World Fleet Forecast 214 233 Dick Forsberg September, 214
Dick Forsberg Head of Strategy, Avolon Dick Forsberg has over 4 years aviation industry experience, working in a variety of roles with airlines, operating lessors, arrangers and capital providers in the disciplines of business strategy, industry analysis and forecasting, asset valuation, portfolio risk management and airline credit assessment. As a founding executive and Head of Strategy at Avolon, his responsibilities include defining the trading cycle of the business, primary interface with the aircraft appraisal and valuation community, industry analysis and forecasting, driving thought leadership initiatives, setting portfolio risk management criteria and determining capital allocation targets. Prior to Avolon, Dick was a founding executive at RBS (now SMBC) Aviation Capital and previously worked with IAMG, GECAS and GPA following a 2-year career in the UK airline industry. Dick has a Diploma in Business Studies and in Marketing from the UK Institute of Marketing is a member of the Royal Aeronautical Society and also a Board Director of ISTAT (The International Society of Transport Aircraft Trading). Disclaimer This document and any other materials contained in or accompanying this document (collectively, the Materials ) are provided for general information purposes only. The Materials are provided without any guarantee, condition, representation or warranty (express or implied) as to their adequacy, correctness or completeness. Any opinions, estimates, commentary or conclusions contained in the Materials represent the judgement of Avolon as at the date of the Materials and are subject to change without notice. The Materials are not intended to amount to advice on which any reliance should be placed and Avolon disclaims all liability and responsibility arising from any reliance placed on the Materials.
World Fleet Forecast 214 233 1 Introduction Every year, Avolon prepares a World Fleet Forecast that projects growth and changes in the global commercial jet fleet over a 2 year period, including aircraft deliveries, storage, retirements and passenger-to-freighter ( P2F ) conversions. For passenger aircraft, the resulting capacity is compared to a forecast of annual worldwide passenger traffic demand. The resulting load factors are used to measure changes in operating efficiency and to estimate the level of capacity surplus or shortfall. Freighter aircraft capacity is benchmarked against forecast demand for air cargo and the proportion of the total that is expected to be transported on dedicated cargo aircraft.
2 World Fleet Forecast 214 233 214 World Fleet Forecast Summary Against a backdrop of 3.2% average annual growth in global economic activity over the next 2 years, Avolon is forecasting passenger traffic to increase by 5.2% per annum (Chart 1), equivalent to an average 1.6x GDP multiple. Capacity is expected to increase more slowly, by 5.1% annually on average. Cargo demand is forecast to grow at a rate of 5.6% a year. Chart 1: Average 2 Year Growth Rates GDP 3.2% RPKs 5.2% ASKs 5.1% Cargo Traffic 5.6% Fleet Size 3.4% Fuel burn per ASK -1.3% Almost 15, aircraft will be retired over the period, representing 63% of today s fleet. Consequently, 4% of all deliveries will support fleet replacement, with the remaining 6% representing industry growth. The industry will continue to secure further efficiencies throughout the forecast period. Fuel efficiency is the most significant area of improvement, with a 25% reduction in fuel burn per ASK over 2 years, equivalent to an annual reduction of 1.3% (Chart 1). In addition, Avolon expects fleet utilisation to increase by 5%, while average seat capacity rises by 17% over 2 years, maintaining the trend to up-size within aircraft families. System load factor will edge up slightly over the period, but will remain in a tight range around the current 8% level. The 2 year financing cost of new deliveries will amount to more than $3.5 trillion at delivery prices and the annual requirement will rise from $1 billion to over $15 billion over the next ten years, averaging $135bn per annum (Chart 3). At the end of the forecast period, Airbus and Boeing will still account for 9% of total delivery dollars. Avolon expects over 36, aircraft to be delivered over the next 2 years, comprising 35,5 passenger aircraft and 8 factory-built freighters (Chart 2). 2 Chart 3 - Ten Year Delivery Financing Outlook Chart 2: Components of 2 Year World Fleet Forecast 15 35,5 New deliveries 8 36,3 US$ Bn 1 5 Passenger Fleet Conversions 1,8 Freighter Fleet - 214 215 216 217 218 219 22 221 222 223 Airbus Boeing Other 12,9 Re red 1,8 14,7 213: 21,1 213: 1,9 233: 41,8 233: 2,7 By 233, the world jet airliner fleet will have almost doubled, increasing from 23, to 44,5 aircraft, of which 2,7 will be freighters. P2F conversions will satisfy over 2/3rds of the freighter requirement, which will total 2,6 additional aircraft over 2 years. Economic Factors Assumptions regarding the timing and amplitude of economic and industry cycles are central to the forecast, which assumes that current levels of demand will continue to strengthen. Subsequent cycles are repeated over a regular period of approximately eight years. Corresponding cycles for aircraft orders and deliveries follow the same broad trend with lags that reflect typical industry behaviour. At 3.2%, Avolon s forecast average GDP 1 growth over the 2 year period includes periodic global economic down-cycles.
