commercial aero-engine market analysis & update...widebody jet turboprop regional jet narrowbody...
TRANSCRIPT
May 2-3, 2018: London, UK
Commercial Aero-Engine
Market Analysis & Update
Aviation Week Network: Engine Leasing, Trading & Finance
Alton Aviation Consultancy is a boutique consulting firm with deep
domain expertise across the aviation value chain
COMPANY INTRODUCTION
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Financing AdvisoryAirlines
Aviation &
Aerospace Investors
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General Aviation
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& Supply ChainMRO & Aftermarket Airports Specialty Projects
1
Lessors, operators, lenders, and investors
rely on Alton’s professionals to provide
independent, objective advisory support
Market research & analysis
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forecasting
Appraisals/valuations
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Alton provides guidance and insight required to inform business
strategies, allocate capital, prioritize resources, and manage risk
COMPANY INTRODUCTION
Aircraft Leasing &
Financing Advisory
2
In China, Alton Aviation Consultancy is known as 德世国际航空咨询(北京)有限公司, or De Shi.
Alton supports a global client base from offices in the U.S., China,
Hong Kong, and Japan
COMPANY INTRODUCTION
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17th Floor
New York, New York 10168
USA
+1 212 256 [email protected]
New York
8 Guanghua Dongli
China Overseas Plaza
South Tower, Floor 11,
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China
+86 10 8598 [email protected]
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Suite 903
Central
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+852 8191 [email protected]
Hong Kong
Konan
Minato-Ku
Tokyo, Japan
+81 90 8057 [email protected]
Tokyo
3
4
TODAY’S AGENDA
Commercial Aircraft & Engine Fleet Dynamics
Aircraft & Engine Fleet Outlook
Engine Leasing Overview
Summary & Conclusions
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
SECTION 1
Source: IATA, Alton analysis
The airline industry has historically been cyclical; the most recent
eight years have been profitable
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
$66B(6%)
(4%)
(2%)
0%
2%
4%
6%
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
FINANCIAL CRISISSEPT. 11GULF WAROIL CRISIS
Global Airline Net Profit Margin, 1980-2017F
6 years 6 years 2 years 8+ years
Alton InsightFactors sustaining current
momentum include:
Continued strong growth in air
traffic demand, driven by GDP
Capacity/pricing discipline
from airline consolidation in
mature markets
Relatively stable and moderate
fuel prices
6
2017F
Air traffic demand has long been noted to correlate to GDP growth –
both continue to expand
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
7Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis
(2%)
0%
2%
4%
6%
8%
10%
12%
14%
0
100
200
300
400
500
600
700
800
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
GD
P G
row
th
Ind
ex
ed
GD
P/ R
PK
GDP Growth
Indexed GDP
Indexed RPK
Global annual passenger
traffic has risen at a
multiple of on average
1.7 times global GDP
over the past 25 years
Demand for air travel
has not wavered long in
the face of exogenous
shocks
Historical Air Traffic and GDP Growth (1980–2017F)
2017F
Fleet growth is driven by increases in air traffic; Middle East and
Asia Pacific have led the world in both over the past 20 years
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
8Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis
Fleet and Air Traffic (RPK) Growth by Region (1997 – 2017)
10.0%
7.1% 6.8%
5.7%
4.6%
2.7%
11.0%
6.0%
4.5% 4.6%4.0%
1.4%0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Middle East Asia Pacific Africa Latin America Europe North America
Ave
rag
e A
nn
ua
l G
row
th
% Fleet growth
