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Commercial Aviation Sector Update
Doric Aviation Day
Rob Morris
Global Head of Consultancy
9th June 2016
On the Menu…..
Introduction to Ascend
The Aviation Demand and Supply Cycles
Aircraft Values
A final thought on oil price and next generation aircraft demand / values
2
Ascend is Appraiser of the Year……again
The Ascend Flightglobal Consultancy Team
4
George Dimitroff Head of Valuations
Mike Lapson Senior Analyst ISTAT Appraiser
Dan Hall Senior Analyst ASA Appraiser
Rob Morris Head of Consultancy
Chris Wills Valuations Manager Senior ISTAT 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 Aviation Analyst
Sara Dhariwal Aviation Analyst
Henk Ombelet Senior Analyst
Evgeny van der Geest Senior Risk Analyst
Richard Evans Senior Analyst
Ben Chapman Aviation Analyst
Eva Karagianni Aviation Analyst
Oliver Biddulph Aviation Analyst
Gary Sze Project Manager
Dennis Lau Aviation Analyst
Michael Hui Aviation Analyst
Oliver Ford Aviation Analyst
Vacant Senior Risk Analyst
On the Menu…..
Introduction to Ascend
The Aviation Demand and Supply Cycles
Aircraft Values
A final thought on oil price and next generation aircraft demand / values
5
Aviation demand cycle
6
Indicator Current level Trend
Passenger traffic Above trend growth for sixth year running; 6.5% growth in. N America & W Europe seeing strong growth. Q1 2016 saw 7.7%.
Growth rate was above 6% for most of 2015 and >7% during summer. After allowing for Leap Year, Jan-Mar 2016 all above 6.5%.
Freight traffic Traffic reached consistent 5% year-on-year growth in H1 2015 for first time since 2010, Last few months hovering around 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; remain high by historic standards. March 2016 @ 9.6c/RPK is below 2011-2015 levels, but fuel price has halved.
Yields have been falling since December 2014; Q1 2016 down around 5%. 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 overcapacity in some areas?
Mixed picture; US stable at very high levels, European airlines LF has peaked and is declining. Asian airlines falling in some cases
New aircraft orders 2015 saw around 2,050 net orders for commercial jets. Book-to-bill = 1.4. YTD (to April) saw 318 net orders, with Book-to-bill less than 1.0. This metric may become Amber shortly.
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
Slight uptick in cancellations towards end of 2015, but too early to conclude if significant yet
Demand side looks very strong (“still as good as it gets”?)
Global passenger traffic growth remains robust
7 Source: IATA
-15%
-10%
-5%
0%
5%
10%
15%
20%
Jul08
Okt08
Jan09
Apr09
Jul09
Okt09
Jan10
Apr10
Jul10
Okt10
Jan11
Apr11
Jul11
Okt11
Jan12
Apr12
Jul12
Okt12
Jan13
Apr13
Jul13
Okt13
Jan14
Apr14
Jul14
Okt14
Jan15
Apr15
Jul15
Okt15
Jan16
Ye
ar-
on
-Ye
ar
Ch
an
ge
Traffic (RPK) Capacity (ASK)
IATA predicting 6.9% traffic
growth for 2016
2015 Capacity
= 5.6%, Traffic
= 6.5%
IATA expect supply to lead demand (marginally) in most
regions in 2016
8 Source – IATA, Year to Date to end March 2016
0%
2%
4%
6%
8%
10%
12%
14%
16%
Africa Asia-Pacific Middle East Latin America NorthAmerica
Europe Global
20
16
Pre
dic
ted
Gro
wth
Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity
Commercial jet backlog at record high
9 Source: Flightglobal Fleets Analyzer & Ascend Values (2016$ Base Full Life Value)
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
Bac
klo
g a
s %
of
Fle
et
Co
mm
erc
ial J
et
Ord
er
Bac
klo
g
Backlog at Year End Backlog as % of Fleet
Backlog Value
Now $952bn
Over 2,050 new aircraft ordered in 2015
10 Source: Flightglobal Fleets Analyzer, commercial passenger & cargo jets only
0 100 200 300 400 500 600 700 800 900 1.000
CRJ Family
MRJ
ARJ21
767
777 Family
787
A330 Family
E-Jet Family
737 Family
A320 Family
(No of aircraft) Current Generation New Generation
Top 10 aircraft type net orders in 2015
35% are A321
• 25 A321 ceo
• 294 A321 neo
