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After relatively benign circumstances in 2014, commercial aviation enjoyed a more favourable market environment dur-ing the first half of 2015. The global economy continued a modest growth-path, and the International Monetary Fund (IMF) projects economic growth of 3.3% for 2015 – up from 3.4% in 2014 – rising to 3.8% in 2016.

However, the inconsistency in the performance from country to country is still a concern. The IMF projects a gradual acceleration in the economic activity in advanced economies but signals a growth slowdown in the emerging markets, caused by, among other things, the impact of lower commodity prices and the rebalancing of China.

For the aircraft finance business, this may be a concern given that significant volumes of commercial jets have been ordered by airlines from emerging economies, such as India, Indonesia and Malaysia. Global airline traffic increased strongly during the first six months of 2014, as reflected by a 6.3% year-on-year growth in airline revenue passenger-kilo-metres (RPKs), according to the International Air Transport Association (Iata). This compares to a 5.9% RPK increase

over 2014, both figures well above the long-term average growth of about 5.6%.

Global spend on air transport reached $769 billion in 2014, almost 1% of global GDP, but a slight decrease to $763 billion is anticipated for 2015 as a result of lower fares caused by the lower oil prices as well as currency effects because of the rise of the US dollar.

Expressed in constant (2015) US dollars, the average return fare in 2014 was $473, a staggering 61% below the level of 1994. In terms of airline profitability, the historic average returns generated at an industry level have always been relatively modest. This changed in 2014 when the system-wide net profit jumped to $16.4 billion and the return on invested capital reached 5.7%. A further, even more spec-tacular, improvement is projected for 2015, mainly thanks to a combination of another strong increase in passenger demand with a significant reduction in (fuel-related) operat-ing costs. For 2015, a record high system-wide net profit of $29.3 billion is projected, resulting in a return on invested capital (ROIC) of 7.5%.

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Industry review and outlookBert van Leeuwen, managing director, aviation research, DVB, looks at trends in the airfinance industry and the wider economy.

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In recent years, the combination of a strong air-transport market with abundant availability of liquidity and the introduction of a broad range of technologically advanced and fuel-efficient new air-craft types pushed order levels for new commercial jets to record levels. A new high of 3,611 orders for commercial jets were placed during 2013, but even that was broken the following year.

In 2014, (civil) operators placed orders for 3,645 new western-built commercial jets, according to Ascend. This number included 90 type swaps but excluded 18 orders for the Italo-Russian (eastern-built) Sukhoi Superjet, as well as 206 orders for western-built turboprops. As of early September, it does not look like the full-year 2015 figure will be another record.

At the start of September, the year-to-date order book stood at 1,406 new orders (plus 69 type swaps) compared to 2,101 orders (plus 34 type swaps) for the same period the previous year, a decrease of about 33%. Of course, the backlog for commercial jets already stands at a record level and a slowdown was to be expected. In addition, no new com-mercial jet designs have been launched in 2015, removing a major incentive for airlines and lessors to place orders and benefit from the usual launch customer concessions.

After a few weaker years, 2015 saw the used equipment market continue a recovery that was already noticeable during 2014, at least for mod-ern (single-aisle) types. It is noteworthy in the used equipment market that airline-to-airline transac-tions now represent the minority of deals. More financially driven deals between investors, lessors and/or traders are providing an increasing share of the used equipment transactions. Many used equip-ment deals involve sales of aircraft – or indeed entire portfolios – from one investor to another, without any change in airline operator.

There is a significant difference in the depth of the market for transactions involving aircraft with leases attached, compared to the more limited demand for aircraft without leases attached. The latter category is obviously much less attractive to the growing population of financial investors in commercial jets.

From the finance side, it is clear that the fund-ing gap discussion that kept the industry busy only a few years ago is no longer an issue. During the first half of 2015 there was plenty of liquidity available to the industry, from a range of debt and equity providers, which, together with prevailing low interest rates, drove down the finance cost for the acquisition of additional aircraft to almost rock-bottom levels. Even when, as of midnight June 30, the Export-Import Bank of the United States ceased processing new applications because of a lapse in the bank’s authority, the market did not panic. Only a few years ago such an action would probably have resulted in chaos. Unfortunately,

some airlines were hurt by this action by the US Congress. They had counted on Ex-Im support for their new Boeing orders, and were essentially left without delivery funding.

A golden ageLast year was the fifth in a row in which global airlines showed positive results on a system-wide basis. This year is projected to be a record one, and Iata expects airline net profits to increase by almost 80% to $29.3 billion. Despite the fact that we are enjoying, as some say, a “golden age of aviation”, not all airlines are profitable. During 2014, only 34 mainly US-based airlines (representing about one-third of the industry’s invested capital) gener-ated a return on invested capital that exceeded the industry’s cost of capital, according to Iata.

The typical median airline earned an ROIC of only 3.2%, probably about half of what a normal ROIC should be. The most frequent result found by Iata was a break-even ROIC of 0%. US air-lines were the most profitable in terms of ROIC. Their success can be explained by a combination of strong macro factors – a strong dollar, a healthy economy and low fuel prices with industry-specific factors, mainly a high degree of industry consolida-tion and a relatively disciplined capacity policy.

During 2014, the North American carriers increased their fleet capacity in terms of available seat-kilometres (ASKs) by only 2.5%, while pas-senger traffic (in RPKs) increased by 2.7%. For 2015, it is anticipated that capacity growth (3.1%) will exceed demand growth (3%) again. Apart from North American carriers, the group of adequately profitable airlines contained several European names, mainly low-cost carriers, as well as network carriers with significant exposure to North Atlantic routes.

One of the main contributors to the anticipated profit explosion for 2015 is obviously the low oil price. During the period 2011-2013 the relatively stable fuel price was a tremendous help to the in-dustry’s bottom line. It seems commercial aviation is more vulnerable to fluctuating oil prices than to high oil prices.

With price levels between $110 and $140 a barrel, the absolute price level of jet kerosene remained high but the market could absorb this level. To the surprise of many in the industry, oil prices and consequently prices of jet fuel plum-meted during the second half of 2014. Between the end of June 2014 and the end December the same year, West Texas Intermediate (WTI) spot dropped from $2.57 to $1.28 a gallon. Jet fuel dropped from $2.96 to $1.56 over the same period. The down-ward movement of oil prices did not stop at the end of 2014 and, on August 24, WTI reached a six-year low of $38.22 a barrel or 91 cents a gallon, followed by a record low of $1.24 per US gallon for jet fuel. Subsequently, oil surged over 20% in three

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days – the biggest three-day gain in 25 years – after Opec said it was ready to talk to other global pro-ducers to achieve “fair prices” and the US govern-ment reduced its crude output.

