Global Aviation Sector Overvie · 2017-02-21 · Source: Flight Fleets Analyzer, Flight Fleet...

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Global Aviation Sector

Overview

21st February 2017

Rob Morris, Global Head of Consultancy

1

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Global Aviation Sector Overview and Outlook

Aviation Asset Value Risk

Twin-Aisle Aircraft Markets

Some Final Thoughts on Operating Leasing


Global Aviation

Sector Overview and

Outlook

5


But first, why invest in commercial aircraft?

Despite volatility in the aviation market over the past 20 years, investment in

aircraft leasing has shown remarkably stable returns

The Ascend Aircraft Investment Index measures this return and volatility

On a risk reward basis, investment in aircraft has outperformed many other asset

classes including shipping and precious metals

Aircraft leasing has shown low correlation with indices that reflect the general

economy such as the S&P500


Returns from investing in aircraft are stable and

uncorrelated to other alternative investments

0

200

400

600

800

1,000

1,200

Aircraft Investment Index

S&P 500 Index

MSCI World Index

Dow Jones Transportation Index

S&P 500 Airlines Index

Source: Ascend Aircraft Investment Index


Commercial aviation is a long-term growth sector

Source: Ascend Analysis of IATA Data

-10%

-5%

0%

5%

10%

15%

20%

Year-

on

-Year

Ch

an

ge

Traffic (RPK) Capacity (ASK)


2016 opened with a strong demand outlook…..

Demand side looks very strong (“as good as it gets”?)

Indicator Current level Trend

Passenger traffic

Freight traffic

Yields

Load Factors

New aircraft orders

Deferrals &

cancellations


…..but closed in a very different place

Demand side weakening, trends suggest may be past cyclical peak


Passenger traffic

Freight traffic

Yields

Load Factors

New aircraft orders

Deferrals &

cancellations


Oil prices stabilised after falls that commenced in 2014

Source: US EIA / IATA

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Jet

Fu

el C

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ts p

er

US

Gall

on

Cru

de O

il $

per

Barr

el

Oil Price Jet Fuel

Crude oil price trajectory

has considerable

uncertainty at present

IATA’s 2017 base case

fuel scenario is now

$64.90 per barrel Jet Fuel

(=$1.54 per USG)


Airline profits at record levels over past two years

-30

-20

-10

0

10

20

30

40

Glo

bal A

irli

ne N

et

Pro

fit

($b

n)

Source: IATA


Supply side indicators suggest a different story

Fewer concerns in supply side but watching for evolving capacity surplus if demand weakens


Aircraft deliveries

Deliveries for

replacement/growth

Deliveries as percentage

of fleet

Stored aircraft

Used aircraft availability

Aircraft economic life

Aircraft utilisation


So where are we in the cycle?

Mixed messages from the global economic cycle Economic recovery remains weak for such a long cycle

Aviation demand cycle remains strong but trends suggest we are now past the

peak Fuel prices previously helped on the cost / yield side but now expecting cost headwinds from

increasing fuel and labour costs

Watching closely for signs of evolving capacity surplus

Expect to see retirement volumes tick up and potentially utilisation tick down

Some amber / red indicators in aviation supply cycle which may be getting ahead

of demand? Deliveries trending towards higher % of installed fleet

Average age of retirement continues to decline

Concerns over OEMs increasing production rates, particularly in single-aisle


1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

0

5000

10000

15000

20000

25000

30000

35000

40000

Co

mm

erc

ial

Passen

ger

Jets

in

S

erv

ice

Single-Aisle Twin-Aisle

15

Passenger jet fleet forecast to increase by 10,600

units in next ten years

Source: Flight Fleets Analyzer, Flight Fleet Forecast


Record backlog driving increased production rates

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500

1000

1500

2000

2500

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Pla

nn

ed

An

nu

al

Pro

du

cti

on

Regional Jet Single-Aisle Twin-Aisle

Source: Flight Ascend Analysis of Announced OEM Production Rates


Airbus and Boeing each expected to deliver around

820-830 aircraft in 2018 worth around $60 billion each

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20

40

60

80

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120

140

160

2016 2017 2018 2019 2020

Esti

mate

d D

eli

very

Valu

e (

2017$)

Airbus Boeing Bombardier Embraer Sukhoi COMAC Mitsubishi Irkut

Source: Flight Fleets Analyzer, Flight Values from Ascend (delivery value assumed to be 2017 FLBV)


Aviation Asset Value

Risk

18


How should investors select their assets?

