GHI Financial overview, trends and opportunities

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1 GHI Financial overview, trends and opportunities 29 March 2017

2 Market overview

3 Market overview: Macro indicators 4.8% Passenger Passenger traffic is expected to reach 7 billion by 2034 with a 4.8% average annual growth in demand. This is double the 3.5 billion passengers who were flown during 2015 Cargo traffic (RTK) 4.2% Growth in trade, favourable policies promoting open and global economy concepts will stimulate global trade and air cargo sector And for 3.8% the Airline first traffic (RPK) time in its history, Airline Fleethe airline 3.6% industry generated Growth in airline traffic due to massive Owing to growth in passengers and cargo, the expansion by low a cost ROIC carriers, that exceeded aviation sector the would cost require approximately of capital increase in global routes, introduction of new routes and low fuel prices 40,000 airplanes in next 20 years with maximum aircrafts delivered in Asia Net Profit of USD 35.3 Billion Revenue 2.9% of USD 718 billion World Economy GDP Growth in world economy is expected to be driven by emerging markets such as China and India. Currently, the number 2.4% (Q4, 2016) Billion 51 MMT 26,000 aircrafts 51,000 routes 700 new routes 100k turns 2.7 Trillion to GDP Source: Boeing, Airbus and KPMG analysis 3

Market overview: Airline industry Flight volumes, which are one of the key drivers of ground handling business, are expected to remain strong and grow in the medium to long term Global

2% CAGR (2015-2034) 600 500 400 300 200 100 Cargo RTK billion RPK (trillion) Passenger aircraft fleet 2016 2034 Change 6.2 16.1 2.5X 19,880 40,630 2.

4 Market overview: Airline industry Flight volumes, which are one of the key drivers of ground handling business, are expected to remain strong and grow in the medium to long term Global RPK/RTK outlook ( F) Passenger RPK trillion Forecast Passenger RPK, 4.9% CAGR ( ) Cargo RTK, 4.2% CAGR ( ) Cargo RTK billion RPK (trillion) Passenger aircraft fleet Change X 19,880 40, X Global air traffic (RPK) to grow at an average annual rate of 4.9% Global cargo growth estimated at 4.2% annually, driven largely by emerging markets World GDP forecast at 2.9% over the same period 0 0 Dedicated freighters 1,720 2, X Source: Boeing, Airbus and KPMG analysis 4

5 Market overview: Airline domicile Within the emerging markets, countries from Asia are expected to out-perform, by 2034 Asia will contribute to more than one-third of global air traffic Asia Pacific 6.0 Growth Engines Europe 3.4 North America 2.7 Middle East Latin America CIS Africa Untapped Potential RPK traffic by airline domicile (trillion) Source: Boeing, KPMG analysis 5

6 This growth in air transport is likely to be led by the emerging markets which are expected to grow at a much higher rate than the developed countries RPK CAGR % RPK CAGR % Western Europe North America Japan China India Middle East Asia Africa CIS Latin America Eastern Europe Source: Boeing, KPMG analysis 6

7 A tale of two markets Volume markets Growth markets LCC model continues to expand, premium customers declining Airline consolidation and global alliances are reducing the potential number of clients Competitive or difficult to enter handling markets Pricing and political pressures North America and Western Europe Ongoing liberalisation but political issues remain M&A activity continues in sector But partnering still strong Asian and Middle Eastern players active in M&A Growth markets (i.e. Asia, Africa, South America) providing opportunity Asia, Middle East, South America, Africa and E Europe 7

Market overview: CG Shifting east Annual GDP growth between 2015 and 2035 1 Vigorous economic growth World Europe North America Latin America Africa Middle East Asia 1.