It is unclear which direction oil prices will take in the coming months. The slowdown in the Chinese economy will reduce demand, while Iranian oil flowing back into the market also seems to dampen any bullish sentiment. A drop in the US oil rig count and reduced activity in the North Sea oil and gas offshore business could become a more constructive foundation for oil prices but overall uncertainty remains.

While the low oil price was an unexpected pleas-ant surprise for the industry, commercial aviation remains vulnerable to any outside shocks. In the recent past, widely diverging events have pushed global aviation in regional or even global crises. Natural disasters or the outbreak of diseases, politi-cal unrest or acts of terrorism, economic problems or a financial crisis, the significant negative impact of these events was not, could not and still cannot be predicted.

Very little has to go wrong before the airline industry plunges into deficit again. Last year, we signalled potential threats in the form of the Ebola outbreak in Africa, the political and military ten-sion around the Ukraine (MH-317), the risk of a Greek exit from the eurozone, as well as the con-cerns about the expansion of Islamic State and the subsequent refugee crisis. Except maybe for Ebola, none of these threats have been taken away, but it seems global airline traffic has remained largely im-

mune to any of these threats. Maybe the slowdown of growth in China and

the wild fluctuations of the (Asian) stock market could become an issue. The drop in demand for a wide range of commodities (coal, iron ore, oil) resulting from the slowdown in Chinese industrial production has put pressure on the economies of a number of emerging countries, including Indo-nesia, Malaysia and India. Ironically, airlines from these countries take three of the top four positions in the league table of largest airline order positions. Lion Air leads the chart with about 475 orders, followed by IndiGo with about 425 and AirAsia with close to 300 in fourth position. Apart from these three, only American Airlines exceeded 300 orders (about 350). Together, Lion Air, IndiGo and Air Asia account for well over 10% of the entire airline backlog for commercial jets and, as will be discussed later, this backlog is at an unprecedented level, equal to about 10 years of production at 2014 production volumes.

Market analysis first-half 2015 The first half of 2015 has shown strong overall growth in the air travel markets. The total transport volume, expressed in RPKs, increased by 6.3% year-on-year, according to Iata, whose 260 members carry 83% of the total air traffic, which is an increase on the 5.9% achieved in full-year 2014. Both international and domestic travel contributed equally to the growth, with 6.3% and 6.2% increases over the period Janu-ary to June respectively.

Airlines based in the Middle East enjoyed another period of double-digit international traffic growth, with an 11.8%

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increase in RPKs. Despite this, load factors lagged behind as the airline capacity in the Middle East increased by an incredible 16%. During the first half of 2015, the big three – Emirates, Qatar and Etihad – took delivery of 22 large twin aisles (A330s, 777-300ERs and A380s), once more underlining their ambitions.

The second-highest international RPK growth percentage was recorded by airlines in the Asia-Pacific region with 8.3%. Capacity, at 6.6%, increased more modestly. Latin America came third with a 6.3% growth, both in demand (RPK) and capacity (ASK). Europe followed with 4.9% RPK growth and a 4.1% ASK increase.

North American carriers now seem to be much less volume focused than they have been in the past. It is interesting to note that this, the most profitable of regions, only saw an increase in demand of 2.4%. Similar to full-year 2014, again dur-ing the first half of 2015, North American capacity growth outstripped demand with a 3.4% ASK increase. Unfortu-nately for this challenging region, Africa once more reported disappointing figures, with a 2.5% decline in international revenue passenger kilometres, albeit that ASKS in the region also dropped, by 2.7%.

Domestic markets are obviously only relevant for larger countries such as Australia, Brazil, China, India, Japan, Russia and the US. India surged to the top of the domestic markets in terms of growth and saw the RPK volume explode with plus 19.4%. This is more remarkable because capacity increased by only 5.4%.

The economic slowdown in China was not yet noticeable in the domestic market with a growth in demand of 12.3%, against 11.4% more capacity. Russia saw domestic demand increase by 5.7% but the Russian airlines needed 9.7% more

capacity to achieve this. The US domestic market showed a reasonable increase of 3.7%, roughly in line with the 4% capacity increase.

Looking at the relationship between traffic growth and capacity expansion, clearly an increase in fleet capacity, result-ing in more destinations, more seats per destination or higher frequencies, stimulates demand. Comparing the traffic growth over the first half of 2015 with the capacity on order confirms the continuing expansion strategy of the Middle East airlines.

During the recent months these carriers added significantly more capacity to their fleet than seems justified by the growth in demand. In addition, the Middle East carriers have the most ambitious order book of all the regions, by a big margin. In terms of number of aircraft, as of early September, the order book was almost 80% of the current fleet size. The only other region where supply outstripped demand during the first half of 2015 – but only just – was North America. It seems North American carriers have a much higher capacity discipline with an order book of only 36.4% of the size of their fleet.

Airline profitability has shot up in a relatively stagnant North American market, thanks to a more benign competitive environment as a result of the most recent round of airline consolidation. With the market largely carved up among the remaining majors, pricing power is pretty robust and, in an en-vironment of decreasing operating costs (fuel), this was bound to result in strong profitability.

According to Iata, the top four airlines and airline joint ventures control 68% of the North American internal market. In the European market, the top four controls only 36%, while in the Asian market the equivalent figure is 33%. Globally, the transatlantic market has the highest degree of consolidation,

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Air Passenger Market Growth (in %) by IATA Region

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with the top four carriers controlling no less than 81% of that market.

Moving to the air cargo market, the results are much less positive than the passenger side of the business. For the first half of 2015, global air cargo volumes, expressed in freight tonne kilometres (FTK), still increased by 3.5%, but there are clear signals growth is declining as a result of the drop in world trade volumes, particularly in emerging markets, as well as the shift in the Chinese economy towards the domestic markets.

Airfreight capacity in available freight tonne kilometres (AFTK) exceeded demand growth and increased by 5.4%.