Air Traffic
9Source: CAPA, Alton analysis
Over the past 25 years, the global fleet has grown at a rate of 5.1%;
Airbus has enjoyed the most significant share expansion
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
0
5,000
10,000
15,000
20,000
25,000
30,000
1992 1997 2002 2007 2012 2017
Widebody Jet
Turboprop
Regional Jet
Narrowbody Jet
Global Fleet Count (1992 – 2017) Global Fleet Count (1992 – 2017)
0
5,000
10,000
15,000
20,000
25,000
30,000
1992 1997 2002 2007 2012 2017
OtherEmbraerBombardierBoeingAirbus
57%
20%
10%
13%
33%
7%
8%
43%
8%
10
Today’s commercial air transport fleet consists of approximately
28,000 aircraft, with Asia Pacific equaling North America in size
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
Narrowbody JetRegional JetTurbopropWidebody Jet
51%
24%
9%
16%
8,400
61%
11%
10%
18%
6,600
63%
5%
10%
22%
8,400
59%
17%
14%
10%
2,10041%
17%
28%
14%
1,300
39%
7%
3%
51% 2,100
Source: CAPA, Alton analysis
Alton Insight
Turboprop aircraft have outperformed
other aircraft classes
Regional jets as a whole have
underperformed – but much of this
has historically been driven by the 50-
seat regional jets
11Source: CAPA, Alton analysis
Aircraft have historically retired between 20-30 years or age
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 5 10 15 20 25 30 35 40 45 50
% R
em
ain
ing
in
Se
rvic
e
Age of Aircraft, in Years
Narrowbody Jet Regional JetTurbopropWidebody Jet
Aircraft Survivor Curves
Alton Insight Narrowbody retirement ages have
compressed from a peak at the top of
the prior cycle
Boeing 787 entry-into-service delays
kept older widebody aircraft in the
fleet through the downturn
Despite headline news reports,
retirement ages for narrowbody
aircraft is close to 25 years today
12Note: Trailing three year average
Source: CAPA, Alton analysis
Retirement ages for narrowbody and widebody jets have
compressed in recent years, but are still near 25 years
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
0
5
10
15
20
25
30
35
1997 2002 2007 2012 2017
Ave
rag
e A
ge
@ R
eti
rem
en
t
Narrowbody Jet
Widebody Jet
Retirement Age Trends, 1997-2017
13Source: CAPA, Alton analysis
Fleet retirements have now declined from previous peak levels
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
$66B
Alton Insight
Peak retirements in 2007-2012 were
driven by (i) a soft demand
environment, (ii) high fuel prices, and
(iii) marginalized 50-seat regional jets
The surge in aircraft retirements
spawned advancements in the tear-
down/part-out industry
Low fuel prices and a strong traffic
growth environment have driven the
recent slowdown in retirements rates
The end-of-life market is highly
competitive today
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1992 -1997
1997 -2002
2002 -2007
2007 -2012
2012 -2017
% o
f F
leet
To
tal A
ircra
ft
Aircraft Retired
% Fleet
Avg.
601
Avg.
294
Aircraft Retirements
Avg.
144
Avg.
464
14Source: CAPA, Alton analysis
Over the course of the last decade, more than 5,000 aircraft and
12,000 engines have left the in-service fleet
COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS
Aircraft Retirements, 2008-2017
Most retirements have been what are now considered “prior generation” aircraft & engines
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
En
gin
es
Re
tire
d CFM56-5ACF6-50C2RB211-524PW4000-94PW100CF6-80C2JT9DJT8D-200CFM56-3JT8D
Engine Retirements, 2008-2017
Top 10 Engines
0
1,000
2,000
3,000
4,000
5,000
6,000
Air
cra
ft R
etr
ied 747-400
757A300/A310DC9747-1/2/300737 OriginalA320MD80727737 Classic
Top 10 Airfames
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
SECTION 2
16Source: CAPA, Alton analysis
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Fle
et
Siz
e
Widebody Jet
Turboprop
Regional Jet
Narrowbody Jet
Over the next decade, Alton projects the commercial fleet will grow
at 3.8% per year, reaching over 44,000 aircraft by 2028