8 Market overview: CG Shifting east Annual GDP growth between 2015 and Vigorous economic growth World Europe North America Latin America Africa Middle East Asia 1.8 Asia expected to witness maximum growth in GDP among other regions, India and China contributing maximum to the growth Key Growth Drivers Open Skies, Low Cost Carrier business model Ease of travel, ease of visa regulations Growing accessibility to air transport service Expected high annual growth in passengers (approximately 100 million) Supportive policy and regulatory environment Expected growth forecast by % Airline traffic 48.7% Passenger traffic 15,100 Fleet requirement 300% (RPK) as a % global traffic Growth in fleet size 8

9 Developing markets such as China, India and Indonesia are expected to be major drivers of the Asia growth story China India (Pop: 1.4b, GDP growth FY15 6.9%) To add 856 million new passengers per year by 2034, highest in the world China will become the world s largest air transport market by 2030, overtaking the US By 2031, China will have 1 billion domestic passengers per year, highest in the world (current approximately 300 million per year) (Pop: 1.3b, GDP growth FY15 7.3%) To add 266 million passengers per year to 2034 (only US and China to add more) Become the third largest market by 2031 with 367 annual passengers (currently ninth with 100 million passengers) Domestic market will grow at CAGR of 6.9% (one of the highest in the world) to reach 215 million passengers by 2031 Source: (1) IATA passenger forecasts, October 2014 (2) IMF Indonesia (Pop: 0.3b, GDP growth FY16 5.0%) To enter the top ten around 2020 and attain sixth place by By 2034 it will be a market of 270 million passengers Become the fifth largest domestic market to reach 191 million passenger per year by

10 India: A global bright spot Growth drivers for Indian Aviation sector Expected growth indicators in % GDP Growth FY 16 >7% Increase in disposable incomes Increased propensity to travel Passenger Growth Airline Traffic Movement 370 Mn 2.3 Mn 15% Deregulation of aviation sector Share of Services in GDP FY 16 57% Prominence of low cost travel Airport Revenue Growth ~INR 400 Billion 20% Decrease in ATF taxes Cargo Traffic Growth 5.7 MMT 16% Aviation Growth FY 16 19% Business friendly policies Positive government support Airline Operating Revenue USD 140 Bn 9% 10

11 India: A global bright spot (cont.) December 2016 (% year-on-year) Work Share (a) RPK ASK PLF (%-PT) (b) PLF (Level) (c) Domestic 36.3% 7.1% 5.8% 1.0% 81.5 Dom. Australia (d) 1.0% 0.9% 0.2% 0.5% 78.6% Dom.Brazil (d) 1.2% (1.9)% (4.3)% 1.9% 81.7% Dom. China P.R. (d) 7.7% 16.9% 13.1% 2.7% 81.4% Dom. India India (d) (d) 1.3% 23.7% 21.4% 1.7% 88.6% Dom. Japan (d) 1.1% 4.7% (1.6)% 4.1% 67.6% Dom. Russian Fed (d) 1.3% 13.4% 11.2% 1.5% 75.0% Dom. USA (d) 14.9% 2.4% 2.7% (0.3)% 83.9% India s Growth Story Development and implementation of aviation related policy interventions NCAP 2016 Regional Connectivity Scheme Infrastructure status for Airport, GHA s Ease of doing business Ease of travel Surge in middle-class incomes from tier II and tier-iii cities Result: India has leapfrogged from 08th position to 03rd position in domestic air travel Note: (a) % of industry RPKs in 2016 (b) Year-on-year change in load factor (c) Load factor level (d) The seven domestic passenger markets for which broken-down n data are available account for 30% of global total RPKs and approximately 82% total domestic RPKs Source: IATA, India s Growth Story Further deregulation of aviation business decongestion of airspace availability of trained manpower CHEAPER CAPITAL and aims to be the number one aviation market by

12 Market overview: Ground handling Global ground handling market size estimates F (USD billion) USD Billion % 76% 48 42% 58% 55 45% 55% 61 Independents to grow at a CAGR of 7.5% F 2022F 50% 50% 72 60% 40% Airports and airlines selfhandling Independents There are differing estimates of market size Which is influenced by what is included in the definition of ground handling. However, there is a general consensus over the anticipated growth rate in the industry The market estimate presented here is based on aircraft turnaround Price growth between 1-2% Mainly inflation driven But margins under pressure as competition has driven down price Source: KPMG estimates 12

