Global Aviation Sector Overview 21 st February 2017 Rob Morris, - - PowerPoint PPT Presentation

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Global Aviation Sector Overview 21 st February 2017 Rob Morris, Global Head of Consultancy flightglobal.com/consultancy 1 FlightGlobal: Pioneering aviation insight and analytics business Part of a leading data solutions group RELX Group:

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Global Aviation Sector Overview

21st February 2017 Rob Morris, Global Head of Consultancy

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FlightGlobal: Pioneering aviation insight and analytics business

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

Part of a leading data solutions group

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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 – NO conflicts of interest Global perspective with offices in London, New York and Hong Kong

Instant access to vast data for research

The only Appraiser with globally recognized Fleets, schedules and values databases used by our clients on a day to day basis

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

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Global Aviation Sector Overview and Outlook Aviation Asset Value Risk Twin-Aisle Aircraft Markets Some Final Thoughts on Operating Leasing

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Global Aviation Sector Overview and Outlook

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But first, why invest in commercial aircraft?

Despite volatility in the aviation market over the past 20 years, investment in aircraft leasing has shown remarkably stable returns The Ascend Aircraft Investment Index measures this return and volatility On a risk reward basis, investment in aircraft has outperformed many other asset classes including shipping and precious metals Aircraft leasing has shown low correlation with indices that reflect the general economy such as the S&P500

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Returns from investing in aircraft are stable and uncorrelated to other alternative investments

200 400 600 800 1,000 1,200

Aircraft Investment Index S&P 500 Index MSCI World Index Dow Jones Transportation Index S&P 500 Airlines Index

Source: Ascend Aircraft Investment Index

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Commercial aviation is a long-term growth sector

Source: Ascend Analysis of IATA Data

0% 5% 10% 15% 20% Year-on-Year Change Traffic (RPK) Capacity (ASK)

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2016 opened with a strong demand outlook…..

Demand side looks very strong (“as good as it gets”?)

Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations

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…..but closed in a very different place

Demand side weakening, trends suggest may be past cyclical peak

Indicator Current level Trend Passenger traffic Freight traffic Yields Load Factors New aircraft orders Deferrals & cancellations

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Oil prices stabilised after falls that commenced in 2014

Source: US EIA / IATA

50 100 150 200 250 300 350 20 40 60 80 100 120 140 Jet Fuel Cents per US Gallon Crude Oil $ per Barrel Oil Price Jet Fuel

Crude oil price trajectory has considerable uncertainty at present IATA’s 2017 base case fuel scenario is now $64.90 per barrel Jet Fuel (=$1.54 per USG)

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Airline profits at record levels over past two years

10 20 30 40

Global Airline Net Profit ($bn)

Source: IATA

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Supply side indicators suggest a different story

Fewer concerns in supply side but watching for evolving capacity surplus if demand weakens

Indicator Current level Trend Aircraft deliveries Deliveries for replacement/growth Deliveries as percentage

f fleet

Stored aircraft Used aircraft availability Aircraft economic life Aircraft utilisation

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So where are we in the cycle?

Mixed messages from the global economic cycle

Economic recovery remains weak for such a long cycle

Aviation demand cycle remains strong but trends suggest we are now past the peak

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

Some amber / red indicators in aviation supply cycle which may be getting ahead

f 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

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 5000 10000 15000 20000 25000 30000 35000 40000

Commercial Passenger Jets in Service Single-Aisle Twin-Aisle

Passenger jet fleet forecast to increase by 10,600 units in next ten years

Source: Flight Fleets Analyzer, Flight Fleet Forecast

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Record backlog driving increased production rates

500 1000 1500 2000 2500 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Planned Annual Production Regional Jet Single-Aisle Twin-Aisle

Source: Flight Ascend Analysis of Announced OEM Production Rates

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Airbus and Boeing each expected to deliver around 820-830 aircraft in 2018 worth around $60 billion each

20 40 60 80 100 120 140 160 2016 2017 2018 2019 2020 Estimated Delivery Value (2017$) Airbus Boeing Bombardier Embraer Sukhoi COMAC Mitsubishi Irkut

Source: Flight Fleets Analyzer, Flight Values from Ascend (delivery value assumed to be 2017 FLBV)

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Aviation Asset Value Risk

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How should investors select their assets?

