Macroeconomic & Political Dynamics Peter Morris, Chief - PowerPoint PPT Presentation

Macroeconomic & Political Dynamics Peter Morris, Chief Economist, Ascend

Macro Economics and Political Dynamics - 2016 Peter Morris Chief Economist Aviation Frontiers 2016 Dublin January 2016

Agenda • Economic and Demand Trends for 2016 • US Domestic Trends • Oil price and effects on the market • Aircraft orders • Global Risks 2015/16 3

Western Europe likely to see the weakest growth, Asia the strongest 4

Majority of regions expect slight improvement in 2016 EIU Dec 2015 5

Tourism - 2015 slightly better than 2014, with some significant regional variances 6

World Trade sees continued slow growth in 2015 7 Source: WTO

Overall, OECD lead indicators suggest stability. US a concern? Source: OECD 2016 8

Global Air Passenger Demand has continued to be robust Annual Passenger Growth and Total Passengers 16 4,000 14 3,500 12 3,000 Annual % Growth 10 2,500 Average of 6% over 2010-16 8 Pax 2,000 6 1,500 4 1,000 2 Source: IATA 500 0 -2 0 Growth (%) LHS Pax (m) RHS 9

Overall industry profits, margins solid since 2010 Global Airline Profits and % (EBIT) Margin 70 9 8 60 7 50 6 40 % Margin 5 $Bn 30 4 3 20 2 10 1 Source: IATA 0 0 -10 -1 Profit ($Bn) % margin 10

Asia-Pacific (APAC) and Middle East (ME) continued to lead demand growth globally in 2015 16% Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity 14% 12% 2015 Predicted / Actual Growth 10% 8% 6% 4% 2% 0% Africa Asia-Pacific Middle East Latin America North Europe Global America 11 Source – IATA, Year to Date to end November 2015, IATA Dec Forecast

Traffic and Capacity expected to grow by 6-7% globally in 2016 14% Predicted Traffic Growth Predicted Capacity Growth 12% 2016 Predicted Growth 10% 8% 6% 4% 2% 0% Africa Asia-Pacific Middle East Latin America North Europe Global America 12 Source – IATA

The changing face of the industry – U.S. Consolidation Changes in the US Domestic Market 2005-2015 100 80 60 40 20 0 Airlines Flights(*10^4) Seats(*10^6) O-D pairs(*10) Aug-05 Aug-15 13

60 + airports lost domestic service Distribution of US scheduled daily flight departures by airport 2005 vs 2015 (August) 450 400 350 300 Airports 250 200 150 100 50 0 No flights < 10 flights 10-50 flights 50-100 flights 100-200 200-350 350-700 700-1000 > 1000 Fllights flights flights flights flights 2005 2015 14

In a decade, 21% fewer flights, and some major US airports have lost 50%+ of domestic service Change in monthly departing scheduled flights (Top 10) 2015 vs 2005 Growth Decline SFO IAH -4173 -21% 3455 SEA MSP -4414 -22% 2812 DAL PIT -4702 -49% 2181 JFK SLC -5090 -34% 1855 CLT DTW -5276 -26% 1738 ATL -5281 -13% AUS 743 CLE -5689 -57% LAX 702 MEM -6456 -72% LKE 700 IAD -9595 -54% DCA 584 CVG -15606 -79% MIA 554 August Schedules, Innovata

How have oil prices played through? GDP Air Travel •Dramatically falling oil price •Reduction in ticket price since 2014Q2 possible •Falling expectations on future •GDP stimulus for oil import •Hedging a factor •Increases in travel and oil prices countries, and overall •Exchange rate effects vs. $ aircraft demand •Additional supply on horizon •Reduced inflation •Competition level drives •Could be +2%/+4% extra •Losers among ‘oil rent’ speed of price change? under certain scenarios economies •Big benefit for previously marginal airlines Oil Price •6.7% RPK growth 2015 16