Investors should favour assets that have liquidity

The aircraft most preferred by investors today are single-aisles

A320 and 737 families

Business model drives portfolio strategy, can differentiate on

Age

Aircraft category (Regional, Single-aisle, Twin-aisle, Turboprop, Helicopter)

Volatility of values must be considered in hand with depreciation

Ratings estimate downside risk on future base value


The Herfindahl-Hirschman Index (HHI) is a recognised

measure of liquidity

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

HH

I

Source: Flight Ascend Consultancy analysis


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30

35

1984 1985 1986 1987 1988 1989 1990 19911992 1993 1994 1995 1996 1997 1998 1999

21

Historical CMV (US$ Mn) – Generic aircraft example

Gulf War and

Early 90s

Recession9/11

Liquidity

Crisis

Oil

Spike

“marginal

lift” benefits

from upturn

Out of production

Older aircraft

more

exposed to oil

Values move in relation to supply and demand driven

by macroeconomic events

Source: Flight Ascend Values


Ratings use historical volatility to forecast a downside

risk envelope

Source: Ascend Values & Ratings, 2005 build 777-300ER, 2% future inflation

0

20

40

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80

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120

140

160

Valu

e, U

S$ M

n

Downside Volatility BV CMV


Twin-Aisle Markets

23


4,100 passenger and 1,000 cargo twin-aisles in

service today

0

1,000

2,000

3,000

4,000

5,000

6,000

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90

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91

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In-S

erv

ice T

win

-ais

le J

et

Fle

et

StoredCargoPassenger

Source: Flight Fleets Analyzer


Twin-aisle deliveries increased significantly over past

few years but paused in 2016…..

0

50

100

150

200

250

300

350

400

450

Tw

in-a

isle

Air

cra

ft D

eli

veri

es

747 767 777 787 A300 A310 A330 A340 A350 A380 MD-11

Source: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only


…..before heading upwards marginally again?

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Tw

in-a

isle

Air

cra

ft D

eli

veri

es /

B

acklo

g

747 767 777 787 A330 A340 A350 A380 Scheduled Production



Deliveries normalised for fleet have increased

significantly

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

50

100

150

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450

Tw

in-a

isle

Deli

veri

es a

s S

hare

of

Fle

et

Tw

in-a

isle

Air

cra

ft D

eli

veri

es

Twin-aisle Deliveries As Share of FleetSource: Flight Fleets Analyzer, commercial aircraft for passenger / cargo use only


530 twin-aisles in store, but 75% of these are more

than 15-years old

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5

10

15

20

25

30

35

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45

Sto

red

Tw

in-a

isle

Fle

et

Aircraft Age (Years)

Other

A380

A350

A330

787

777

767

747


400 passenger aircraft, ~10%

have known future placements,

~10% scheduled for part-out


Used twin-aisle jet availability stable

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20

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120

140

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180

200

Jan

-10

Apr-

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10

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10

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Apr-

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-15

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Jul-

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Oct-

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Jan

-17

Tw

in-a

isle

Jet

Mo

nth

ly A

vail

ab

ilit

y

Source: Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI)


1,360 twin-aisles retired since 2008

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Avera

ge A

ge a

t A

ircra

ft

Reti

rem

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Air

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ft R

eti

red

<15 Years Old at Retirement >15 Years Old at RetirementAverage Age at Retirement Average Age at Economic Retirement



94 operating lessors managing 1,700 twin-aisle aircraft

worth ~$100 billon

0

2,000

4,000

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14,000

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100

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Tw

in-a

isle

Po

rtfo

lio

Valu

e (

$m

n)

Tw

in-a

isle

Po

rtfo

lio



Operating lessor share of deliveries increases at times

of market stress?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

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era

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hare

of

New

D

eli

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in-a

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cra

ft D

eli

veri

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Direct Order PLB Non Lessor Lessor Share