Investors should favour assets that have liquidity The aircraft most preferred by investors today are single-aisles

A320 and 737 families

Business model drives portfolio strategy, can differentiate on

Age Aircraft category (Regional, Single-aisle, Twin-aisle, Turboprop, Helicopter)

Volatility of values must be considered in hand with depreciation

Ratings estimate downside risk on future base value

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The Herfindahl-Hirschman Index (HHI) is a recognised measure of liquidity

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

HHI

Source: Flight Ascend Consultancy analysis

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5 10 15 20 25 30 35 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Historical CMV (US$ Mn) – Generic aircraft example

Gulf War and Early 90s Recession 9/11 Liquidity Crisis Oil Spike “marginal lift” benefits from upturn Out of production Older aircraft more exposed to oil

Values move in relation to supply and demand driven by macroeconomic events

Source: Flight Ascend Values

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Ratings use historical volatility to forecast a downside risk envelope

Source: Ascend Values & Ratings, 2005 build 777-300ER, 2% future inflation

20 40 60 80 100 120 140 160 Value, US$ Mn Downside Volatility BV CMV

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Twin-Aisle Markets

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4,100 passenger and 1,000 cargo twin-aisles in service today

1,000 2,000 3,000 4,000 5,000 6,000 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 In-Service Twin-aisle Jet Fleet Stored Cargo Passenger

Source: Flight Fleets Analyzer

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Twin-aisle deliveries increased significantly over past few years but paused in 2016…..

50 100 150 200 250 300 350 400 450 Twin-aisle Aircraft Deliveries 747 767 777 787 A300 A310 A330 A340 A350 A380 MD-11

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only

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…..before heading upwards marginally again?

50 100 150 200 250 300 350 400 450 500 Twin-aisle Aircraft Deliveries / Backlog 747 767 777 787 A330 A340 A350 A380 Scheduled Production

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only

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Deliveries normalised for fleet have increased significantly

1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 50 100 150 200 250 300 350 400 450 Twin-aisle Deliveries as Share of Fleet Twin-aisle Aircraft Deliveries Twin-aisle Deliveries As Share of Fleet

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only

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530 twin-aisles in store, but 75% of these are more than 15-years old

5 10 15 20 25 30 35 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 Stored Twin-aisle Fleet Aircraft Age (Years) Other A380 A350 A330 787 777 767 747

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only

400 passenger aircraft, ~10% have known future placements, ~10% scheduled for part-out

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Used twin-aisle jet availability stable

20 40 60 80 100 120 140 160 180 200 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 Twin-aisle Jet Monthly Availability

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

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1,360 twin-aisles retired since 2008

5 10 15 20 25 30 50 100 150 200 250 Average Age at Aircraft Retirement Aircraft Retired <15 Years Old at Retirement >15 Years Old at Retirement Average Age at Retirement Average Age at Economic Retirement

Source: Flight Fleets Analyzer

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94 operating lessors managing 1,700 twin-aisle aircraft worth ~$100 billon

2,000 4,000 6,000 8,000 10,000 12,000 14,000 50 100 150 200 250 300 350 Twin-aisle Portfolio Value ($mn) Twin-aisle Portfolio

Source: Flight Fleets Analyzer

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Operating lessor share of deliveries increases at times

f market stress?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 50 100 150 200 250 300 350 400 450 Operating Lessor Share of New Deliveries Twin-aisle Aircraft Deliveries Direct Order PLB Non Lessor Lessor Share

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only

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710 known scheduled lease expiries through 2026

20 40 60 80 100 120 140 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Twin-aisle Aircraft Scheduled Lease Returns 747 767 777 787 A330 A350 A380 Other

Source: Flight Fleets Analyzer

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Twin-aisle market summary

Deliveries increased over past few years but likely to have peaked now Deliveries normalised for fleet currently close to historical highs Idle fleet marginally down today; 410 passenger aircraft including 57 777s and 78 A330s

