Retirements and Inductions How are Fleet Demographics Changing?

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1 Retirements and Inductions How are Fleet Demographics Changing? Aviation Week Network: Aero-Engines Americas February 1, 218: Fort Lauderdale, USA

2 TODAY S AGENDA Historic Commercial Air Transport Fleet Dynamics Future Commercial Air Transport Fleet Outlook 1

3 SECTION 1 HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS

4 HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS The airline industry has historically been cyclical; the most recent eight years have been profitable 6% 4% 2% % (2%) (4%) Global Airline Net Profit Margin, F OIL CRISIS GULF WAR SEPT. 11 FINANCIAL CRISIS 6 years 6 years 2 years 8+ years (6%) $66B Source: IATA, Alton analysis Alton Insight Factors sustaining current momentum include: Continued strong growth in air traffic demand, driven by GDP Capacity/pricing discipline from airline consolidation in mature markets Relatively stable and moderate fuel prices 3

5 Indexed GDP/ RPK GDP Growth HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Air traffic demand has long been noted to correlate to GDP growth both continue to expand Historical Air Traffic and GDP Growth ( F) 8 GDP Growth 14% 7 Indexed GDP 12% 6 Indexed RPK 1% % 6% 4% 2% % (2%) Global annual passenger traffic has risen at a multiple of on average 1.7 times global GDP over the past 25 years Demand for air travel has not wavered long in the face of exogenous shocks Source: USDA ERS, Real GDP Projections, September 217; ICAO Annual Report; Alton analysis 4

6 Average Annual Growth HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Fleet growth is driven by increases in air traffic; Middle East and Asia Pacific have led the world in both over the past 2 years 12.% 1.% 8.% 6.% 4.% 2.%.% Fleet and Air Traffic (RPK) Growth by Region ( ) 11.% 1.% 7.1% 6.8% 5.7% 6.% 4.5% 4.6% % Fleet growth Air Traffic 4.6% 4.% 2.7% 1.4% Middle East Asia Pacific Africa Latin America Europe North America Source: USDA ERS, Real GDP Projections, September 217; ICAO Annual Report; Alton analysis 5

7 HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Over the past 25 years, the global fleet has grown at a rate of 5.1%; Airbus has enjoyed the most significant share expansion Global Fleet Count ( ) Global Fleet Count ( ) 3, 3, Widebody Jet Other Embraer 8% 25, Turboprop 25, Bombardier 7% Regional Jet Boeing 9% 2, Narrowbody Jet 2, Airbus 15, 15, 43% 1, 1, 5, 5, 33% Source: CAPA, Alton analysis 6

8 HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Today s commercial air transport fleet consists of approximately 28, aircraft, with Asia Pacific equaling North America in size 18% 9% 16% 24% 8,4 51% 1% 11% 6,6 61% 51% 2,1 39% 22% Narrowbody Jet Regional Jet Turboprop Widebody Jet 14% 17% 1% 2,1 59% 28% 14% 41% 1,3 17% 7% 3% 1% 5% 8,4 63% Source: CAPA, Alton analysis 7

9 % Remaining in Service HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Aircraft have historically retired between 2-3 years or age 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Aircraft Survivor Curves Narrowbody Jet Regional Jet Turboprop Widebody Jet Age of Aircraft, in Years Alton Insight Turboprop aircraft have outperformed other aircraft classes Regional jets as a whole have underperformed but much of this has historically been driven by the 5- seat regional jets Source: CAPA, Alton analysis 8

10 Average Retirement HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Retirement ages for narrowbody and widebody jets have compressed in recent years, but are still near 25 years Retirement Age Trends, Narrowbody Jet 5 Widebody Jet Note: Trailing three year average Source: CAPA, Alton analysis Alton Insight Narrowbody retirement ages have compressed from a peak at the top of the prior cycle Boeing 787 entry-into-service delays kept older widebody aircraft in the fleet through the downturn Despite headline news reports, retirement ages for narrowbody aircraft is close to 25 years today 9

11 Total Aircraft % of Fleet HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Fleet retirements have now declined from previous peak levels 3,5 3, 2,5 2, 1,5 1, Aircraft Retirements Aircraft Retired % Fleet $66B Avg Avg Avg Avg % 2.5% 2.% 1.5% 1.%.5%.% Alton Insight Peak retirements in were driven by (i) a soft demand environment, (ii) high fuel prices, and (iii) marginalized 5-seat regional jets The surge in aircraft retirements spawned advancements in the teardown/part-out industry Low fuel prices and a strong traffic growth environment have driven the recent slowdown in retirements rates The end-of-life market is highly competitive today Source: CAPA, Alton analysis 1

12 Aircraft Retried Engines Retired HISTORIC COMMERCIAL AIR TRANSPORT FLEET DYNAMICS Over the course of the last decade, more than 5, aircraft and 12, engines have left the in-service fleet Aircraft Retirements, , 5, 4, 3, 2, 1, Top 1 Airfames A3/A31 DC /2/3 737 Original A32 MD Classic Engine Retirements, , 12, 1, 8, 6, 4, 2, Top 1 Engines CFM56-5A CF6-5C2 RB PW4-94 PW1 CF6-8C2 JT9D JT8D-2 CFM56-3 JT8D Most retirements have been what are now considered prior generation aircraft & engines. Source: CAPA, Alton analysis 11

