Commercial Aviation Sector Update Doric Aviation Day Rob Morris Global Head of Consultancy 9 th June 2016
On the Menu.. Introduction to Ascend The Aviation Demand and Supply Cycles Aircraft Values A few final thoughts 2
Ascend is Appraiser of the Year again
The Ascend Flightglobal Consultancy Team George Dimitroff Head of Valuations Rob Morris Head of Consultancy Chris Wills Valuations Manager Senior ISTAT Appraiser Joanna Lu Head of Advisory Asia Mike Lapson Senior Analyst ISTAT Appraiser Dan Hall Senior Analyst ASA Appraiser Peter Morris Chief Economist Chris Seymour Head of Market Analysis Henk Ombelet Senior Analyst Richard Evans Senior Analyst Evgeny van der Geest Senior Risk Analyst Tony Brooks Senior Analyst ISTAT Appraiser Ben Chapman Aviation Analyst Oliver Biddulph Aviation Analyst Eva Karagianni Aviation Analyst Sara Dhariwal Aviation Analyst Oliver Ford Aviation Analyst Thomas Kaplan Aviation Analyst Gary Sze Project Manager Dennis Lau Aviation Analyst Michael Hui Aviation Analyst Vacant Senior Risk Analyst 4
On the Menu.. Introduction to Ascend The Aviation Demand and Supply Cycles Aircraft Values A few final thoughts 5
Aviation demand cycle 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 Above trend growth for sixth year running; 6.5% growth in. N America & W Europe seeing strong growth. Q1 2016 saw 7.7%. Traffic reached consistent 5% year-on-year growth in H1 2015 for first time since 2010, Last few months hovering around 0%. US yields are only readily available monthly data point; remain high by historic standards. March 2016 @ 9.6c/RPK is below 2011-2015 levels, but fuel price has halved. Generally very high, exceeding 2008 levels. Asia much lower emerging evidence of overcapacity in some areas? 2015 saw around 2,050 net orders for commercial jets. Book-to-bill = 1.4. YTD (to April) saw 318 net orders, with Book-to-bill less than 1.0. This metric may become Amber shortly. Deferrals are at a low absolute level compared to ten year average, and cancellations around average however, this is lower if taken as % of a growing fleet Growth rate was above 6% for most of 2015 and >7% during summer. After allowing for Leap Year, Jan-Mar 2016 all above 6.5%. Growth recovery has slowed since Q1 2015; capacity exceeding demand; consistent with weak manufacturing data from China Yields have been falling since December 2014; Q1 2016 down around 5%. However, this is not a major concern yet, as costs are down by >10% as a result of falling oil prices Mixed picture; US stable at very high levels, European airlines LF has peaked and is declining. Asian airlines falling in some cases Order intake has fallen sharply from the levels of 2011-2014. New programmes are sold out for several years, with limited slots now available, driving downward trend Slight uptick in cancellations towards end of 2015, but too early to conclude if significant yet 6
Global Airline Net Profit (US$bn) Crude Oil Price (US$ per Barrel) Airline profits benefitting from low oil prices 50 40 30 20 10 0-10 -20 110 100 90 80 70 60 50 40 30 20 10-30 Net Profit Crude Oil Price 0 Source US EIA / IATA 7
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 Year-on-Year Change Global passenger traffic growth remains robust 20% 15% IATA predicting 6.2% traffic growth for 2016 10% 5% 0% -5% -10% 2015 Capacity = 6.7%, Traffic = 7.4% -15% Traffic (RPK) Capacity (ASK) Source: IATA 8
2016 Predicted Growth IATA expect supply to lead demand (marginally) in most regions in 2016 16% 14% 12% 10% 8% 6% 4% 2% 0% Africa Asia-Pacific Middle East Latin America North America Europe Global Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity Source IATA, Year to Date to end April 2016 9
Global Airline Net Profit (US$bn) Airline profits continue to grow through 2016 50 40 30 20 10 0-10 -20-30 Source: IATA 10
Commercial Jet Order Backlog Backlog as % of Fleet Commercial jet backlog at record high 16,000 14,000 Backlog Value Now $952bn 80% 70% 12,000 10,000 8,000 6,000 4,000 2,000 0 60% 50% 40% 30% 20% 10% 0% Backlog at Year End Backlog as % of Fleet Source: Flightglobal Fleets Analyzer & Ascend Values (2016$ Base Full Life Value) 11
Over 2,050 new aircraft ordered in 2015 Top 10 aircraft type net orders in 2015 A320 Family 737 Family E-Jet Family A330 Family 35% are A321 25 A321 ceo 294 A321 neo 787 777 Family 767 ARJ21 MRJ CRJ Family 0 100 200 300 400 500 600 700 800 900 1,000 Current Generation New Generation (No of aircraft) Source: Flightglobal Fleets Analyzer, commercial passenger & cargo jets only 12
Only 540 net new aircraft ordered in 2016 to date Top 10 aircraft type net orders in 2016 737 Family CSeries A320 Family A330 Family E-Jet Family A350 777 Family 787 CRJ900 Regional Jet 747 0 50 100 150 200 250 Current Generation New Generation Net Aircraft Orders Source: Flightglobal Fleets Analyzer, commercial passenger & Cargo jets only, as at 6 June 2016 13