Similar to the passenger business, Middle East carriers lead the way with a 14% increase in FTKs, enabled by an even larger capacity increase of 18.9% AFTK. Asian-Pacific car-riers came second with 5.4% growth in demand, achieved with a 6.4% increase in capacity. Africa showed some positive developments with 4.8% growth in demand versus a 1% capacity increase, albeit freight load factors for African carri-ers are very low at 30.9% versus a global average of 44.6%. North America (-0.4%), Europe (-0.6%) and, in particular, Latin America (-6.9%) lost freight volume despite adding some capacity to their fleets.

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FInAncIAL FoRcAST IATA / IcAo MID 2015

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annual volume of orders Placed(western commercial Jets - civil operations)

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Financial performanceFor the full-year 2015, North America is expected to contrib-ute $15.7 billion, almost 54%, to the anticipated $29.3 billion net system-wide global airline profit. Maybe surprisingly, European carriers are expected to contribute $5.8 billion, fol-lowed by Asian-Pacific carriers with $ 5.1 billion. Middle East carriers are projected to chip in with $1.8 billion, but contribu-tions from Latin American ($600 million) and African ($100 million) carriers will be marginal. While these figures are all just projections, a representative airline sample that is followed by Iata generated more than 70% higher net post-tax profits during the second quarter of 2015, compared to the same period a year earlier. Iata’s full year overall industry projection for 2015 is about 78% higher compared to 2014.

The comparisons with the cost of a meal illustrate the poor profits airlines make per passenger. In previous years, the per passenger profit would hardly buy a fast-food lunch. For the first time, some areas have reached the levels of the cost of a decent lunch. The per passenger profit in North America is expected to reach $18.12. In the Middle East, this will be $9.61 and, in Europe, $6.30. Other regions still have to stick to a simple hamburger with $2.27 in Latin America, $4.24 in Asia-Pacific and only $1.59 in Africa.

It has to be considered that not all airlines in the world are Iata members and the figures used may not contain data for some of the (most profitable) low-cost carriers.

Equipment marketStill floating on a sea of liquidity in the financial markets that was triggered by the various rounds of quantitative easing, as well as continuing traffic growth and record airline profit-ability, it is no wonder that new aircraft ordering is still at high levels. Last year marked an absolute high in terms of new

commercial jet orders, and it seems the order total for 2015 will still be high although unlikely to match the previous year’s level.

During the calendar year 2014, a total of 3,869 commercial aircraft for all civil operations were ordered (excluding business jets). The vast majority of these (3,645) were western-built commercial jets. From the 18 orders for eastern-built jets, 17 were for the semi-western Italo-Russian Sukhoi Superjet 100. In the turboprop category, 206 new western-built aircraft were ordered.

Focusing on the category of western-built jets, the 3,645 new orders included 90 so-called type swaps, mainly A320s and/or 737s that had been ordered previously but where the customer decided for a different version. With or without type swaps, 2014 was a record year by any standard and it is un-likely that the last few months of 2015 will see enough orders to break that record.

During the first eight months of 2015 (data as at September 15), so including orders placed at the Paris Air Show, a total of 1,475 western-built jets were ordered for all types of civil operations. This can be compared to 2,337 the year before over the same period. Extrapolating the orders received so far in 2015, it looks like the full year may still see about 2.600 new western-built jet orders.

Generally, announcements of new aircraft programmes trigger a flurry of new orders. For the first time in many years, 2015 has seen no new aircraft types announced by the manu-facturers. Last year was not a stellar year either, with essentially only the launch of the re-engined Airbus A330-200 and -300, dubbed respectively the A330-800neo (new engine option) and the -900neo.

The single-aisle 150- to 200-seat category remains the focal point of the industry. Here we see the usual intense competi-

annual volume oF orders PlaCed(western CommerCial Jets - Civil oPerations)

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Source: Flightglobal Ascend Fleets

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1.647 coMMERcIAL AIRcRAFT oRDERS 2015 YTD(all Civil oPerators, as oF 9/9/2015, inCl. 69 tyPeswaP in a320/737 Families)

“MARKET ShARE” JET PRoGRAMS In coMMERcIAL JET MARKET(year 2014, 2015 ytd; all Civil oPerators)

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tion between Airbus’s A320 family and Boeing’s 737s. The in-production versions of both families, the 737NG (Next Generation) and the A320ceo (current engine option), con-tinue to sell in significant numbers. During 2014 a total of 288 NGs were ordered plus 521 Ceos. During 2015, so far, 130 NG orders have been placed plus 120 Ceos.

While the manufacturers generally claim they are sold out on the current-generation single aisles, a recent order by Jet2.com for 27 Boeing 737-800s for delivery in 2016/17 proves there is still availability, albeit probably because of cancella-tions of other orders. This illustrates the importance for the manufacturers of overbooking.

Of more interest is maybe the battle between the future-generation single aisles – Airbus’s A320neo and Boeing’s 737 Max. The A320neo was launched in December 2010, a few months before the 737 Max. Measured by new order intake, 2011 was the year of the (A320) Neo and 2012 the year of the (737) Max. Interestingly enough, during 2013, 2014 and the first months of 2015, the Neo continued to dominate. As of early September, the order total for the Max was 2,869, while the Neo had reached 4,188, so 60-40 in favour of the Airbus product. As the Max was launched several months after the Neo, it had some catching up to do.

The 2015 order book for the single-aisle jets was heavily influenced by several A320neo megaorders coming from Ge-cas (66) Avianca (98) and IndiGo (250). At the time of writing, Wizzair’s order for 110 A321neos was still to be confirmed. Against this, Boeing could only report megaorders by Ruili

(30), Copa (51) and, in particular, lessor AerCap (100). When analyzing the cumulative order patterns for the

various new-generation single aisles, it seems that now, four years after receiving its launch order, the Max starts to follow a slightly lower growth path compared to the Neo, although this could be rectified easily with just a few megaorders.

It is interesting to note that apart from the Neo and Max, all other new single-aisle aircraft types have had difficulty gaining market momentum and all seem to be stuck at levels below 300 cumulative orders. Clearly this could change in the coming years, but there should not be any concerns about the market liquidity of the Neo and Max, assuming the engines will perform as advertised. These concerns still exist for the other single-aisle types, especially given the market rumours that some orders could be cancelled because of delays in the programmes.

Looking at the split of orders within the single-aisle families, it seems the market is favouring a mix of the standard length fuselage plus, increasingly, the larger variants, at the expense of the shorter versions. As with the current-generation programmes, where the short A318 and 737-600 failed to impress the market, the same seems to be happening with the A319neo and the 737 Max 7. Interestingly, this does not seem to be benefiting their closest competitors – the new-generation regional jets – too much, at least for the time being.