710 known scheduled lease expiries through 2026

0

20

40

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100

120

140

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Tw

in-a

isle

Air

cra

ft S

ch

ed

ule

d

Lease R

etu

rns

747 767 777 787 A330 A350 A380 Other



Twin-aisle market summary

Deliveries increased over past few years but likely to have peaked now

Deliveries normalised for fleet currently close to historical highs

Idle fleet marginally down today; 410 passenger aircraft including 57 777s and

78 A330sAround 10% known to be placed and another 10% scheduled for part-out

Passenger aircraft 50% removed from service at 20-years

~160 retirements annually since 2008

Share of fleet trading as used aircraft currently in decline

Only around 30% of fleet in operating lease ownership / management

Operating lessor share of deliveries increases at times of market stress


Twin-Aisle Market

Outlook

35


4,200 commercial twin-aisle deliveries forecast

through 2026

0

50

100

150

200

250

300

350

400

450

500

Tw

in-a

isle

Air

cra

ft F

ore

cast

Deli

veri

es 2

017

-2026

747 767 777 787 A330 A350 A380

Source: Flight Fleets Analyzer, Flight Fleet Forecast, commercial aircraft for passenger / cargo use only


1,940 twin-aisles predicted to be retired from service

through 2026

0

100

200

300

400

500

600

747 767 777 787 A300 A310 A330 A340 A380 DC-10 MD-11

Tw

in-a

isle

Air

cra

ft F

ore

cast

Reti

rem

en

ts 2

017-2

026

Source: Flight Fleet Forecast


Twin-aisle fleet expected to total around 7,750 aircraft

by 2026

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900019

90

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Tw

in-a

isle

Air

cra

ft F

leet

in S

erv

ice

747 767 777 787 A330 A350 A380 Other

Source: Flight Fleets Analyzer, Flight Fleet Forecast, commercial aircraft for passenger / cargo use only

38% of the fleet in 2027

expected to be A350 / 787, 42%

expected to be A330 / 777


Some Final Thoughts

on Operating Leasing

39


Operating lessors currently manage around 42% of

the global passenger fleet

0%

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era

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leet

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tal F

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Fle

et

Man

ag

ed

by

Op

era

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esso

rs

Single-Aisle Twin-Aisle Share of Fleet

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


The top 20 lessors account for close to 80% of the

total lease fleet today

Source: Flight Fleets Analyzer (passenger single and twin-aisles only)

2017 Ranking (by Fleet +

Backlog)Manager Current Fleet

Order

Backlog

Current Fleet

CMV ($mn)

2016 Ranking (by Fleet

+ Backlog)

1 AerCap 1,150 348 30,713 1

2 GECAS 979 311 23,699 2

3 Avolon (Inc CIT) 571 260 20,217 9

4 SMBC Aviation Capital 446 200 14,677 4

5 Air Lease Corporation 262 365 11,449 3

6 BOC Aviation 276 188 11,260 5

7 BBAM LLC 388 16,531 7

8 Aviation Capital Group 257 126 5,852 8

9 ICBC Leasing Co 266 47 11,769 12

10 AWAS 236 15 6,415 10

11 Macquarie 202 40 5,181 11

12 Aircastle 192 5,447 17

13 ALAFCO 59 125 1,812 14

14 Boeing Capital Corp 177 1,412 13

15 China Aircraft Leasing 82 91 2,888 15

16 CDB Leasing Company 142 23 5,357 18

17 ORIX Aviation 163 4,173 16

18 Standard Chartered 116 12 3,952 20

19 Jackson Square Aviation 119 5,088 19

20 BoCom Leasing 111 4,595 21


Although lessor fleets will continue to grow 50%

penetration is unlikely to be achieved any time soon

Global passenger fleet at end of 2026 (excluding RJs) is predicted to be ~28,900 aircraft

Leasing fleet in service to achieve 50% would need to be ~14,470 aircraft

Equivalent leasing fleet today is ~8,300 aircraft

So net addition of ~6,200 aircraft required over next ten years

Flight Fleet Forecast predicts delivery of ~17,100 commercial passenger jets through 2026

~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates

to 3,300 aircraft that could be expected to exit the leased fleet in the next 7-10 years

So to achieve 50% fleet market share by 2026, under this scenario lessors would need to add 9,500 new

aircraft (6,200 growth plus 3,300 replacement) to their portfolios over the next ten years – that’s

equivalent to 55% of new deliveries predicted over that period

Even to maintain today’s market share under this scenario would require ~7,300 new deliveries –

43% of all new deliveries


Rob Morris

Head of Consultancy

+44 (0)20 8564 6735

+44 (0)7730 213189

[email protected]

Global Aviation Sector Overvie · 2017-02-21 · Source: Flight Fleets Analyzer, Flight Fleet...

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Transcript of Global Aviation Sector Overvie · 2017-02-21 · Source: Flight Fleets Analyzer, Flight Fleet...