Market Perspectives Robert Martin Managing Director & Chief - - PowerPoint PPT Presentation

market perspectives
SMART_READER_LITE
LIVE PREVIEW

Market Perspectives Robert Martin Managing Director & Chief - - PowerPoint PPT Presentation

Market Perspectives Robert Martin Managing Director & Chief Executive Officer Growth Frontiers Asia Pacific Conference 31 st October 2017 Disclaimer This presentation contains general background information about the activities of BOC


slide-1
SLIDE 1

Market Perspectives

Robert Martin Managing Director & Chief Executive Officer

Growth Frontiers Asia Pacific Conference 31st October 2017

slide-2
SLIDE 2

Disclaimer

This presentation contains general background information about the activities of BOC Aviation Limited (“BOC Aviation”), current as at the date hereof. This document does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of BOC Aviation or any of its subsidiaries

  • r affiliates in any jurisdiction or an inducement to enter into investment activity.

The information contained in this document has not been independently verified and no representation or warranty, expressed or implied, is made as to, and no reliance should be placed on, the information or opinions contained herein. The information set out herein may be subject to revision and may change materially. BOC Aviation is not under any

  • bligation to keep current the information contained in this document and any opinions expressed in it are subject to change without notice. None of BOC Aviation or any of its

affiliates, advisers or representatives (including directors, officers and employees) shall have any liability whatsoever for any loss whatsoever arising from any use of this document

  • r its contents or otherwise arising in connection with this document (whether direct, indirect, consequential or other).

No part of this document, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. None of BOC Aviation or any of its affiliates, advisors, agents or representatives including directors, officers and employees shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with the

  • document. This document is highly confidential and is being given solely for your information and for your use and may not be shared, copied, reproduced or redistributed to any
  • ther person in any manner.

This document may contain “forward-looking statements”, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or that include the words “will”, “would”, “aim”, “aimed”, “will likely result”, “is likely”, “are likely”, “believe”, “expect”, “expected to”, “will continue”, “will achieve”, “anticipate”, “estimate”, “estimating”, “intend”, “plan”, “contemplate”, “seek to”, “seeking to”, “trying to”, “target”, “propose to”, “future”, “objective”, “goal”, “project”, “should”, “can”, “could”, “may”, “will pursue” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond BOC Aviation’s control that could cause the actual results, performance or achievements of BOC Aviation to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Neither BOC Aviation nor any of its affiliates, agents, advisors or representatives (including directors, officers and employees) intends or has any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained in this document. Any securities or strategies mentioned herein (if any) may not be suitable for all investors. Recipients of this document are required to make their own independent investigation and appraisal of the business and financial condition of BOC Aviation, and any tax, legal, accounting and economic considerations that may be relevant. This document contains data sourced from and the views of independent third parties. In replicating such data in this document, BOC Aviation does not make any representation, whether express or implied, as to the accuracy of such data. The replication of any views in this document should not be treated as an indication that BOC Aviation agrees with or concurs with such views. The information contained in this document is provided as at the date of this document and is subject to change without notice. 2

slide-3
SLIDE 3

3

Summary

The BOC Aviation Journey Reflections On The Last Year Looking Forwards – What Are We Thinking About?

slide-4
SLIDE 4

Private & Confidential

The BOC Aviation Journey

4

1993 1997

SALE established with 50:50 joint ownership between Singapore Airlines and Boullioun Aviation Services Temasek and GIC each became 14.5% shareholders

2006

Bank of China acquired 100%

  • f SALE on 15 Dec 2006

2016

Listed on HKEx on 1 June

  • 70% by Bank of China
  • 30% by public float

Ownership

2009

>US$5B

2006

>US$10B

2000

>US$1B

2013

>US$3B

1997

>US$0.5B

Total Assets

Jun-2017

US$14.4B 2018 will be our Company’s 25th anniversary!

slide-5
SLIDE 5

Core Competencies of a Leasing Company

BOC Aviation Performs on Every Measure

5

 Sales  Transitions  Repossessions2  Procurement  Leasing  Debt financing1 280 aircraft sold More than 60 transitions 33 aircraft in 13 jurisdictions 740 aircraft purchased totaling more than US$37 billion More than 750 leases executed with more than 140 airlines in 52 countries More than US$20 billion in debt raised since 1 January 2007 US$2.7 billion1 in cumulative net profit after tax generated since inception