During 2014, 582 widebodies were sold. The new Boeing 777X took the honour of being the best-selling twin-aisle jet, followed by the equally new A330neo, the A350 and the

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787, the last two both being all-new-technology aircraft. Over the first months of 2015, it turned out the widebody market was a little stagnant, with only 247 aircraft sold. Surprisingly, the A330ceo retook first place based on orders by Chinese airlines and International AirFinance Corporation. The 787

came second (with many unannounced customers) and also surprisingly the older design 767-300ER was in third position (including 48 freighter orders placed by FedEx).

The A330neo (25 from Air Lease Corporation), the 777X (10 from Qatar plus 10 unannounced) and the 777-300ER/-

1590 866

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max and neo : split of Fuselage length 9/9/15(only if announced, excl. corp. Jets )

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commercial Jet cancellationscancellations during Year

Cancellations as a % of backlog

max and neo: sPlit oF Fuselage length 9/9/15(only iF announCed, exCl. CorP. Jets)

coMMERcIAL JET cAncELLATIonS

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200LRF (United, Eva, Qatar) have already topped up their order books in 2015, but order intakes for the A350 (eight from Iberia), the 747-8 (four) and the A380 (zero) were disap-pointing.

Airbus still had a significant number of unsold A330ceo production slots at the start of the year, even after adjusting the production volume downward. It cannot be ruled out that, as a consequence, the A330ceos were offered to the market this year at attractive terms. After major orders by Saudia (20) and China (45 plus 30 options) and a cancellation by AirAsia X (14) it seems Airbus has further reduced the gap in the A330ceo order book. Airbus did agree to open a cabin-completion centre for widebody aircraft in China, probably as part of the A330 deal.

Boeing seems to be confronted with a similar challenge for the remaining open production slots on the current 777 line where the -300ER and the -200LRF are assembled. Boeing, however, apparently does not see any reason to reduce the annual production volume for this type.

At the other end of the payload-range spectrum, the total order intake (51) in the turboprop category was much lower compared to 2014 (206). Contrary to the commercial jet mar-ket, where the backlog equals about 10 years of production at current rates, the backlog equals only three years of produc-tion in the turboprop market. A backlog like this, as such, can-not be the reason for the slowdown in ordering. It is unclear if there is any link with the low oil price reducing demand for the ultra-fuel-efficient turboprop aircraft.

In the regional jet category, the 2015 order volume looks a little better. Some 169 aircraft have been sold, mainly by Brazilian manufacturer Embraer. Lessor Aircastle ordered

25 second-generation Embraer E-Jets (E2s). Azul (30) and Tianjin (20) opted for the E2s as well. Current generations (E1s) were ordered by among others KLM (17), Tianjin (20) and United (15), resulting in a total of 129 orders for Embraer. Japan Airlines ordered 32 of the Japanese Mitsubishi MRJs, leaving Bombardier with just seven orders from Mesa for the CRJ900NG.

While the Bombardier CSeries made its long-awaited inter-national air show debut in Paris, demonstrating both a CS100 and a CS300, no additional orders could be booked, much to the chagrin of the Canadian manufacturer. The industry seems a little worried about the future of the CSeries not least because of rumours about potential cancellations.

It is generally seen as a good aircraft, but critics believe it may be too expensive and only fits in a very narrow market niche between the established (smaller) E-Jets and the larger (re-engined) mainline A320 and 737 single aisles. The clear up-gauging trend in the single-aisle market probably works against the CSeries as well.

While the discussion about a possible order bubble con-tinues without an industry-wide consensus, the first months of 2015 did not see any significant increase in the number of order cancellations. During 2014, orders for a total of 490 commercial aircraft (western-built jets and turboprops, plus eastern-built jets) were cancelled. Only 122 orders were cancelled for the period January to September 2015. These included 37 members of the A320 family, plus 28 Boeing 737s. These aircraft orders were in many cases replaced by orders for other members of the same family, including Neos and Maxs (type swaps). About 26 Boeing 787s were cancelled, 15 from an unannounced customer (Aeroflot?) plus 10 by

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order backlog Commercial Jets

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order baCklog CommerCial Jets

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backlog as % of Fleet - by Equipment category(western built commercial jets, all civil ops.)

all western built Jets (Civil ops.)

Pax narrowbody

Pax widebody

Regional Jets

Freighters

baCklog as PerCentage oF Fleet Per region

baCklog as % oF Fleet - by equiPment Category(western built CommerCial Jets, all Civil oPs.)

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United (swapped for 777-300ERs) and a Boeing BBJ. Also, order deferrals were rare in 2015, a reported total of only 61. American deferred orders for 37 A321neos by about three years. In addition, Russian airlines deferred orders for A380s and A321Ceos.

As the ordering of new aircraft continued at a high pace, the backlog has reached record levels. As at early September, the backlog for western-build commercial jets (all civil opera-tions) stood at 13,458, or 59% of the 22,841 in-service fleet or 53% of the total fleet. If all reported aircraft options and let-ters of intent were included, the total commitments would be about 88% of the in-service fleet. With 1,495 commercial jets delivered during 2014, the current backlog would be sufficient to keep the production lines busy (at 2014 production levels) for more than nine years. In reality, this period will probably be shorter, given Airbus and Boeing’s announced plans to increase the A320 and 737 production respectively. The jet storage level is at a relatively low 9.8% of the total fleet and includes many outdated previous generation types.

The backlog is not evenly distributed over the regions. As would be expected, the Middle Eastern carriers are expand-ing fastest and their backlog in terms of aircraft count is just less than 80% of their current fleet. Asia-Pacific has a backlog equal to about 52% of its fleet. For Latin America the backlog is 49%, Europe 48% and North America 36%, while for Africa this percentage is 14% of its fleet.

On a global basis, the backlog is about 53%, higher than the average of the individual regions because a significant number of speculative orders placed by geographically neutral leasing companies has not been assigned to any of the regions yet.

In terms of backlog over the various aircraft categories, the single-aisle narrowbodies have just surpassed the bigger twin aisles as a result of the continuing flurry of Neo and Max orders. In this category, the backlog stands at 70% of the current fleet. For twin-aisle models, the percentage has come down slightly to 64% as deliveries of the delayed 787 orders, in particular, are gaining momentum and the number of new orders is relatively low. The regional jets backlog is fairly static, just below 20%, because the initial order flurry for new designs (Mitsubishi MRJs, Embraer E2s, etc) has come to a halt and backlogs are generally close to flat-lining.

