Macroeconomic & Political Dynamics Peter Morris, Chief - - PowerPoint PPT Presentation

Macroeconomic & Political Dynamics

Peter Morris, Chief Economist, Ascend

Macro Economics and Political Dynamics - 2016

Peter Morris Chief Economist Aviation Frontiers 2016 Dublin January 2016

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Agenda

• Economic and Demand Trends for 2016
• US Domestic Trends
• Oil price and effects on the market
• Aircraft orders
• Global Risks 2015/16

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

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Majority of regions expect slight improvement in 2016

EIU Dec 2015

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Tourism - 2015 slightly better than 2014, with some significant regional variances

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World Trade sees continued slow growth in 2015

Source: WTO

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Overall, OECD lead indicators suggest stability. US a concern?

Source: OECD 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

• 2

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

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Overall industry profits, margins solid since 2010

• 1

1 2 3 4 5 6 7 8 9

• 10

10 20 30 40 50 60 70

% Margin

$Bn

Global Airline Profits and % (EBIT) Margin

Profit ($Bn) % margin

Source: IATA

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Asia-Pacific (APAC) and Middle East (ME) continued to lead demand growth globally in 2015

Source – IATA, Year to Date to end November 2015, IATA Dec Forecast

0% 2% 4% 6% 8% 10% 12% 14% 16% Africa Asia-Pacific Middle East Latin America North America Europe Global 2015 Predicted / Actual Growth Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity

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Traffic and Capacity expected to grow by 6-7% globally in 2016

Source – IATA

0% 2% 4% 6% 8% 10% 12% 14% Africa Asia-Pacific Middle East Latin America North America Europe Global 2016 Predicted Growth Predicted Traffic Growth Predicted Capacity Growth

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The changing face of the industry – U.S. Consolidation

20 40 60 80 100

Airlines Flights(*10^4) Seats(*10^6) O-D pairs(*10)

Changes in the US Domestic Market 2005-2015

Aug-05 Aug-15

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60 + airports lost domestic service

50 100 150 200 250 300 350 400 450

No flights < 10 flights 10-50 flights 50-100 flights 100-200 flights 200-350 flights 350-700 flights 700-1000 flights > 1000 Fllights Airports

Distribution of US scheduled daily flight departures by airport 2005 vs 2015 (August)

2005 2015

In a decade, 21% fewer flights, and some major US airports have lost 50%+ of domestic service

Change in monthly departing scheduled flights (Top 10) 2015 vs 2005

SFO

3455

SEA

2812

DAL

2181

JFK

1855

CLT

1738

AUS

743

LAX

702

LKE

700

DCA

584

MIA

554 IAH

• 4173
• 21%

MSP

• 4414
• 22%

PIT

• 4702
• 49%

SLC

• 5090
• 34%

DTW

• 5276
• 26%

ATL

• 5281
• 13%

CLE

• 5689
• 57%

MEM

• 6456
• 72%

IAD

• 9595
• 54%

CVG

• 15606
• 79%

Growth Decline

August Schedules, Innovata

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How have oil prices played through?

• Dramatically falling oil price

since 2014Q2

• Falling expectations on future
• il prices
• Additional supply on horizon

Oil

• GDP stimulus for oil import

countries, and overall

• Reduced inflation
• Losers among ‘oil rent’

economies

GDP

• Reduction in ticket price

possible

• Hedging a factor
• Exchange rate effects vs. $
• Competition level drives

speed of price change?

Price

• Increases in travel and

aircraft demand

• Could be +2%/+4% extra

under certain scenarios

• Big benefit for previously

marginal airlines

• 6.7% RPK growth 2015

Air Travel

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A view from 2008

History lesson?

There were dire predictions of the impact of fuel price on demand in 2008. While it was still a huge challenge, demand proved more robust, and supply costs more flexible than expected

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Having returned to profitability during high oil prices, the industry is profiting from their rapid decline

20 40 60 80 100 120

• 30
• 20
• 10

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

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70%+ Collapse of oil price in 18 months

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Oil ‘Futures’ prices suggests only slow rebound - and have reduced dramatically since last year

Source: Barchart

20 40 60 80 100

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

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Next generation lease rate premiums are sensitive to fuel price

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Next generation fuel burn environmentally more efficient

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

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

• 13%
• 14%

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Order volumes continue to be high

Source: Flightglobal Fleets Analyzer – orders for commercial customers only

500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Commercial jet orders Jet Gross Orders Jet Net Orders

$123bn

$209bn

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Commercial jet backlog at record high

Source: Flightglobal Fleets Analyzer & Ascend Values (2016$ Base Full Life Value)

0% 10% 20% 30% 40% 50% 60% 70% 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 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 Backlog as % of Fleet Commercial Jet Order Backlog Backlog at Year End Backlog as % of Fleet

Backlog Value Now $960bn

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Deliveries represent typically 6-8% of the global fleet

Source: Flightglobal Fleets Analyzer & Flightglobal Fleet Forecast

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

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Comparing take off - Widebody programme

200 400 600 800 1,000 1,200

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

A350 and 787 Cumulative Orders from First Year

787 A350

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Comparing Take Off - Narrowbody Programmes

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

Year 1 Year 2 Year 3 Year 4 Year 5 A320neo and 737 Max Cumulative Orders from First Year A320neo 737 Max

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Trying to categorise and assess Global Risk

Source: World Economic Forum

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Ratings for Likelihood and Impact of Global Risks

Source: Global Risks Survey 2015 World Economic Forum

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Significant variance in risk factors by region

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Heightened concerns on geopolitical issues and terrorism

Source: McKinsey, Dec 15

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Caution in Developing Markets

Source: McKinsey, Dec 15

Summary

GDP growth continues (if weak) and cost structures under control Oil price continuing fall is a big plus for industry, and continues (for five years?) Global Traffic Demand 2016 will likely be higher than previously forecast, with local exceptions Various stakeholders will bid for a share of the ‘new’ profitability Aircraft demand strong, with a few ‘widows and orphans’ Current orders seem robust and younger/mid life aircraft more attractive Wider demand risk factors continue to fission

A final thought, after analysing the industry for 30 years

• Positive GDP Growth
• Profitable Industry
• Full Order Books
• Possible 50% (and more) fuel cost decline
• New aircraft technology coming on stream

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Flightglobal and Ascend – Aviation Connected Peter Morris Chief Economist

+44 (0)20 8564 6790 peter.morris@ascendworldwide.com

The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is supplied on the understanding that no legal liability whatsoever shall attach to Ascend Advisory, its offices, or employees in respect of any error or omission that may have occurred.