Macro-Economic & Political Dynamics and the Commercial ......Head of Consultancy Ops. ISTAT Sr. Appraiser Ben Chapman Valuations Manager ISTAT Appraiser Richard Evans Senior Analyst

flightglobal.com/consultancy

Macro-Economic & Political Dynamics and the Commercial Aviation Cycle30th October 2018

Rob Morris, Global Head of Consultancy

1

http://bit.ly/flightascendaoty


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Flight Ascend’s unique Value proposition as an appraiser

Independent Global team – fully objectiveWe do not invest in aircraft and we are not brokers – NO conflicts of interestGlobal perspective with offices in London, New York and Hong Kong

Instant access to vast data for researchThe only Appraiser with globally recognized Fleets, schedules and values databases used by our clients on a day to day basis

Unparalleled Historical values dataHistorical 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


The Flight Ascend Consultancy Team

4

Rob MorrisGlobal Head of Consultancy

Chris SeymourHead of Market Analysis

Henk OmbeletHead of Advisory Operations

Alex VathylakisValuations Analyst

Sara DhariwalValuations Analyst

Peter MorrisChief Economist

Chris WillsHead of Consultancy Ops.ISTAT Sr. Appraiser

Ben ChapmanValuations ManagerISTAT Appraiser

Richard EvansSenior Analyst

Tony BrooksSenior AnalystISTAT Appraiser

Eva KaragianniValuations Analyst

Andrew SavvidesValuations Analyst

Michalina GlapaValuations Analyst

Valerie BershovaValuations Analyst

Lionel OlongaValuations Analyst

Ryan HammacottRisk Analyst

Joanna LuHead of Consultancy Asia

Thomas KaplanSenior Analyst

Dennis LauAviation Analyst

VacancyAviation Analyst

George DimitroffHead of ValuationsISTAT Appraiser

Michael LapsonSenior AnalystISTAT AppraiserDaniel HallSenior AnalystISTAT AppraiserASA Sr. Appraiser

Syed ZaidiAviation Analyst

David GriffinSenior AnalystISTAT Appraiser

Vivi WeiSenior Risk AnalystNovember 2018

Herman TseAviation AnalystNovember 2018


Macro-economic and demand cyclesThe supply sideAircraft values & lease rates


Macro-economic and demand cycles

6


2018 forecast a healthy 3.0%, driven by strength in China, US & Eurozone. 2019 to be lower - US/China trade dispute risks.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 2019

Year

-on-

year

cha

nge

in G

DP

USA W Europe Asia Pac China Lat America WorldSource: EIU, World is calculated at Market Exchange Rates


Source: OECD CLI

OECD leading indicators show some weakening overall in last three months

98.0

98.5

99.0

99.5

100.0

100.5

101.0

USA Eurozone Major 5 Asian OECD Total


Source: US EIA, US Gulf Coast spot price

Jet fuel up 37% YTD in 2018 and highest price since October 2014

-60%

-40%

-20%

0%

20%

40%

60%

80%

0.0

0.5

1.0

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3.5Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

Apr-1

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l-12

Oct

-12

Jan-

13Ap

r-13

Jul-1

3O

ct-1

3Ja

n-14

Apr-1

4Ju

l-14

Oct

-14

Jan-

15Ap

r-15

Jul-1

5O

ct-1

5Ja

n-16

Apr-1

6Ju

l-16

Oct

-16

Jan-

17Ap

r-17

Jul-1

7O

ct-1

7Ja

n-18

Apr-1

8Ju

l-18

Oct

-18

Year

-on-

Year

Cha

nge

Jet F

uel C

ents

per

US

Gal

lon

Jet Fuel $ per USG Year-on-Year Change


Downturn in World Trade Outlook Indicator after stable 2017

10

Driver (colour = direction of change) 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Merchandise trade vol.

