1400 1440 Avitas Order Bubble
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Transcript of 1400 1440 Avitas Order Bubble
The Order Bubble and How Fuel Price Will Change It All
Adam M. Pilarski
AVITAS
October 18th, 2012
Atlanta, Georgia
Role of Forecaster
Short term
Long term
Example
Page 2
Role of Forecaster
Causalities are very robust
Unpredictable events
(by definition)
cannot be predicted
Their consequence though can
Importance of scenarios
Page 3
Typical Forecast (Long Term)
Page 4
There will be a demand for
33,248 aircraft from 2011-2030
worth $4,128,645,811.78
Not Typical Forecast (Precise Date)
Page 5
The world will end December 21, 2012
(in the afternoon)
(3:48pm) The Maya
I believe Boeing will re-engine this year
The Bet
Page 6
Page 7
Bet was for a bottle of wine
but
I prefer models
Not
Page 8
Not Even
Page 9
But
Page 10
Page 11
Page 12
Page 13
Showing True Class
Page 14
Page 15
Jim Albaugh Private Correspondence December 16, 2011
“It was the best bet I ever lost”
Page 16
Current Big Issues
Page 17
Bubble in narrowbody aircraft
Oil Prices
Another Perfect Storm Possible
Iran flare-up
Oil prices go through the roof
European recession/China slowdown
Lack of financing
Bubble of orders
Page 18
How is this cycle different?
Low interest rates
ExIm/ECA financing
High oil prices, need for newer aircraft
Manufacturers need money
Declining military expenditure
Airbus/Boeing want to slow new entrants
New aircraft types
Leahy not retiring yet
Page 19
Page 20
0
500
1,000
1,500
2,000
2,500
3,000
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Orders and Delivery, Narrowbody and Widebody Jets
Narrowbody and Widebody Delivery
Narrowbody and Widebody Orders
Page 21
0
400
800
1,200
1,600
2,000
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Orders and Delivery, Narrowbody Jets
Narrowbody Delivery
Narrowbody Orders
Page 22
0
200
400
600
800
1,000
1,200
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Orders and Delivery, Widebody Jets
Widebody Delivery
Widebody Orders
Page 23
0%
10%
20%
30%
40%
50%
1971 1976 1981 1986 1991 1996 2001 2006 2011
Backlog as Percentage of Active Fleet, Narrowbody Jets
Page 24
0%
10%
20%
30%
40%
50%
60%
70%
1976 1981 1986 1991 1996 2001 2006 2011
Backlog as Percentage of Active Fleet, Widebody Jets
Page 25
0
2
4
6
8
1971 1976 1981 1986 1991 1996 2001 2006 2011
Backlog as Multiples of Annual Production, Narrowbody Jets
Page 26
0
2
4
6
8
10
12
14
1976 1981 1986 1991 1996 2001 2006 2011
Backlog as Multiples of Annual Production, Widebody Jets
I believe we are in a bubble environment
with too many orders
Page 27
Additional Reasons for Bubble
Double counting
ME/Rest of World
New/Legacy leasing companies
C-Series Factor
Page 28
Historical production growing at 2.9% annually
Announced production rates of 42/month by
2012 (Airbus) and 2014 (Boeing)
Talk of rates of 60 aircraft/month
C Series, 919 and MS21 not included
Page 29
Page 30
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030
Narrowbody Delivery, History and Forecast
Page 31
30
40
50
60
70
80
90
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Forecast of Narrowbody Monthly Production Rate, By Duopolists
If past trend continues
to be compatible with Airbus/Boeingforecast
if other narrowbody types deliver as EdGreenslet predicts
Announced rates not compatible with
Airbus/Boeing forecasts
Possibility of much higher retirements, shorter
economic life – depends on oil prices
Page 32
Widebody production needs to grow from 1% to
5.9% annually to satisfy Airbus/Boeing forecasts
Page 33
Page 34
0
100
200
300
400
500
600
1970 1980 1990 2000 2010 2020 2030
Widebody Delivery, History and Forecast
Issues
Page 35
Retirements
Economic life of aircraft
How will the bubble burst?
Sweet home Alabama
Oil prices
Fearless Forecast - Oil
Page 36
My bold forecast
By October 16th, 2018 oil prices will be $40
Page 37
Are we running out of oil?
NO
Page 38
Years of reserves left
Page 39
20
30
40
50
60
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
Years
Years of Crude Oil Reserves Left
Source: U.S. Department of Energy, Energy Information Administration
Are price increases result of demand push?