13 SECTION 2 FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK

14 Fleet Size FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Over the next decade, Alton projects the commercial fleet will grow at 3.8% per year, reaching over 44, aircraft by 228 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Widebody Jet Turboprop Regional Jet Narrowbody Jet Source: CAPA, Alton analysis 13

15 # of Aircraft 22, FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Demand for new aircraft deliveries will be driven by the combination of aircraft needed for growth & replacement Growth Drivers Economic and middle-class expansion, particularly in emerging markets Stimulation from low fares Market deregulation & liberalization Fleet Projection ( ) 45, 44, 4, 35, 3, Growth 14, 3, 25, Replacement 8, 2, 15, Retained 1, 22, 5, Replacement Drivers Demographics, and attainment of economic life Supply/demand balance Interest rates Fuel prices Emissions regulations Source: CAPA, Alton analysis 14

16 Rate/mo FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Aircraft OEMs presently enjoy large order books and are ramping-up production of the most in-demand aircraft Select Aircraft Fleet & Backlog 787/777X (Next) In Service 777 (Current) Inactive Backlog A33neo/A35 (Next) A33ceo (Current) 737 MAX (Next) 737NG (Current) A32neo (Next) A32ceo (Current) 2, 4, 6, 8, OEM Production Rates ~217 ~ NB WB NB WB Airbus Boeing Source: CAPA, Alton analysis; OEM announcements 15

17 FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK The majority of the backlog is held by Airbus and Boeing 2, 1,8 1,6 1,4 1,2 1, Year Backlog by OEM Others Embraer Bombardier Boeing Airbus Alton Insight Airbus and Boeing combined hold about 85% of the backlog and their relative proportions are fairly steady in the coming years Bombardier and Embraer have smaller and shorter backlogs Remainder of backlog distributed amongst ATR and some emerging manufacturers Source: CAPA, Alton analysis 16

18 FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Asia Pacific accounts for the largest portion of the backlog, although a substantial portion is not yet allocated 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Backlog by Region Widebody Jet Turboprop Regional Jet Narrowbody Jet Source: CAPA, Alton analysis Alton Insight Asia Pacific accounts for 29% of firm backlog true figure is likely more given unallocated orders region s high demand for narrowbodies Europe and North America account for the next highest shares of the backlog at 15% and 14% respectively Approx. 4, aircraft on backlog have not yet been allocated to an operator or region many of these aircraft have been ordered by lessors 17

19 Retirements per Year % of In Service Fleet FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK In 1 years, retirements will grow to more than 1, per year, led by narrowbodies Aircraft Retirement Forecast 1,2 1, 8 6 Widebody Jet Turboprop Regional Jet Narrowbody Jet 3.% 2.5% 2.% 1.5% Alton Insight A gradual increase in retirements is anticipated, absent a major change in industry dynamics or macroeconomic drivers %.5% The end-of-life market, by unit, will nearly double from today s levels % Source: CAPA, Alton analysis 18

20 Aircraft Retried Engines Retired FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Over 8, aircraft and 18, engines are projected to leave the inservice fleet through 228 Aircraft Retirement Forecast, , Top 1 7,5 5, 2,5 CRJ7/9/1 E-Jet MD-8/9 ERJ135/ CRJ1/2 737 Classic 737NG A32 Engine Retirement Forecast, , 15, 1, 5, Top 1 CF34-8C AE37 CF34-3 CFM56-3 PT6A PW1 CF6-8C2 V25-A5 CFM56-5B CFM56-7B The next decade s retirements will include many of today s current generation aircraft & engines. Source: Alton analysis 19

21 Fleet Size FUTURE COMMERCIAL AIR TRANSPORT FLEET OUTLOOK Aftermarket demand will still be driven by current generation equipment for many years to come, despite the retirements A32 Family Fleet Forecast, , A32neo A32ceo 12, 1, 8, 6, 4, 2, Alton Insight The A32neo fleet will grow quickly, reaching A32ceo parity in 226 The in-service fleet of A32ceo aircraft is expected to remain above today s levels through 223 In 227, the A32ceo fleet will be 19% smaller than today s levels Significant opportunity will remain for years to come, for those participating in the current generation aftermarket Source: Alton fleet forecast 2

22 SUMMARY Overall, the state of the aviation industry is strong: Airlines profitable Manufacturers raising production rates Aftermarket demand volumes up The industry remains susceptible to exogenous events Demographics will drive increased retirements in the coming decade most will be today s current generation equipment Despite these retirements, aftermarket demand will still be driven by today s current generation equipment for years to come 21

23 John J. Mowry ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO

24 Alton Aviation Consultancy is a boutique aviation consulting firm with deep domain expertise across the aviation value chain Aircraft Leasing & Financing Advisory Airlines Aviation & Aerospace Investors Business & General Aviation Aerospace Manufacturers & Supply Chain MRO & Aftermarket Airports Specialty Projects Agile. Global. Independent. 23

25 Alton supports a global client base from offices in the U.S., China, Hong Kong, and Tokyo, with additional associates worldwide New York Beijing Hong Kong Tokyo 38 Lexington Avenue 17 TH Floor New York, New York 1168 USA 8 Guanghua Dongli China Overseas Plaza South Tower, Floor 11, Suite A53 Chaoyang, Beijing 12 China 136 Des Voeux Road Central Suite 93 Central Hong Kong Konan Minato-Ku Tokyo, Japan In China, Alton Aviation Consultancy is known as 德世国际航空咨询 ( 北京 ) 有限公司, or De Shi. 24

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