Commercial Aero-Engine Market Analysis & Update Aviation Week Network: Engine Leasing, Trading & Finance May 2-3, 2018: London, UK
COMPANY INTRODUCTION Alton Aviation Consultancy is a boutique consulting firm with deep domain expertise across the aviation value chain Aircraft Leasing & Financing Advisory Airlines Aviation & Aerospace Investors Business & General Aviation Aerospace Manufacturers & Supply Chain MRO & Aftermarket Airports Specialty Projects Agile. Global. Objective. 1
COMPANY INTRODUCTION Alton provides guidance and insight required to inform business strategies, allocate capital, prioritize resources, and manage risk Lessors, operators, lenders, and investors rely on Alton s professionals to provide independent, objective advisory support Market research & analysis Aircraft Leasing & Financing Advisory Investment strategy Commercial due diligence Maintenance and lease cash flow forecasting Appraisals/valuations Technical advisory 2
COMPANY INTRODUCTION Alton supports a global client base from offices in the U.S., China, Hong Kong, and Japan New York Beijing Hong Kong Tokyo 380 Lexington Avenue 17 th Floor New York, New York 10168 USA 8 Guanghua Dongli China Overseas Plaza South Tower, Floor 11, Suite A053 Chaoyang, Beijing 100020 China 136 Des Voeux Road Central Suite 903 Central Hong Kong Konan Minato-Ku Tokyo, Japan +1 212 256 8488 New.York@AltonAviation.com +86 10 8598 4981 Beijing@AltonAviation.com +852 8191 3028 Hong.Kong@AltonAviation.com +81 90 8057 1956 Tokyo@AltonAviation.com In China, Alton Aviation Consultancy is know n as 德世国际航空咨询 ( 北京 ) 有限公司, or De Shi. 3
TODAY S AGENDA Commercial Aircraft & Engine Fleet Dynamics Aircraft & Engine Fleet Outlook Engine Leasing Overview Summary & Conclusions 4
SECTION 1 COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS The airline industry has historically been cyclical; the most recent eight years have been profitable 6% 4% 2% 0% (2%) (4%) Global Airline Net Profit Margin, 1980-2017F OIL CRISIS GULF WAR SEPT. 11 FINANCIAL CRISIS 6 years 6 years 2 years 8+ years (6%) $66B 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2017F Source: IATA, Alton analysis Alton Insight Factors sustaining current momentum include: Continued strong growth in air traffic demand, driven by GDP Capacity/pricing discipline from airline consolidation in mature markets Relatively stable and moderate fuel prices 6
Indexed GDP/ RPK GDP Growth COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Air traffic demand has long been noted to correlate to GDP growth both continue to expand Historical Air Traffic and GDP Growth (1980 2017F) 800 GDP Growth 14% 700 Indexed GDP 12% 600 Indexed RPK 10% 500 400 300 200 100 0 (2%) 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2017F 8% 6% 4% 2% 0% Global annual passenger traffic has risen at a multiple of on average 1.7 times global GDP over the past 25 years Demand for air travel has not wavered long in the face of exogenous shocks Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis 7
Average Annual Growth COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Fleet growth is driven by increases in air traffic; Middle East and Asia Pacific have led the world in both over the past 20 years 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Fleet and Air Traffic (RPK) Growth by Region (1997 2017) 11.0% 10.0% 7.1% 6.8% 5.7% 6.0% 4.5% 4.6% % Fleet growth Air Traffic 4.6% 4.0% 2.7% 1.4% Middle East Asia Pacific Africa Latin America Europe North America Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis 8
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Over the past 25 years, the global fleet has grown at a rate of 5.1%; Airbus has enjoyed the most significant share expansion Global Fleet Count (1992 2017) Global Fleet Count (1992 2017) 30,000 30,000 Widebody Jet Other Turboprop Embraer 8% 25,000 20% 25,000 Regional Jet Bombardier 7% Narrowbody Jet Boeing 8% 10% 20,000 20,000 Airbus 15,000 13% 15,000 43% 10,000 57% 10,000 5,000 5,000 33% 0 1992 1997 2002 2007 2012 2017 0 1992 1997 2002 2007 2012 2017 Source: CAPA, Alton analysis 9