Only 376 net new aircraft ordered in 2016 to date
11 Source: Flightglobal Fleets Analyzer, commercial passenger & Cargo jets only, as at 12 May 2016
0 20 40 60 80 100 120 140
747
CRJ900Regional Jet
787
777 Family
A350
E-Jet Family
A330 Family
A320 Family
CSeries
737 Family
(No of aircraft) Current Generation New Generation
Top 10 aircraft type net orders in 2016
Book to bill above one but below long-run average
in 2015, well below one in 2016 to date
12 Source: Flightglobal Fleets Analyzer – western built jets only, 2016 to May 12th
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Com
me
rcia
l Je
t B
oo
k to
Bill
Ratio
Aviation supply cycle
13
Indicator Current level Trend
Aircraft deliveries 2015 had record commercial jet deliveries, 2016 expected to exceed further
Production rates set to increase for A320, 737, 787 & A350, plus CSeries ramp-up; A330 reducing and 777 also to see cuts
Deliveries for replacement/growth
Past 5 years, deliveries for replacement made up around 50% of the total, around ten points higher than long-run average
Decline since 2008; 2015 has seen share for replacement falling significantly, towards numbers consistent with peak years of cycles
Deliveries as percentage of fleet
6.5% in 2015, actually marginally down over 2014. The average over the past 25 years has been 6%
Trend is to a higher percentage, with above 8% in 2016 – 2019; such levels could indicate global overcapacity based on past history
Stored aircraft Absolute level of stored commercial jets remains at historic high, though declining since the recession in terms of % of fleet
Single-aisle declining, small increase in twin-aisle, RJs increasing rapidly, driven by 50 seat jets ex-US market
Used aircraft availability Commercial aircraft offered for sale / lease currently at lowest point since 2010
Falling numbers of available twin-aisles, RJs stable - many stored 50 seat jets not actively being marketed
Aircraft economic life Average age at retirement is now <25 years, despite fall in fuel prices
Few very young aircraft continue to part-out, total continues to decline in 2015
Aircraft utilisation Single-aisle & twin-aisle utilisations are at or near historic highs
Fairly flat trend since recovering in 2010/11. Year to June 2015 showed less than 1% decline off post-recession peak.
Despite strong demand, several indicators amber or red
Jet deliveries down year to date in 2016
14 Source: Flightglobal Fleets Analyzer, 2016 to May 12th
0
200
400
600
800
1.000
1.200
1.400
1.600
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Aircra
ft D
eliv
erie
s
Regional Jet Single-Aisle Twin-Aisle
47% of last 7 years passenger jet deliveries have
been for replacement
15
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
200
400
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800
1000
1200
1400
1600
% o
f D
eliv
erie
s E
stim
ate
d fo
r R
ep
lace
me
nt
Pa
sse
nge
r A
irlin
er
Deliv
erie
s
Deliveries % of Deliveries for Replacement
Source: Flightglobal Fleets Analyzer - deliveries into passenger airline service only, 2016 to end Q1
Used jet availability declining
0
100
200
300
400
500
600
700
800
900
0
50
100
150
200
250
300
350
400
450
Ja
n 1
0
Apr
10
Ju
l 10
Okt 1
0
Ja
n 1
1
Apr
11
Ju
l 11
Okt 1
1
Ja
n 1
2
Apr
12
Ju
l 12
Okt 1
2
Ja
n 1
3
Apr
13
Ju
l 13
Okt 1
3
Ja
n 1
4
Apr
14
Ju
l 14
Okt 1
4
Ja
n 1
5
Apr
15
Ju
l 15
Okt 1
5
Ja
n 1
6
Apr
16
To
tal C
om
me
rcia
l Je
t M
on
thly
Ava
ilab
ility
Tw
in-A
isle
/ S
ingle
-Ais
le /
Regio
na
l Je
t M
on
thly
A
va
ilab
ility
Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS)
Source – Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI)
Some element of production “surplus” has driven
increased retirements at reduced age in this cycle
17 Source: Flightglobal Fleets Analyzer
0
5
10
15
20
25
30
35
40
0
100
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400
500
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700
800
Ave
rage