Finally, the stagnant air cargo market has pushed the factory-built freighter backlog further down to a minimal 6%. However, this number does not take passenger-to-freighter conversion orders into account.

The industry is going through an almost unprecedented generation change in terms of equipment designs. In the regional jet segment, the Embraer E2 family, the CSeries, the Mitsubishi MRJ and the Russian/Italian Superjet will aim to replace the current E-Jets and CRJs. In the single-aisle seg-ment, the A320neo family and the 737 Max will replace the A320ceo and 737NG, while Chinese manufacturer Comac is close to rolling out its new C919 in the same category, with the Russian Irkut MC-21 not far behind.

In the small-to-medium twin-aisle segment, the A330-800 and -900, the A350-900 and the 787 will replace the A330-200/-300 and A340 (CFM-powered) family as well as the 767-300ER and 777-200ER. In the large twin-aisle category, the 777-300ER and A340 (Rolls-Royce-powered) models will be replaced by the 777-8X, -9X and A350-1000. In the very-large-aircraft segment, the 747-8I and A380 have already

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difference in Current market value 0 year old aircraftCmv mid 2014 vs. mid 2015 - Source : Ascend

Cmv Δ 2014-15

taken the place of the 747-400, although sales of both new types are stagnant.

There has been much speculation about a potential A380n-eo to keep the programme alive. Reportedly, if launched, this aircraft will be a stretched and re-engined version with seat-mile costs that should be competitive with the new large Boeing 777-9X. An alternative may be to develop an increased capacity version of the A350 – an A350-1200 – but this is highly speculative. With no new types launched in 2015 so far, the original equipment manufacturers have focused on increasing seat capacity of their current products. Much has been debated around the acceptability of reduced seat-widths and/or slim-line seats. Squeezing in a few more seats helps to reduce the seat-mile cost, and can be important when making comparisons between competing aircraft designs.

Aircraft valuesFor investors and financiers it is important to analyze what the impact of the ongoing generation change is – or will be – on aircraft values. If a new aircraft design offers better fuel burn and/or maintenance cost levels, the only way the older tech-nology aircraft can remain competitive is by lowering capital costs – ie, lower purchase prices or lower lease rates.

For new aircraft pricing, there is no public domain data with respect to, for example, average net transaction price levels. As a proxy, we use independent appraiser data, in this case from Flightglobal’s Ascend.

We have reflected the difference between estimated mid-2014 and mid-2015 market values. It seems that in most cases any negative value adjustments were for aircraft types where the manufacturer may be facing potentially open production slots.

The Boeing 767-300ERF was adjusted downward by about

16%, which may be explained by the fact that effectively Fe-dEx is the only commercial customer for the type, pending the production start of the military KC-46A Tanker Transport. As FedEx has committed to a significant number of 767-300ERs, this would warrant significant price concessions. Next to the 767, the Boeing 777-200LR and -300ER values were discounted. The explanation may be found in a combination of open slots on the 777 production line until production of the new Boeing 777-8X and -9X kicks in towards the end of the decade.

There is also the impact of a direct competitor in the form of the Airbus A350-1000, which was designed to be a 777-300ER killer. The Bombardier CRJ700, 900 and 1000 also saw a reduction in value. These aircraft types are coming under increasing pressure from the new generation of regional jets.

The same can be said for the Embraer 170. This smallest member of the E-Jet family is losing orders to the larger E175, which seems to be the preferred version for the US regional airlines. Embraer did not even bother to launch an E2 version of the 170, which says enough about potential demand for this version. The Boeing 747-8F value was also adjusted down-ward, obviously also caused by a lack of new orders.

On the positive side, surprisingly enough, the Boeing 737-700 value was adjusted upwards by just more than 3%. While this shorter member of the 737NG family is not as popular as it once was, Southwest and United are buying used -700s, and consequently are seen as stimulating values.

The Boeing 787-8 and -9 values also saw an uptick, which reflects the increased popularity, as well as Boeing’s premium pricing policy for the type and the impact of price escalation.

In the used-equipment market, it seems an increasing gap is developing between aircraft with leases attached and naked

diFFerenCe in Current market value 0 year old airCraFtCmv mid 2014 vs. mid 2015 - sourCe: asCend

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market value dynamics - Twin Aislesaircraft of hypothetical constant age, changes in mid year Cmv's

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market value dynamiCs - twin aisles airCraFt oF hyPtheiCal Constant age, Changes in mid year Cmvs

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A319-100 -10yr

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market value dynamics - Single Aislesaircraft of hypothetical constant age, changes in mid year Cmv's

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Market Lease-rate Dynamics - Single Aislesaircraft of hypothetical constant age, changes in mid year cMLRs

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market value dynamiCs - single aisles airCraFt oF hyPtheiCal Constant age, Changes in mid year Cmvs

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aircraft. With significant appetite among financial investors for commercial aircraft, models with a solid longer-term lease commend a premium.

The potential buyers group for these income-generating assets is significantly larger compared to the number of potential buyers for off-lease aircraft. Off-lease aircraft sales may be targeted at airlines which are looking for short-term fleet expansion or sophisticated lessors/traders which have the capability of arranging a new lease for the aircraft.

To analyze used equipment prices, we have compared Ascend’s published current market value estimates for the mid-year points in 2013, 2014 and 2015. In the chart, we have used constant age values for hypothetical aircraft of an age that can be seen as representative for the type. Consequently, the value dynamics do not take the value effect of the physical ageing of an aircraft into account. In the twin-aisle market, the Airbus A340-600 and the Boeing 747-400SF suffered most.

The four-engined Airbus product is now seen as not com-petitive to its direct competitor, the Boeing 777-300ER, and airlines such as Virgin Atlantic have been returning these air-craft at the end of their lease term. With virtually no demand in the western world, some of the A340s ended up in Iran, where there is huge demand for modern types to replace the fleet of very old pre-boycott or illegally acquired aircraft. Prob-ably, if and when the boycott is lifted, a significant number of western jets will head for this Middle East country.

The 747-400SF as a converted freighter does not offer the benefits of the nose-cargo door that a factory-built freighter brings, and both the Boeing-converted freighters and the IAI-converted models were parked in large numbers as a result of the crisis in the air cargo market. A recovery for this type seems unlikely. The Boeing 767-300ER remains fairly stable. This type still seems a good alternative to the modern medium-size twin aisles, as long as fuel costs remain low. In addition, the 767-300ER enjoys popularity as feedstock aircraft for cargo conversion.

