Engine Fleet Analysis & Evolution May 2017 Richard Evans, Senior Consultant flightglobal.com/consultancy 1
FlightGlobal: Pioneering aviation insight and analytics business Part of a leading data solutions group RELX Group: London, Amsterdam and New York Stock Exchange listed 28,500 employees Market Capital $36.87bn FlightGlobal: 370+ staff 11 offices across the world flightglobal.com/consultancy 2
Flight Ascend s unique Value proposition as an appraiser Independent Global team fully objective We do not invest in aircraft and we are not brokers we have NO conflicts of interest We are based in London, New York and Hong Kong and travel the world bringing regional and global opinion into our research Instant access to vast data for research The only Appraiser with a globally recognized Fleets database used by our clients The only appraiser with schedule information Unparalleled Historical values data Historical Market values from 1965 Access to industry Tier 1 participants Clients are Airlines, all the top lessors, the major banks involved in aviation finance, MROs, OEMs, regulatory bodies Presence at all major aviation events (Paris Airshow, ISTAT Asia / US / Europe ) Source: Flight Ascend Consultancy flightglobal.com/consultancy 3
The Flight Ascend Consultancy Team George Dimitroff Head of Valuations Rob Morris Head of Consultancy Chris Wills Head of Consultancy Ops. ISTAT Sr. Appraiser Joanna Lu Head of Advisory Asia Michael Lapson Senior Analyst ISTAT Appraiser Daniel Hall Senior Analyst ASA Sr. Appraiser Syed Zaidi Aviation Analyst Peter Morris Chief Economist Chris Seymour Head of Market Analysis Henk Ombelet Senior Analyst Richard Evans Senior Analyst Tony Brooks Senior Analyst ISTAT Appraiser Ben Chapman Valuations Manager ISTAT Appraiser Eva Karagianni Valuations Analyst Sara Dhariwal Valuations Analyst Thomas Kaplan Valuations Analyst Dennis Lau Aviation Analyst Michael Hui Aviation Analyst Brad Lim Senior Consultant Ryan Hammacott Risk Analyst Lionel Olonga Valuations Analyst Oliver Ford Valuations Analyst Luke Smith Valuations Analyst Kevin Ng Aviation Analyst flightglobal.com/consultancy 4
Current aerospace demand & capacity trends Engine aftermarket drivers Engine & aircraft fleet trends & forecast Q & A flightglobal.com/consultancy 5
Current aerospace demand & capacity trends Engine aftermarket drivers Engine & aircraft fleet trends & forecast Q & A flightglobal.com/consultancy 6
Global economic cycle has stepped up Steady performance with improvement seen since late 2016 Indicator Current level Trend GDP OECD Leading Indicators World Trade flightglobal.com/consultancy 7
Global passenger traffic growth still high 20% 15% Feb 2017 = 8.5% corrected for Leap Year Year-on-Year Change 10% 5% 0% -5% -10% -15% Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 2016 Capacity = 6.2%, Traffic = 6.3% IATA predicting 5.1% traffic growth for 2017 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: IATA Traffic (RPK) Capacity (ASK) flightglobal.com/consultancy 8
Airline profits peaked in 2016? 40 30 Q1 2017 results have been significantly down on 2016 Global Airline Net Profit (US$bn) 20 10 0-10 -20-30 Source: IATA flightglobal.com/consultancy 9
US airline yields now showing small increases, but fuel prices are up 50% year-on-year Passenger yield (Usc/RPK) 12 11 10 9 8 7 6 5 4 3 2 1 Yields fell from Dec 2014 to Oct 2016. Fuel costs were down 30-40%, but are now up 50% year-on-year. Will yields increase enough in Q1 2017? Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 Yield (c/rpk) Year-on-year change Jet fuel price change 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Year-on-year change Source: A4A, EIA flightglobal.com/consultancy 10
Passenger load factor exceeds pre-recession level, but appears to have peaked 90% 85% Passenger load factor 80% 75% 70% European airlines below 2015. US slightly down. Asian airlines at historic highs. 65% Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 A4A AEA Asian airlines A4A 12mma AEA 12mma Asian 12mma Source: Flight Ascend analysis, Airline reports flightglobal.com/consultancy 11
Book to bill fell below average in 2016. Around 1.0 for single-aisles, but 0.5 for twins & RJs 3.0 Commercial Jet Book to Bill Ratio 2.5 2.0 1.5 1.0 0.5 0.0 Source: Flight Fleets Analyzer western built jets only flightglobal.com/consultancy 12
Aviation demand cycle a year ago Demand side looks very strong ( still as good as it gets?) Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations flightglobal.com/consultancy 13
Aviation demand cycle today Demand side stable, traffic trends positive, but some yield pressures Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations flightglobal.com/consultancy 14
Aviation supply cycle a year ago Some indicators at amber or red, but no real concerns at present Indicator Current level Trend Aircraft deliveries Deliveries for replacement/growth Deliveries as percentage of fleet Stored aircraft Used aircraft availability Aircraft economic life Aircraft utilisation flightglobal.com/consultancy 15
Aviation supply cycle today Fewer concerns in supply side at present but watching for evolving capacity surplus if demand weakens Indicator Current level Trend Aircraft deliveries Deliveries for replacement/growth Deliveries as percentage of fleet Stored aircraft Used aircraft availability Aircraft economic life Aircraft utilisation flightglobal.com/consultancy 16