World Fleet Forecast 214 233 3 Demand Passenger demand, measured in RPKs, is forecast on a global basis. Growth rates closely follow the economic cycle, with GDP highly correlated with demand and accounting for around two-thirds of the movement in traffic levels. Over the next 2 years, RPK growth is forecast to average 5.2% per annum, underpinned by the strong economic and demographic dynamics of emerging markets, where liberalisation and the new low cost airline business models will increasingly provide affordable travel opportunities to large and expanding middle-class populations. Cargo demand continues to exhibit much greater volatility and a clear pattern of recovery from the downturn has yet to be established. Avolon continues to believe that a portion of demand for air freight has been permanently diverted to surface modes as a result of the high cost of fuel and greater efficiencies now available in the shipping sector. Nevertheless, some level of recovery is on the horizon and average growth of 5.6% per annum over the next 2 years is forecast for the dedicated freighter market. Capacity Avolon forecasts total industry capacity to grow on average by 5.1% per annum over 2 years, very slightly slower than RPK growth. Consequently, average system load factor will increase only modestly over the forecast period, from 8% to a little over 82%. Aircraft Delivery Forecast Avolon expects 35,5 new passenger jets to be delivered over the next 2 years, of which 78% will be narrowbodies and 22% (8,) will be widebodies. In addition, 8 freighter aircraft will be delivered, all of them widebody (Chart 4). Almost 28, single aisle passenger jets will be delivered, of which 2,2 will be regional jets with less than 1 seats. 17% of deliveries (6, aircraft) will be intermediate widebodies (A33s, A35s, 787s, etc) and 6% (2,) will be large widebodies (747s, 777s, A38s). Almost 5% of the total, and two-thirds of narrowbodies, will be in the 16-18 seat category, which includes A32s and 737-8s and their replacements. Boeing will deliver slightly more aircraft than Airbus during the period (15,7 vs 14,7), and together they will account for 84% of all aircraft deliveries and over 9% by value. More than 8, regional jets and larger narrow-bodies will also be delivered by other OEMs, the majority from Embraer and Bombardier (Chart 5). Chart 4: 2 Year Deliveries by Aircra Segment 6, 2, 8 2,2 <1 seats 1-21 seat NB 25,3 Intermediate WB Large WB WB Freighter Airline fleet and network efficiencies help to raise annual fleet utilisation by 5% over the 2 year period. Average aircraft size is also expected to increase, reflecting the efficiencies of operating larger aircraft as markets grow as well as the pressures of airport and ATC congestion in many markets. Average seat count is expected to rise by 17% to 198 seats by 233. This combines with the introduction of new aircraft types to improve fuel efficiency by 23%, equivalent to a 1.3% annual reduction in fuel per ASK. Cargo capacity on all-freighter aircraft is expected to increase on average by 5.1% per annum over 2 years, more slowly than demand, allowing load factors to rise once again. Chart 5: 2 Year Deliveries by OEM 7% 3% 7% 4% 43% Airbus Boeing Embraer Bombardier Others 1. World GDP at constant prices, as measured by the IMF
4 World Fleet Forecast 214 233 Retirement and Cargo Conversion 1,8 passenger aircraft are forecast to be converted for cargo use over the next 2 years, 6% of which will be narrowbody types, predominantly from A32, 737 and 757 families. Avolon anticipates that almost 15, aircraft will be retired from airline service over the next 2 years, comprising around 13, passenger aircraft and 2, freighters. Consequently, 4% of all deliveries over the next 2 years will be used to replace current fleet retirals (Chart 6), a proportion that will increase to 43% over the next ten years, reflecting a surge of aircraft approaching 25 years of age that were ordered and delivered in the late-198s and early- 9s. In-service fleet Chart 6: Deliveries for Growth & Replacement 5, 4, 3, 2, 1, Source: Avolon Growth 6% Replacement 4% Retained Avolon anticipates that almost 15, aircraft will be retired from airline service over the next 2 years, comprising around 13, passenger aircraft and 2, freighters. 21,6 14,7 8,3 The average retirement age of both single aisle and twin aisle passenger jets is forecast to increase slightly in the near term as the remaining first generation commercial jets are withdrawn. Retirement age then follows a cyclical pattern around a median average age of around 25 years, reflecting an expectation that the weakest points in each cycle present value opportunities for owners to part-out small numbers of younger aircraft (Chart 7). Re rement Age (years) 3 25 2 15 1 5 Chart 7: Average Re rement Age -Passenger Aircra All NB WB RJ Ex RJ These opportunities do not represent a material impact on economic life patterns - the average retirement age for narrowbody aircraft will range between 24 and 26 years throughout the next decade, with widebodies ranging between 23.5 and 24.5 years. The retirement age for regional jets rises steeply as the installed fleet migrates from 5-seat RJs to new generation types such as E-Jets with economic life characteristics that more closely resemble those of mainline jets.