All data as at 30 September 2017, since inception unless otherwise indicated Notes: 1. As at 30 June 2017 2. Includes repossessions and consensual early returns 3. Average value over last 10 years since 1 January 2008

 Fleet Utilization3  Cashflow Collection3 Average 99.8% Average 99.6%

slide-6
SLIDE 6

6

Reflections on the Last Year

slide-7
SLIDE 7

7

The Operating Leasing Industry Today 5 key airframe manufacturers 3 key engine manufacturers 10,000+ supply chain partners c.800 airlines globally 46,950 new aircraft required over

the next 20 years1

200+ active banks 1000+ capital market investors 350+ aircraft lessors

Suppliers Customers Funding Investors

Aircraft Leasing Industry

Notes: 1. Boeing CMO 2017-2036

slide-8
SLIDE 8

Airline Demand – Macro Environment

8

  • Trump
  • North Korea
  • Middle East
  • Turkey
  • China CPC meeting last week
  • Brexit
  • French and German elections
  • Catalonia

Notes: 1. Based on World Bank Global Economic Prospect Report, as at June 2017 2. Source: IATA (August 2017)

What made the headlines? But…

  • Expected global GDP growth for 2017: 2.7%1
  • Airline traffic growth of close to 8%2
slide-9
SLIDE 9

9/11 & Second Gulf War Global Economic Crisis First Gulf War

Underlying Traffic Growth

Source: IATA (August 2017) Source: Airbus Global Market Forecast, Boeing Capital Market Outlook

20-year fleet growth rate, % Asia: ~x2 Asia: ~x2

Source: Euromonitor Source: Ascend Flightglobal Fleet Forecast 2015, Oxford Economics, Boeing Current Market Interactive Forecast 2017-2036 Note: 1.Defined as number of households with yearly income between US$25,000 and US$150,000 Air traffic is estimated to grow by 2.5x by 2036 1990-2016 2017-2036 Air Traffic +5.3% +4.7% Global GDP +2.9% +2.8%

Above-trend passenger demand growth Growth in the middle classes1 to be driven by emerging economies Air traffic estimated to grow by 150% in the next two decades… Fleet expected to double in the next 20 years

Middle class households (million) 5.3% 5.2% 5.9% 6.5% 6.3% 7.9% 2012 2013 2014 2015 2016 Aug-2017 RPK growth (YTD) 20-year RPK trend growth 75 83 91 96 127 150 168 189 16 26 40 56 60 99 199 338 2000 2010 2020E 2030E North America Europe LATAM Asia Asia: ~x2 Asia: ~x2 Middle class households (million) 3.7% 3.5% 2017 Airbus Boeing

9

slide-10
SLIDE 10

7.4% 10.2% 8.7% 7.5% 7.0% 4.5%

Africa Asia Pacific Europe Latin America Middle East North America

Passenger Load Factor YoY change, %

Source: IATA (Airline Industry Economic Performance – June 2017) Source: IATA (August 2017)

Positive Environment with Airline Profitability near Records

Aggregate net profit US$ billion

Source: IATA (August 2017)

RPK growth, YTD Passenger Load Factor %

Elevated airline profitability sustained Emerging markets continue to record high air traffic growth High load factors suggest well-managed capacity

Aggregate net profit US$ billion RPK growth, YTD 50 60 70 80 90 (5) 5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Passenger Load Factor YoY % Change (LHS) Passenger Load Factor (RHS) Passenger Load Factor 12M Mov. Avg (RHS)

10

slide-11
SLIDE 11

Jet Fuel Price Movements Over The Last Six Years

11

20 40 60 80 100 120 140 7/2011 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 7/2016 1/2017 7/2017 US$/BBL

US$67.27

slide-12
SLIDE 12

Is BRIC back?

