Source: IATA grow 7.3% in 2017 Freight market now predicted to Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Traffic (FTK) Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Capacity (AFTK) Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 2016 traffic = 3.8%, Jul-14 capacity = 5.3% Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 20
IATA has markedly updated forecasts for 2017 10 7.7 Previous forecast Percentage change or % revenues 7.4 8 7.3 7 6.6 Current forecast 5.6 6 5.1 4 3.3 2.9 2.5 2 0 0 -2 -2 -4 GDP Pax yields RPKs Freight tonnes ASKs Operating margins Source: IA T A
2017 industry profits down but upgraded Net profits and operating margins Net profits - current Net profits - previous Operating margin - current Operating margin - previous 40 10 35 30 8 25 % revenues US$ billion 20 6 15 10 4 5 0 2 -5 -10 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: IA T A
Global economic cycle Steady performance with improvement seen since late 2016 Indicator Current level Trend GDP EIU estimate for 2016 was 2.2%. 2017 forecast Forecasts for global GDP for 2017 show an currently higher at 2.9%. Asia-Pacific leads at improvement over 2016 for North and Latin 4.4%, US 2.2%, W Europe 2.1%, Latin America America, as well as Middle East and Africa. Russia 1.1%. also emerging from recession. OECD Leading Indicators OECD members stable over 100 index. Within Inflexion point in many countries (e.g. China by this, Euro Area above 100; Major 5 Asian Q4 2016). Overall, most major economies countries (including China) now above 100, as showed an improving trend. PMIs also showing are many developing nations. US just below 100. improving trend Trade in 1 st 2Q 2017 up 3-4% World Trade World trade drivers continue to show momentum in to Q3 2017. WTO Outlook indicator showing 3 Green, 3 Amber and 1 Red in August 2017 23
Aviation demand cycle Demand side stable, traffic trends positive, but some yield pressures Indicator Current level Trend Passenger traffic Above trend growth for sixth year running, 2017 Traffic growth accelerating since late 2016. Q2 2017 up to predicted to be 7.4%. Led by India. China. LCCs and year- over 7% compared to 2016. on-year recovery in Russia. Freight traffic Improving trend in recent months. Freight load factors Jan-July 2017 up 10.6% increasing throughout 2017. Yields US saw declines of 5-10% for most of 2016, reflecting Yields fell from December 2014; However, costs were lower fuel prices. IATA estimate -8% globally. Costs are down by >10% as a result of falling oil prices. Now costs now increasing again, and US yields are flat to up 2% are increasing, yields have stabilised. year-on-year Load Factors Still near historically record levels in all markets. India All regions except Middle East showing improvements in and China at record highs recent months New aircraft orders Order intake fallen sharply from the levels of 2011- YTD 2017 book-to-bill around 0.7 for all commercial jets, 2014. However, this was expected given record backlog even lower for RJs of 14,000 aircraft ($900bn) and limited open slots through 2020 Deferrals & Deferrals have ticked up following recent airline capacity Both cancellations and deferral rate increased in 2016, adjustments from prior low level. Cancellations now just but slowing in 2017. Most cancellations due to OEMs cancellations above average, although this is lower if normalised for cleaning order book but deferrals reflect fleet plan fleet size iteration (Southwest, AA, Turkish, Qantas). 24
Forward schedules show some slowing of ASK growth for winter 2017/18, but still above 6% 12% Feb 2016 was a Leap History Forecast Year 10% Year-on-Year Change 8% 6% Capacity ran at 6% growth during 4% Q2/Q3 2016 2% 0% Nov 2016 Schedule Jan 2017 sched Mar 2017 sched Leap Year adj. Jun 2017 sched Aug 2017 sched Sep 2017 Sched Source: Flight Schedules data 25
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