The Continued Evolution of Commercial Operating Leasing Rob Morris, - - PowerPoint PPT Presentation

The Continued Evolution of Commercial Operating Leasing Rob Morris, Head of Consultancy, Ascend Worldwide

The Continued Evolution of Commercial Aircraft Operating Leasing

Rob Morris Head of Consultancy 20th January 2016

On the Menu….

Operating Leasing Growth Trend The Operating Leasing Competitive Landscape Operating Leasing Outlook

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On the Menu….

Operating Leasing Growth Trend The Operating Leasing Competitive Landscape Operating Leasing Outlook

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Operating lease fleet market share stagnated since 2008

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Share of Fleet Managed by Operating Lessors Passenger Jet Fleet in Service / Stored Operating Lease Fleet Owned Fleet

Operating lease fleet market share stagnated since 2008

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Passenger Jet Fleet in Service / Stored Single-Aisle

If trend to 2008 were projected, then 50% share would have been achieved last year

0% 10% 20% 30% 40% 50% 60% Share of Fleet Managed by Operating Lessors

Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

So can we get to 50% from where we are today?

0% 10% 20% 30% 40% 50% 60% Share of Fleet Managed by Operating Lessors

Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

Resumption of the trend to 2008

What would this require in arithmetical terms?

Global passenger fleet at end of 2022 (excluding RJs) is predicted to be ~25,500 aircraft Leasing fleet in service would need to be ~12,750 aircraft Equivalent leasing fleet today is 7,220 aircraft So net addition of 5,530 aircraft required over next seven years Flightglobal Fleet Forecast predicts delivery of 11,500 commercial passenger jets through 2022 ~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates to 3,100 aircraft that could be expected to exit the leased fleet in the next seven years So to achieve 50% fleet market share by 2022, under this scenario lessors would need to add 8,450 new aircraft (5,530 growth plus 3,100 replacement) to their portfolios over the next seven years – that’s equivalent to 75% of new deliveries predicted over that period (and worth US$643 billion in 2015EC) Even to maintain today’s 42% market share under this scenario would require ~6,600 new deliveries – 57% of all new deliveries (US$490 billion)

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Source: Flightglobal Fleets Analyzer / Fleet Forecast (passenger aircraft only, excludes RJs)

However, the leased fleet has continued to grow in line with overall fleet growth

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Source: Flightglobal Fleets Analyzer, passenger aircraft only

1000 2000 3000 4000 5000 6000 7000 8000 9000 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 Operating Leased Fleet in Service / Stored A320 Family 737 Family Other SA A330 Family 777 Family Other TA

Operating lessor share of deliveries from direct OEM orders averages 23% over the past 10-years

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 5% 10% 15% 20% 25% 30% 35% 50 100 150 200 250 300 350 Operating Lessor Share of Total Deliveries Operating Lessor Deliveries Single-Aisle Deliveries Twin-Aisle Deliveries

Purchase and leaseback at delivery is a popular method of lessors acquiring new aircraft

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 10% 20% 30% 40% 50% 60% 100 200 300 400 500 600 Operating Lessor PLB Share of Total Deliveries Operating Lessor PLB at Delivery Single-Aisle PLBs Twin-Aisle PLBs Single-Aisle Share Twin-Aisle Share

Lessors have acquired around 54% of new deliveries overall over the past ten years

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 10% 20% 30% 40% 50% 60% 70% 80% 100 200 300 400 500 600 700 800 Operating Lessor Share of Total Deliveries Operating Lessor Deliveries Single-Aisle Dels + PLBs Twin-Aisle Dels + PLBs

Used aircraft PLBs are less popular but still present some element of fleet growth opportunity

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

50 100 150 200 250 300 Used Aircraft PLBs Single-Aisle "Used" PLBs Twin-Aisle "Used" PLBs

Operating leasing growth trend summary

The current share of the commercial passenger airline fleet managed by

• perating lessors is around 42%

The linear growth trend seen through 2008 has stagnated in recent years If that growth trend were to have continued, then 50% share would have been achieved last year ~75% of deliveries will have to be acquired by lessors over the next seven years if 50% share is to be achieved by 2022 To maintain a 42% market share lessors will have to acquire an estimated 57% of new deliveries over that same period

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On the Menu….

Operating Leasing Growth Trend The Operating Leasing Competitive Landscape Operating Leasing Outlook

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Lessor overall fleet share is 39% including RJs, 42% excluding RJs

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13% 35% 13% 5% 28% 6% Other RJ Other SA Other TA Lessor RJ Lessor SA Lessor TA

22,773 active & stored commercial passenger jets

Source: Flightglobal Fleets Analyzer, “Other” includes all non-operating lessor managed aircraft

Lessors are relatively under-represented in firm order backlog

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5% 60% 16% 1% 15% 3% Other RJ Other SA Other TA Lessor RJ Lessor SA Lessor TA

13,508 commercial passenger jet backlog

Source: Flightglobal Fleets Analyzer, “Other” includes all non-operating lessor managed aircraft

Lessors share of installed fleet highest for current generation types

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Source: Flightglobal Fleets Analyzer, passenger aircraft only

0% 10% 20% 30% 40% 50% 60% Lessor Share of Fleet in Service

Lessors backlog share broadly consistent for current generation types

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Source: Flightglobal Fleets Analyzer, passenger aircraft only

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Lessor Share of Firm Order Backlog

224 984 160 588 92 30 55 70 20 22 142

Leasing penetration varies by region of operator

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0% 10% 20% 30% 40% 50% 60% Africa Asia Pacific Europe Latin America and Caribbean Middle East North America Operating Leasing Fleet Penetration Single-Aisle Twin-Aisle

Source: Flightglobal Fleets Analyzer – western built passenger jets only

Share growth was largely driven out of Europe and Asia-Pacific

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

0% 10% 20% 30% 40% 50% 60% Operating Lessor Share of Fleet in Region Africa Asia Pacific Europe Latin America and Caribbean Middle East North America

Although the operating leasing market appears highly competitive it is also highly concentrated

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10 20 30 40 50 60 70 80 90 100 110 120 130 Cumulative Operating Lease Portfolio Value Number of Operating Lessors 80% of the fleet (by value) is managed by top 20 lessors

Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

Competitive landscape hardly changed numerically over last five years

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0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10 20 30 40 50 60 70 80 90 100 110 120 130 140 Cumulative Operating Lease Portfolio Number of Operating Lessors 2016 2011 2006

Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

Six new entrants in top 20 lessors chart, plus one new name, since 2011

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Source: Flightglobal Fleets Analyzer – western built jets only (excludes RJs)

2016 Ranking (by Fleet + Backlog) Current Fleet Order Backlog Current Fleet CMV ($mn) 2011 Ranking (by Fleet + Backlog) 1 AerCap 1,240 366 32,601 8 2 GECAS 1,084 266 27,766 1 3 Air Lease Corporation 229 389 9,877 13 4 SMBC Aviation Capital 388 206 11,202 6 (as RBS) 5 BOC Aviation 248 234 9,852 10 6 CIT Aerospace 282 132 9,091 5 7 BBAM LLC 398 15,358 3 8 Aviation Capital Group 254 105 6,303 4 9 Avolon Aerospace Leasing 207 136 8,499 33 10 AWAS 251 2 7,120 7 11 Macquarie AirFinance 192 40 5,060 12 12 ICBC Leasing Co 179 41 7,318 31 13 Boeing Capital Corp 191 1,574 9 14 ALAFCO 50 125 1,533 17 15 China Aircraft Leasing Limited 64 104 2,375 84 16 ORIX Aviation 157 3,734 15 17 Aircastle Advisor LLC 143 4,734 14 18 CDB Leasing Company 115 4,731 25 19 Jackson Square Aviation 109 4,447 70 20 Standard Chartered 100 2 3,771 22

Developments over the past few years

AerCap acquired ILFC SMBC Aviation Capital acquired RBS Avolon grown significantly, IPO, acquisition by Bohai Leasing and assumption of HKAC portfolio Air Lease IPO CK Holdings entered the market via Accipiter / Vermillion (aircraft currently managed by BOC Aviation, GECAS, JSA, MCAP) from whom aircraft have been acquired Goshawk JV formed between Chow Tai Fook Enterprises, NWS Holdings and Investec Bank ICBC Leasing portfolio more than doubled in size

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Chinese lessors have been growing tremendously over recent years, though are still focused on China

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Growth of Chinese Mainland Lessors

100 200 300 400 500 600 700 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Chinese Operating Lessor managed Fleet

• 2/3 of the Chinese lessor

fleet is leased to Chinese

• perators
• Including Hong Kong, the

total fleet is 830

• Including Hong Kong and

BOC Aviation the total fleet is 1,093 (~13% of total lessor jet fleet)

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Source: Flightglobal Fleets Analyzer – western built passenger jets only (excludes Avolon)

China is a huge source of new lessor capital

Domestic domiciled: ICBC, CDB Leasing, Minsheng, AVIC International Leasing, Bo Comm Leasing, CMB Financial Leasing, Changjiang Leasing Company, Ping An Leasing, ABC Leasing, SPDB Leasing, CITIC Securities, Everbright Financial Leasing, CCB, Industrial Bank … Chinese Money invested offshore: Cheung Kong’s Accipiter*, Bohai Leasing’s successful bid for Avolon, ICBC Leasing and Bohai bidding for AWAS Chinese Airlines (mainly finance lease, but for how long?): China Eastern, China Southern Airlines, Juneyao, Spring Airlines, Lucky Air, Joy Air…

Mainland China lessors

*Cheung Kong is headquartered in Hong Kong, but it still represents a very important event for Chinese leasing due to its high profile nature Source: Ascend Flightglobal Consultancy

Non-exhaustive

On the Menu….

Operating Leasing Growth Trend The Operating Leasing Competitive Landscape Operating Leasing Outlook

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Aviation demand cycle

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Indicator Current level Trend Passenger traffic

Above trend growth for sixth year running, N America & W Europe seeing strong growth but former (and Middle East) do have capacity ahead of traffic YTD Year-on-year growth rate has been above 6% for most of 2015 and above 7% in past three months

Freight traffic

Traffic reached consistent 5% year-on-year growth in H1 2015 for first time since 2010, past few months has declined to <1.0% Growth recovery has slowed since Q1 2015; capacity exceeding demand; consistent with weak manufacturing data from China

Yields

US yields are only readily available monthly data point; these remain high by historic standards, but August is lowest since early 2011 @ 9.5c/RPK (fuel price has halved) Yields have been falling since December 2014; August was down 8%; however, this is not a major concern yet, as costs are down by >10% as a result of falling oil prices

Load Factors

Generally very high, exceeding 2008 levels. Asia much lower – emerging evidence of

• vercapacity in some areas?

Mixed picture; US stable, European airlines continuing to increase, Asian airlines falling in some cases

New aircraft orders

Orders continue to be placed in high numbers; first half 2015 saw around 800 net

• rders for commercial jets driving book-to-

bill to remain >1 Order intake has fallen sharply from the levels of 2011-2014. New programmes are sold out for several years, with limited slots now available, driving downward trend

Deferrals & cancellations

Deferrals are at a low absolute level compared to ten year average, and cancellations around average – however, this is lower if taken as % of a growing fleet Declining, after a large number of cancellations (~500 aircraft) in 2014

Most measures of demand are good, though some clouds forming?

Global passenger fleet expected to grow to exceed 28,000 aircraft in ten years time

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Source: Flightglobal Fleet Forecast

5,000 10,000 15,000 20,000 25,000 30,000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Passenger Jet Fleet in Service Single-Aisle Twin-Aisle

What needs to change for leasing share to grow again?

Interest rates increase Airlines cash and profit generation needs to slow Lessor share of new deliveries needs to increase Lessors accept lower returns Market liberalisation / deregulation creating incremental growth

• pportunities

New start-up airlines Recycling of older aircraft – change in view on residuals Change in tax rules adversely impacting benefits of airline ownership

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If operating leasing share growth does resume, it will likely be a much flatter trajectory than previously

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Source: Flightglobal Fleets Analyzer / Ascend Estimates – western built jets only (excludes RJs)

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Column1 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Operating Leasing Fleet Share

Potential future scenarios?

Conclusions

The share of the commercial passenger fleet managed by operating lessors is unlikely to achieve 50% within the next ten years However, even if the fleet share declines marginally, as per most recent trend, the overall leased fleet will continue to grow in line with the forecast overall fleet trend The net growth is estimated to be around 3,400 >100 seat aircraft over the next ten years Further portfolio additions will be required to replace aircraft that will exit the fleet through sale at end of lease and retirement / part-out

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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 Flightglobal Consultancy, its offices, or employees in respect of any error or omission that may have occurred.

Rob Morris

Head of Consultancy

+44 (0)20 8564 6735 +44 (0)7730 213 189 rob.morris@ascendworldwide.com