Macro Economics and Political Dynamics Hong Kong, 31 October 2017 - - PowerPoint PPT Presentation

Hong Kong, 31 October 2017 Peter Morris, Chief Economist

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Macro Economics and Political Dynamics

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The Flight Ascend Consultancy Team

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George Dimitroff Head of Valuations ISTAT Appraiser Michael Lapson Senior Analyst ISTAT Appraiser Daniel Hall Senior Analyst ASA Sr. Appraiser Rob Morris

Global Head of Consultancy

Chris Wills

Head of Consultancy Ops.

ISTAT Sr. Appraiser Peter Morris Chief Economist Chris Seymour

Head of Market Analysis

Tony Brooks Senior Analyst ISTAT Appraiser Joanna Lu Head of Advisory Asia Thomas Kaplan Valuations Analyst Sara Dhariwal Valuations Analyst Henk Ombelet Senior Analyst Richard Evans Senior Consultant Ben Chapman Valuations Manager ISTAT Appraiser Eva Karagianni Valuations Analyst Dennis Lau Aviation Analyst Michael Hui Aviation Analyst Oliver Ford Valuations Analyst Luke Smith Valuations Analyst Lionel Olonga Valuations Analyst Ryan Hammacott Risk Analyst Syed Zaidi Aviation Analyst Vacant Senior Consultant Kevin Ng Aviation Analyst Valerie Bershova Valuations Analyst David Griffin Senior Analyst ISTAT Appraiser

Outline

• Industry Drivers
• Recent Traffic and Capacity Trends
• Profitability
• Political Uncertainty

The Aviation Evolutionary Cycle

• Ownership
• Alliances
• Route network growth
• Segmentation
• Consolidation
• Aircraft performance
• Distribution options
• Information flow
• On board product
• Actual Performance
• Liberalisation
• Trade Blocs
• Competition
• Protectionism
• GDP and population
• Price
• Product & Information
• Shock Events
• Changing tastes

Customer Regulatory Airline/ Airport market structure Technology Investment

Passenger traffic growth has varied, but shown robust recovery from shocks

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Gulf War NYC GFC AFC

Changes in the world’s economic centre of gravity

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Mature markets slip down table, developing markets rise

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Source: PWC Feb 2017

A decade and a half of structural change by region

11% 2%

Changing airline shares of world seat capacity 2002-16

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Source : Turkish Airlines

Steady growth expectations to 2021 across most regions

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Steady Improvement in European growth expectations

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Similarly in Asia Pacific

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China GDP growth is expected to slow with economic maturity and demographics

15 1 2 3 4 5 6 7 8 9 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

China GDP Growth Projection

Three major regions and OECD overall now over 100 on Composite Leading Indicators Index

• USA now the major one left marginally below 100

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98.0 98.5 99.0 99.5 100.0 100.5 101.0

USA Eurozone Major 5 Asian OECD Total OECD Leading Indicators, August 2017

WTO Trade Indicator now highest since 2011

17 Source: WTO September 2017

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Source: IATA

Global passenger traffic growth stronger than expected in early 2017

• 15%
• 10%
• 5%

0% 5% 10% 15% 20%

Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17

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

2016 Capacity = 6.2%, Traffic = 6.3% 2017YTD Capacity = 6.5% Traffic = 7.9%

Strong growth seen in domestic markets

• 0.7%

6.0% 3.4% 8.1% 15.3% 14.9% 14.8% 7.4%

• 2.1%

3.0% 4.7% 6.6% 12.7% 15.3% 16.7% 7.7%

• 5%

0% 5% 10% Domestic revenue passenger kilometres (% year-on-year) Source: IA T A 15% 20% Apr 2017 Mar 2017 Industry Domestic Russia Domestic India Domestic China Domestic Japan Domestic USA Domestic Brazil

• Dom. Australia

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Source: IATA

Freight market now predicted to grow 7.3% in 2017

• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 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 (FTK) Capacity (AFTK)

2016 traffic = 3.8%, capacity = 5.3%

IATA has markedly updated forecasts for 2017

2.5 5.1 3.3 5.6 6.6 2.9

• 2
• 2
• 4

7.4 7.3 7 7.7 2 4 6 8 10 GDP Pax yields RPKs Freight tonnes ASKs Operating margins Percentage change or % revenues

Previous forecast Current forecast

Source: IA T A

2017 industry profits down but upgraded

2 4 6 8 10 40 35 30 25 20 15 10 5

• 5
• 10

% revenues US$ billion Net profits and operating margins Net profits - current Operating margin - current Net profits - previous Operating margin - previous 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: IA T A

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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 stable over 100 index. Within this, Euro Area above 100; Major 5 Asian countries (including China) now above 100, as are many developing nations. US just below 100. 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

Trade in 1st 2Q 2017 up 3-4% 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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Aviation demand cycle

Demand side stable, traffic trends positive, but some yield pressures

Indicator Current level Trend Passenger traffic

Above trend growth for sixth year running, 2017 predicted to be 7.4%. Led by India. China. LCCs and year-

• n-year recovery in Russia.

Traffic growth accelerating since late 2016. Q2 2017 up to

• ver 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
• f 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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Source: Flight Schedules data

Forward schedules show some slowing of ASK growth for winter 2017/18, but still above 6%

0% 2% 4% 6% 8% 10% 12% Year-on-Year Change Nov 2016 Schedule Jan 2017 sched Mar 2017 sched Leap Year adj. Jun 2017 sched Aug 2017 sched Sep 2017 Sched Feb 2016 was a Leap Year Capacity ran at 6% growth during Q2/Q3 2016

Forecast History

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Source: ICAO, IATA, Flight Ascend Consultancy Analysis

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

• 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

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 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%

And to cheer us all up for 2017 - the Global Worry Index reaches new heights but has relented to level of GFC

Source: Policyuncertainty.com

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Peter Morris Chief Economist +44 (0)20 8564 6790 +44 (0)7725 496758 peter.morris@ascend worldwide.com

Thank you!