Around 10% known to be placed and another 10% scheduled for part-out

Passenger aircraft 50% removed from service at 20-years ~160 retirements annually since 2008 Share of fleet trading as used aircraft currently in decline Only around 30% of fleet in operating lease ownership / management Operating lessor share of deliveries increases at times of market stress

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Twin-Aisle Market Outlook

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4,200 commercial twin-aisle deliveries forecast through 2026

50 100 150 200 250 300 350 400 450 500 Twin-aisle Aircraft Forecast Deliveries 2017-2026 747 767 777 787 A330 A350 A380

Source: Flight Fleets Analyzer, Flight Fleet Forecast, commercial aircraft for passenger / cargo use only

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1,940 twin-aisles predicted to be retired from service through 2026

100 200 300 400 500 600 747 767 777 787 A300 A310 A330 A340 A380 DC-10 MD-11 Twin-aisle Aircraft Forecast Retirements 2017-2026

Source: Flight Fleet Forecast

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Twin-aisle fleet expected to total around 7,750 aircraft by 2026

1000 2000 3000 4000 5000 6000 7000 8000 9000 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 2025 2026 Twin-aisle Aircraft Fleet in Service 747 767 777 787 A330 A350 A380 Other

Source: Flight Fleets Analyzer, Flight Fleet Forecast, commercial aircraft for passenger / cargo use only

38% of the fleet in 2027 expected to be A350 / 787, 42% expected to be A330 / 777

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Some Final Thoughts

n Operating Leasing

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Operating lessors currently manage around 42% of the global passenger fleet

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Operating Lessor Fleet as Ratio

f Total Fleet

Passenger Fleet Managed by Operating Lessors

Single-Aisle Twin-Aisle Share of Fleet

Source: Flight Fleets Analyzer (passenger aircraft in service / stored)

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The top 20 lessors account for close to 80% of the total lease fleet today

Source: Flight Fleets Analyzer (passenger single and twin-aisles only) 2017 Ranking (by Fleet + Backlog) Manager Current Fleet Order Backlog Current Fleet CMV ($mn) 2016 Ranking (by Fleet + Backlog) 1 AerCap 1,150 348 30,713 1 2 GECAS 979 311 23,699 2 3 Avolon (Inc CIT) 571 260 20,217 9 4 SMBC Aviation Capital 446 200 14,677 4 5 Air Lease Corporation 262 365 11,449 3 6 BOC Aviation 276 188 11,260 5 7 BBAM LLC 388 16,531 7 8 Aviation Capital Group 257 126 5,852 8 9 ICBC Leasing Co 266 47 11,769 12 10 AWAS 236 15 6,415 10 11 Macquarie 202 40 5,181 11 12 Aircastle 192 5,447 17 13 ALAFCO 59 125 1,812 14 14 Boeing Capital Corp 177 1,412 13 15 China Aircraft Leasing 82 91 2,888 15 16 CDB Leasing Company 142 23 5,357 18 17 ORIX Aviation 163 4,173 16 18 Standard Chartered 116 12 3,952 20 19 Jackson Square Aviation 119 5,088 19 20 BoCom Leasing 111 4,595 21

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Although lessor fleets will continue to grow 50% penetration is unlikely to be achieved any time soon

Global passenger fleet at end of 2026 (excluding RJs) is predicted to be ~28,900 aircraft Leasing fleet in service to achieve 50% would need to be ~14,470 aircraft Equivalent leasing fleet today is ~8,300 aircraft So net addition of ~6,200 aircraft required over next ten years Flight Fleet Forecast predicts delivery of ~17,100 commercial passenger jets through 2026 ~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates to 3,300 aircraft that could be expected to exit the leased fleet in the next 7-10 years So to achieve 50% fleet market share by 2026, under this scenario lessors would need to add 9,500 new aircraft (6,200 growth plus 3,300 replacement) to their portfolios over the next ten years – that’s equivalent to 55% of new deliveries predicted over that period Even to maintain today’s market share under this scenario would require ~7,300 new deliveries – 43% of all new deliveries

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Rob Morris Head of Consultancy +44 (0)20 8564 6735 +44 (0)7730 213189 rob.morris@ascendworldwide.com