(aka all Chinese now driving cars)
NO
Page 40
2005-2011
Oil Price Increase 77%
China Oil Consumption 54.3%
China GDP 86.2%
World GDP 14.7%
World Oil Consumption 0.5%
Page 41
2000-2011
Oil Prices up 198.9%
Traffic up 53%
Jet Fuel Demand up 3%
Source: Airbus
Page 42
Clearly the price mechanism works
Page 43
Historically production disruptions caused by
supply rather than demand factors
Page 44
Millions of barrels a day
Iran + Iraq
1976 1981 1989 1991 2011
8.3 2.4 5.7 3.6 6.7
Libya
2010 2011
1.7 0.4
Former USSR
1979 1992 1995 2011
11.4 8.3 6.7 11.7
Kuwait
1979 1991 2011
2.5 0.2 2.5
Page 45
Millions of barrels a day
Page 46
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1976 1981 1986 1991 1996 2001 2006 2011
Iran + Iraq
8.3 in 1976
2.4 in1981
5.7 in 1989
3.6 in 1991
6.7 in 2011
0.0
0.5
1.0
1.5
2.0
2007 2008 2009 2010 2011
Libya
1.7 in 1989
0.4 in 2011
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1979 1984 1989 1994 1999 2004 2009
Former USSR
11.4 in 1979
8.3 in 1992
6.7 in 1995
11.7 in 2011
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1979 1984 1989 1994 1999 2004 2009
Kuwait
2.5 in 1979
0.2 in 1991
2.5 in 2011
Historical Oil Prices
Page 47
0
20
40
60
80
100
120
140
1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
Historical Oil Prices
Source: BP Statistical Review of World Energy. 1861-1944 US Average; 1945-1983 Arabian Light posted at Ras Tanura;
1984-2011 Brent dated.
2011 Constant U.S. Dollars Per Barrel
Page 48
0
15
30
45
60
75
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Million Barrels Per Day
OPEC
Non-OPEC
Source: U.S. Department of Energy, Energy Information Administration
World Crude Oil Production, OPEC vs. Non-OPEC Countries, 1965 - 2011
Last time oil prices went sky-high – OPEC II
(1979-1986)
Page 49
World Oil Production
The level of World oil production did not recover
to 1979 levels until 1996
During this time GDP at same time rose 60.8%
Page 50
Page 51
0
5
10
15
20
25
30
35
40
45
50
55
60
65
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995
Million Barrels Per Day
Source: U.S. Department of Energy, Energy Information Administration
OPEC
Non-OPEC
World Crude Oil Production, OPEC vs. Non-OPEC Countries, 1965 - 1996
Page 52
0
5
10
15
20
25
30
35
40
45
50
55
60
65
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995
Million Barrels Per Day
Source: U.S. Department of Energy, Energy Information Administration
OPEC
Non-OPEC
World Crude Oil Production, OPEC vs. Non-OPEC Countries, 1965 - 1996
Page 53
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1979 1980 1981 1982 1983 1984 1985
OPEC Production (1979 = 100%)
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
1979 1980 1981 1982 1983 1984 1985
Saudi Production (1979 = 100%)
How is today’s situation different from OPEC II?
Page 54
Are we in a competitive oil market?
Can you spell cartel?
Page 55
Power of OPEC (% share)
1980 2000 2011
Production 42.6% 42.3% 42.9%
Reserves 66.5% 79.2% 72.4%
Page 56
Recent Realities (2004-2011)
Page 57
0
20
40
60
80
100
120
140
160
2-Jan-04 2-Jan-05 2-Jan-06 2-Jan-07 2-Jan-08 2-Jan-09 2-Jan-10 2-Jan-11
2004 - 2011 Crude Oil Price
Source: U.S. Department of Energy, Energy Information Administration
Europe Brent Spot Price FOB (2011 Constant U.S. Dollars per Barrel)
Reasons
Political uncertainties
Middle East unrest
The dangerous troika
Saudis unwilling to act
Speculations
Page 58
Page 59
0
5
10
15
20
25
30
35
40
45
2-Jan-90 2-Jul-90 2-Jan-91 2-Jul-91 2-Jan-92 2-Jul-92
Historical Daily Oil Prices, 1990 - 1992
Source: U.S. Department of Energy, Energy Information Administration
Europe Brent Spot Price FOB (1990 Jan Dollars per Barrel)
Page 60
0
5
10
15
20
25
30
35
40
45
2-Jan-90 2-Jul-90 2-Jan-91 2-Jul-91 2-Jan-92 2-Jul-92
Historical Daily Oil Prices, 1990 - 1992
Source: U.S. Department of Energy, Energy Information Administration
Europe Brent Spot Price FOB (1990 Jan Dollars per Barrel)
So Where Are We?
Possible Scenarios
Oil Prices stay high forever
Shorter economic life of aircraft
Advancements in technology
Less demand for aircraft
More replacement aircraft
Page 61
So Where Are We?
Adam’s view correct
Bubble bursts, causes pain to some
Long term future favors more new aircraft
Slow down in fuel efficiency improvements
Different regional patterns of traffic
Timing of bubble bursting important
Page 62
Summary
Future is predictable but has substantial random
elements
Bubble in narrowbody aircraft orders
Potential of much lower oil prices should be
considered in planning
Page 63