Maybe the most interesting twin-aisle families for the finan-cial community are Airbus’s A330 and Boeing’s 777 models. Both types have enjoyed significant popularity with lessors, investors and bankers. The share of operating lessors in the A330-200 fleet, at close to 50%, is almost at single-aisle level. For the A330-300, this percentage is lower but still a respect-able 39%. The Boeing 777-300ER comes close with a lessor share of 34%, while the 777-200ER fleet is predominantly owned by the airlines as the lessor-managed percentage is just about 20%.

Within the A330 family, it seems the older jets (represented in the chart by the 15-year-old A330-200 and 20-year-old A330-300) were suffering in 2013 and 2014 but have seen more stable values in 2015. Newer A330s, both -200 and -300, have seen slightly positive developments over the past years. It remains to be seen how values for these two twin-aisle families will develop in the coming years, with a significant number of lease returns (such as at least 12 former Singapore Airlines A330s and 43 former Emirates 777s) scheduled by the end of the decade.

Larger twin-aisle jets have proven to be challenging in terms of remarketing, partly because top-tier airlines generally prefer new equipment and partly because of the high transition costs. New interior parts are expensive and, with interior manufac-

turers not even capable of delivering interior parts for new aircraft in time, reconfiguring a used twin-aisle can be very challenging. While for an aircraft such as the 777-200ER it is mainly the airlines that will have to find an end-of-life solution – for example, by operating the type for longer – for the 777-300ER and the A330 many lessors and/or financial investors will be confronted with the task of remarketing.

It cannot be excluded that some of these aircraft will not find homes anymore. Already during 2015 a pair of former Emirates A330-200s were parted-out at the incredibly young age of 14 to 15 years. According to the value development, the 777-300ER – one of the most popular twin aisles – is starting to display some weakness after years of strength. While still a very efficient long-haul people mover for the airlines, this type needs to be watched carefully from an investor perspective.

Lease rates moved largely in line with values in the twin-aisle segment – here the younger A330-300HGWs proved very popular. It can be argued that only in recent years has the full potential of the A330-300 been released with the introduction of the higher gross-weight versions. The 242-tonne version that was introduced this year gives the A330-300 an unprec-edented range of more than 6,000 nautical miles.

The single-aisle market segment has been very strong over the past three years. Apart from the 737 Classics, which are now down and out (except the -400 version that enjoys popu-larity in the market for cargo conversions), most single-aisle types were in demand. Even the Boeing 757 is enjoying popu-larity in the cargo market and FedEx has acquired a significant fleet as the mainstay of its domestic short-haul operation.

Demand for the 737-800 and younger A320s remain strong as airlines wait for the deliveries of the A320neo and 737 Max to start. Some top-tier carriers were confronted with a short-age in single aisles and even the likes of British Airways, Air Canada, Southwest and United had to acquire used aircraft for fleet expansion. For carriers such as Delta and Allegiant, opportunistic buying of used aircraft is already part of their business models.

More problematic was the situation in the regional jet market, with further deterioration of the CRJ200 and increas-ing weakness of the Embraer 170, with the market moving to larger regional jets, including the E175. This trend may continue if US airline pilot scope clauses allow it.

Lease rates for the A320 family continued to recover after a period of weakness, especially for mid-life A320s. With the thousands of Neos and Maxs that will be delivered in the coming years, it remains to be seen how long single-aisle values and lease rates can continue to perform as strongly as they have.

In a market as bullish as today’s, the above may seem a rather theoretical exercise. For investors and financiers that enter the market floating in on the sea of liquidity, many of the aircraft that are delivered and those coming in two to three years’ time can probably be characterized as late-production aircraft.

With hardly any exception, history has shown that late-production aircraft generally lose value much faster than early- and mid-production aircraft. Could it be that we are seeing some of the smart money minimizing their risk positions in these aircraft in the form of portfolio sales or even by selling their equity positions?

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Aircraft finance environmentOverall, the aircraft-financing environment is relatively healthy, with a balanced mix of funding sources world-wide available to the industry. According to data from Boeing Capital, a total of $124 billion will be needed to fund 2015 deliveries, up from $115 billion in 2014 and double the amount of the $62 billion that was needed for all deliveries in 2010.

Lessors cover an estimated one-third of the delivery finance market and consequently are an important fund-ing source for the industry. For 2015, lessors are projected to be funded predominantly by the capital markets (53%), followed by bank debt (20%), export credit (6%) and self-generated cash (21%).

Over the past two to three years, there have been several significant equity transactions involving aircraft leasing companies and/or leased aircraft portfolios. The takeover of International Lease Finance Corp (ILFC) by AerCap was the most spectacular transaction, if only because of its sheer size. Although announced in 2014, this year AerCap completed its $7.6 billion purchase of ILFC from American International Group, and by so doing created the world’s largest independent jet-leasing firm (after GE-owned Gecas).

This year at least two other transactions made the headlines. Irish lessor Awas agreed to sell 90 of its younger aircraft to Australian bank Macquarie in a $4 billion transaction. Reportedly the remaining – older – part of the Awas portfolio is for sale as well, with Chinese investors probably in pole position.

In September, China’s Bohai Leasing made an offer to buy Irish aviation lessor Avolon in an equity transaction valued at just over $2.63 billion. This deal is expected to close in 2016. Interestingly, Bohai Leasing is part of HNA Group, which also controls lessor Hong Kong Aviation Capital (HKAC). It seems logical for HNA Group eventually to combine the operations of Avolon and HKAC. Although the final set-up still has to be an-nounced, Avolon will probably be the dominant partner.

In Hong Kong, Goshawk aircraft leasing – owned by Chow Tai Fook Enterprises, NWS Holdings and Investec Bank – is expanding its management team and looks set for further growth, supported by significant Chinese funding sources. Also in Hong Kong, billionaire Li Ka-shing’s Cheung Kong Holdings, through its aircraft lessor, Accipiter Holdings, agreed to buy several significant air-craft portfolios, including from Gecas. It seems Chinese investors are looking en masse for alternatives to investing in shares or in the Chinese property market.

As US dollar income-generating assets, commercial jets are seen as an excellent option, especially as com-mercial aviation is still a growth market.

Aircraft lessors have found various creative ways of expanding their funding sources to grow their fleets outside of traditional bank financing: public equity; pre-initial public offering (IPO) equity; sidecar vehicles; and asset portfolio sales.