Commercial Jet Book to Bill Ratio Book to bill above one but below long-run average in 2015, below one in 2016 to date 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Flightglobal Fleets Analyzer w estern built jets only, as at 6 June 2016 14
Aviation supply cycle Despite strong demand, several indicators amber or red 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 2015 had record commercial jet deliveries, 2016 expected to exceed further Past 5 years, deliveries for replacement made up around 50% of the total, around ten points higher than long-run average 6.5% in 2015, actually marginally down over 2014. The average over the past 25 years has been 7% Absolute level of stored commercial jets remains at historic high, though declining since the recession in terms of % of fleet Commercial aircraft offered for sale / lease currently at lowest point since 2010 Average age at retirement is now <25 years, despite fall in fuel prices Single-aisle & twin-aisle utilisations are at or near historic highs Production rates set to increase for A320, 737, 787 & A350, plus CSeries ramp-up; A330 reducing and 777 also to see cuts Decline since 2008; 2015 has seen share for replacement falling significantly, towards numbers consistent with peak years of cycles Trend is to a higher percentage, with above 7% in 2016 2019; such levels could indicate overcapacity based on past history Single-aisle declining, small increase in twinaisle, RJs increasing rapidly, driven by 50 seat jets ex-us market Falling numbers of available single-aisle, RJs stable - many stored 50 seat jets not actively being marketed Few very young aircraft continue to part-out, total continues to decline in 2015 Fairly flat trend since recovering in 2010/11. Year to June 2015 showed less than 1% decline off post-recession peak. 15
Aircraft Deliveries Jet deliveries down year to date in 2016 1,600 1,400 1,200 1,000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Regional Jet Single-Aisle Twin-Aisle Source: Flightglobal Fleets Analyzer, as at 6 June 2016 16
Passenger Airliner Deliveries % of Deliveries Estimated for Replacement 47% of last 7 years passenger jet deliveries have been for replacement 1600 1400 1200 1000 800 600 400 200 0 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Deliveries % of Deliveries for Replacement Source: Flightglobal Fleets Analyzer - deliveries into passenger airline service only, 2016 as at 6 June 17
1990 1991 1992 1993 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 Passenger Airliner Deliveries Deliveries as % of Fleet in Service Deliveries represent typically around 7% of global fleet 2200 2000 1800 11% 10% 9% 1600 1400 1200 1000 800 600 400 200 0 8% 7% 6% 5% 4% 3% 2% 1% 0% Deliveries / Forecast Deliveries Deliveries as % of Fleet in Service Source: Flightglobal Fleets Analyzer & Flightglobal Fleet Forecast (deliveries into passenger airline service only) 18
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 Twin-Aisle / Single-Aisle / Regional Jet Monthly Availability Total Commercial Jet Monthly Availability Used jet availability declining 450 400 350 300 250 200 150 100 50 0 900 800 700 600 500 400 300 200 100 0 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 w et-lease / ACMI)
Aircraft Retired Average Age at Aircraft Retirement Some element of production surplus has driven increased retirements at reduced age in this cycle 800 700 600 500 400 300 200 100 0 40 35 30 25 20 15 10 5 0 <15 Years Old at Retirement >15 Years Old at Retirement Average Age at Retirement Average Age at Economic Retirement Source: Flightglobal Fleets Analyzer 20
32% of single-aisle slots open in next ten-years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total Airbus Backlog Boeing Backlog Others Backlog Open Slots Source: Flightglobal Fleets Analyzer & current / planned production,
Aircraft Deliveries Risk of supply exceeding demand in single-aisle market increasing towards end of decade 1800 1600 Airbus Rate 60 Boeing Rate 57 1400 1200 1000 800 600 400 200 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Airbus Backlog Boeing Backlog Others Backlog Planned Production Forecast Deliveries Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast 22
A comment on single-aisle production rates Airbus currently headed to rate 50 by 2017 (and then 60 by 2019), Boeing rate 52 in 2018 (and now 57 in 2019) This drives ~5.4% single-aisle fleet growth through 2020 Single-aisle productivity (more seats, longer sectors, increased utilisation) has increased by 2.4% per annum over last ten years So 5.4% fleet growth equals 7.8% capacity growth Single-aisle share of global capacity is growing (also by 2.4% per annum) So current rates actually equate to 5.4% global capacity through 2020 Allowing for load factor increases, traffic will need to exceed this But...leaves no room for CSeries, C919 or MC-21..assumes single-aisle share continues to grow..assumes 2,000 single-aisle retirements through 2020 Single-aisle rates 57 / 60 may be an increase too far? 23