12

Country Latest GDP Growth Rate1 Domestic Airline Traffic Growth2 (RPKs based on YoY % change) Size of Domestic Market as % of Total Brazil 0.7% 5.5% 1.2% Russia 1.8% 8.3% 1.3% India 6.7% 16.0% 1.3% China 6.8% 10.0% 8.7% USA 2.2% 6.4% 15.0% Japan 1.5% 9.0% 1.1% WORLD 3.6% 7.6%

  • Notes:

1. Source: International Monetary Fund, October 2017 2. Source: IATA Air Passenger Market Analysis (August 2017)

BRICS are now four of the five largest domestic markets

slide-13
SLIDE 13

Large Airlines & Relative Market Share

13

The largest 128 airlines today operate 75% of aircraft in the market

Source: Ascend, by number of airlines and aircraft, as at 30 September 2017

Our Addressable Market

Largest 10 airlines have a combined aircraft market share of 26% Largest 43 airlines have a combined aircraft market share of 50% Largest 128 airlines have a combined aircraft market share of 75%

% of Aircraft Operated Airlines (#) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 100 200 300 400 500 600 700 797

slide-14
SLIDE 14

14

143 airlines, 18% 43, 5% 64, 8% 56, 7% 84, 11% 407, 51%

Structure of the Airline Market

 797 airlines in service today

Source: Ascend, as at 30 September 2017

Airline Segmentation by Credit Score and Fleet Size Our Target 143 Airlines Operate 74%

  • f the Current In-service Aircraft

Credit above minimum, fleet >20 aircraft Credit above minimum, fleet 10-20 aircraft Credit above minimum, fleet < 10 aircraft Credit below minimum, fleet >20 aircraft Credit below minimum, fleet 10-20 aircraft Credit below minimum, fleet < 10 aircraft

14,948 aircraft, 72% 15213 aircraft, 73% 15,914 aircraft, 74% 643, 3% 302, 1% 2,289, 11% 1,142, 5% 1,347, 6% c.90% of BOC Aviation’s portfolio

slide-15
SLIDE 15

Inter-Airline Investments

15

  • In the past year, we have seen the following equity investments:
  • Delta & Air France & Virgin Atlantic & China Eastern
  • Delta bought 10% of Air France
  • China Eastern bought 10% of Air France
  • Air France bought 31% of Virgin Atlantic alongside Delta
  • American invested US$200m into China Southern
  • Scoot merger with Tiger Air
  • HNA Group continued airline investments
  • Qatar bought 49% stake in Italy’s Meridiana
  • Israel’s El Al acquired Israir
  • Adria Airways acquired Darwin Airlines
  • Etihad discontinued support for Air Berlin and Alitalia
slide-16
SLIDE 16

16

Predominantly Smaller Airlines Have Exited The Market

Source: FlightGlobal & various public sources for 100+ seats commercial aircraft, as at 30 September 2017

Number of airlines

Number of Airlines that Left the Market, By Year 298 airlines left the market across 2000 to 2017, but less than 10% had more than 20 aircraft in their fleet

5 10 15 20 25 30 35 40 45 50 Airlines with fleet >20 aircraft Airlines with fleet <20 aircraft

slide-17
SLIDE 17

17

Larger Airlines Show Greater Resilience

Airlines (Fleet >20 Aircraft) That Left the Market, By Year No more than 4 large airlines (fleet >20 aircraft) per year left the market

Number of airlines with fleet >20 aircraft 1 2 3 4 5 Airlines with fleet >20 aircraft

Source: FlightGlobal & various public sources for 100+ seats commercial aircraft, as at 30 September 2017

slide-18
SLIDE 18

18

Airline Bankruptcies Tend to Affect Smaller Airlines – Until Market Disruption Occurs

50 100 150 200 250 300 350 400 10 20 30 40 50 60 2000 2002 2004 2006 2008 2010 2012 2014 2016

  • No. of opr
  • No. of ac

Total airline bankruptcies and the total number of aircraft repossessed per annum

  • No. of airline
  • perators
  • No. of aircraft

repossessed

9/11 effect – impacted US carriers most; few airlines but many aircraft Weaker airlines hit by high fuel price followed by financial crisis; many airlines and many aircraft

Source: Ascend, Innovata, BOC Aviation Risk Management, based on 100+ seat operators, as at 30 September 2017

European consolidation

slide-19
SLIDE 19

Liquidity Cycle

19

  • Liquidity remains very strong and stock markets high
  • USD interest rates – still remain low
  • Re-emergence of the CNY bond market
  • Chinese MOF returns to USD bond markets
  • T+15bp for 5 year and T+25bp for ten year USD Bonds
  • 10x oversubscribed
  • Investment grade leasing issuance high
  • Unsecured debt issuance by lessors
  • ABS issuance by lessors
  • EETC issuance by airlines
  • No IPOs from leasing companies in the past year
  • Three M&A transactions in leasing market
  • Airline IPOs – only Azul