13 Market overview The expected high growth in traffic is likely to propel the development of new aviation mega hubs in Asia and Middle East From 18 hubs currently to 35 hubs by 2034 Number of mega hubs expected to grow 4 times Key: >50,000 daily long-haul passengers >20,000 daily long-haul passengers >10,000 daily long-haul passengers Source: (1) Recreated based on data from Airbus reports Note: Indicative placements only 13

14 The growth trajectory aside, there are several market dynamics and operations related issues which are influencing the decisions of leading players in this market Emerging trends and key issues Emergence of independent third party handlers The challenging business environment is forcing many airlines and airports to re-evaluate the strategic fit of their ground handling operations Many are increasingly looking at third party providers in a move aimed at converting their fixed costs into variable costs Network expansion in high growth markets Key players have been expanding their size (build-up or organic growth for the Middle-East/Asian players) To meet requirements of the global airlines and emerge as one-stop-shop ground handlers High cost pressure and increase in quality requirements Digital disruption Airlines are putting pressure on ground handling companies to reduce costs While at the same time the requirements on quality and on-time-performance are continuously rising The emergence of the digital traveller has forced airlines to relook at their business models around customer experience This may lead to potential obsolescence of a large chunk of terminal services offered by ground handlers Lease versus buy Adoption of leasing as a concept in the GSE market is gaining prominence, as the focus of GH services model shifts from ownership of GSE to renting and leasing of GSE 14

15 Are we asking the right question? Am I the best owner of my own or other s assets? Portfolio review, core competencies, asset landscape, operational fit Where to go for footprint expansion? Market selection, access to M&A, finance, integration Am I betting on the right horses? Carriers with mixed outlooks, conversion of aircraft orders, ongoing LCC impact What else can we do? New service models, new services, addressing customer needs and non-customers needs How can I mitigate pricing pressure? Implement new pricing models, incentives, differential services Will scale be necessary to compete? Scale consolidation amongst big players slowly changing shape of industry 15

16 Winter is coming! with a new friend

17 4th Industrial revolution 17

18 4th Industrial revolution A fusion of technologies that is blurring the lines between the physical, digital, and biological spheres. Will fundamentally alter the way we live, work, and relate to one another At a speeds that has no historical precedence Impact on business Transforming business models across industries Acceleration of innovation and the velocity of disruption are hard to comprehend Major shifts on the demand side 18

Changing our World Digital Traveller Airline Ground handling is approximately 8% to 12% of the airline CASK With increased cost pressures on an airline, they would seek to push the cost of ground

19 Changing our World Digital Traveller Airline Ground handling is approximately 8% to 12% of the airline CASK With increased cost pressures on an airline, they would seek to push the cost of ground handling down The airline however cannot afford to lower the quality of service in order to seek cost advantages Ex Fuel CASK Ground handling 8-12% Ground Handler Ground handlers, as service providers to airlines seek to push their revenues and operating profits higher However, the growth has only been on account of compensating for inflation The ground handler is already squeezed to the extent possible The ground handler also cannot afford to lower the quality of service in order to seek cost advantages 20

Digital Traveller The digital traveller is a millennial

and perpetually connected Needs Real Time Information

gratification Believes in Self Service Religiously

20 Digital Traveller The digital traveller is a millennial who grew up with digital technology Uses multiple devices and perpetually connected Needs Real Time Information (JIT) OCDDigital Seeks rich experience and instant gratification Believes in Self Service Religiously Monitors Social Media Traveller Wants to control the travel experience 21