Forecast Deliveries (2015 2034) Current single-aisle production rates exceed OEM s long-term demand forecasts 35,000 30,000 Airbus & Boeing total @ sustained Rate 60 / 57 post-2019 25,000 20,000 15,000 10,000 5,000 0 Announced / Estimated Production Rates Flightglobal Fleet Forecast Airbus GMF Boeing CMO Airbus Boeing CSeries MC-21 C919 Single-Aisle Source: 2015 Flightglobal Fleets Forecast, Airbus GMF, Boeing CMO; Ascend Analysis 24
45% of twin-aisle slots open in next ten-years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total Airbus Backlog Boeing Backlog Open Slots Source: Flightglobal Fleets Analyzer & current / planned production,
Aircraft Deliveries Twin-aisle production surplus looks to be higher risk in near-term 600 500 400 300 200 100 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Airbus Backlog Boeing Backlog Planned Production Forecast Deliveries Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast 26
Aircraft Deliveries Significant open demand in regional jet market 350 300 250 200 150 100 50 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Bombardier Backlog Comac Backlog Embraer Backlog Mitsubishi Backlog Sukhoi Backlog Planned Production Forecast Deliveries Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast
New & emerging aircraft programmes - scorecard Type A320neo Order success Market position Execution / delivery Comment Hitting cash-flow. Recovery by end 2016 key. A321neo winning at airlines and leasing co s. 737 Max Good programme execution, but wobbles on family strategy in face of A321neo and CSeries. A330neo 777X CSeries E-Jet E2 MRJ C919 MC-21 Steady order progress. Production gap bridged successfully. Lower fuel prices help vs. 787. EIS now late 2019. No new customers announced since 2014. Is it too big? Boosted by new orders and route proving. Can BBD sell at sustainable prices? Large established operator base. Programme appears on time. E190/195 need more orders. Programme delays problematic. Vulnerable to lack of change to US scope clauses. Huge domestic market, but no evidence aircraft will be competitive or on-time. Dependence on Russian orders. Behind schedule. 28
Demand & supply cycle summary Mixed messages from the global economic cycle geopolitical risk China remains on watch Brazil, Russia!!! Aviation demand cycle remains strong still as good as it gets Fuel prices are helping a lot on the cost / yield side Watching closely for signs of evolving capacity surplus Some amber / red indicators in aviation supply cycle OEM capacity! Deliveries trending towards higher % of installed fleet Average age of retirement continues to decline Utilisations flattened since recovering post-2008 29
On the Menu.. Introduction to Ascend The Aviation Demand and Supply Cycles Aircraft Values A few final thoughts 30
Cumulative % of Aircraft Type / Variants / Vintages 50% of today s jet fleet has CMV > BV 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Feb-16 Jul-08 Jul-10 0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% CMV / BV Source Ascend Values 31
Cumulative % of Aircraft Type / Variants / Vintages Single-Aisles skew the distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Regional Jet Single-Aisle Twin-Aisle 0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% CMV / BV Source Ascend Values 32
Market Value Changes since January 2016 737-700 10% 747-8F 0-12% 757-200 6-8% 757-200F 7-9% A320neo 3% 777-200ER 5% ATR Freighters 0-18% Dash 8-100 3-10% Dash 8-200 5% Dash 8-300 9-13% EMB-120 28-36% Fokker 50 3% CSeries new values added Images sourced from avionvale.com and Bombardier press release respectively 33
Market Lease Rate Changes since January 2016 A321-200 (post-2000) up to 11% A321-200 Sharklets 1.5% 767-300ER 3-10% A321-200 (pre-2000) up to 11% A320neo 3% 747-8i 4-5% 747-8F 6-10% 777-200ER 18-20% CRJ700/900 15-20% Dash 8-1/2/300 5-13% Images sourced from Airbus and Bombardier press releases respectively 34
Key Aircraft on Watch 737-700 potential for more value drops 737-800 Lease Rates lots of [re]marketing activity in progress A330 Lease Rates keeping an eye on remarketing activity.. Offers not too high ATR 72-600 market appears somewhat oversupplied both Values and Lease Rates on watch 35
Cumulative % of Aircraft Type / Variants / Vintages The last cycle saw significantly better CMV / BV improvement than the current cycle 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Jul-02 (Trough of Prior Cycle) Jul-08 (Peak of Prior Cycle) Jul-10 (Trough of Current Cycle) Current Position 0% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% CMV / BV Source Ascend Values 36