A view from 2008 17

History lesson? There were dire predictions of the impact of fuel price on demand in 2008. While it was still a huge challenge, demand proved more robust, and supply costs more flexible than expected

Having returned to profitability during high oil prices, the industry is profiting from their rapid decline 40 120 30 100 Crude Oil Price (US$ per Barrel) Global Airline Net Profit (US$bn) 20 80 10 60 0 40 -10 20 -20 -30 0 Net Profit (LHS) Crude Oil Price (RHS) 19 Source – IATA/ Ascend

70%+ Collapse of oil price in 18 months 20

Oil ‘Futures’ prices suggests only slow rebound - and have reduced dramatically since last year Future Brent Crude Price ($/Barrel) for Delivery 2016-20 At Jan 2015 At Jan 2016 100 80 60 40 20 Source: Barchart 0 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 21

Next generation lease rate premiums are sensitive to fuel price 22

Next generation fuel burn environmentally more efficient 90 CO2 emissions (g per pax-km) -13% 80 -14% 70 60 50 40 30 20 10 0 767-300ER 787-8 A330-300 A330-900neo 23 Source – Ascend analysis of Airbus and Boeing data, 3,000nm sector

Order volumes continue to be high $209bn 4,000 3,500 3,000 $ 123bn Commercial jet orders 2,500 2,000 1,500 1,000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jet Gross Orders Jet Net Orders 24 Source: Flightglobal Fleets Analyzer – orders for commercial customers only

Commercial jet backlog at record high 16,000 70% Backlog Value 14,000 Now $960bn 60% Commercial Jet Order Backlog 12,000 Backlog as % of Fleet 50% 10,000 40% 8,000 30% 6,000 20% 4,000 10% 2,000 0 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Backlog at Year End Backlog as % of Fleet 25 Source: Flightglobal Fleets Analyzer & Ascend Values (2016$ Base Full Life Value)

Deliveries represent typically 6-8% of the global fleet 2200 11% 2000 10% Deliveries as % of Fleet in Service Passenger Airliner Deliveries 1800 9% 1600 8% 1400 7% 1200 6% 1000 5% 800 4% 600 3% 400 2% 200 1% 0 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2011 Deliveries / Forecast Deliveries Deliveries as % of Fleet in Service 26 Source: Flightglobal Fleets Analyzer & Flightglobal Fleet Forecast

Comparing take off - Widebody programme A350 and 787 Cumulative Orders from First Year 1,200 1,000 800 600 400 200 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 787 A350 27

Comparing Take Off - Narrowbody Programmes A320neo and 737 Max Cumulative Orders from First Year 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Year 1 Year 2 Year 3 Year 4 Year 5 A320neo 737 Max 28

Trying to categorise and assess Global Risk Source: World Economic Forum 29

Ratings for Likelihood and Impact of Global Risks Source: Global Risks Survey 2015 World Economic Forum 30

Significant variance in risk factors by region 31

Heightened concerns on geopolitical issues and terrorism Source: McKinsey, Dec 15 32

Caution in Developing Markets Source: McKinsey, Dec 15 33

Summary GDP growth continues (if weak) and cost structures under control Oil price continuing fall is a big plus for industry, and continues (for five years?) Global Traffic Demand 2016 will likely be higher than previously forecast, with local exceptions Various stakeholders will bid for a share of the ‘new’ profitability Aircraft demand strong, with a few ‘widows and orphans’ Current orders seem robust and younger/mid life aircraft more attractive Wider demand risk factors continue to fission

A final thought, after analysing the industry for 30 years • Positive GDP Growth • Profitable Industry • Full Order Books • Possible 50% (and more) fuel cost decline • New aircraft technology coming on stream

Flightglobal and Ascend – Aviation Connected Peter Morris Chief Economist +44 (0)20 8564 6790 peter.morris@ascendworldwide.com The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to Ascend Advisory, its offices, or employees in respect of any error or omission that may have occurred. 36