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Today s commercial air transport fleet consists of approximately 28,000 aircraft, with Asia Pacific equaling North America in size 18% 9% 16% 24% 8,400 51% 10% 11% 6,600 61% 51% 2,100 39% 22% Narrowbody Jet Regional Jet Turboprop Widebody Jet 14% 17% 10% 2,100 59% 28% 14% 41% 1,300 17% 7% 3% 10% 5% 8,400 63% Source: CAPA, Alton analysis 10
% Remaining in Service COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Aircraft have historically retired between 20-30 years or age 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Aircraft Survivor Curves Narrowbody Jet Regional Jet Turboprop Widebody Jet 0 5 10 15 20 25 30 35 40 45 50 Age of Aircraft, in Years Alton Insight Turboprop aircraft have outperformed other aircraft classes Regional jets as a whole have underperformed but much of this has historically been driven by the 50- seat regional jets Source: CAPA, Alton analysis 11
Average Age @ Retirement COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Retirement ages for narrowbody and widebody jets have compressed in recent years, but are still near 25 years 35 30 25 20 15 10 5 Retirement Age Trends, 1997-2017 Narrowbody Jet Widebody Jet 0 1997 2002 2007 2012 2017 Note: Trailing three year average Source: CAPA, Alton analysis Alton Insight Narrowbody retirement ages have compressed from a peak at the top of the prior cycle Boeing 787 entry-into-service delays kept older widebody aircraft in the fleet through the downturn Despite headline news reports, retirement ages for narrowbody aircraft is close to 25 years today 12
Total Aircraft % of Fleet COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Fleet retirements have now declined from previous peak levels 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1992-1997 Aircraft Retirements Aircraft Retired % Fleet $66B Avg. 144 1997-2002 Avg. 294 2002-2007 Avg. 601 2007-2012 Avg. 464 2012-2017 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Alton Insight Peak retirements in 2007-2012 were driven by (i) a soft demand environment, (ii) high fuel prices, and (iii) marginalized 50-seat regional jets The surge in aircraft retirements spawned advancements in the teardown/part-out industry Low fuel prices and a strong traffic growth environment have driven the recent slowdown in retirements rates The end-of-life market is highly competitive today Source: CAPA, Alton analysis 13
Aircraft Retried Engines Retired COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS Over the course of the last decade, more than 5,000 aircraft and 12,000 engines have left the in-service fleet Aircraft Retirements, 2008-2017 6,000 5,000 4,000 3,000 2,000 1,000 0 Top 10 Airfames 747-400 757 A300/A310 DC9 747-1/2/300 737 Original A320 MD80 727 737 Classic Engine Retirements, 2008-2017 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Top 10 Engines CFM56-5A CF6-50C2 RB211-524 PW4000-94 PW100 CF6-80C2 JT9D JT8D-200 CFM56-3 JT8D M ost retirements have been what are now considered prior generation aircraft & engines Source: CAPA, Alton analysis 14
SECTION 2 COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
Fleet Size COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Over the next decade, Alton projects the commercial fleet will grow at 3.8% per year, reaching over 44,000 aircraft by 2028 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Widebody Jet Turboprop Regional Jet Narrowbody Jet 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Source: CAPA, Alton analysis 16
Aircraft Delivered Engines Delivered COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Over 22,000 aircraft and 44,000 engines are projected to be delivered through 2028 Aircraft Delivery Forecast, 2018-2028 25,000 Top 10 20,000 15,000 10,000 5,000 0 MRJ A330neo E-Jet E2 777X C Series ATR72 A350 787 737 MAX A319/320/321neo Engine Delivery Forecast, 2018-2028 50,000 40,000 30,000 20,000 10,000 0 Top 10 Trent 7000 Trent 1000 GE9X PW1500G GEnx -1B PW100 Trent XWB PW1100G CFM56-LEAP-1A CFM56-LEAP-1B New technology platforms will comprise the vast majority of the next decade s deliveries Source: Alton analysis 17
