The latest commentary and analysis from Ascend Flightglobal Consultancy 15 years later In this issue What to watch for in 2016? Wobbly widebodies twin-aisle shake-up Chinese carriers go international Bizjets not business as usual
Ascend named Appraiser of the Year 2011 2013 2014 2015 2016 r aaviation 100 Appraiser of the Ye We are delighted to announce that we have been awarded Appraiser of the Year at the Aviation 100 Awards for the fifth time. 2015 was another hugely successful year for Ascend Flightglobal Consultancy with more than 60,000 aviation assets valued for almost 200 different clients by our valuations team. Our online system was used more than 180,000 times to value aircraft and helicopters and assess current values and future residual values. As demand for our services continues to grow, our team is also expanding, as is the scope of our offerings in valuations and our wider advisory services. Ascend Flightglobal Consultancy valuation services and risk advisory allow you build a stronger aircraft investment strategy by providing: Expert opinion and valuations from ISTAT and ASA certified appraisers, with over five decades of trends and data to drive analysis Aircraft, engine, helicopter and business jet valuations updated continuously to track market changes Historical, current and future values, schedules data and commercial aircraft, business aircraft and helicopter global fleet tracking To find out more about how we can help you, visit flightglobal.com/finance
Welcome to V1ewPoint 50 Introduction Rob Morris, Head of Consultancy, introduces Ascend s 50th edition of V1ewPoint rob.morris@ Welcome to the 50th issue of V1ewpoint, and our first for 2016. As I write these notes, our Gregorian New Year seems more than just a few weeks ago as we have worked our way through a busy January and the Dublin Air Finance conferences, while our colleagues in Asia are celebrating their Lunar New Year and the Chinese welcome the year of the monkey. But by the time you read this, both celebrations will be long over and we will be well into the business as usual phase of 2016. Among the four key themes I picked up from Dublin was an optimistic market sentiment. As our Chief Economist Peter Morris said in his keynote presentation, This is (still) as good as it gets. Peter first used that phrase in Dublin in January 2015 when noting that commercial aviation demand was currently the strongest we had ever seen. And with oil prices driving lower costs for airlines, potential for demand stimulation through lower ticket prices remains strong. Therefore, while revenues can increase through volume, costs are declining and inevitably profits are set to remain as high as they have ever been. So we enter 2016 with aviation markets in a great place, and to use one of my favourite football vernaculars (usually uttered as my team goes 2-0 up in the match), nothing can go wrong now. But as we all know, risk either geopolitical, demand, supply, or some other is ever present and it is the role of the analyst to monitor and measure for signs of increasing risk. In this issue Richard Evans sets out some of the metrics that we at Ascend will be monitoring through 2016 as we try to understand how the year is evolving for our sector. Turning to our core values content, George Dimitroff shines the spotlight on the widebody sector, where Airbus A330s and Boeing 777s saw some weakness occurring in both Market Values and Lease Rates as we proceeded through 2015. Overall, around 80% of today s fleet of twin-aisle aircraft have Current Market Values lower than Base Values. George sets out some analysis of secondary markets for such assets and explains why we think there is limited potential for improvement in this metric at present. Moving from assets to regions, Joanna Lu, our Head of Advisory in Asia, uses this issue to examine network developments within Chinese carriers as they undertake their global expansion. I covered an overview of Chinese markets in our first webinar of 2016 recently. There we observed continued growth in Chinese airlines share of global capacity and aircraft fleets. The former is already around 16%, while the latter is presently around 14% but expected to grow to close to 20% in 10 years time. To achieve this, our Flightglobal Fleet Forecast predicts the 3 Ascend Flightglobal Consultancy