World Fleet Forecast 214 233 5 Load Factor Development The long term development of the industry, as represented by the supply of seats and demand for passenger travel, is expected to continue to follow long-term trends, broadly in balance through the cycles and maintaining an average system load factor within a narrow band at or slightly below the current 8% level (Chart 8). RPM/ASMs (Bn) 12, 1, 8, 6, 4, 2, - Chart 8: Supply, Demand and Load Factor RPMs ASMs Load Factor Global trends towards tighter capacity management have resulted in industry average load factors reaching 8% on a consistent basis. 1% 9% 8% 7% 6% 5% 4% Load Factor % Global trends towards tighter capacity management have resulted in industry average load factors reaching 8% on a consistent basis. Whilst further moderate increases are achievable, the forecast anticipates a near-term decline, more noticeable across the single aisle fleet, which is linked to the accelerating rate of aircraft deliveries. By the end of the decade, however, this trend will have begun to reverse and, through the following decade, load factors are forecast to move with the industry cycle within narrow ranges: 77-83% for narrowbodies and 73-8% for widebodies (Chart 9). By the end of the forecast period, average system load factor will be around 2 percentage points above the current average. Chart 9: Industry Load Factor Trends 85% 8% 75% 7% 65% 6% 55% 5% 214 216 218 22 222 224 226 228 23 232 NB + RJ WB
6 World Fleet Forecast 214 233 Supply and Demand The OEM Perspective Both Airbus and Boeing have enjoyed a sustained run of strong orders that, for the past five years, have averaged a multiple of 1.7x deliveries. Consequently, the backlog of firm orders has steadily increased, breaking the 5, barrier for the first time in 213 for each of the two large airframe OEMs. These levels now represent 9 years of production for Airbus and 8 years for Boeing (Charts 1a & 1b), far in excess of the historical industry standard. However, it is now recognised that the dynamic of commercial aviation sales, at least for the commodity single aisle types, has undergone a permanent paradigm shift, whereby both OEMs actively over-book their production by 15% or more and employ sophisticated skyline management processes to minimise the risk of white-tails. At the same time, airlines and lessors alike have come to accept that they may need to make fleet commitments 1 years or more into the future. A sense of urgency, at least for the airlines, has been created by the launch of new generation, fuel efficient models in each of the three size categories, that in an environment of high oil prices has accelerated some decisions to replace ageing and inefficient fleets. The Avolon forecast assumes that the new patterns of overbooking, orders and backlog will be broadly sustained into the future, but with some moderation of the rate at which new orders are booked (Charts 11a & 11b). Even if the 15% overbooking profile is excluded from the total backlog, the levels fall by less than 18 months of production, leaving them still materially above the previous normal level. Chart 1a: Airbus Book:Bill Trend Number of aircra 6 5 4 3 2 1 12 1 8 6 4 2 Backlog Orders Deliveries Backlog (Years) Backlog (years produc on) Number of aircra 8 7 6 5 4 3 2 1 Chart 11a: Airbus Book:Bill Outlook 12 1 8 6 4 2 Backlog (years produc on) Backlog Orders Deliveries Backlog (Years) Chart 1b: Boeing Book:Bill Trend Number of aircra 6 5 4 3 2 1 Produc on lost due to strike Backlog Orders Deliveries Backlog (Years) 12 1 8 6 4 2 Backlog (years produc on) Number of aircra 8 7 6 5 4 3 2 1 Chart 11b: Boeing Book:Bill Outlook 8 6 4 2 Backlog (years produc on) Backlog Orders Deliveries Backlog (Years)