Lessors such as Air Lease Corporation, AerCap, Fly Leasing, Aircastle and Avolon use public equity. Pre-IPO

$ 62 bln.

$ 125 bln$ 132 bln.

$ 141 bln.

$ 156 bln.

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Delivery Finance Requiremens commercial Jets

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capital Markets

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Source : Boeing Capital Corp.

delivery FinanCe requirements CommerCial Jets

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funding has been obtained by, among others, Intrepid Aviation, which sourced it from Reservoir Capital Group and Centerbridge Partners. How long this remains pre-IPO remains to be seen.

A creative way to enable lessors to expand their fleets without necessarily taking on 100% of the asset risk has been found in so-called sidecar vehicles; joint ventures between established aircraft lessors and third-party financial investors. Examples include Air Lease Corpo-ration joining forces with Napier Park Global Capital, a global alternative asset management firm. Together they established Blackbird Capital with the intention of investing in a fleet of leased aircraft. CIT Group agreed with Century Tokyo Leasing to form TC-CIT Aviation, a sidecar to expand further CIT’s aircraft leasing activities.

Apart from its own subsidiary Accipiter Holding, Cheung Kong also formed a venture with MC Aviation Partners to acquire even more aircraft.

In some cases, private equity firms and alternative investment managers such as KKR, Apollo and Wood Creek acquired portfolios of aircraft for their investment partners, adding even more liquidity to the market.

The capital markets are expected to take 32% of the total commercial jet funding requirements this year. Lessors and airlines, both US and non-US, benefit from the capital market’s increased interest in aircraft funding. This year is set to see a significant volume of interna-tional (non-US) issuer-related enhanced equipment trust certificate activity on top of the US-issued volume.

The asset-backed securitization market has proven also to be a significant funding source for the lessor com-munity. The market has enjoyed healthy appetite from private placements by sovereign wealth funds, superan-

nuation funds, pension funds and insurance companies. These private placements were not only limited to North America and Canada, but included investors from Singapore, Hong Kong, South Korea and Japan as well as Australia.

Commercial Bank debt is estimated to cover 28% of the 2015 delivery financing requirements. In just a few years, China has more than doubled its market share, from 11% in 2012 to 23% in 2015. With this, China has become the market leader in the commercial debt market for aircraft financing. Germany takes the second position with 17% and former market leader Japan has been pushed back to third position. According to Boeing Capital Corp, about 80% of commercial bank debt went to top-tier airlines and lessors last year, leaving only 20% for second- and third-tier players. It is maybe another confirmation that many commercial banks are more credit- than asset-focused.

Only a few years ago the industry desperately needed the export credit agencies to close the funding gap left by commercial financiers because of the Lehman banking crisis. Again, according to Boeing Capital data, between 2009 and 2012, Ex-Im funding was used for about 30% of all deliveries. Preliminary figures for 2015 indicate this number to have gone down to only 13%. This percentage will decrease even further for Boeing products in the un-likely event that US Congress decides not to reauthorize Ex-Im Bank to engage in new business. The previous au-thorization lapsed on July 1. At the moment, Ex-Im Bank cannot process applications or engage in new business, and reportedly for this reason two Boeing 787s intended for Kenya Airways could not be delivered and had to be parked at the manufacturer’s Everett production site.

china23%

Germany 17%

Japan13%

France10%

US9%

Australia8%

others20%

Commercial bank debt Financing for Commercial aircraft Deliveries 2015F

china Germany Japan France US Australia others

CommerCial bank debt FinanCing For CommeriCal airCraFt deliveries 2015F

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OutlookIt is always difficult to call the peak in any busi-ness cycle. First of all, the business cycle does not really exist and unfortunately reality is too complex to capture it in a simple up, down, peak or trough statement. Short term, it seems all traffic lights for the commercial aviation business remain on green.

During the first months of 2015, neither the conflict in the Middle East between Islamic State and the Kurdish and Iraqi troops, nor the explo-sive situation around the Ukraine, nor the Ebola virus, nor the feared Greek exit from the eurozone seemed to have had any noticeable negative impact on the commercial airline business in general. A year ago we concluded that any of these situations could either develop into a global crisis or could turn out to be irrelevant for airline traffic volumes. It now seems the latter has been the case. Rather unexpectedly, the industry got a nice bonus in the form of a spectacular drop in the fuel prices, with the immediate positive impact on the airlines’ bot-tom lines (apart from some mark-to-market adjust-ments on fuel hedges).

Today, once more the aviation industry is des-perately looking to identify any factors that could upset the current benign market circumstances. Could the refugee crisis from the Middle East be such a factor, or could the Chinese economy make such a hard landing that the shock waves would cause damage to global aviation? Could the airlines absorb a sudden and quick return of fuel prices to the old $100-plus-a-barrel level?

Under the current sunny market circumstances, any analyst pointing too often at potential risk areas runs the risk of becoming the boy who cried wolf. But have we now mastered the cycle and are downturns a thing of the past? For the time being this seems unlikely.

In a way, there may be some similarity in the ef-fect on the financiers of the synchronized boom the shipping market enjoyed for almost a decade as a result of the rapidly expanding Chinese and Indian economies. Especially, the increase in industrial production in China required significant import volumes of bulk materials, such as iron ore, crude oil and coal. Shipping capacity was needed for this significant bulk. The export of finished products from China to the western consumption centres caused a surge in demand for general cargo and container ships.

The Baltic Dry Index (BDI) gives a clear picture of what happened. The BDI, a measure for charter rates of various types of bulk carriers, had been fluctuating between index-level 1,000 and 1,500 for decades. However, starting in 2003, the China-effect caused the BDI to rise to an unprecedented peak of 11,783 in May 2008. Then, suddenly the party was over. Barely six months later, in Decem-ber 2008 the BDI had collapsed by 94% to 663. Despite a short recovery in 2010, the index reached

an historic low of 509 in early 2015. Obviously commercial aviation has not experi-

enced a similar boom in lease rates, aircraft values or airline fares and fortunately production capacity for new aircraft is relatively limited, compared to the capacity of the world’s shipyards, so the huge overcapacity that plagued many of the shipping markets is unlikely to affect commercial aviation.

However, where there are similarities, in the almost unlimited confidence that many investors seem to have in aviation, judged by the aircraft purchase prices (and residual value assumptions) they are willing to pay. Despite a relatively long period of prosperity, we believe this is still a cycli-cal business.