So where are we in the cycle? Mixed messages from the global economic cycle Economic recovery remains weak for such a long cycle, but things are improving Aviation demand cycle remains stronger than expected, but under yield pressure Fuel prices previously helped on the cost / yield side but now expecting cost headwinds from increasing fuel and labour costs Watching closely for signs of evolving capacity surplus Expect to see retirement volumes tick up and potentially utilisation tick down Few amber / red indicators in aviation supply cycle, but is supply getting ahead of demand? Deliveries trending towards higher % of installed fleet Average age of retirement continues to decline Concerns over OEMs increasing production rates, particularly in single-aisle As usual, it will be an interesting year ahead for industry watchers flightglobal.com/consultancy 17
Current aerospace demand & capacity trends Engine aftermarket drivers Engine & aircraft fleet trends & forecast Q & A flightglobal.com/consultancy 18
Forward schedules show ASK growth above 6% year-on-year driving strong hours increase 12% Feb 2016 was a Leap Year History Forecast Year-on-Year Change 10% 8% 6% 4% Capacity ran at 6% growth during Q2/Q3 2016 Slight capacity cuts since November (Jan = 6.9% vs. 7.3%) Slight schedule cutback in April/May vs. March sched. 2% 0% Source: Flight Schedules data Nov 2016 Schedule Feb 2017 schedule Apr 2017 schedule Jan 2017 Schedule Mar 2017 schedule Leap Year adj. flightglobal.com/consultancy 19
Stored aircraft shows contrast between fall in single-aisle and increase in twin-aisle & RJ Commercial Jet Aircraft in Storage 2500 2250 2000 1750 1500 1250 1000 750 500 250 0 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% % of Fleet in Service RJ SA TA RJ % stored SA % stored TA % stored Total% stored Source: Flight Fleets Analyzer western build jets only flightglobal.com/consultancy 20
Aircraft utilisation is at record highs Average annual utilisation (rolling 4 quarters) 4,200 4,000 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 Single-aisle Twin-aisle Total Source: Flight Fleets Analyzer, all Airbus/Boeing/MDC aircraft with data, all usages flightglobal.com/consultancy 21
Used jet availability stable and at lowest level since 2010 but keep a watch on this. 450 900 Twin-Aisle / Single-Aisle / Regional Jet Monthly Availability 400 350 300 250 200 150 100 50 0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 800 700 600 500 400 300 200 100 0 Total Commercial Jet Monthly Availability Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS) Source: Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI) flightglobal.com/consultancy 22
Thoughts on aftermarket impact of lower fuel Lower fuel price drives higher traffic growth all else being equal Middle East is different as low oil prices have hit economic growth We can t predict oil prices, but many assume prices recover in medium term Some widebody leases being extended, but equally we are seeing a lot of mid-life twin-aisles being parked and available for sale/lease Record aircraft deliveries and lower retirement numbers are driving strong increase in fleet numbers, which should be reflected in aftermarket growth Impact from lower fuel prices is perhaps at the margins and masked by toplevel fleet trends. i.e. airlines are already committed to new generation types that offer a natural hedge if fuel prices rise in the future. Sustained above average traffic growth is needed to absorb all the new deliveries over the next five years. Lower fuel prices help, but the boost may be coming to an end, since prices are actually up 30-40% against last April. Airline profits are declining, which may ultimately be negative for mid-life aircraft aftermarket flightglobal.com/consultancy 23
Current aerospace demand & capacity trends Engine aftermarket drivers Engine & aircraft fleet trends & forecast Q & A flightglobal.com/consultancy 24
RJ & NB engine fleets proportion remaining in service in May 2016 Only 1-2% of CFM56-5B, -7, V2500 retired to-date 100% 90% Number of installed engines 80% 70% 60% 50% 40% 30% 20% 10% 0% Current in service Current stored Retired Source: Flight Fleets Analyzer flightglobal.com/consultancy 25
RJ & NB engines fleet changes since May 16 Strongest growth in CFM56-5B/7B Number of in-service installed engines 1000 500 0-500 -1000-1500 -2000 10% 5% 0% -5% -10% -15% -20% Fleet change 2016-17 Deliveries/Returns Retirements/into store Fleet change Source: Flight Fleets Analyzer flightglobal.com/consultancy 26
WB engine fleets proportion remaining in service in May 2016 Many types still in honeymoon stage, others well into phase-out Number of installed engines 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Current in service Current stored Retired Source: Flight Fleets Analyzer flightglobal.com/consultancy 27
WB engines fleet changes since May 16 GEnX, GE90, Trent 1000 & XWB show strongest growth Number of in-service installed engines 400 350 300 250 200 150 100 50 0-50 -100-150 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Fleet change 2016-17 Deliveries/Returns Retirements/into store Fleet change Source: Flight Fleets Analyzer flightglobal.com/consultancy 28
Engine fleet forecast average annual growth to 2022/2027 (LEAP/GTF not plotted) Growth rates highlight generational shift 40% Avreage annual growth rate 30% 20% 10% 0% -10% 2017 to 2022 2017 to 2027-20% Source: Flight Fleets Analyzer flightglobal.com/consultancy 29
CFM56 will remain largest installed engine fleet until 2027 LEAP & GTF have combined fleet of 29,500 engines by 2027 35,000 30,000 Engines in service 25,000 20,000 15,000 10,000 5,000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016 CFM56 V2500 LEAP PW GTF flightglobal.com/consultancy 30
Part-out value driven by fleet decline Strong demand for lease engines until significant part-outs occur 100% Percentage of engine fleet in service 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CFM56-5 CFM56-7 Trent 700 Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016 flightglobal.com/consultancy 31
Questions? Richard Evans Senior Consultant FRAeS +44 7717 730933 richard.evans@ascendworldwide.com flightglobal.com/consultancy 32