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IBA Market Update WebinarOctober 2017

Mike Yeomans Head Analyst

Jonathan McDonald Head Analyst

Melissa Whybrow Marketing Manager

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What are we covering…

1. Economic outlook

2. Operator performance

3. Supply and demand CEO/NEO/NG/MAX status A330, 787, A350, 777 status

4. Lease end & fleet estimates

5. Trading volumes

IBA - Winner of the CFI 2017 Best UK Aviation Advisory Firm Award

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Geopolitical Risk Continues

2016 was dominated by a continued right-wing shift – against poll predictions – 2017 is pretty much as expected!

Brexit vote – a “no” deal looking more likely

US presidential Election – immediate use of executive power to curb pax movement

Rise in European right-wing movement – centrist movements prevailed in elections

Increasing tension against Moscow – North Korea

Increased Terrorism presence in Europe

UK, France, Germany, Belgium

Turkey – traffic bouncing back though

Religious & Nationalist movements

Economic Signals surprisingly resilient to geopolitical shock (except currency)

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2017 Signals

General uplift in 2017-2018 predictions

Steady decline of GDP growth evident during 2016 for most at some point – although Latin America had a much larger swing – China trend consistent

Most noticeable casualty from the Brexit vote is confidence in Sterling

US (2.1) & UK (1.7) marked down after disappointing 1Q

Eurozone, Japan, China, India, Latin America and Canada all receiving a bump-up in predictions for 2017-18

Middle East expected to continue to slowdown – low oil and weaker than expected “Iran effect” – 5.0 to 2.6

World prediction was 3.2 for 2017, now up to 3.5 – with 3.6 in 2018

Emerging markets in Asia at 6.5 and holding, Developed markets at 2.0

World Bank

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Oil Continues to fluctuate

Oil Price has been resilient in the face of pressure

Hurricane Harvey triggered an initial spike – but Brent remained fairly static ($52/bbl)

OPEC apparently remain committed to supply constraints other weaker economic conditions could knee jerk a reaction

Game plan to rid market of high cost producers continues, but with fracking and improved processes coming on line –supply could still rise

Long term predictions have oil at ~$55/bbl until mid 2020

Gross orders continue to track downward

IBA iQ

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2017 Traffic

IATA

Solid Traffic Growth Continues

Economic situation is still strong, though PMI has plateaued recently

Traffic continues to outstrip capacity growth for all regions

On track to be an above trend year in terms of RPK growth

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2017 Traffic

IATA

Solid Traffic Growth Continues

Good international traffic movements with growth at 7.0% YTD

Capacity increases tracking too closely to current ME traffic trends still

International traffic affected by travel bans of PEDs

PLFs on the increase too – except for ME and Latin America, latter due to capacity growth outstripping demand

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2017 Traffic

IATA

Solid Traffic Growth Continues

Growth in all regions except Australia

India continues to grow rapidly recording its 36th consecutive month of double digit growth

China too is seeing double digit growth

Russia starting to see trend more sideways

Brazil continues to emerge financial struggle and growth is reflecting this with growth accelerating

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2017 Traffic

IATA

There may be trouble ahead…

GDP outlook for the region is poor

The list of reasons continues to grow

Low oil pricing though it is slightly increasing

Several rethinks in widebody policy, Etihad write-downs, the Qatar gang-up – all playing a part

777 & A380 future market still defined by this market

777X backlog in potential danger – as capacity still peaks above demand

Strong possibility of deferrals for the Airbus A350 and Boeing 787, due to overcapacity

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2017 Traffic

Low but starting to trend up

Stronger economic conditions, weaker dollar, and airfares stabilising have provided a 4% boost to yields since start of the year

In constant dollar terms, this is only 0.1%

Upward pressure from increased labour costs

Premium traffic share also on the rise – especially across the Pacific

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Interest Rates

UK view – No Change

Initial forecasts pre-Brexit vote pointed to a rise by 2017 – despite negative inflation threats from 2015. Unemployment fell from 7% to ~4%

Post-Brexit vote issues triggered a drop from 0.5% to 0.25%. The expectation was for mid-2017 rise back to 0.5%

Inflation easing back from 2.9% to 2.6% will mean that the BOE will wait and see

Next prediction is for mid-2018

US Prediction – No Change

Inflation has been running low since start of 2017 – which has killed the initial rate rise.