Liquidity is still very strong

slide-20
SLIDE 20

US Dollar Interest Rates Remain Low

20

1 2 3 4 5 6 7 8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 6-Month LIBOR US 10-Year Swap Rates (%)

6-month LIBOR (Oct 2017): 1.56% US 10-Yr Swap Rates (Oct 2017): 2.43%

Bloomberg, as at 27 October 2017

slide-21
SLIDE 21

The Manufacturer Cycle

21

  • Balance of Widebody versus Narrowbody aircraft deliveries
  • Supply-chain challenges have resulted in delayed deliveries
  • Unprecedented levels of new technology aircraft entering market
  • Challenge of certification of new aircraft types by

individual countries

  • Emergence of big data and predictive data technology
slide-22
SLIDE 22

Narrowbody vs. Widebody Aircraft Deliveries in 2017

22

More widebody CAPEX

  • Annual aircraft capex is equivalent to 15% of global airline revenues

US$70B in Aircraft CAPEX in 2017

Narrowbody Aircraft 45% Widebody Aircraft 55%

slide-23
SLIDE 23

Looking Forwards, More Choices But Supply Chain Strained?

23

B787-8 Superjet B747-8 B787-9 A350-900 ARJ21 A320NEO (PW) A320NEO (CFM) CS100 CS300 A321NEO (CFM) A321NEO (PW) B737 MAX 8 Irkut MC-21 A350-1000 B737 MAX 9 B787-10 E190-E2 A330-900 E195-E2 B737 MAX 7 A330-800 A319NEO B777-9 B737 MAX 10 MRJ E170-E2 B777-8 C919 B737 MAX 8 (200 seat) 50 100 150 200 250 300 350 400 450 2010 2011 2012 2013 2014 2016 2017 2018 2019 2020 2021 2022

As at October 2017

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

slide-24
SLIDE 24

The Operating Lessor Market

24

  • Leasing market continues to grow in proportion to overall aircraft global fleet growth
  • Consolidation in the aircraft leasing space:
  • Century Tokyo investment in ACG
  • DAE acquisition of AWAS
  • Avolon acquisition of CIT
  • Response of international lessors to new competition: JV vehicles with lower cost of

equity

  • Aggregate of all aspirations for balance sheet growth is significantly higher than the

actual balance sheet growth

  • Could drive purchases of portfolios and M&A activity
  • Narrowbody SLB yields to lessors under pressure due to limited supply of

narrowbody SLBs relative to demand from leasing companies

  • Direct manufacturer orders by airlines with limited capital providing some SLBs
slide-25
SLIDE 25

Aircraft Operating Leasing Drivers

Source: Ascend, 30 September 2017

Number of aircraft Number of aircraft 41,030 46,950

Source: Boeing CMO 2017-2036

Demand driven by market growth and replacement of old aircraft New aircraft demand led by Asia Pacific Predominantly single aisle aircraft Share of operating lessors now stable

Source: Boeing CMO 2017-2036 Source: Boeing CMO 2017-2036

41,030 46,950 Number of aircraft

25

slide-26
SLIDE 26

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 108 114 120 126 132 138 144 150 156 162 168 174 180 186 192 198 204 210 216 222 228 234 240 246 252 258 264 270 276 282 288 294 300 2015 2017 YTD

26

Whilst M&A has occurred in top 10, largest two lessors didn’t grow

Aircraft owned / managed (%)

Source: Ascend, as at 30 September 2017. Fleet data includes in-service owned and managed aircraft, based on aircraft of 100+ seats

  • Dec 2015: Largest 5 lessors managed 40%
  • Oct 2017: Largest 5 lessors manage 37%
  • Dec 2015: Largest 10 lessors managed 54%
  • Oct 2017: Largest 10 lessors manage 52%

1

Lessor (#) 350

Less Concentration Now in the Market

slide-27
SLIDE 27

Financing: Strong Credit Rating is Key

27 Source: Bloomberg, as at 5 October 2017 Note: 1. Dubai Aerospace completed its acquisition of the AWAS portfolio in August 2017