On the Menu.. Introduction to Ascend The Aviation Demand and Supply Cycles Aircraft Values A few final thoughts 37
Some final thoughts about oil prices Low oil prices stimulate opportunities in the demand side $50 - $70 per barrel seems to be the latest outlook Low oil prices degrade the immediate advantage of next generation aircraft Next generation aircraft backlogs are huge, with most commitments placed in the prior high fuel price scenario Unwinding these commitments will be expensive There are a finite number of current generation opportunities So for next generation, demand will remain strong but it s now all about the price 38
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30+ Cumulative % of Passenger Jets in Airline Service Around 4% points more of 15+ year old aircraft in service today than three years ago 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2013 2016 Aircraft Age (Years) Source Flightglobal Fleets Analyzer 39
Passenger Jet Aircraft in Service Fleet of 15+ year old aircraft is 1,350 aircraft larger than it was three years ago 1,600 1,400 2016 2013 1,200 1,000 800 600 400 200 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30+ Aircraft Age (Years) Source: Flightglobal Fleets Analyzer, as at 6 June 2016 40
Jet fuel price estimated to deliver A320ceo and A320neo equal block hour DOC ($ per USG) Next generation lease rate premiums are sensitive to fuel price 3.5 3.0 2.5 US Gulf-Coast Jet Kerosene presently at $1.16 per USG 2.0 1.5 1.0 0.5 0.0 20000 25000 30000 35000 40000 45000 50000 55000 60000 65000 70000 75000 80000 A320neo monthly lease rate premium (vs A320ceo) 41
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 CMV (US$ Mn) 737NG / 737 Classic Fleet in Service Technology upgrades have an impact on values of legacy models Impact of 737NG introduction on 737 Classics values 35 30 First 737NG Delivery 7000 6000 25 5000 20 4000 15 3000 10 2000 5 1000 0 0 737-300 (0-Year) 737-300 (5-Year) 737-300 (10-Year) 737-300 (15-Year) 737-300 (20-Year) 737-300 (25-Year) 737 Classic Fleet 737NG Fleet Source: Flightglobal Fleets Analyzer & Ascend Values from Flightglobal (in service = airline passenger aircraft only) 42
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 Boeing 737NG fleet projected to remain larger than 737Max through 2027 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 737NG Fleet Project 737NG Fleet Projected 737Max Fleet Source: Flightglobal Fleet Forecast 43
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 2036 2037 2038 2039 2040 2041 2042 Depreciation significantly accelerated for later build aircraft in Ascend Base Values 737-800 Base Value, US$ Mn 50 45 40 35 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Ascend Values from Flightglobal 44
Early build aircraft depreciate less steeply HL Base Value, US$ Mn 60 50 40 30 20 10 0 A320S A320neo Source: Ascend Values from Flightglobal, note values are uninflated 45
First A320neo takes five more years to get to 25% HLBV as ratio of initial HLBV 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 A320S A320neo Source: Ascend Values from Flightglobal, note values are uninflated 46
Used commercial jet aircraft sales Used aircraft transactions have been increasing since 2012 2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0-4 Years 5-9 Years 10-14 Years 15-19 Years 20-24 Years 25+ Years Source: Flightglobal Fleets Analyzer, Western jets for passenger usage
Used Commercial Jet Aircraft Sales % of Fleet Transacted Typically around 8% of the global fleet is transacted as used aircraft annually 2500 12% 2000 10% 1500 8% 1000 6% 500 4% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0-4 Years 5-9 Years 10-14 Years 15-19 Years 20-24 Years 25+ Years 2% Source: Flightglobal Fleets Analyzer, Western jets for passenger usage, PLBs at delivery excluded
Final thoughts summary Lower oil prices are a short-term positive for demand There are more older aircraft in service today then three years ago Aircraft values are most fundamentally driven by demand and supply, but values aren t necessarily reflective of the current strong demand environment Technology transition is potentially a factor here Aircraft value behaviour through technology transition is well understood Provided the accelerated depreciation of late-build models is factored in, there is little to be nervous about 49
Question time.. Rob Morris Global Head of Consultancy +44 (0)20 8564 6735 +44 (0)7730 213 189 rob.morris@ascendworldwide.com The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to AscendFlightglobalConsultancy, its offices, or employees in respect of any error or omission that may have occurred.