delivery of 3,700 new passenger jets to airlines in China through 2025. Our Fleets Analyzer database indicates that only around 440 of those aircraft are presently in firm order backlog, and even if we adjust for the 1,400 or so orders currently recorded for undisclosed customers but which we estimate will be delivered to Chinese airlines, the country appears to us to be under-ordered over the next 10 years. So despite the predicted slowing of economic growth in China, it seems well set to remain a key engine of growth for the commercial aviation sector in the near and medium term. And back to assets, Daniel Hall, our leading expert in business jet aircraft values, takes a look at what happened in the market over 2015, from the perspective of new deliveries and secondary-market values. Business jet markets in particular have been slow to recover from the global woes of 2008 and 2009, but there remain some clouds on the horizon as well as bright spots, as Daniel highlights in his article. As I noted in my welcome, this edition marks our 50th milestone. Our first issue was published almost 15 years ago in September 2001, just a week after the terrible events in New York and Washington which changed our world forever. That first issue, entitled An asset risk perspective, concluded with the words: The short term portents for the industry are bleak, and depression rather than recession may prove to be a more accurate description. The return to traditional growth levels is probably some way off, but time and time again the industry has proven its resilience and its ability to bounce back. We firmly believe that it will do so again, albeit it will involve a shift to the right in the industry s growth curve in the intervening period. Information, and the timeliness of information, remains key to the decision making of all participants in this industry, and will be a major component in their recovery. As we all know, recovery followed and since then we have been through yet another global cycle. The more things change, the more they stay the same. Information and analysis remain the bedrocks of sound decision making and strategy and Ascend Flightglobal Consultancy remains one of your favoured providers of that analysis. In closing I must thank you all for once again nominating Ascend as Appraiser of The Year for 2016 in the recently concluded Aviation 100 awards. This is the fifth time we have won this award in six years. We truly value your validation of our market proposition and we will strive throughout 2016 to ensure we remain truly worthy of that accolade. 4 Ascend Flightglobal Consultancy
Wobbly widebodies twin-aisle shake-up George Dimitroff, Head of Valuations, discusses how the arrival of new technology aircraft is changing Values and Lease Rates of widebodies george.dimitroff@ Twin-aisle aircraft and their values have been a bit of a trending topic in the last six months or so, and all with good reason. There has been a lot of controversy generated by comments like that made by Delta chief executive Richard Anderson about acquiring a Boeing 777-200ER for $7.7 million and it has been exhaustively debated at several conference platforms. We figured it is time Ascend takes a look at the changes occurring in the twin-aisle space. Where it began For several years after the Asian financial crisis of 1997, there was a continual under-ordering of new technology twin-aisle aircraft. There was the dotcom bubble around 2000, then 9/11, SARS in 2003, and it was only around 2004-2005 that orders for twin-aisle aircraft started picking up again, largely led by the rapidly expanding Gulf hub carriers and further boosted by the launch of the Boeing 787. Combined with rising fuel prices at the time, this helped induce a new replacement cycle, with rising orders for 787s, Airbus A350s, and the then still-young A330 (which has sold more units since the launch of the 787 than prior to it). When all this replacement cycle ordering began 10-12 years ago, the twin-aisle fleet consisted mostly of Boeing 747s, 767s, 777 Classics, early A330s and A340s. Newer A330s and 777s were like gold dust at the time, to quote one industry veteran. It is difficult to fathom that this year will mark 24 years since the first A330 ever flew and 22 years since the first 777 flew. Of course, there have been many upgrades and improvements to the reliability, efficiency, and performance of these aircraft since they first entered service, but the fact is, they are no longer in the prime of their youth. The order backlog for twin-aisle aircraft has certainly caught up with the slack from the 1997-2004 period. Today, a lot of the new technology aircraft that were little more than drawings when they started being sold a decade ago, are now entering service. Thus the effects of that replacement cycle are starting to be felt. 8 Ascend Flightglobal Consultancy