A tighter labour market will hike inflation and rates will have to come up too – but they don’t want to stifle growth

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Economic Outlook

Signals

Oil

Interest Rates

GDP

World Trade

USD

Geopolitical threats

Regional Forecast

Europe

North America

China

Latin America

Asia Pacific

World

India

Demand trends

Pax traffic

Freight traffic

Yield

Load Factors

Orders

Some Supply factors

Deliveries

Parking levels

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2017 Indicative Operator Performance

Diverse results despite strong traffic performance…

North American carriers performing the best from a financial perspective

Additional costs are accumulating into significant losses for a number of airlines

Competition in Europe which has been intense for a number of years is starting to result in some airline failures

Alitalia was the first this year to go into administration, followed by Air Berlin, VIM and Monarch

All carriers have had interest from other parties such as easyJet (Monarch/Air Berlin), IAG (Monarch) Ryanair (Air Berlin/Alitalia)

Concern surrounding Norwegian and their narrow profit margin, fast growth and high debt business model

Norwegian’s narrow profit margin is coming under pressure from higher fuel and personnel costs, higher leasing costs and higher technical costs as well as yields softening.

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Supply Side - Widebodies

Market Dominated by the Efficient Twins

Boeing retains a very small lead

Last of the 747s and 767s keep part of Everett busy

169 777s left to deliver – before 777-8/9 steps up for 2019/20 first deliveries

787 build rates now up to >11/mo, 777 down to 6.5/mo

118 A330ceos left to deliver, neo backlog only at 189 units

A350 now up to 7/mo and increasing pace

81 A380s left to deliver

IBA iQ

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Supply Side - Widebodies

Wider Market Coverage

Still quite messy in there with aircraft covering a very wide area between 240-400 seats

The low-end is very congested with the 787 and A330 dominating. Price and range requirements important

The A350-900 and 787-10 occupy the middle space but it depends on how each OEM draws it!

The large space is dominated by the 777

The NMA is supposed to fit into the low-end WB space!!

IBA iQ

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Supply Side

Airbus still retains a healthy 1,000 aircraft lead

Asia Pacific, Europe and North America still account for 71%

17% still undisclosed

Boeing still fighting to not lose sight of the upper side of this market –737 MAX 10 & NMA

Neo gathering production pace but GTF issues still persist

IBA iQ

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The Leasing Side

There is a busy cycle ahead

10,021 Airbus & Boeing lease ends over next 15 years –without considering the new leases in between – or other OEMs!

Based on current fleet, around 1200-1400 per year and a steady flow of around 1,000 narrowbodies.

IBA iQ

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The Leasing Side

Looking just at A320-200 & 737-800s

There is still the same concentration between 2019-2022 – but the peak is more towards the back-end

If oil remains low and EIS problems persist, backlogs could shift and push this further to the right with extensions.

IBA iQ

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The Leasing Side

Digging into the ages specifically

Whilst there is a good number of aircraft returning off lease younger than 10, the vast majority are older as expected –particularly those built from the boom orders in 2005-2007

Whilst owned aircraft may continue until replaced by a newer aircraft with the same operator, the fuel environment will dictate to what happens to the oldest aircraft.

Assume that if market conditions remain the same – 50 to 100 leased aircraft could be retired per year – if conditions turn, that will spread

IBA iQ

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The Leasing Side

Age by Region

Whilst Europe holds the largest number and greatest spread over the next few years, Asia Pacific has the volume.

North America is naturally where the largest proportion of the oldest live with very few of the young ones in there. It is however likely that a good proportion will extend or their leases will be bought out

IBA iQ

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The Leasing Side

Age by Region

India and China specifically have a very different profile

Mostly through IndiGo, leases are generally shorter. A lot of new aircraft are due to enter this market but the operator is still growing through leasing slightly older aircraft that have left their first lease elsewhere

China on the other hand has a lot of first lease aircraft on 12 year terms

Fewer age restrictions in the near term

IBA iQ

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The Leasing Side

Switching over to the 737-800

The age profile is a little cleaner given the shorter production length. Regardless, the boom orders of 2005-2007 still show the bow-wave age profile that will head into the next lease –or part-out

Much like for the A320, whilst owned aircraft may continue until replaced by a newer aircraft with the same operator, the fuel environment will dictate to what happens to the oldest aircraft.

Assume that if market conditions remain the same – 50 to 150 leased aircraft could be retired per year – if conditions turn, that will spread

IBA iQ

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The Leasing Side

Age by Region

Once again, a similar pattern to the A320-200 although fewer of the oldest variants and a larger spread of the youngest aircraft in Europe, Asia Pacific, Middle East and Latin America

IBA iQ

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The Leasing Side

Age by Region

India repeats the same process as before with shorter terms generally, but the aircraft are older for the 737-800

A good number of aircraft will move over the 15 year threshold too in an around 2021 and 2022

The number of younger aircraft is much higher for the 737-800 than it was for the A320

IBA iQ

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The Leasing Side

Leasing by Numbers

Compared to the rest of the world fleet, the number of leased aircraft A320s and 737-800s is greater than the number owned – around 55% for the A320-200 and 54% for the 737-800. Widebodies are ~30%

