macro economic & political dynamicsglobal economic cycle steady performance but weakening trend...

flightglobal.com/consultancy

Macro Economic & Political Dynamics

2nd November 2016

Rob Morris, Global Head of Consultancy

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flightglobal.com/consultancy 4

How far have we come?GDP growth and tradeTraffic and profitabilityMarket outlook


How far have we come?

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Air travel has created a transport revolution in less than a century


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Global economic growth continues to drive air travel growth

Source: IATA


The world’s economic and trade axis continues to change


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Global passenger capacity has almost doubled since 2003

Source: FlightGlobal Schedules, October 2016, region of domicile of carrier


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Fleet growth has also been significant

Source: Flight Fleets Analyzer, October 2016, Western built single and twin-aisle passenger jets in airline service


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Regional significance has changed

Source: Flight Fleets Analyzer, October 2016, Western built single and twin-aisle passenger jets in airline service


GDP growth and trade

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Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-150.0%

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2015 economic growth underperformed initial estimates

Source: EIU, World is calculated at Market Exchange Rates


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2016 economic growth forecasts have slowed

Source: EIU, World is calculated at Market Exchange Rates


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USA Eurozone Major Five Asian OECD Total

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OECD leading indicators are a concern

Source: OECD CLI


The impact of political tensions and instability are clear

Source: Sojern.com


Global economic cycle

Steady performance but weakening trend over 2016

Indicator Current level Trend

GDP EIU estimate for 2015 was 2.4%, slightlydown on 2014;2016 forecast currentlylower at 2.1%. Asia-Pacific leads at 3.9%, US 1.8%, W Europe 1.6%. Latin America (-0.4%) continues to see many countries in recession

Forecasts for global GDP for 2016 have declined since the start of the year, from 2.6% to 2.1%, with reductions for the US & Latin America being sharpest. China has increased to 6.6% for 2016.

OECD Leading Indicators OECD members fairly stable at ~100 index. Within this, Euro Area above 100; US and major 5 Asian countries (including China) are below 100, as are many developing nations

Some concerns on trend for China, Asia and US, with Europe and India suggesting expansion

World Trade World Trade in dollar terms showing a decline in 2015, but small rise(c.2%) in volume terms

Small slowing of trade growth seen sinceend-2014. Q1 2016 showed around 1.0% year-on-year increase. Levels still well below early noughties which was 5-10%


Oil prices stabilised after falls that commenced in July 2014

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IATA’s 2016 base case fuel scenario is now $55.4

per barrel Jet Fuel (=$1.32 per USG)

Crude oil price trajectory has considerable

uncertainty at present

Source: US EIA / IATA


Traffic and profitability

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Global passenger traffic growth rate slowing

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Traffic (RPK) Capacity (ASK)

IATA predicting 6.2% traffic growth for 2016

2015 Capacity = 6.7%, Traffic = 7.4%

Source: IATA


IATA expect supply to lead demand marginally in most regions in 2016

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Freight market recovery has stalled; gap between demand & supply growing

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Traffic (FTK) Capacity (AFTK)

2015 Capacity = 6.1%

IATA reported 2.3% traffic growth in 2015, 2016 forecast is 2.1%

Source: IATA


Airline profits continue to grow through 2016

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F

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)IATA indicating that Q2 2016 is likely to be the

top of the airline profit cycle

Source: IATA


Market outlook

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Aviation demand cycle

Demand side still very strong but trends suggest it could have peakedIndicator Current level TrendPassenger traffic Above trend growth for sixth year running; 5.8% YTD.

Asia-Pacific growth still strong, N America and Europe more mature

Growth rate was above 6% for most of 2015 and >7% during summer. Last seven months have seen demand lag supply

Freight traffic Recovery seen in 2015 has now slowed, 2016 YTD only 1.4%. Express/regional freight performing better.

Capacity significantly 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 Still near historically record levels. Asia much lower –emerging evidence of overcapacity in some areas?

US, European, Asian, Middle East load factors are all now falling, as supply (capacity) starts to exceed demand.

New aircraft orders Around 2,050 net orders for commercial jets. In 2015 with book to bill of 1.3. 2016 Single-aisle still >1.0 (GREEN), but twin-aisle and RJ around 0.5 (AMBER)

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

Deferrals & cancellations

Deferrals have ticked up following several recent airline capacity adjustments from prior low level. Cancellations now just above average, although this is lower if normalised for fleet size

Both cancellations and deferral rate increasing in Q3 2016. Most recent cancellations arise from OEMs cleansing order book but deferrals reflect significant fleet plan adjustments (Southwest, American, Turkish)


Aviation supply cycleDespite strong demand, several indicators amber Indicator Current level TrendAircraft deliveries 2015 had record commercial jet deliveries, 2016

expected to slightly exceedProduction rates set to increase for A320, 737, 787 & A350, plus CSeries ramp-up; A330 reducing; 777, 747, A380 being cut.

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 7%

Trend is to a higher percentage, with above 7% in 2016 – 2019; such levels could indicate overcapacity based on past history

Stored aircraft Absolute level of stored commercial jets has fallen slightly since 2012, and shows significant decline since the recession in terms of % of fleet

Single-aisle declining, some increases 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 single-aisle, 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

Average age ticked up slightly in 2016, consistent with strong demand environment, but still some young aircraft parting out

Aircraft utilisation Single-aisle & twin-aisle utilisations are at or near historic highs

Fairly flat trend since recovering in 2010/11. 2016 shows modest increases.


Commercial jet backlog at record high

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Backlog Value Now $935bn

Source: Flight Fleets Analyzer & Flight Ascend Values (2016$ Full Life Base Value); 2016 to 1st September


Only 7% of slots remain open in next five years

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total

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Source: Flight Fleets Analyzer & OEM Announced Production Rates


Conclusions

Global economic prospects positive but many weaknessesSubstantially lower oil prices benefit the majority of major economiesEurope continues to have regional economic issues, but overall Eurozone growth is the highest since the recessionUS growth still ambivalentChina heavy manufacturing slowdown, but services still strong

Geo-political risks are ever-presentRussia-Ukraine-Europe. TurkeyMiddle East & North AfricaChina claims in S China sea

Despite all of which…the global industry remains profitable and growing for now


A final comment on operating leasing

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Operating lessor share of fleet has stagnated since peak in 2009

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Single-Aisle Twin-Aisle Share of Fleet

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


January 2016 analysis indicates 50% penetration is unlikely to be achieved in five years time

Global passenger fleet at end of 2022 (excluding RJs) is predicted to be ~25,500 aircraftLeasing fleet in service would need to be ~12,750 aircraftEquivalent leasing fleet today is 7,220 aircraftSo net addition of 5,530 aircraft required over next seven yearsFlightglobal 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 yearsSo 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)


Operating lessors have acquired only 38% of new commercial jet deliveries in 2016 to date

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Source: Flight Fleets Analyzer (passenger aircraft only)


Rob MorrisHead of Consultancy

+44 (0)20 8564 6735+44 (0)7730 [email protected]

macro economic & political dynamicsglobal economic cycle steady performance but weakening trend...

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