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
17Source: Alton analysis
Over 22,000 aircraft and 44,000 engines are projected to be delivered
through 2028
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
Aircraft Delivery Forecast, 2018-2028
0
10,000
20,000
30,000
40,000
50,000
En
gin
es
De
live
red Trent 7000
Trent 1000
GE9X
PW1500G
GEnx -1B
PW100
Trent XWB
PW1100G
CFM56-LEAP-1A
CFM56-LEAP-1B
Engine Delivery Forecast, 2018-2028
Top 10
0
5,000
10,000
15,000
20,000
25,000
Air
cra
ft D
eli
ve
red MRJ
A330neo
E-Jet E2
777X
C Series
ATR72
A350
787
737 MAX
A319/320/321neo
Top 10
New technology platforms will comprise the vast
majority of the next decade’s deliveries
Demand for new aircraft deliveries will be driven by the combination
of aircraft needed for growth & replacement
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
Source: CAPA, Alton analysis
30,000
22,000
8,000
14,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2018 2028
# o
f A
irc
raft
22
,00
0
44,000
Growth
Retained
Replacement
Fleet Projection (2018 – 2028)
Economic and
middle-class
expansion,
particularly in
emerging markets
Stimulation from
low fares
Market deregulation
& liberalization
Growth Drivers
Demographics, and
attainment of
economic life
Supply/demand
balance
Interest rates
Fuel prices
Emissions
regulations
Replacement Drivers
18
19Source: CAPA, Alton analysis; OEM announcements
Aircraft OEMs presently enjoy large order books and are ramping-up
production of the most in-demand aircraft
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
0 2,000 4,000 6,000 8,000
A320ceo (Current)
A320neo (Next)
737NG (Current)
737 MAX (Next)
A330ceo (Current)
A330neo/A350 (Next)
777 (Current)
787/777X (Next) In ServiceInactiveBacklog
Select Aircraft Fleet & Backlog
46
14
44
20
60
15
57
24
0
10
20
30
40
50
60
70
80
NB WB NB WB
Ra
te/m
o
Current rate/moFuture rate/mo (2019)
Airbus Boeing
OEM Production Rates
20Source: CAPA, Alton analysis
The majority of the backlog is held by Airbus and Boeing
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,00010 Year Backlog by OEM
Others
Embraer
Bombardier
Boeing
Airbus
Alton Insight
Airbus and Boeing combined hold
about 85% of the backlog and their
relative proportions are fairly steady
in the coming years
Bombardier and Embraer have
smaller and shorter backlogs
Remainder of backlog distributed
amongst ATR and some emerging
manufacturers
21Source: CAPA, Alton analysis
Asia Pacific accounts for the largest portion of the backlog,
although a substantial portion is not yet allocated
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
Alton Insight
Asia Pacific accounts for 29% of firm
backlog – true figure is likely more
given unallocated orders region’s
high demand for narrowbodies
Europe and North America account
for the next highest shares of the
backlog at 15% and 14% respectively
Approx. 4,000 aircraft on backlog
have not yet been allocated to an
operator or region – many of these
aircraft have been ordered by lessors
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Backlog by Region
Widebody Jet
Turboprop
Regional Jet
Narrowbody Jet
22Source: Alton analysis
Over 8,000 aircraft and 18,000 engines are projected to leave the
in-service fleet through 2028
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
Aircraft Retirement Forecast, 2018-2028
0
5,000
10,000
15,000
20,000
En
gin
es
Re
tire
d CF34-8CAE3007CF34-3CFM56-3PT6APW100CF6-80C2V2500-A5CFM56-5BCFM56-7B
Engine Retirement Forecast, 2018-2028
Top 10
0
2,500
5,000
7,500
10,000
Air
cra
ft R
etr
ied
CRJ7/9/1000E-JetMD-80/90ERJ135/145767777CRJ1/200737 Classic737NGA320
Top 10
The next decade’s retirements will include many of
today’s “current generation” aircraft & engines
23Source: Alton Analysis, all figures constant dollars ($2018 USD)
Today’s commercial air transport MRO market demand is approx.