World Fleet Forecast 214 233 7 Financing Requirements Over the next 2 years, new deliveries will require financing totalling $3.5 trillion in delivery dollars, with $6 billion needed over the next 5 years and an average of $135 billion annually over the next decade (Chart 12). US$ Bn 4, 3,5 3, 2,5 2, 1,5 1, 5 Chart 12: 2 Year Delivery Financing Avg. $135Bn Avg. $2Bn US$3.5tr and from new sources that will be developed and expanded. The true sources of capital - which reflect the extent to which lessors in particular access external funding sources in addition to their internal resources - will also evolve in a similar manner, with reductions in the shares (although not in the absolute dollar volumes) of commercial banks and the ECAs, offset by increases for the capital markets and the new classes of investors now starting to develop a presence in the sector (Chart 15). The primary funding deployment channel for the new investors is expected to be operating leasing, which will support a forecast increase in the lessors share of new delivery financing from 4% to 5% within the next decade. 25 Chart 14: Delivery Financing Forecast 47% of this funding will be required for narrowbody aircraft, with 46% needed for passenger widebodies, 5% for freighters and 2% for RJs (Chart 13). Delivery Dollars (Bn) 2 15 1 5 Chart 13: 2 Year Delivery Dollars by Segment 5% 2% NB WB Pax - 214 215 216 217 218 Avg. 219- Avg. 224-223 233 Lessors* Banks ECAs OEMs Cash & Other Cap. Mkts New Sources * Lessors include internal & external financing 46% 47% WB Frtr The mix of new delivery funding sources is expected to continue to evolve over the next number of years (Chart 14), with a reduction in the proportion of direct commercial debt and export credit support to airlines and a commensurate increase in the level and share of funding coming from the operating lessor channel, supported by growth in capital markets RJ 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Chart 15: True Source Delivery Financing Mix 3% 4% 4% 4% 11% 5% 6% 15% 17% 17% 18% 19% 13% 2% 12% 12% 12% 11% 11% 16% 1% 15% 14% 14% 14% 14% 14% 4% 35% 34% 33% 31% 29% 26% 2% 2% 2% 2% 21% 21% 22% 213 214 215 216 217 218 Avg. 219-223 Lessors (self) Banks ECAs OEMs Cash & Other Cap. Mkts New Sources
8 World Fleet Forecast 214 233 Over the coming decade, lessor financing volume is forecast to grow at an average rate of 1% a year, with total lessor funding reaching $9 billion by 223 (Chart 16). 6% 5% 4% 3% 2% 1% % Chart 16: Lessor Share of Delivery Financing $9 Bn The key factors driving this growth are the underlying traffic demand, partly offset by airline operating efficiencies (fleet utilisation, load factor, etc); escalation of delivery prices; up-gauging of aircraft size within families; the transition to new generation models priced at a premium to the current generation aircraft that precede them; and increasing lessor market share (Chart 17). 12% 6% Funding 1% 5% Growth in Lessor Channel 4% 8% 3% 6% 2% 4% 1% 2% % Annual % Chart 17: 16: Drivers Lessor Share of Lessor of Delivery Channel Financing Growth $9 Bn Demand Efficiency Infla on Fleet Mix Lessor Share Summary Although the 214 World Fleet Forecast incorporates all of the recent industry trends and events, the expected size and shape of the industry over the next 2 years does not vary significantly from the 213 forecast. The expected deliveries of over 36, aircraft requiring $3.5 trillion of funding is in line with forecasts by other industry analysts, with the same broad drivers of supply and demand factored into the mix. The industry will require an average of $135 billion annually over the next decade to finance new deliveries and the roles of the various funding providers will continue to evolve, with operating lessors market share increasing from 4% to 5%, supported by increased participation by capital markets and new investor classes.
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1 World Fleet Forecast 214 233 Avolon Holdings Limited The Oval, Building 1 Shelbourne Road Ballsbridge, Dublin 4 Ireland United States Ireland Dubai Singapore China www.avolon.aero