# of Aircraft 22,000 COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Demand for new aircraft deliveries will be driven by the combination of aircraft needed for growth & replacement Growth Drivers Economic and middle-class expansion, particularly in emerging markets Stimulation from low fares Market deregulation & liberalization Fleet Projection (2018 2028) 45,000 44,000 40,000 35,000 30,000 Growth 14,000 30,000 25,000 Replacement 8,000 20,000 15,000 Retained 10,000 22,000 5,000 0 2018 2028 Replacement Drivers Demographics, and attainment of economic life Supply/demand balance Interest rates Fuel prices Emissions regulations Source: CAPA, Alton analysis 18
Rate/mo COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Aircraft OEMs presently enjoy large order books and are ramping-up production of the most in-demand aircraft Select Aircraft Fleet & Backlog 787/777X (Next) In Service 777 (Current) Inactive Backlog A330neo/A350 (Next) A330ceo (Current) 737 MAX (Next) 737NG (Current) A320neo (Next) A320ceo (Current) 0 2,000 4,000 6,000 8,000 80 70 60 50 40 30 20 10 0 OEM Production Rates Current rate/mo Future rate/mo (2019) 60 57 46 44 24 20 14 15 NB WB NB WB Airbus Boeing Source: CAPA, Alton analysis; OEM announcements 19
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK The majority of the backlog is held by Airbus and Boeing 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 10 Year Backlog by OEM Others Embraer Bombardier Boeing Airbus Alton Insight Airbus and Boeing combined hold about 85% of the backlog and their relative proportions are fairly steady in the coming years Bombardier and Embraer have smaller and shorter backlogs Remainder of backlog distributed amongst ATR and some emerging manufacturers Source: CAPA, Alton analysis 20
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Asia Pacific accounts for the largest portion of the backlog, although a substantial portion is not yet allocated 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Backlog by Region Widebody Jet Turboprop Regional Jet Narrowbody Jet Source: CAPA, Alton analysis Alton Insight Asia Pacific accounts for 29% of firm backlog true figure is likely more given unallocated orders region s high demand for narrowbodies Europe and North America account for the next highest shares of the backlog at 15% and 14% respectively Approx. 4,000 aircraft on backlog have not yet been allocated to an operator or region many of these aircraft have been ordered by lessors 21
Aircraft Retried Engines Retired COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Over 8,000 aircraft and 18,000 engines are projected to leave the in-service fleet through 2028 Aircraft Retirement Forecast, 2018-2028 10,000 Top 10 7,500 5,000 2,500 0 CRJ7/9/1000 E-Jet MD-80/90 ERJ135/145 767 777 CRJ1/200 737 Classic 737NG A320 Engine Retirement Forecast, 2018-2028 20,000 15,000 10,000 5,000 0 Top 10 CF34-8C AE3007 CF34-3 CFM56-3 PT6A PW100 CF6-80C2 V2500-A5 CFM56-5B CFM56-7B The next decade s retirements will include many of today s current generation aircraft & engines Source: Alton analysis 22
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK Today s commercial air transport MRO market demand is approx. $69B, growing to $103B by 2028 an annualized growth rate of 4.1% Africa Latin America Middle East Europe North America Asia Pacific World Total $2.4B $3.8B $7.4B $16.4B $16.9B $22.6B $69B Modifications Airframe Heavy Line Components Engine World Total $6B $8B $13B $14B $29B $69B $0 $20 $40 $60 $80 $100 $120 $0 $20 $40 $60 $80 $100 $120 10yr CAGR 10yr CAGR Africa Latin America Middle East Europe North America Asia Pacific World Total 5.0% 5.0% 6.5% 2.2% 1.6% 5.7% $103B Modifications Airframe Heavy Line Components Engine World Total 6.1% 2.9% 3.9% 3.1% 4.4% $103B $0 $20 $40 $60 $80 $100 $120 $0 $20 $40 $60 $80 $100 $120 Source: Alton Analysis, all figures constant dollars ($2018 USD) 23