Export orders

Air freight

Container port throughput

Auto.prod/sales

Electronic components

Agricultural raw materials

Source: WTO

96979899

100101102103104

2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Wor

ld T

rade

Out

look

In

dica

tor (

WTO

I)In

dex


Global worry index on the way up again

Source: policyuncertainty.com

0

50

100

150

200

250

300

1 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4 7101 4

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018

Global Economic Policy Uncertainty Index (The ‘Worry Index')

GEPU_current


Geo-political and economic threat to growth cycle increasing

12

US – China trade dispute escalating monthlyChinese economy starting to show signs of weakness with signs of economic growth edging down in Q3Capital Economics estimate 25% tariffs globally could drive 2-3% global GDP decline (assuming no-conflict scenario)IATA predict 4% traffic growth in 2019 under a “pick up in protectionism” scenario

Major UK-EU political and economic framework disruption now less than six months away, impacting UK economy with long term consequence

Aerospace, aviation, tourism are premium sectors at riskUK FDI already seen dropping by 90% in 2017

Oil prices (but increases could be opportunity for OEMs and lessors)Interest ratesUSD FX


Global economic cycle

Growth cycle continues but some uncertainty over outlook

Indicator Current level Trend

GDP

OECD Leading Indicators

World Trade


Source: IATA

Global passenger traffic growth continues to exceed expectations but some evidence of marginal slowing

-15%

-10%

-5%

0%

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15%

20%Ju

l-08

Oct

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Apr-1

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Apr-1

8

Jul-1

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Year

-on-

Year

Cha

nge

Traffic (RPK) Capacity (ASK)

IATA predicting 7.0% traffic growth for 2018; YTD (August) 6.8%

2017 Traffic = 8.1%, Capacity = 6.7%


Source: Flight Ascend analysis, airline trade associations

2018 traffic growth above long-term trend for 8th consecutive year, but marginally down over 2017

Y-o-Y Global Passenger Traffic GrowthArrow indicates direction of growth rate vs. H1 2017 rate

5.0%

8.0%

4.7%10.3%

7.6%

2.7%

Global

4.5%


Source: IATA

Cumulative airline profits set to exceed $200 billion in this cycle

-30

-20

-10

0

10

20

30

40

50

Glo

bal A

irlin

e N

et P

rofit

(US$

bn)

2018 profit outlook revised from $38.0

billion to $33.8 billion in June 2018, on basis of

higher fuel prices


Operating margins under pressure from cost increases

17

Rev

enue

Source: Flight Ascend Consultancy analysis, airline reports

North America Europe Asia PacificAirline Latest Margin Airline Latest Margin Airline Latest Margin

American Q2 8.8% Lufthansa Q2 10.6% China Southern Q2 3.5%

Delta Q3 13.7% AF/KLM Q2 5.2% Air China Q2 8.0%

United Q3 10.9% IAG Q2 13.5% ANA Holdings Q2 4.1%

Southwest Q2 16.9% Turkish Q2 8.3% China Eastern Q2 9.2%

Air Canada Q2 5.2% Aeroflot Q2 1.9% Cathay Group H1/18 1.3%

Alaska Q2 12.6% Easyjet H1 -0.8% JAL Q2 7.3%

JetBlue Q3 4.1% Ryanair Q3 33.9% Qantas H2 17/18 10.5%

WestJet Q2 -2.5% SAS Q2 16.0% Singapore Gp Q2 4.8%

Hawaiian Q2 13.0% Norwegian Q2 1.5% Korean Air Q2 2.7%

Spirit Q2 12.7% Finnair Q2 5.6% Hainan Airlines Q2 -6.2%


Source: Flight Schedules data

Slight cut in Q4 schedules, but annual growth remains at 6-8% over 2017; Winter 2018/19 still at 5-7% rate.