Recent shake-up Both the 777 and the A330 have had very good residual value behaviour in the past two downturns; but they have also experienced very little used aircraft trading until now, especially in the case of the 777. Does the decline in values of 777 Classics surprise us? Not really. We were anticipating it for quite some time. Although the aircraft still does a fantastic job in service with many of its original operators, it has a few things that limit its liquidity: one of them is the availability of three different powerplants (also in the case for the A330) and the market share of each of these three is fairly even (30%/30%/40% for General Electric/Pratt & Whitney/ Rolls-Royce). As a result, the active population of 777-200/200ER and 777-300 aircraft with any one given engine type is actually very small (just 165 aircraft with GE, 165 with P&W and 214 with R-R engines) especially when compared with the larger and newer 777-300ER, or the much more populous 767-300ER. Liquidity and concentration Of all 777s ever built, the -300ER model represents a 45% share; no other variant/engine combination has more than a 12% share. But of greater concern, perhaps, is that 50% of the 777 fleet is operated by just nine airlines, and 75% of the fleet is with 19 airlines. That is a fairly small market and represents a lot of concentration another barrier to liquidity. A330 AND 777 CURRENT IN-SERVICE FLEET DISTRIBUTION Cumulative percentage of in-service fleet 100% A330 777 80% 60% 40% 20% 0% 0 20 SOURCE: Flightglobal Fleets Analyzer 40 Number of operators 60 80 100 In the chart, a flatter curve stretching further to the right indicates better liquidity. As can be seen, the A330 fares much better: 50% of the fleet is with the 18 largest operators and 75% is with 36 operators. Altogether there are around 100 A330 operators and that list is growing as used aircraft find their way (usually on lease) into new airlines that have not operated the type before. Overall the numbers tend to indicate that the A330 family is, in theory, twice as liquid as the 777 family. Ascend Flightglobal Consultancy 9
Effects of turbulence Even when demand is strong, a spike in availability could cause serious headaches for lessors, as witnessed by the default of Japan s Skymark Airlines on all its A330s early last year. The main lesson learnt from the Skymark experience was that any aircraft, however new it may be, is viewed as a used aircraft by any potential buyers or lessees once it has been configured for its original customer and left the factory. Even if it is less than a year old, any potential new operator looks at reconfiguring the aircraft and this can be as costly and as time consuming as dealing with a 10- or 15-year-old machine. It also highlights the importance of having a popular interior layout, rather than a niche one. The impact of such a spike in availability can be very harmful to lease rates, even if the aircraft type remains in demand. Distressed aircraft under pressure to be placed quickly can see monthly rentals up to a third lower than previous market rates, and also affect other lessors going through the scheduled lease return and remarketing process without having experienced a default themselves. The spike in 777 availability in 2015 was also considerable. The number of stored 777s more than tripled in 2015, from 15 to 45 aircraft, with aircraft from Malaysia, Kenya, Transaero and others. Ascend has been monitoring all these changes in the twin-aisle market very closely. For example, we have captured details, including maintenance condition, sale prices etc, on all but two of the 777s parted out to date. We have also managed to obtain good visibility on the sale pricing of aircraft that have changed owners. This has enabled us to remain close to the market and move values accordingly. There were several necessary and difficult downward revisions to -200ER values and they seem to have been in the right direction, because when we captured values of the most recent 777 sales they were reasonably close to our Current Market Value opinions as of January 2016. Sadly it is not over yet and we expect more declines throughout the year, albeit more gradual. What does the future hold? We expect