Assuming that Airbus continues to sell and produce at the targeted rates, and aircraft retire at 25 (av), ceo will reduce to 1,500 units by 2037. The overall fleet will be ~12,000 units

Assuming that the leased:owned ratio remains static, the number of leased A320s will increase from 2,547 to 6,233 units

IBA iQ

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The Leasing Side

Leasing by Numbers

Compared to the rest of the world fleet, the number of leased aircraft A320s and 737-800s is greater than the number owned – around 55% for the A320-200 and 54% for the 737-800. Widebodies are ~30%

Assuming that Airbus continues to sell and produce at the targeted rates, and aircraft retire at 25 (av), ceo will reduce to 1,500 units by 2037. The overall fleet will be ~12,000 units

Assuming that the leased:owned ratio remains static, the number of leased A320s will increase from 2,547 to 6,233 units

IBA iQ

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The Leasing Side

Leasing by Numbers – a more conservative view

Assuming that the neo presence speeds up retirements, the ceo fleet will reduce ~500 units

The neo fleet will then reach 10,500 units

Based on current lease:owned ratios – the leased fleet will grow from 2,547 A320s to 5,710 by 2037

IBA iQ

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The Leasing Side

Leasing by Numbers – a more conservative view

Assuming that the neo presence speeds up retirements, the ceo fleet will reduce ~500 units

The neo fleet will then reach 10,500 units

Based on current lease:owned ratios – the leased fleet will grow from 2,547 A320s to 5,710 by 2037

IBA iQ

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Trading Volumes

Considering new operating leases, secondary sales and sale leasebacks, trading volumes for 2016 appears to be close to levelsencountered for 2015 – although majority of most liquid aircraft are down so far

Once again, we expect the top 3 families that trade under those scenarios to remain the same. In terms of % of trades performed this year:

A320 family = 22.9% ≡ 3.7% of the in service fleet

737NG = 14.2% (16.0% in 2015) ≡ 2.7% of the in service fleet

737 classics = 8.8% (8.5% in 2015) ≡ 7.5% of the in service fleet

A320 family trading is at same level as for 737classics & 737NG

The top 3 specific models are the same as in 2015:

A320-200 = 12.5% of trades

737-800 = 10.9% of trades

A321-200 = 6.3% of trades

Widebody trading is down from 2015 – but not far from long-term trend

767s = 4.1% of 2016 trades ≡ 10.2 % of the in service fleet

A330s = 2.6% of 2016 trades ≡ 4.6% of the in service fleet

777s = 2.0% of 2016 trades ≡ 3.2% of the in service fleet

4 engined aircraft overall remain down on previous year

Secondary trading 2016 v 2015

Volume

• A320-200 ▼

• 737-800 ▼

• A321-200 ▲

• 767-300ER ▲

• A319-100 ▲

• 737-700 ▼

• A330-200 ▼

• A330-300 ▼

• 787-9 ▲

• 777-300ER ▲

• 777-200ER ▲

• A350-900 ▲

• 737-900ER ▼

• 787-8 ▼

• A380-800 ▼

• A340-500/600 ▼IBA iQ

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Single Aisle Market

Values remain strong for newer types – strong demand remains for sale leaseback transactions supporting new delivery values

Oil prices remain suppressed supporting values and lease rates of older aircraft – older single aisle values have improved, but are more sensitive to fuel price volatility

Lease rate factors continue to be squeezed, particularly at the newer end of the narrowbody market – below 0.6% is not rare

Shorter lease terms, even for new generation of jets

Little premium in terms of lease rates for new generation single aisles compared with outgoing generation

Lease rates factors falling aided by new entrants entering the market

Orders had shown signs of slowdown, however popular neo and MAX models have received orders this year and we still have the Dubai Air Show to come next month

Trends

Sale & Leaseback Pricing

Sales with leases attached

Lease Rate Factors

Lease rates

OEM pricing

Lease Term Lengths

Extension opportunities

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Twin Aisle Market

A few orders for widebody aircraft this year – Dubai is just around the corner

Expensive reconfigurations place pressure on residual values for larger second-hand widebodies – specification, configuration and maintenance condition are key

A380 second-hand market is about to be tested – new deals continue to be struck at buoyant prices, will residual values and secondary lease rates stand the test?

Parking of mature widebodies expected to continue –part-outs expected for A330s and 777 classics

Newer Boeing 787 and Airbus A350 models are becoming established in the market

Single aisles remain a less risky proposition. Easier and cheaper to transition and manage

Trends

• Sale & Leasebacks

• Lease Rate Factors

• Orders

• Return Conditions for lessors

• Mature widebody values and

lease rates

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Mike Yeomans Head Analystmike.yeomans@iba.aero

Jonathan McDonaldHead Analystjonathan.mcdonald@iba.aero

Melissa WhybrowMarketing Managermelissa.whybrow@iba.aero

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