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1%

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4%

5%

6%

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9%

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

Year

-on-

Year

Cha

nge

Jan-18 May-18 Aug-18 Sep-18

ForecastHistory


Aviation demand cycle

Demand side stable, traffic trends positive, but some cost pressures Indicator Current level TrendPassenger traffic

Freight traffic

Airline operating margins

Load Factors

New aircraft orders

Deferrals & cancellations


Conclusions

20

Airline operating margins are lower than last year, across all regions and types of airlinePrimarily due to fuel price increases that have not been reflected in increased yieldsCompetition and high capacity growth rates make it more difficult to raise fares

Competitive pressures mentioned by airlines in Asia, European low-cost sector and on some transatlantic markets as contributing to lower results.

Labour cost pressures (and strikes/ATC disruption) not helping mattersFocus on pilot costs at US airlines, but much of this cost increase happened last year. American & United actually saw flat unit labour costs in Q2 2018.Pressure on LCCs - Ryanair saw labour costs increase 34% in quarter ending June, on passenger numbers up 7%. Spirit up 45% on capacity up 30%.

Economic outlook has some risks, but forecasts are still for relatively strong growthPast experience would indicate that airlines will lower capacity plans to gain pricing power, but little sign of action as yetIf oil prices stay around the $80/barrel mark, we expect to see capacity growth slowing in 2019


…and the Supply Side?

21


Source: Flight Fleets Analyzer – commercial jet deliveries

Annual deliveries are set to pass 2,000 by 2020

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

Annu

al D

eliv

erie

s / F

irm B

ackl

og

Regional Jet Single Aisle Twin Aisle


Source: Flight Fleets Analyzer & Flight Ascend Values Analyzer (FLBV) – orders for commercial customers only; at 1 Aug 2018

2018 order intake about 50% of 2017 value in first 7 months

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018YTD

Com

mer

cial

Jet

Ord

ers

Jet Gross Orders Jet Net Orders

$124b

$96b

$209b

$123b

$61b


Source: Flight Fleets Analyzer & Flight Ascend Analyzer Values (2018$ Full Life Base Value); 2018 @ Oct 1

Commercial jet backlog stable at record levels in 2018 and still representing around eight years of production

0%

10%

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0

2,000

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Bac

klog

as

% o

f Fle

et

Com

mer

cial

Jet

Ord

er B

ackl

og

Backlog at Year End Backlog as % of Fleet

2018 Backlog Value $940bn


Source: Flight Fleets Analyzer, 2018 Flight Fleet Forecast

Very limited single-aisle slots available in near or medium-term

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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Sing

le-A

isle

Airc

raft

Del

iver

ies

Airbus Backlog Boeing Backlog Others Backlog Planned Production FFF Forecast Dels

Airbus Rate 60Boeing rate 57


Monthly stored passenger single-aisles

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200

400

600

800

1000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Com

mer

cial

Jet

Airc

raft

in S

tora

ge

2016 2017 2018

Source: Flight Fleets Analyzer – passenger jets only


Source: Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI)

Used jet availability declining and at lowest level since 2010

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Jan-

10Ap

r-10

Jul-1

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n-11

Apr-1

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l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

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3Ju

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Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

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Oct

-15

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6Ja

n-17

Apr-1

7Ju

l-17

Oct

-17

Jan-

18Ap

r-18

Jul-1

8O

ct-1

8

Tota

l Com

mer

cial

Jet

Mon

thly

Ava

ilabi

lity

Twin

-Ais

le /

Sing

le-A

isle

/ R

egio

nal J

et M

onth

ly

Avai

labi

lity

Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS)


airberlin & Monarch – 12 months on…..