Age
at A
ircra
ft R
etire
me
nt
Aircra
ft R
etire
d
<15 Years Old at Retirement >15 Years Old at Retirement
Average Age at Retirement Average Age at Economic Retirement
32% of single-aisle slots open in next ten-years
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total
Airbus Backlog Boeing Backlog Others Backlog Open Slots
Source: Flightglobal Fleets Analyzer & current / planned production,
Risk of supply exceeding demand in single-aisle
market increasing towards end of decade
19 Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast
0
200
400
600
800
1000
1200
1400
1600
1800
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Aircra
ft D
eliv
erie
s
Airbus Backlog Boeing Backlog Others Backlog Planned Production Forecast Deliveries
Airbus Rate 60
Boeing Rate 57
A comment on single-aisle production rates
Airbus currently headed to rate 50 by 2017 (and then 60 by 2019), Boeing
rate 52 in 2018 (and now 57 in 2019)
This drives ~5.4% single-aisle fleet growth through 2020
Single-aisle productivity (more seats, longer sectors, increased utilisation)
has increased by 2.4% per annum over last ten years
So 5.4% fleet growth equals 7.8% capacity growth
Single-aisle share of global capacity is growing (also by 2.4% per annum)
So current rates actually equate to 5.4% global capacity through 2020
Allowing for load factor increases, traffic will need to exceed this
But……. • …..leaves no room for CSeries, C919 or MC-21
• …..assumes single-aisle share continues to grow
• …..assumes 2,000 single-aisle retirements through 2020
Single-aisle rates 57 / 60 may be an increase too far?
20
Current single-aisle production rates exceed OEM’s
long-term demand forecasts
21 Source: 2015 Flightglobal Fleets Forecast, Airbus GMF, Boeing CMO; Ascend Analysis
0
5.000
10.000
15.000
20.000
25.000
30.000
35.000
Announced / EstimatedProduction Rates
Flightglobal Fleet Forecast Airbus GMF Boeing CMO
Fo
reca
st D
eliv
erie
s (
20
15
– 2
03
4)
Airbus Boeing CSeries MC-21 C919 Single-Aisle
Airbus & Boeing total
@ sustained Rate 60
/ 57 post-2019
45% of twin-aisle slots open in next ten-years
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total
Airbus Backlog Boeing Backlog Open Slots
Source: Flightglobal Fleets Analyzer & current / planned production,
Twin-aisle production surplus looks to be higher risk
in near-term
23
0
100
200
300
400
500
600
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Aircra
ft D
eliv
erie
s
Airbus Backlog Boeing Backlog Planned Production Forecast Deliveries
Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast
Significant open demand in regional jet market
0
50
100
150
200
250
300
350
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Aircra
ft D
eliv
erie
s
Bombardier Backlog Comac Backlog Embraer Backlog Mitsubishi Backlog
Sukhoi Backlog Planned Production Forecast Deliveries
Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast
New & emerging aircraft programmes - scorecard
25
Type Order success
Market position
Execution / delivery
Comment
A320neo Hitting cash-flow. Recovery by end 2016 key. A321neo winning at airlines and leasing co’s.
737 Max Good programme execution, but wobbles on family strategy in face of A321neo and CSeries.
A330neo Steady order progress. Production gap bridged successfully. Lower fuel prices help vs. 787.
777X EIS now late 2019. No new customers announced since 2014. Is it too big?
CSeries Boosted by new orders and route proving. Can BBD sell at sustainable prices?
E-Jet E2 Large established operator base. Programme appears on time. E190/195 need more orders.
MRJ Programme delays problematic. Vulnerable to lack of change to US scope clauses.
C919 Huge domestic market, but no evidence aircraft will be competitive or on-time.
MC-21 Dependence on Russian orders. Behind schedule.
Demand & supply cycle summary
Mixed messages from the global economic cycle – “geopolitical risk”
• China remains on watch
• Brazil, Russia!!!