that in the next five years, values and lease rates for older 777 Classics and older A330s will continue to decline as lease returns increase, as do part-outs. There will inevitably be a secondary market for some aircraft but not for all. We also expect the first 777-300ERs to start coming off lease in the coming years, although we believe the initial availability will be in small numbers and fairly manageable for lessors. We also expect the first A380s to start coming off lease before 2020. The next chart summarises this. It appears that the greatest challenge for lessors in 2016 will be A330s, although from next year onwards they are likely to be overtaken by 777 lease expiries, and the most challenging year will be 2019. We don t expect much pain to be felt for 777-300ER values until the early to mid-2020s, when the 777-X will be in service in some numbers and more -300ER replacement occurs. Unlikely candidates Contrary to tradition, it seems most aftermarket interest for used large twin-aisle aircraft might actually come from first-tier carriers in the Western hemisphere. Most of the usual suspects second-tier carriers in developing markets, already have new aircraft ordered directly from the OEMs. Aside from Delta, which has been shopping for used 777-200ERs, Virgin Atlantic expressed an interest in leasing used 777-300ERs at the ISTAT conference in Prague last year, and IAG chief executive Willie Walsh expressed an interest in used A380s and 777-300ERs at the Airline Economics conference in Dublin in January. 10 Ascend Flightglobal Consultancy
KNOWN LEASE EXPIRES BY YEAR Number of aircraft with leases known to be expiring 70 777 787 A330 A350 A380 60 50 40 30 20 10 0 2016 2017 2018 SOURCE: Flightglobal Fleets Analyzer 2019 2020 2021 2022 2023 2024 Year in which lease is expiring 2025 2026 2027 2028 2029 Please note that there may be more leases expiring where Ascend is not aware of the lease expiry date, but on the other hand, some of the leases shown in the chart may be renewed. Although these may turn out to be good deals for a few lucky lessors, we do not believe that they are adequate to absorb anywhere near the full amount of capacity coming out from airlines retiring the types. A few more large twin-aisle aircraft may be absorbed by charter and ACMI carriers, but the remainder will reluctantly have to go for part-out, which will increase the supply of spare engines and parts, and reduce maintenance costs for existing operators. Winning formula History has shown us that the optimal sized twin-aisle aircraft for the secondary market is in the 200-300 seat range, depending on configuration. This is because most new operators entering long-haul operations for the first time need something small to begin with and an aircraft with relatively low operating costs. Historically this has been the 767-300ER, but focus is now shifting to the A330-200/300 (which has created a number of new secondary market operators in the last few years), and in the more distant future it will probably be the 787-8 and -9. Anything bigger than 300 seats tends to be a tougher proposition when it comes to the secondary market. Hopefully, a lot of the first tier operators of such aircraft will fly them until the end of their service life, but with the growing boldness of lessors to enter the large aircraft sector, as they have with the 777-300ER, the challenge of remarketing mid-life large twin-aisles may be put to the toughest test ever in a decade from now. Ascend Flightglobal Consultancy 11
CHINA-US SEAT CAPACITY MARKET SHARE CHANGE China-US, February 2011 CA (Air China) UA (United) MU (China Eastern) CZ (China Southern) DL (Delta) AA (American) CZ, 4% CA,19% UA, 33% MU, 13% DL, 8% AA, 10% Others, 12% China-US, February 2016 CA,26% UA, 21% MU, 15% CZ, 10% DL, 10% AA, 10% Others, 8% SOURCE: Innovata 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% In the Middle East, Gulf carriers have shaken up the aviation industry, particularly in terms of dominating access to the Asia-Pacific region. Intercontinental capacity is growing the fastest in absolute terms between Asia-Pacific and the Middle East, in part driven by increased partnerships between the major Gulf carriers and Asian operators, further closing the gap behind Europe and North America as the biggest markets for airlines in the region. During the last five years, Gulf carriers doubled their seat capacity to Southeast Asia and they currently account for 90% of the market between