So, on aggregate, the industry is enjoying almost unprecedented prosperity. This does not imply that on the level of individual airlines or suppliers eve-rything is hunky dory. In Europe, a number of the established lag carriers continue to struggle, albeit their problems are partly masked by the low fuel costs. Europe’s low-cost carriers, such as Ryanair, easyJet, Wizz, Vueling and Norwegian, continue to expand aggressively and their product offerings clearly move more and more in the direction of the business passengers.

Low-cost carriers are opening bases at the main airports close to population centres and are not restricted anymore to cheap, remote airports that will only attract leisure passengers. While this may erode a part of the pure low-cost carrier model’s fundamentals, for the established network carri-ers, direct competition on their own home base may be more dangerous. So far their responses have not been too convincing. Low-cost subsidiar-ies launched by the network carriers have not been too successful, maybe with the exception of IAG’s Vueling.

In eastern Europe, the fleet restructuring of Aer-oflot will be interesting to follow. The Russian flag carrier has announced it is offering a significant number of relatively young aircraft for lease or for sale, including 777-300ERs, A330s and members of the A320 family. In addition, after the integra-tion of Transaero into the Aeroflot organization, it remains to be seen what will happen to the former Transaero fleet. This fleet includes a significant number of older 737 Classics, 737 NGs, 767s, 747s and 777s, plus order positions for new 747-8Is and A380s. It is not immediately obvious if these types could find homes outside of Aeroflot/Transaero.

In the long-haul part of the networks, the Middle East carriers continue to put pressure on the Euro-pean carriers. Even some of the North American carriers seem to have become worried because their international networks may prove not to be immune to this competition either. While not yet a proven business model, Norwegian’s long-haul, low-cost initiative seems to gain some traction and could undermine the position of the established

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carriers even more, especially on the usually more lucrative transatlantic routes. Could we finally see the breakthrough of the long-haul, low-cost model?

Asia, in particular South-East Asia, is another area of potential tension. With the slowdown in the Chinese economy, many of the emerging markets in the region may start to experience limits of their growth strategy. Countries that rely heavily on the export of basic materials to China could be in for a particularly difficult time. Ironically, it is from these emerging markets that we have seen most mega-orders for new aircraft. Indonesia’s Lion Air and Malaysia’s AirAsia are sitting on huge order books, anticipating that the growth in their region will continue for many years. Will these airlines be forced to revisit their expansion plans? Could the strategy of becoming a quasi-lessor work? Already in 2014/2015 we have seen deferrals of both single- and twin-aisle deliveries coming from this region.

We can be short about the North American market. After far-reaching consolidation, North American carriers have reached an unprecedented level of profitability. Even in a low-growth environ-ment, the capacity discipline among the American operators seems to ensure high load factors and a strong yield environment. For the domestic market, the risk of new entrants upsetting this equilibrium seems limited. Internationally, there is a risk of increasing competition, from the Middle Eastern carriers, in particular.

In the equipment market, the entry into service of the Airbus A320neo will come very soon. From an airframe perspective, this aircraft seems a low-risk design, but its new engine designs – the Pratt & Whitney PW1000G-JM and the CFM Leap-1A – will have to be proven in day-to-day airline opera-tion. The same applies possibly even more to the Leap-1B on the Boeing 737 Max. It certainly will not be easy for the new engines to match the reli-ability of the current engine generation.

The entry into service of the new-generation regional jets is also approaching. Bombardier’s CSeries made its debut at the Paris Air Show and, according to the manufacturer, certification should be completed by the end of the year, followed by an entry into service during the first half of 2016, which could finally trigger the order volume that is needed to make the CSeries a success. Bombardier at least can offer short-term availability of aircraft, which should be a positive factor compared to the situation of the Neo and Max.

Further down the road, the other new regional jet designs, such as the MRJ and Embraer E2 family, as well as the Sukhoi SSJ, will need to book more orders to establish themselves in the market and become truly financeable assets.

In the widebody segment, the 767 is soldiering on, supported by orders for the -300ERF version from FedEx. The 787 family is doing well, with the

787-9 looking more like the true champion of the family. The -8 order intake was clearly overshad-owed by the -9 in recent months, and it is difficult to avoid comparing this development with experi-ences from the shorter versions of the 767 and 777.

The 777-200ER/LR has reached the end of the line with no more aircraft on order (apart from the freighter version), and question marks are start-ing to appear even for the -300ER in light of the competition of the A350-1000, as well as the future 777X. While the 777-300ER remains a fantastic production tool for the airlines, given the experi-ence with other large widebodies, the residual value assumptions for the type have to be carefully evalu-ated. The 747-8 continues to struggle, and several cancellations have been announced that could not be compensated by firm orders. Maybe some more -8Fs can be sold, but from a financier or investor’s perspective, the 747-8 remains a challenging asset.

The Airbus twin-aisle family may be complicated to evaluate. The A330-200 and especially the -300 continue to enjoy market popularity. The re-engined A330-900 also has gained some traction, but like the A350-800, the shorter A330-800 has not impressed the market. With a minimal back-log (only 10), does it make any sense to build this shorter version at all?

There are no such question marks about the A350-900. Although -900 deliveries continue at a remarkably slow pace, the backlog is impressive. This cannot be said about the A350-1000, and it is interesting to see how this type will fare against the 777-9X. Could we eventually expect a higher capacity version, an A350-1200? A drawback of such an aircraft would be that in terms of capacity, it comes closer to the A380. The A380 continues its struggle to find new orders, and it looks as if some existing clients may not be able to take delivery of the aircraft as scheduled.

Is a stretched and re-engined A380neo a real solution? Something has to be done to maintain a seat-mile cost advantage over the new-generation ultra-efficient twin-engine widebodies. We believe that eventually an A380neo will be launched, be-cause the alternative of closing down A380 produc-tion just seems unacceptable.

So, overall the outlook for commercial aviation is still optimistic for the short term. Traffic growth in the passenger market continues at relatively healthy levels. The cargo market seems more volatile. Inter-est rates are low and so are fuel prices. While we do not see an immediate threat to this environment, this does not mean there are no more risks.

Should the market be hit by another cyclical downturn, say in the period 2017-2019, the impact on existing (used) equipment values may be more severe than usual as a result of the generation change. Indeed, the skies are blue, but make sure to take an umbrella with you. When the weather turns, it may get really rough out there.

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