Aviation demand cycle remains strong – “still as good as it gets”
• Fuel prices are helping a lot on the cost / yield side
• Watching closely for signs of evolving capacity surplus
Some amber / red indicators in aviation supply cycle – “OEM capacity!”
• Deliveries trending towards higher % of installed fleet
• Average age of retirement continues to decline
• Utilisations flattened since recovering post-2008
26
On the Menu…..
Introduction to Ascend
The Aviation Demand and Supply Cycles
Aircraft Values
A final thought on oil price and next generation aircraft demand / values
27
Market Value Changes since January 2016
▼ 737-700 10%
▼ 747-8F 0-12%
▼ 757-200 6-8%
▼ 757-200F 7-9%
▼ A320neo 3%
▼ 777-200ER 5%
▼ ATR Freighters 0-18%
▼ Dash 8-100 3-10%
▼ Dash 8-200 5%
▼ Dash 8-300 9-13%
▼ EMB-120 28-36%
▼ Fokker 50 3%
► CSeries new values added
28 Images sourced from avionvale.com and Bombardier press release respectively
Market Lease Rate Changes since January 2016
▲ A321-200 (post-2000) up to 11%
▲ A321-200 Sharklets 1.5%
▼ 767-300ER 3-10%
▼ A321-200 (pre-2000) up to 11%
▼ A320neo 3%
▼ 747-8i 4-5%
▼ 747-8F 6-10%
▼ 777-200ER 18-20%
▼ CRJ700/900 15-20%
▼ Dash 8-1/2/300 5-13%
29 Images sourced from Airbus and Bombardier press releases respectively
Key Aircraft on Watch
737-700
• potential for more value drops
737-800 Lease Rates
• lots of [re]marketing activity in progress
A330 Lease Rates
• keeping an eye on remarketing activity.. Offers not too high
ATR 72-600
• market appears somewhat oversupplied
• both Values and Lease Rates on watch
30
50% of today’s jet fleet has CMV > BV
31 Source – Ascend Values
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%
Cu
mu
lati
ve %
of
Air
craf
t Ty
pe
/ V
aria
nts
/ V
inta
ges
CMV / BV
Feb-16
Jul-08
Jul-10
Single-Aisles skew the distribution
32 Source – Ascend Values
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%
Cu
mu
lati
ve %
of
Air
craf
t Ty
pe
/ V
aria
nts
/ V
inta
ges
CMV / BV
Regional Jet
Single-Aisle
Twin-Aisle
The last cycle saw significantly better CMV / BV
improvement than the current cycle
33 Source – Ascend Values
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%
Cu
mu
lati
ve %
of
Air
craf
t Ty
pe
/ V
aria
nts
/ V
inta
ges
CMV / BV
Jul-02 (Trough of Prior Cycle)
Jul-08 (Peak of Prior Cycle)
Jul-10 (Trough of Current Cycle)
Current Position
On the Menu…..
Introduction to Ascend
The Aviation Demand and Supply Cycles
Aircraft Values
A final thought on oil price and next generation aircraft demand / values
34
Some final thoughts about oil prices
Low oil prices stimulate opportunities in the demand side
$50 - $70 per barrel seems to be the latest outlook
Low oil prices degrade the immediate advantage of next generation
aircraft
Next generation aircraft backlogs are huge, with most commitments
placed in the prior high fuel price scenario
Unwinding these commitments will be expensive
There are a finite number of current generation opportunities
So for next generation, demand will remain strong but it’s now all about
the price
35
Next generation lease rate premiums are sensitive to fuel
price
36
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
20000 25000 30000 35000 40000 45000 50000 55000 60000 65000 70000 75000 80000Je
t fu
el p
rice
estim
ate
d to
de
live
r A
32
0ce
o a
nd
A
32
0n
eo
equ
al b
lock h
ou
r D
OC
($
pe
r U
SG
)
A320neo monthly lease rate premium (vs A320ceo)
US Gulf-Coast Jet
Kerosene presently
at $1.16 per USG
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.
Question time…..
Rob Morris Global Head of Consultancy +44 (0)20 8564 6735 +44 (0)7730 213 189 [email protected]
