Perspectives on

Aviation Industry

Opportunities

National Civil Aviation Development Forum

Dublin

February 2017

Peter Morris

Chief Economist

1

Agenda

• Global Industry Background and Trends

• Where is the industry going?

• Geographically

• Technically

• Economics/ Business models

• Where are the opportunities?

Macro

-

eco

no

mic

Change in Global Pattern of Economic Activity

Changing Consumer Landscape

So

cia

l /

En

vir

on

men

tal

Global Labour Market

Regulation and Scrutiny

Public Sector Challenges

Natural Resources

Bu

sin

ess

New Global Industry Structures

Changing Economics of Knowledge

Trends to watch for the future

A long term growth industry

4

A Global Interrelated Business

5

Passenger and cargo CUSTOMERS

AIRLINE BUSINESSES

MANUFACTURERSSUPPLIERS

FINANCE

GDS

AIR TRAFFICCONTROL

GOVTS & REGULATORS

•Fuel•Insurance•Handling•MRO•IT& IFE

•Airport Systems•Duty Free, Car Parking•Security

•Shareholders•Leasing•Debt•M&A•Fuel Hedging

AIRPORTSAGENTS &

INTERMEDIARIES

•Airframes•Engines•Components•Spares

Tourism and

Destination

Operators

•Car Hire

•CC

•Hotel

•Ground Transport

The Aviation Evolutionary Cycle

•Ownership

•Alliances

•Route network growth

•Segmentation

•Consolidation

•Aircraft performance

•Distribution options

• Information flow

•On board product

•Actual Performance

•Liberalisation

•Trade Blocs

•Competition

•Protectionism

•GDP and population

•Price

•Product & Information

•Shock Events

•Changing tastes

Customer Regulatory

Airline/ Airport market

structure

Technology Investment

Changes in the world’s economic centre of gravity

7

8 Source: PWC Feb 2017

The noughties saw major changes in regional capacity

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

10

Creating a competitive airline business model

Reducing cost Increasing revenue

Aircraft utilisation Premium services

Distribution Hubs/ networks

Staff utilisation/ cost Targeting niche markets

Airport charges

Aircraft technology

Product unbundling

Overheads

Outsourcing

(Hubs/ networks)

CRITICAL MASS THEN NEEDED TO PROTECT

PROFITABILITY

Roadmap for ‘The Basic Hardware’

12 Source: Flight Fleet Forecast 2016, Passenger Jets

Developing Markets set to grow faster than Established ones

Source: Flight Fleet Forecast 2016, Passenger Jets

The demographic downturn

Typical issue among developed

country workforces (US, DE, JP)

Potential losses of skills in critical

areas (e.g. pilots, engineers)

Productivity of different age groups

may vary significantly

Need to match future strategy with

demographic change in a proactive

manner

Similar factors may apply in high

growth environment with skills

shortages

15

Operating lessor share of fleet has stagnated since

peak in 2009

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Op

era

tin

g L

es

so

r F

lee

t a

s R

ati

o o

f To

tal

Fle

et

Pa

ss

en

ger

Fle

et

Ma

na

ge

d b

y O

pe

rati

ng

L

es

so

rs

Single-Aisle Twin-Aisle Share of Fleet

Source: Flight Fleets Analyzer (passenger aircraft in service / stored)

Competition is always round the corner

• The majority of the (8,000+) operating leased aircraft fleet is currently domiciled for

tax purposes in Ireland

• This has created a successful cluster of aviation leasing and related businesses

and expertise

• Other countries with proactive taxation regimes increasingly interested to compete

• Singapore currently offers some advantages but the current financial benefit is

relatively marginal

• From April 2017 Hong Kong proposes to offer a regime for aircraft leasing with an

Effective Tax Rate estimated below 4% (was 33%), compared with Ireland (12.5%)

and Singapore (10%). This could amount to a saving of nearly $1m per aircraft in PV

terms (@5%)

• Would be extended to non-HK based aircraft, and further advantages could accrue

for Chinese airlines using a HKG lessor

16

It can go wrong: Dubai Aerospace Enterprise

• Dubai Aerospace Enterprise was founded in 2006

• As a “global aerospace manufacturing and services corporation”, DAE was set up with

a capital base of USD15bn to establish “an integrated aerospace industry cluster”

• DAE Chairman in 2006: “Within 10 years, DAE will become an integral part of the

global aerospace industry and a leading player. We are putting down a marker for the

future.”

• The company originally had six divisions - DAE Capital, DAE Services, DAE

Manufacturing, DAE Airports, DAE Engineering and DAE University. It has since shut all

units except for leasing division DAE Capital and DAE Manufacturing. These are minor

players.

17

A Cautionary Tale

Our conclusion: The enterprise did not properly research its markets,

and failed to create the right business infrastructure, financial infrastructure or human

capital to support its ambitions. It clearly underestimated the intense global and

established competition in these aeronautical business areas

18

Some Areas of Opportunity

Airline/ Airport

Fleet & Services

Network

Global

Education and Training

Travel Distribution

A New Generation of opportunity

19

New Long Haul Potential from Ireland?

• ‘Low Cost Long Haul’ wide body

operations show marginal profitability

• New generation narrowbodies offer 6-

8h flight capability

• Lower trip cost reduces financial risk

and improves profitability

• Dublin has good connectivity and

Transatlantic hub location - potential for

incumbents and new entrants

• Potential from Shannon?

20

Source: Barclays Analysis

A new information, education and training world beckons for Global

Travel

21

Source: Brown/ Costello Dublin City Uni Aug 16

https://onlinetraveltraining.com

On Line Academies

• 200 courses in 15 Languages

• Both promotional and qualification levels

• Content controlled by suppliers

• Suppliers communicate with closed user

groups

• Micro learning

Universities form an essential part of the education, training and talent

ecosystem for aviation and travel, which can be lucrative

Source: THEdS

Pilot training is evolving too

24

Assessing opportunities

Identify Context

Industry trends

Trend scenarios

Understanding the players

Benchmark the competition

Quantify the outcome, scenarios

and reaction

Step off the pier

25

Summary

• Aviation has proved a robust global business, but has evolved

considerably since the 80s

• Growth has moved eastwards, challenging a W. Europe location

• Competition is a given in most areas of aviation goods and services

• Opportunities exist for developing:

• Advantageous regulatory framework (tax, facilitating market entry, COE)

• Proactive business encouragement (e.g. LCLH)

• Encourage co-operative physical ecosystems (Education, training, linked

businesses e.g. ‘Airport City’, MRO, manufacture)

• Develop new technology for products/ services to improve efficiency, flexibility

• Virtual products (training, distribution) for AsPac growth markets

Some questions for the panel

• What are the long term strengths Ireland can exploit?

• Regulatory

• Business Framework

• Geography

• EU Regional Bloc

• Education/ Training

• ‘Aviation ecosystems’

• Global Relationships

• What/ who are the enablers in Ireland and elsewhere to target?

• How can government best facilitate the opportunities?

• What opportunities will UK aviation chaos throw up?

27

28

Peter Morris

Chief Economist

+44 (0)20 8564 6790

+44 (0)7725 496758

peter.morris@ascendworldwide.com

Thank you!