Southeast Asia and Gulf states. But there are also challenges. North Asia, which is more a protected market, is a different story for Gulf carriers. Over the last five years, the three major Gulf carriers have not made much headway in deploying new capacity to China. Restrictions have been imposed by the Chinese aviation authority, hampering approval for more slots for Gulf carriers. The reason for this is simply the fear that Chinese flag carriers may lose market share to other regions, such as Europe and the rest of Asia, as Gulf carriers provide such a strong hub network to those regions. Likewise, because of this fear, Chinese carriers are extra cautious about flying to the Gulf states. Over the last five years, there has been almost no increase in capacity except for China Southern Airlines, which increased its connections to the Middle East from 57 in July 2011 to 107 scheduled for July 2016, leveraging its multiple hubs in Guangzhou, Beijing, Urumqi, Wuhan and Shenzhen. Ascend Flightglobal Consultancy 13
In the near future, it does not seem that this deadlock will be broken, but it is fundamental to understand that there is potential traffic demand to drive network growth in this market. We believe Chinese carriers face a lack of direct connections and adequate offerings to the European market, both from major hubs and secondary markets. Addressing this gap could well possibly be a roundabout way to deal with the challenge from Gulf carriers. Through proper planning and partnerships, Gulf carriers could possibly support Chinese carriers in connecting to Africa, where service is currently insufficient. AIRLINE SEATS FROM UAE AND QATAR (2016 vs 2011) 140000 120000 AE, QA - CN, HK, JP (and two others), July 2011 AE, QA - CN, HK, JP (and two others), July 2016 100000 80000 60000 40000 20000 0 Emirates (EK) SOURCE: Flightmaps Analytics Qatar Airways (QR) Etihad Airways (EY) China Southern Airlines (CZ) Air China Limited (CA) Korean Air Lines (KE) China Eastern Airlines (MU) Air Arabia (G9) Sichuan Airlines (3U) Cathay Pacific Airways (CX) Hainan Airlines (HU) Yemen Airways (IY) There are also signs of continued liberalisation by Chinese aviation regulators in attempting to ease market access, such as the recent roll-out of pilot schemes to tackle slot allocation. Although there is clearly a lot of work for regulators to do before any new policies are launched, it is always a good sign that changes are being made to facilitate needs in the market. One way or other, the need for rapid network growth implies increased demand on operators in-service fleets over a short period of time, inevitably creating new demand for aircraft sourcing and requiring more flexibility in switching aircraft portfolios. This may apply particularly to Chinese carriers that are fast developing their network. 14 Ascend Flightglobal Consultancy
NEW BUSINESS JET DELIVERIES BY SIZE SEGMENT New Deliveries 350 2013 2014 2015 300 250 200 150 100 50 0 SOURCE: Flightglobal Fleets Analyzer Light Midsize Large / ULR / Bizliner It is fair to say the manufacturers at the top end of the market have been feeling the pain. Backlogs are shrinking and Bombardier and Gulfstream have both announced production rate cuts. Dassault has been public about the harsh realities of the market and saw a near 20% drop in new deliveries and 50% decline in orders. With 25% of Dassault s deliveries going to Asia/Latin America in 2013, the manufacturer is more exposed to emerging markets than other OEMs. Dassault Falcon 7X deliveries, for example, more than halved from 2014 to 2015. Values It would not be a discussion about the business jet market without some reference to Market Values. While it appeared 12 months ago that some stabilisation was taking place, through 2015 it became apparent that certain strands of the market (namely the large cabin segment) were showing some serious signs of weakness in light of the emerging markets slowdown and reduced demand from oil-producing (or benefiting) corporations or countries. Headlines include 16% year-on-year declines in Gulfstream G550 Market Values (or by up to 20% for older vintages). The G450 reads just as poorly also down by 16% to as much as 23%. The Bombardier Globals fell by a smaller margin, while the G650 took a 10% hit and the Falcon 7X is down 9% year on year. In the midsize space, the Challenger 604 performed better (down 6%) but its newer sibling, the 605, saw an 18% hit. Falcon 2000s saw an under 7% decline but the Challenger 300 and Gulfstream G200 both saw Market Values down by 14%. What exactly is going on here? Why the stark difference? It is all about inventory levels and aircraft age. Models such as the G450 and G550 may meet the so-called 10% for sale metric but they are plagued by high absolute numbers of aircraft for sale. With over 30 of one model for sale, there is a lot of (usually older) vintage concentration. 16 Ascend Flightglobal Consultancy