SECTION 3 ENGINE LEASING OVERVIEW
Aircraft Fleet Value (USD Billion) Value (USD Billion) ENGINE LEASING OVERVIEW The commercial jet fleet is valued at nearly $650 billion; of the total aircraft value, as much as 45% may be attributed to installed engines 1 Global Commercial Aircraft Fleet Value $400 by Aircraft Type and Age $350 Regional Jet $300 $250 $200 $150 $100 $50 $0 < 5 years 5-10 years 10-15 years Widebody Narrowbody 15-20 years > 20 years $400 $350 $300 $250 $200 $150 $100 $50 $0 Global Commercial Aircraft/Engine Value by Aircraft Type and Age Spare Engines Installed Engines Airframe Narrowbody Widebody Regional Jet Spare engines are around 10% of the installed engine base, with a value on the order of $25 billion Note: 1\ Engines assumed to be valued at spare engine market values Source: Source: CAPA Fleet Database, December 2017, Alton analysis and estimates 25
SALE-LEASEBACK OUTRIGHT SALE-LEASEBACK ENGINE LEASING OVERVIEW Trading Volumes: a complex web of primary, secondary, and tertiary aircraft transactions take place between market participants OUTRIGHT AIRCRAFT / ENGINE OEM Transaction Schematic: Installed & Spare Engines AIRLINE OUTRIGHT AIRLINE OUTRIGHT PART-OUT Alton Insight Buyers of aircraft with installed engines include airlines, aircraft lessors, and part-out specialists at different phases of the life cycle OUTRIGHT AIRCRAFT/ ENGINE LESSOR LEASE ATTACHED OUTRIGHT AIRCRAFT/ ENGINE LESSOR OUTRIGHT Similarly, purchasers of spare engines include airlines, engine lessors, and part-out specialists PRIMARY (NEW) SECONDARY (USED) TERTIARY (RETIRE) Source: Alton analysis 26
ENGINE LEASING OVERVIEW There are an estimated ~50,000 total engines in the global fleet; ~10% of installed base are spares, of which ~1,500 (35%) are leased Leased Proportion of Spare Engines in Global Fleet Alton Insight Spare Fleet While there is overlap in the various categories, engine lessors fall into three general categories: OEM (or OEM-affiliated) Global Fleet 0 10,000 20,000 30,000 40,000 50,000 Spare Leased Spare Owned In-Service Independents (including Endof-Life specialists) MROs (or MRO-affiliated) Source: Alton estimates 27
ENGINE LEASING OVERVIEW Participants in the engine market form a view on the attractiveness of various engines, yet there is a buyer and seller on each side of a deal V2500-A5 CFM56-7B Leap-1B Leap-1A CFM56-5B GEnx PW1100G CF34-10E Trent 700 GE90 CF34-8E Trent 1000 CF34-8C CF6-80 PW2000 RB211-535 PW4000 GP7200 Trent 900 CFM56-3C Trent 800 RB211-524 CFM56-5A CFM56-5C Trent 500 PW6000 Investor Appeal Remarketing Potential Residual Value 0 2 4 6 8 10 12 14 16 18 20 Source: Airfinance Journal Engine Investor Poll, 2017 28
ENGINE LEASING OVERVIEW As with aircraft leasing, the industry consensus is a strong outlook for engine leasing in the foreseeable future Outlook Growth in the spare engine leasing industry is dependent on two fundamental drivers: Number of commercial aircraft, and therefore engines in the market, and correspondingly determining the volume of spares needed Proportion of engines that are leased by operators, forecast to grow Trends Narrowbody Preference OEM Aftermarket Prominence Fuel Price Production Rates Technology Improvements Innovation of Services to Compete Development of Chinese Engine Lessors 29
SECTION 4 SUMMARY & CONCLUSIONS
SUMMARY Overall, the state of the aviation industry is strong: Airlines profitable Manufacturers raising production rates Aftermarket demand volumes up The industry remains susceptible to exogenous events Demographics will drive increased retirements in the coming decade most will be today s current generation equipment as new technology platforms form a greater share of the global fleet Strong growth expected in the engine leasing market on basis of overall fleet growth and expanding share of leased engines 31
Adam Guthorn +1 212 301 0572 adam.guthorn@altonaviation.com ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO