Market Update Narrow bodies and transition management May 2016 Phil Seymour CEO Stuart Hatcher CIO
Enhancing Decision Making Full service Data, asset management, technical advisory Independent No vested interest in a deal progressing or in placating advertisers No conflict in treatment of assets under management or for sale Diversified talent pool Imaginative solution finding from a breadth of backgrounds Exclusive data Unique access to critical data and intelligence EXIT IPO readiness DD on prospective buyer Sell side advisory ADDRESSING ISSUES SELECTION Portfolio monitoring & analysis Early warning of concerns Litigation & dispute support Target intelligence Market entry Competitive intelligence 4. EXIT 1. IDENTIFICATION 3. BUILDING VALUE 2. AQUISITION OPPORTUNITY Asset DD & values Competitor analysis Key stakeholder DD Benchmarking THE DEAL Negotiation Critical factors Risk assessment RUNNING THE ASSET Technical & regulatory support and advisory Redelivery planning Maintenance reserves and DOC analysis Regular reporting around fleets & values
2016 Catch up Economic View Traffic Narrow body Market Rest of the year
2016 Qu2 Economic Views Oil volatility persists and pricing is becoming more sensitive to supply disruptions Canadian Wildfire, Libyan unrest, Saudi Oil Ministry change Chinese demand increase but for how long? Pricing maybe low now, but as oil discovery budgets have reduced from $95bn to $40bn, current supply could be hit hard within next 20 years! USD has been dropping, but signs of a return are apparent Oil/Gold/Stock v USD No absence of new investors continuing to pile into the space
Economic Outlook Signals Oil Interest Rates GDP World Trade USD Regional Forecast Europe North America China Latin America Asia Pacific World 2016 2017
Traffic Relationship has shifted Source: IATA
Pax Traffic remains steady Passenger traffic growth up at 7.9% in February, Whilst economic signals look poor for China, service industry business growth continues to hold. Once again, India remains on top. Fastest growing economy and >20% YOY growth and growing Domestic Japanese & Brazilian market remains under pressure. Russia recovered well in March after loss in January Source: IATA
The Impact on the Aviation Cycle Demand trends Pax traffic Freight traffic Yield Load Factors Supply factors Deliveries Parked Secondary market Economic life Orders
Single Aisle Points Slow orders for 2016 Oil may shift focus Fewer lessor orders with more bias towards operators that haven t bought yet Expect keener pricing from Boeing to steady 737MAX market share Availability Falling Storage Falling Lease Rates under pressure will leak into pricing Market remains liquid across all ages, but. At a price Sale & Leasebacks Sales with leases attached Lease Rate Factors OEM pricing Lease Term Lengths Extensions
Potential New Orders Airbus A320 family Operators Fleet Backlog AMERICAN AIRLINES 363 138 CHINA EASTERN AIRLINES 250 0 EASYJET 249 174 CHINA SOUTHERN AIRLINES COMPANY 238 0 AIRASIA 174 306 JETBLUE AIRWAYS 159 87 UNITED AIRLINES 153 0 LUFTHANSA 151 126 TAM - LINHAS AEREAS 134 0 BRITISH AIRWAYS 131 35 DELTA AIR LINES 129 79 AIR CHINA 128 0 AIR FRANCE 122 3 LATAM AIRLINES GROUP 112 78 INDIGO 108 426 VUELING 106 58 UNDISCLOSED 104 676 TURKISH AIRLINES 103 100 SICHUAN AIRLINES 100 0 AIR CANADA 94 0 AEROFLOT RUSSIAN AIRLINES 87 0 SPIRIT AIRLINES 85 81 ALITALIA 79 0 SHENZHEN AIRLINES 78 0 WIZZ AIR 67 144 AVIANCA 67 136 AIR INDIA 66 0 AIR BERLIN 65 3
Potential New Orders Boeing B737 family Operators Fleet Backlog Southwest Airlines 599 248 Ryanair 351 223 United Airlines 312 139 American Airlines 271 134 China Southern Airlines 147 25 Delta Air Lines 141 62 Air China 138 22 GOL Transportes Aereos 134 71 Hainan Airlines 128 9 Xiamen Airlines 125 37 Alaska Airlines 129 60 WestJet 114 70 Lion Air 108 240 Shandong Airlines 90 13 Shenzhen Airlines 86 7 Turkish Airlines 92 86 SAS 85 0 Garuda Indonesia 80 50 Virgin Australia 74 45 COPA Airlines 76 70 China Eastern Airlines 76 43 Jet Airways 70 75 Qantas 67 0 Shanghai Airlines 72 0 Norwegian Airlines 59 130
Other Considerations Single Aisle New generation engine technology reliability & reserve rates Economic life debate continues Premium of neo/max v ceo/ng Developing economic market softness Lease rate factors under pressure Shorter lease term economics Order bubble Lots of interior flexibility but will it lead to marginalised fleets Ramp ups on the way
Values & Rates Single Aisle A320-200 A319-100 A321-200 A320neo A320 Classics 737-800 737-700 737-900ER 737 MAX 8 757-200s 737 Classics
Other Asset Classes Turboprops Storage rising, regional distress, falling lease rates & values Regional Jets Storage rising, demand remains strong for specific types, a lot of new aircraft technology coming Twin Aisle Storage rising, A330 production line bridged, 777 still has some way to go. Softness in placing speculative orders challenged by low oil price. Appetite remains intact on financing for new deliveries to good credits Freighters Out of production large freighters still in turmoil, narrowbody demand rising
Economic Summary Economy weak growth on the horizon generally uneasy Traffic on the up, LFs holding steady, freight struggling Airlines great revenue for some, strong USD squeezing profits Developing economies dependant on oil airline bankruptcies ahead OEM Challenges: Ramp-ups, market share Lessors sales in the pipeline, falling LRFs, increasing competition & new accounting rules
Redeliveries Revisited
Extend or Return? Extend Good deals to be had, especially on widebodies, given demand and fit out costs. Gap between current and next generation kit has narrowed, slowing adoption Still a big decision driven by a complex balance of rates, costs, reserves and demand. Return Last minute = bad news and/or big fees Two years planning How to replace/where s it going What can I avoid paying for What do I get next engines, IFE Not a lesson in each side shafting the other In fact the opposite is true, doing the right thing = a better deal and more choice.
Two years out MONTHS PRIOR TO AIRCRAFT REDELIVERY ACTIVITY 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 INITIAL PHASE Confirmation of Lease Return PRE REDELIVERY PHASE Analysis of Redelivery Conditions MRO Selection (Lessee) Initial Meeting with Lessor Project Plan Cabin & Cargo Bays Inspection Preparation of Aircraft Records Preliminary Workpack Preliminary Engine & APU Borescope Inspections Final Workpack (Lessor approval) Pre Input Meeting with MRO REDELIVERY PHASE Maintenance Plan from MRO Perform Workscope (MRO) Aircraft Records Review Engines High Power Run Demonstration Flight Engine & APU Borescope Inspections Final Discrepancy List Commercial Resolution AIRCRAFT RETURN We rarely see redeliveries planned sufficiently in advance, yet when they are, they cost less and take up less time. 24 months ideal, from 15 months out, you risk the domino effect Getting lessees to engage early enough is the biggest issue
$1.65m It soon adds up and is increasing Engines General Components Fuselage, windows and doors Landing gear Corrosion Interior and carpet APU Costs fall into three areas: Redelivery planning: falling between cracks Maintenance planning: work to the lease, not the MPD Commerciality: the above two are OK, but the negotiation goes badly Wings & Empennage 100,000 200,000 300,000 400,000 500,000 600,000
The main culprits Engines/APU - $630k Always complex to assess, forecast and maintain given the myriad of variables Borescope, by definition, is invasive, can they be avoided? So what to do: Manage cycles and shop visits more strategically. Components - $260k Documentation is everything, yet we have never (that s right, NEVER, seen a full set, on time and acceptable to the lessor So what to do: Have tight control of the subcontracted component providers, to minimise downtime General - $500k Watch for catch-all and ambiguous terms: good, clean, etc Damage and old repairs can create need for rework and lead time for materials almost always delays redelivery if only identified at the redelivery check. Modifications without detailed acceptable source documents and certification. Back to Birth, PMA and DER So what to do: Plan better and that starts at the outset of the negotiations Fuselage, Windows and Doors - $195k Records vital again in relation to the fuselage condition More ambiguity again. Substantially free etc. Corrosion: Watch again for ambiguity and clauses above and beyond what may be required by the MPD/SRM So what to do: Replace components earlier if access is easy and monitor forceful life limitations terms
Recent examples Start up airline 8 year lease Marketing and sales 95% of management time Lease docs literally shoved in drawer and ignored 6 months out nowhere near return conditions, gears and engines late to MRO at peak time of year (Winter) Big prob for both parties late delivery penalty, high costs for each side Lessor fails to deliver to next lessee on time. Medium airline Great tech team, but focus on up, not back. Focus on the day to day difficult to change Sufficient volume to really hit core operations. We are seeing moves for this size of airline to realise limitations and outsource to specialists Large airline Some might say arrogance Assume strong commercial strength will mean lessors will concede Probably the worst at collating records, mods and repair files if various tech depts. are spread over a large area.
Recent examples Cost Oh dear, late and High cost.. Ideal low cost / no delay The cost weren t high but practicalities of missing records caused delays Time