Macro Economic Outlook 18 th October 2017 Rob Morris, Global Head - - PowerPoint PPT Presentation

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Macro Economic Outlook 18 th October 2017 Rob Morris, Global Head - - PowerPoint PPT Presentation

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Macro Economic Outlook 18 th October 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: London,

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Macro Economic Outlook

18th October 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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The Flight Ascend Consultancy Team

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Rob Morris Global Head of Consultancy Peter Morris Chief Economist Chris Seymour

Head of Market Analysis

Henk Ombelet Senior Analyst Richard Evans Senior Analyst Chris Wills

Head of Consultancy Ops.

ISTAT Sr. Appraiser Tony Brooks Senior Analyst ISTAT Appraiser Ben Chapman Valuations Manager ISTAT Appraiser Lionel Olonga Valuations Analyst Ryan Hammacott Risk Analyst Joanna Lu Head of Advisory Asia Thomas Kaplan Valuations Analyst Dennis Lau Aviation Analyst Michael Hui Aviation Analyst Vacant Senior Consultant Kevin Ng Aviation Analyst Sara Dhariwal Valuations Analyst Eva Karagianni Valuations Analyst Oliver Ford Valuations Analyst Luke Smith Valuations Analyst Valerie Bershova Valuations Analyst George Dimitroff Head of Valuations ISTAT Appraiser Michael Lapson Senior Analyst ISTAT Appraiser Daniel Hall Senior Analyst ASA Sr. Appraiser Syed Zaidi Aviation Analyst David Griffin Senior Analyst ISTAT Appraiser

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GDP Growth and Trade Commercial Aviation Outlook A final comment on OEM supply outlook

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GDP Growth & Trade

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Air travel has created a transport revolution

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Global economic cycle

Steady performance with improvement seen since late 2016

Indicator Current level Trend GDP

EIU estimate for 2016 was 2.2%. 2017 forecast currently higher at 2.9%. Asia-Pacific leads at 4.4%, US 2.2%, W Europe 2.1%, Latin America 1.1%. Forecasts for global GDP for 2017 show an improvement over 2016 for North and Latin America, as well as Middle East and Africa. Russia also emerging from recession.

OECD Leading Indicators

OECD members fairly stable at ~100 index. Within this, Euro Area above 100; US and major 5 Asian countries (including China) are below 100, as are many developing nations Inflexion point in many countries (e.g. China by Q4 2016). Overall, most major economies showed an improving trend. PMIs also showing improving trend

World Trade

World trade drivers continue to show momentum in to Q3 2017. WTO Outlook indicator showing 3 Green, 3 Amber and 1 Red in August 2017

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5 year economic growth forecasts improved

Source: EIU, World is calculated at Market Exchange Rates

  • 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F Year-on-year change in GDP N America W Europe Asia Pac China L America World

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2017 forecast marginally up, 2018 forecast to be lower in Asia & China

Source: EIU, World is calculated at Market Exchange Rates

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Year-on-year change in GDP USA W Europe Asia Pac China Lat America World

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Economic recovery forecast in 2017 for Africa & Americas, but slowdown in China & W Europe

Source: EIU (PPP within regions)

  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% APAC E Europe L America ME & N Africa N America S Africa W Europe China Year on Year GDP Growth 2015 2016 2017

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OECD leading indicators show stability

Source: OECD CLI

94 95 96 97 98 99 100 101 102 103 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 OECD Composite Leading Indicators USA Eurozone Major Five Asian OECD Total

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Manufacturing PMIs improving, overall indications generally positive

Source: Markit

30 35 40 45 50 55 60 65 Jan-08 Apr-08 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 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 PMI Index (Positive less negative answers) US Manufacturing Eurozone Composite China Manufacturing Global Composite Values > 50 indicate economic expansion

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Oil prices stabilised after falls that commenced in July 2014

Source: US EIA / IATA

50 100 150 200 250 300 350 20 40 60 80 100 120 140 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 2017F Jet Fuel Cents per US Gallon Crude Oil $ per Barrel Oil Price Jet Fuel

Crude oil price trajectory stabilised and averaging $51 per barrel 2017 YTD IATA’s 2017 base case fuel scenario is now $64.0 per barrel Jet Fuel (=$1.52 per USG)

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Jet fuel price up 20% in 2017YTD

Source: US EIA / IATA

  • 60%
  • 40%
  • 20%

0% 20% 40% 60% 80% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 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 Apr-17 Jul-17 Oct-17 Year-on-Year Change Jet Fuel Cents per US Gallon Jet Fuel $ per USG Year-on-Year Change

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Cycle risk factors

Interest rates China slowdown Middle East slowdown Policy errors

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Commercial aviation

  • utlook

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Global passenger traffic growth stronger than expected through 2017 to date

Source: Ascend Analysis of IATA Data

  • 15%
  • 10%
  • 5%

0% 5% 10% 15% 20%

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 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Year-on-Year Change Traffic (RPK) Capacity (ASK)

IATA predicting 7.4% traffic growth for 2017 2017YTD Capacity = 6.5%, Traffic = 7.9%

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Historical strong correlation between GDP & traffic growth

Source: ICAO, IATA, World Bank

  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 16%

  • 3%
  • 2%
  • 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% Traffic Growth GDP Growth World GDP growth (LHS) Traffic growth (RHS)