$69B, growing to $103B by 2028 – an annualized growth rate of 4.1%
COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK
$0 $20 $40 $60 $80 $100 $120
World Total
Asia Pacific
North America
Europe
Middle East
Latin America
Africa
$103B
10yr CAGR
5.0%
5.0%
6.5%
2.2%
1.6%
5.7%
$0 $20 $40 $60 $80 $100 $120
World Total
Engine
Components
Line
Airframe Heavy
Modifications
10yr CAGR
$103B
6.1%
2.9%
3.9%
3.1%
4.4%
$0 $20 $40 $60 $80 $100 $120
World Total
Asia Pacific
North America
Europe
Middle East
Latin America
Africa
$69B
$3.8B
$7.4B
$16.4B
$16.9B
$22.6B
$2.4B
$0 $20 $40 $60 $80 $100 $120
World Total
Engine
Components
Line
Airframe Heavy
Modifications
$69B
$6B
$8B
$13B
$14B
$29B
ENGINE LEASING OVERVIEW
SECTION 3
25Note: 1\ Engines assumed to be valued at spare engine market values
Source: Source: CAPA Fleet Database, December 2017, Alton analysis and estimates
The commercial jet fleet is valued at nearly $650 billion; of the total
aircraft value, as much as 45% may be attributed to installed engines1
ENGINE LEASING OVERVIEW
Global Commercial Aircraft Fleet Value
by Aircraft Type and Age
$0
$50
$100
$150
$200
$250
$300
$350
$400
< 5years
5-10years
10-15years
15-20years
> 20years
Air
cra
ft F
lee
t V
alu
e(U
SD
Bil
lio
n)
Regional Jet
Widebody
Narrowbody
Global Commercial Aircraft/Engine
Value by Aircraft Type and Age
$0
$50
$100
$150
$200
$250
$300
$350
$400
Narrowbody Widebody Regional Jet
Va
lue
(US
D B
illi
on
) SpareEngines
InstalledEngines
Airframe
Spare engines are around 10% of the installed
engine base, with a value on the order of $25 billion
Source: Alton analysis
Trading Volumes: a complex web of primary, secondary, and tertiary
aircraft transactions take place between market participants
ENGINE LEASING OVERVIEW
AIRCRAFT
/ ENGINE
OEM
AIRLINE
AIRCRAFT/
ENGINE
LESSOR
AIRLINE
AIRCRAFT/
ENGINE
LESSOR
PRIMARY (NEW) SECONDARY (USED)
SA
LE-L
EA
SE
BA
CK
OU
TR
IGH
T
OUTRIGHT
LEASE
ATTACHED
OUTRIGHT
PART-OUT
TERTIARY (RETIRE)
SA
LE-L
EA
SE
BA
CK
OUTRIGHT
OUTRIGHTOUTRIGHT
OUTRIGHT
Transaction Schematic: Installed & Spare Engines
Alton Insight
Buyers of aircraft with
installed engines include
airlines, aircraft lessors, and
part-out specialists – at
different phases of the life
cycle
Similarly, purchasers of spare
engines include airlines,
engine lessors, and part-out
specialists
26
27Source: Alton estimates
There are an estimated ~50,000 total engines in the global fleet;
~10% of installed base are spares, of which ~1,500 (35%) are leased
ENGINE LEASING OVERVIEW
0 10,000 20,000 30,000 40,000 50,000
Global Fleet
Spare Fleet
Spare Leased Spare Owned In-Service
Leased Proportion of Spare Engines in Global Fleet Alton Insight
While there is overlap in the
various categories, engine
lessors fall into three general
categories:
OEM (or OEM-affiliated)
Independents (including End-
of-Life specialists)
MROs (or MRO-affiliated)
Source: Airfinance Journal Engine Investor Poll, 2017
Participants in the engine market form a view on the attractiveness of
various engines, yet there is a buyer and seller on each side of a deal
ENGINE LEASING OVERVIEW
0 2 4 6 8 10 12 14 16 18 20
PW6000Trent 500
CFM56-5CCFM56-5ARB211-524
Trent 800CFM56-3CTrent 900
GP7200PW4000
RB211-535PW2000CF6-80
CF34-8CTrent 1000
CF34-8EGE90
Trent 700CF34-10EPW1100G
GEnxCFM56-5B
Leap-1ALeap-1B
CFM56-7BV2500-A5
Investor Appeal Remarketing Potential Residual Value
2828
29
As with aircraft leasing, the industry consensus is a strong outlook
for engine leasing in the foreseeable future
ENGINE LEASING OVERVIEW
Narrowbody Preference
OEM Aftermarket Prominence
Fuel Price
Production Rates
Technology Improvements
Innovation of Services to Compete
Development of Chinese Engine Lessors
Outlook Trends
Growth in the spare engine leasing
industry is dependent on two
fundamental drivers:
Number of commercial aircraft, and
therefore engines in the market, and
correspondingly determining the
volume of spares needed
Proportion of engines that are leased
by operators, forecast to grow
SUMMARY & CONCLUSIONS
SECTION 4
31
SUMMARY
Overall, the state of the aviation industry is strong:
• Airlines profitable
• Manufacturers raising production rates
• Aftermarket demand volumes up
The industry remains susceptible to exogenous events
Demographics will drive increased retirements in the coming decade – most
will be today’s current generation equipment – as new technology platforms
form a greater share of the global fleet
Strong growth expected in the engine leasing market on basis of overall
fleet growth and expanding share of leased engines
ALTONAVIATION.COM
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Adam Guthorn
+1 212 301 0572