Credit ratings now prevalent amongst aircraft operating leasing companies

Lessor Fitch S&P Moody’s BOC Aviation A- A- NR SMBC Aviation Capital A- BBB+ NR Aviation Capital Group BBB A- NR Air Lease Corporation BBB BBB NR Aercap BBB- BBB- Baa3 Avolon BB BB+ Ba2 Aircastle NR BB+ Ba1 Dubai Aerospace1 NR BB Ba2 FLY Leasing NR BB- B1

slide-28
SLIDE 28

Bond Issuance by Lessors in 2017

28

Close to US$30B worth of bonds issued by lessors in 2017 so far

Source: Bloomberg, as at 26 October 2017

1 2 3 4 5 6 7 8 9 Avolon DAE Aviation Capital Group BOC Aviation ICBC IL Finance CDB Leasing AerCap Air Lease Corp SMBC Aviation Capital Aircastle CALC Fly Leasing US$B

slide-29
SLIDE 29

29

Looking Forwards – What Are We Thinking About?

slide-30
SLIDE 30

Airlines

30

  • What new game changers are coming?
  • Long haul LCCs?
  • Australia-Europe direct flights have started
  • The Asian markets are changing
  • Impact of LCCs
  • Mid-sized widebodies enabling more point-to-point flights to

Europe and US

  • Consolidation
  • Americas and Australasia have already consolidated
  • Europe is consolidating
  • When will Asian airline consolidation start?
  • We are seeing startup activity in both Europe and the developing markets
  • One key to success will be access to long term financial liquidity
slide-31
SLIDE 31

Liquidity

31

  • Overall financial liquidity
  • When will the reductions in government balance sheets begin to

take effect?

  • How quickly will USD interest rates rise?
  • Regulatory changes
  • Impact of BASEL IV on bank debt providers
  • MIFID on the equity markets and analyst coverage
  • Significant delivery growth will increase demand for PDP and post

delivery financing

  • Presently small margin difference between investment grade and

non investment grade

  • Why aren’t LCCs putting backstop liquidity in place?
  • Don’t wait until after the Minsky moment….
slide-32
SLIDE 32

The ‘Minsky’ Moment

32

1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 10 11 12

Time GDP CREDIT

Hedge Finance Speculative Finance Ponzi Finance Minsky Moment

Stylized “Minsky Cycle”

slide-33
SLIDE 33

Supply

33

  • New aircraft production
  • How fast will single aisle production actually rise
  • How solid is the overbooking?
  • Proportion of aircraft coming through leasing channel
  • Supply chain issues
  • When will present engine delivery slippage finish?
  • Can the supply chain effectively support further production increases?
  • Supply chain consolidation
  • Airbus acquisition of majority of C Series programme
  • What next?
  • Impact of big data – pros and cons for aircraft owners
  • Used aircraft market
  • Larger numbers of used aircraft could return to the market during rest of

decade when new aircraft supply high

  • The flip side of 6 year leases…
slide-34
SLIDE 34

Leasing Market

34

  • Market depth
  • No lack of demand for buying assets, issue is supply
  • Lack of balance sheet growth for lessors without orderbooks
  • This has driven new entrants to order aircraft directly from

manufacturers

  • The new single aisle aircraft placement market will be highly

competitive from 2019

  • Core competencies and deep stakeholder relationships then become

crucial

  • For those without order books, more consolidation or acquisition of

portfolios as alternative growth?

slide-35
SLIDE 35

35

  • Airline market strong but reshaping in certain parts of world
  • There are always new entrants and airlines leaving the market
  • Moving aircraft is part of operating leasing
  • Liquidity continues to be strong driving funding costs and aircraft trading
  • The use of bond markets has significantly increased for lessors
  • Margins between investment grade and non investment grade at

cyclical low for airlines and lessors

  • Supply presently stable but we don’t need any rapid ramp up of production

rates

  • Can supply chain support it?
  • Competition in leasing is fierce
  • Recent M&A hardly changes overall market concentration

Conclusions

slide-36
SLIDE 36

36

www.bocaviation.com

BOC Aviation Limited 8 Shenton Way #18-01 Singapore 068811 Phone +65 6323 5559 Facsimile +65 6323 6962

Incorporated in the Republic of Singapore with limited liability Company Registration No. 199307789K