21 Our world is changing Digital Traveller Self Service Information JIT Instant Gratification Options and Choices Airline Ground Handler Cost Pressures Maximise Revenue Revenue Pressures Minimize Investments Highly Competitive Eco-System Maximise Resource Utilisation Competitive Eco-System A good to-do list would be... Change this Change that Change it Digital traveller exerting pressure on Airlines to change Airlines exerting pressure on Ground Handlers for: - Enhanced Service - Reduced Cost Ground Handlers pushing for higher margins Ground handlers also facing service obsolescence due to digital transformation of airlines Conflicting business models between the airlines and ground handlers Ground handlers would therefore need to evolve and innovate to survive 22

22 Warming up to the winter Alliances between Ground Handlers Managed Service Provider Cue Cards Monetize additional revenue streams such as training Change Business Model to Tech Based Service Provision and many more transformational ideas 23

23 Digital revolution is coming and is coming fast Customer Experience is the new Operational Excellence To keep warm (survive) 24

Connect with KPMG Dedicated Aviation Professionals KPMG Aviation Global Footprint Thought Leaderships Stephen

Kelvin Seow Senior Advisor Aviation Ops KPMG Jared Harckham Vice President Airline ICF Amber Dubey Partner Head

Principal Airline Advisory ICF We bring to you a global team of specialists with a combined experience of over

Have consulted to airlines worldwide for more than 50 years All major airport operators in India Assisted in

airlines Helping clients embrace, adapt, and capitalize on change Governments & Regulators More than 250 aviation

strategy, planning, commercial, and operations Airlines and NSOPs Ground Handlers KPMG are at the forefront of

Our approach draws on skills from right across our global firm to deliver rapid, real benefits.

Each CoE is directed by a dedicated Aviation industry partner and focused on delivering consistently high quality

24 Connect with KPMG Dedicated Aviation Professionals KPMG Aviation Global Footprint Thought Leaderships Stephen Beatty Partner Global Head of Infra Americas & India KPMG James Stamp Partner Global Head of Aviation UK KPMG Kelvin Seow Senior Advisor Aviation Ops KPMG Jared Harckham Vice President Airline ICF Amber Dubey Partner Head of Aviation India KPMG Ashwin Noronha Director Aviation KPMG Mark Drusch Vice President Aviation ICF Mark Diamond Principal Airline Advisory ICF We bring to you a global team of specialists with a combined experience of over 150 years KPMG ARE THE TRUSTED ADVISOR TO THE WORLDS LEADING AVIATION ORGANIZATIONS. Have consulted to airlines worldwide for more than 50 years All major airport operators in India Assisted in framing the National Civil Aviation Policy, India Airports MRO Have consulted to the vast majority of Middle East airlines Helping clients embrace, adapt, and capitalize on change Governments & Regulators More than 250 aviation strategy advisory engagements across the globe Major airports in Middle East region Expertise in air transport strategy, planning, commercial, and operations Airlines and NSOPs Ground Handlers KPMG are at the forefront of aviation sector thinking as demonstrated by our suite of thought leadership. Our approach draws on skills from right across our global firm to deliver rapid, real benefits. Aviation Center of Excellence KPMG has multiple Aviation Centres of Excellence (CoE). Each CoE is directed by a dedicated Aviation industry partner and focused on delivering consistently high quality services to our clients. CoE focuses include: Digital Labs for Aviation Market Entry strategies Network, route, capacity and RM optimization Procure to pay processes Engineering & maintenance Operation improvement Operational benchmarking 25

25 Thank you Contact us Amber Dubey Kelvin Seow Ashwin Noronha Rohit Tomar Partner and Head Aerospace and Defense Sr. Advisor Aerospace and Defence Director Aerospace and Defence Manager Aerospace and Defence KPMG in India KPMG in India KPMG in India KPMG In India T: M: F: E: T: F: E: T: M: F: E: T: F: E:

ROUTE TRAFFIC FORECASTING DATA, TOOLS AND TECHNIQUES

ROUTE TRAFFIC FORECASTING DATA, TOOLS AND TECHNIQUES Introduction and Background COURSE OBJECTIVES Understanding how economic factors impact demand for air travel. Understanding of how changes in airline