1982 had worst global GDP since 1945, but still 2% traffic growth 1991 and 2001 saw 3% traffic fall, exacerbated by 'shock' events Actual GDP growth in 2009 was –2.1%, worst since 1945

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IATA now expects demand to marginally lead supply in most regions in 2017

Source: IATA, year to date to end August 2017

0% 2% 4% 6% 8% 10% 12% Africa Asia-Pacific Middle East Latin America North America Europe Global 2017 Predicted Growth Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity

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Demand outlook remains strong, “still as good as it gets”

Indicator Current level Trend Passenger traffic

Above trend growth for sixth year running. Led by India. China. LCCs and year-on-year recovery in Russia. IATA predicting 7.4% growth in 2017 Traffic growth accelerating since late 2016. Q2 2017 up to over 7% compared to 2016.

Freight traffic

Jan-July 2017 up 10.6% Improving trend in recent months. Freight load factors increasing throughout 2017.

Yields

US saw declines of 5-10% for most of 2016, reflecting lower fuel

  • prices. IATA estimate -8% globally. Costs are now increasing

again, and US yields are flat to up 2% year-on-year Yields fell from December 2014; However, costs were down by >10% as a result of falling oil prices. Now costs are increasing, yields have stabilised.

Load Factors

Still near historically record levels in all markets. India and China at record highs All regions except Middle East showing improvements in recent months

New aircraft orders

YTD 2017 book-to-bill around 0.7 for all commercial jets, even lower for RJs Order intake fallen sharply from the levels of 2011-2014. However, this was expected given record backlog of 14,000 aircraft ($900bn) and limited open slots through 2020

Deferrals & cancellations

Deferrals have ticked up following recent airline capacity adjustments from prior low level. Cancellations now just above average, although this is lower if normalised for fleet size Both cancellations and deferral rate increased in 2016, but slowing in 2017. Most cancellations due to OEMs cleaning order book but deferrals reflect fleet plan iteration (Southwest, AA, Turkish, Qantas).

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Airline profits peaked in 2015 but 2016 and 2017 not far behind

Source: IATA

  • 30
  • 20
  • 10

10 20 30 40 Global Airline Net Profit (US$bn)

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North America driving global net profits

Source: IATA

  • 0.9
  • 1.7

1.1 7.5 7.8 21.5

  • 0.1

1.6 1.1 8.6 8.1 16.5

  • 0.1

0.8 0.4 7.4 7.4 15.4

Africa Latin America Middle East Europe Asia-Pacific North America 2017F 2016E 2015

$31 billion net profit forecast for 2017

Net profit, US$ Bn

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US airline yields now showing small increases but fuel is again increasing sharply over 2016

Source: A4A, EIA

  • 50%
  • 40%
  • 30%
  • 20%
  • 10%

0% 10% 20% 30% 40% 50% 60% 1 2 3 4 5 6 7 8 9 10 11 12 Year-on-year change Passenger yield (cents/RPK) Yield (c/RPK) Year-on-year change Jet fuel price change

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Airlines generally reporting challenging yield environment

Source: FlightGlobal Dashboard

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A final comment on OEM supply outlook

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OEMs plan to deliver as many as 2,200 jet aircraft in 2020

Source: Ascend Analysis

60 7 13 1 57 5 14 9 4 8 1 2 2 2 3 10 20 30 40 50 60 70 Estimated monthly build rates

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What do those rates mean for growth?

Airbus currently at rate 50 and headed to rate 60 by 2019, Boeing rate 47 and headed to 57 in same timescale Twin-aisle production rates also increasing Assume average 680 annually retirements over next four years (~400 single-aisle, ~150 twin-aisle) Results in estimated 6.7% fleet seats CAGR through 2020 Stage length continues to increase at ~1.0% per annum => 7.7% ASK CAGR through 2020 Allowing for load factor increases, traffic will need to exceed this If traffic doesn’t support this level of growth then the 2019 rates aren’t justified Airlines will have to retire more aircraft Airlines will have to reduce unit productivity OEMs will have to reduce build rates Most likely a mix of the first two but build rates are likely to be achieved as OEM plans are set

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

Source: ICAO, IATA, Flight Ascend Consultancy Analysis

  • 4%
  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 1980 1981 1982 1983 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 2017 2018 2019 2020 Global Passenger Traffic Growth

Traffic growth of 7.7% 2017-2020 implied by OEM production rates

Period CAGR 1983-1990 8 Years 6.6% 1994-2000 7 Years 6.6% 2003-2008 6 Years 6.6% 2010-2016 7 Years 6.5% 2010-2020?? 11 Years 6.9%

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2017 forecast implies Airbus and Boeing achieve planned single-aisle rates in 2020

Source: Flight Fleet Forecast, note A320 builds on 11.5 month cycle, all others on 12 month cycle

10 20 30 40 50 60 70 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 FFF Implied Monthly Build Rate A320 737 CSeries C919 MC-21

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2017 forecast implies 787 has peaked at 12, A350 peaks at 9, 777 returns to 7

Source: Flight Fleet Forecast, note A320 builds on 11.5 month cycle, all others on 12 month cycle

2 4 6 8 10 12 14 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 FFF Implied Monthly Build Rate A330 A350 A380 777 787

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