28

Total 147 aircraft in service with both carriers at failure144 of those aircraft are back in service today with 38 different operators

Eurowings, EasyJet Europe, Laudamotion, Condor, Malaysia Airlines, Thomas Cook Airlines, LATAM Airlines Chile, Level (Austria), Red Wings Airlines, Virgin Atlantic Airways, Aegean Airlines, IndiGo, Nordwind Airlines, TUIfly, Ural Airlines, Vueling Airlines, Aigle Azur, Edelweiss Air, Germania, Iberia, Lanmei Airlines, Small Planet Airlines (Poland), TUIFly Nordic, Air Canada Rouge, Anda Air Lines, Azul, Brussels Airlines, Ellinair, Evelop Airlines, Ifly, JC International Airlines, Jet2, Royal Air Maroc, SpiceJet, Sundair, SunExpress, VLM Airlines, Wings of Lebanon

Only one A320 was retired and parted-outOnly two aircraft remain in storage

One 4-year old A321 with Minsheng Financial LeasingOne 19-year old A330-200 with GECAS

Average transition time was only 145 days (excluding turboprops)139 days for single-aisle184 days for twin-aisle (A330)


Source: Flight Fleets Analyzer

Retirement volumes down in 2018, average economic life stable

0

5

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25

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40

0

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800

Aver

age

Age

at A

ircra

ft R

etire

men

t

Airc

raft

retir

ed

<15 Years Old at Retirement >15 Years Old at RetirementAverage Age at Retirement Average Age at Economic Retirement


Aviation supply cycle

Increased supply is justified by the current demand scenarioIndicator Current level TrendAircraft deliveries

Deliveries for replacement/growth

Deliveries as percentage of fleet

Stored aircraft

Used aircraft availability

Aircraft economic life

Aircraft utilisation


Source: ICAO, IATA

Global traffic will need to be well above trend to absorb increasing OEM output through 2020

-4%

-2%

0%

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4%

6%

8%

10%

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16%19

8019

8119

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1920

2020

21

Glo

bal P

asse

nger

Tra

ffic

Gro

wth

1982 had worst global GDP since 1945, but still 2% traffic growth

1991 and 2001 saw 3% traffic fall, exacerbated by 'shock'

events

Traffic growth of at least 6.8% 2018-2021 implied by

OEM production rates (single-aisle Rate 57/60); needs to be ~0.2% points

higher to sustain Rate 67/70

Period CAGR1983-1990 8Years 6.6%1994-2000 7Years 6.6%2003-2008 6Years 7.1%2010-2017 8Years 6.8%2010-2021?? 12Years 6.8%


Conclusions

32

Supply is justified by demand at presentExecution issues causing temporary drag in output (more of that in a moment)Concerns about airline performance as we head into Q4 2018Backlog is causing OEMs to consider further increases in Rate beyond those already committed in 2019Unprecedented long and high cycle already required to efficiently assimilate output already committed from OEMsFurther Rate increases simply exacerbate this challengeIF demand doesn’t justify the supply then OEMs will have to hope for

Sustained high fuel prices rendering new output more efficient than current installed fleetContinued availability of finance to allow airlines to accept deliverySubsidiary implication for aftermarket where new deliveries will be used for replacement rather than growth (in this scenario), meaning installed fleet of current generation types will potentially retire earlier than hypothesised


The aircraft value cycle

Indicator Current level Trend

Market To Base Value ratios

Single-Aisle Values

Single Aisle Lease Rates

Twin-Aisle Values

Twin-Aisle Lease Rates

Lease Rate Factors

Values & Lease Rates surprisingly ‘lukewarm’ given current demand and supply dynamic


A Final Summary

34

Global economics remain strong but geo-political risk driving uncertaintyAirline financial performance weakening (profit cycle has turned?) which in turn is likely to drive considerations of capacity reductions (demand cycle is turning?)Significant capacity committed for delivery from OEMs production lines -backlog exposure is highest in Asia-Pacific and ChinaValues and lease rates remain stable for now

OEMs in the spotlight – cool rate increases and focus on execution / delivery on timeThe next couple of years will be more challenging than the last couple!


Rob MorrisGlobal Head of Consultancy

+44 (0)20 8564 6735+44 (0)7730 [email protected]

http://bit.ly/flightascendaoty

Documents

Macro-Economic & Political Dynamics and the Commercial ......Head of Consultancy Ops. ISTAT Sr. Appraiser Ben Chapman Valuations Manager ISTAT Appraiser Richard Evans Senior Analyst