[PPT] - Macro View on the Aviation Industry Dublin January 2017 Peter PowerPoint Presentation

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Macro View on the Aviation Industry

Dublin January 2017 Peter Morris Chief Economist

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Agenda

Macroeconomic drivers and trends
GDP
Tourism
Trade
Leading indicators
Oil price and effects on the market
Aircraft orders
Global Risks 2015/16

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The Aviation Evolutionary Cycle

Ownership
Alliance
Route network
Polarisation
Consolidation
Aircraft
Distribution
Information
On board product
Performance
Liberalisation
Trade Blocs
Competition
Protectionism
GDP
Price
Product & Information
Shock Events
Changing tastes

Customer Regulatory Airline/ Airport market structure Technology

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Western Europe likely to see the weakest growth, Asia the strongest

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4
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2 4 6 8

% GDP growth

GDP Growth Expectations to 2020

Asia and Australasia - [19] Eastern Europe - [13] Latin America - [20] Middle-East and North Africa - [19] North America - [2] Sub-Saharan Africa - [17] Western Europe - [21]

Source: EIU Dec 16

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Four regions indicate improved GDP for 2017

(2) (1)

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2 3 4 5

Asia and Australasia - [19] Eastern Europe - [13] Latin America - [20] Middle-East and North Africa - [19] North America - [2] Sub-Saharan Africa - [17] Western Europe - [21]

%

GDP Growth Trends (%) 2015-17

2015 2016 2017

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EIU Dec 2016

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Forecasts slipping then recovering in Asia

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FlightAscend analysis of EIU data

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Will the new administration bridge the gap?

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Optimism for some parts of Western Europe subsided in July

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FlightAscend analysis of EIU data

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Tourism - 2016 trend slightly lower than 2015, but significant regional variations

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Trade outlook shows some optimism for 2017

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Source: WTO Nov 2016

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Overall, OECD lead indicators suggest stability, improvement

Source: OECD 2016

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Global economic cycle

Steady performance with improvement seen in Q4 2016

Indicator Current level Trend GDP

EIU estimate for 2016 was 2.2%. 2017 forecast currently higher at 2.5%. Asia-Pacific leads at 4.0%, US 2.3%, W Europe 1.3%. Latin America 1.7%. 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

H1 2016 showed World Trade value decline of c6%, volume up 0.5%. H2 2016 shows some improvements. World trade drivers indicators have shown improvements. WTO Outlook Indicator dial shows 2 green, 4 amber, 1 red as at Nov 2016.

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Global Air Passenger Demand has continued to be robust

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

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2 4 6 8 10 12 14 16

Pax Annual % Growth

Annual Passenger Growth and Total Passengers

Growth (%) LHS Pax (m) RHS

Source: IATA Average of 6% over 2010-16

Source: IATA 2016

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Overall industry profits, margins solid since 2010

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1 2 3 4 5 6 7 8 9

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10 20 30 40 50 60 70

% Margin

$Bn

Global Airline Profits and % (EBIT) Margin

Profit ($Bn) % margin

Source: IATA

Source: IATA 2016

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IATA expect supply to marginally lead demand in all regions in 2017

0% 2% 4% 6% 8% 10% 12% Africa Asia-Pacific Middle East Latin America North America Europe Global 2016 Predicted Growth Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity

Source: IATA 2016

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Source: IATA

Global passenger traffic growth still firm

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

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

IATA predicting 5.1% traffic growth for 2017 2016 Capacity = 6.2%, Traffic = 6.0%

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Source: IATA

Airline profits peaked in 2016?

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

IATA indicating that Q2 2016 is likely to be the top of the airline profit cycle

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Source: IATA

Cumulative Profit over past 20 years

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20 40 60 80 100 120 140 Global Airline Net Profit (US$bn)

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Having returned to profitability with high oil prices, the industry has profited from their rapid decline

20 40 60 80 100 120

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20
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10 20 30 40 Crude Oil Price (US$ per Barrel) Global Airline Net Profit (US$bn)

Net Profit (LHS) Crude Oil Price (RHS)

Source – IATA/ Ascend

Source: IATA, EIA 2016

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Source: US EIA / IATA

Oil prices have stabilised after falls that commenced in July 2014

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

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Oil ‘Futures’ prices suggests stable oil prices - still substantially below the view in 2015

10 20 30 40 50 60 70 80 90

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Future Brent Crude Price ($/Barrel) for Delivery 2016-20

At Jan 2015 At Jan 2016 At Jan17

Source: Barchart

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Fuel price impacts the justifiable lease premium for A320neo vs. ceo

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 2015 Ave Fuel Price 152c 2016Ave Fuel 124c 2017 Ave Fuel 154c

Monthly Lease premium ($) for average yearly fuel price

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Source: FlightAscend calculation

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Next generation fuel burn environmentally more efficient

10 20 30 40 50 60 70 80 90 767-300ER 787-8 A330-300 A330-900neo CO2 emissions (g per pax-km)

Source – FlightAscend analysis of Airbus and Boeing data, 3,000nm sector

13%
14%

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Source: Flight Fleets Analyzer & 2016 Flight Fleet Forecast (deliveries into passenger airline service only)

Deliveries represent typically around 7% of global fleet

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 Deliveries as % of Fleet in Service Passenger Airliner Deliveries Deliveries / Forecast Deliveries Deliveries as % of Fleet in Service

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Source: Flight Fleets Analyzer & Flight Ascend research – jet firm orders backlog @ 1 Jan 2017

Current jet backlog deliveries to 2021

500 1000 1500 2000 2017 2018 2019 2020 2021 No of Aircraft on Firm Order Airbus Backlog Boeing Backlog Others Backlog

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Significant variance in risk factors by region

Source: WEF 2017

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Source: WEF 2017

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And to cheer us all up for 2017 - the Global Worry Index reaches new heights

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Summary

GDP growth and other macro indicators show overall improvement in

2017

Oil price has increased since 2015 but oil futures prices indicate stability
Passenger Traffic growth 2017 expected to slow, but will likely be higher

than previously forecast, with local exceptions

Airline business model dynamic continues to evolve for a share of the

‘new’ profitability

Aircraft demand remains strong, with most main new programmes sold
ut till 2020
Wider demand risk factors (war, politics, terrorism) continue to fission

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A final thought

Positive GDP Growth
Profitable Industry
Full Order Books
Fuel drifting upwards, but relatively stable
New aircraft technology coming on stream

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

Thank you!

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Factors impacting airline and airport markets

Dimension Factor Geopolitical War, Terror, Health issues Political/ Economic Regulatory, Market Environment, Environmental legislation Macro Economic GDP Growth, Exchange Rates, Finance Rates Airline Business Models Network, LCC, Regional on SH and LH Supplier Costs Fuel, Labour, Airport, ATC, booking, Security Competitor Behaviour Pricing, Products, Capacity, Alliances Customer Behaviour Premium Markets, Destination Choice, FFPs

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