Using current and historical Ascend Values data, we can demonstrate this in the two charts that follow. The chart below reflects constant age Current Market Values for 10-year-old large cabin business jet types since 2012. In a completely stable market, these lines would be flat, while in a softening market (as appears to be the case today), they would trend down, and vice versa in a strengthening market. Clearly here, the only way is down. In three years, the CMV of a 10-year-old Global Express classic moved from $27.50 million to $18 million. A Global 5000 has fallen by 24% for the same age of aircraft, in little over two years. Similar percentage falls can be seen for an early-build, 10-year-old G550, worth $30 million back in 2013 and trading today for around $22 million. The G450 has trended in similar fashion. CONSTANT AGE MARKET VALUES OF 10-YEAR-OLD LARGE/LONG RANGE BIZJETS CMV, US$m 35 Global 5000 Global Express Global XRS G450 G550 F900EX EASy 30 25 20 15 10 5 0 2012 SOURCE: Ascend Values from Flightglobal 2013 2014 2015 2016 If we look over the same data but for popular midsize models, we see a similar picture. It is interesting to review the Challenger 300 and 604 relationship. While both have fallen by around one-quarter for the same age, at many points a Challenger 300 was actually worth more than a more capable Challenger 604. Why? Firstly, because of the market perception on technology and in-production versus out-of-production models. Secondly, this is due to inventory levels which is why the Falcon 2000EX EASy has fared pretty well. Embraer s Legacy 600 has had a torrid four years, with the Market Value of a 10-year-old model falling by 40%. Will it continue to decline? Ascend Flightglobal Consultancy 17
Issue 50 CONSTANT AGE MARKET VALUES OF 10-YEAR-OLD MIDSIZE BIZJETS CMV, US$m 18 CL604 CL300 Legacy 600 F2000 F2000EX 16 14 12 10 8 6 4 2 0 2012 2013 2014 2015 2016 SOURCE: Ascend Values from Flightglobal High inventory levels are to blame for the most recent value declines, and unfortunately for many of the types above, they are trending in the wrong direction. The year 2016 is set to be another interesting one and Ascend will be watching and reporting on it very closely. Contact us Visit our websites: flightglobal.com For more information, call us now: The Americas Europe, Middle East and Africa Asia New York Office +1 646 746 6845 Heathrow Office +44 (0)20 8564 6700 Hong Kong Office +852 2813 6366 Washington Office +1 703 706 9470 London Office +44 (0)20 7911 1700 asia@ usa@ uk@ Tokyo Office +81 (0)3 5561 5630 japan@ Singapore Office +65 6780 4315 sin@ Aviation 2020 community LinkedIn group Ascend Aviation twitter.com/ascendaviation LinkedIn group Flightglobal twitter.com/flightglobal The information contained in our databases and used in this publication has been assembled from many sources, and while reasonable care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to Ascend part of Flightglobal, Reed Business Information Limited, its offices, or employess in respect of any error or omission that may have occurred. 2016 Reed Business Information Ltd
FLIGHTGLOBAL FINANCE FORUM: EUROPE 2016 The Waldorf Hilton, London, 27 th June 2016 Get an insight into the latest aviation trends at our exclusive Flightglobal Finance Forum market briefing. We ll cover the supply and demand in the commercial aviation sector, the growth of operating lease ownership and the impact this has had on aircraft values and lease rates, so register your place now to not miss out. CONFIRMED SPEAKERS INCLUDE: Shane Matthews Head of Strategic and Market Analysis SMBC Aviation Capital al Gordon Welsh Head of Aviation UK Export Finance Michel Dembinski Head of Aviation ion Structured red Finance nce Office fice for EMEA EA Bank of Tokyo o Mitsubishi UFJ Joerg Schirrmacher rm cher Head of Aviation ion Helaba a Gold sponsor: Bronze sponsor: Visit our new website www.flightglobalevents.com/europefinanceforum16 Book on or before 22 nd April and save 150
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