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World Fleet Forecast 2017–2036 Dick Forsberg October, 2017

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World Fleet Forecast 2017–2036

World Fleet Forecast 2017–2036

Dick ForsbergOctober, 2017

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Dick Forsberg has over 45 years’ aviation industry experience, working

in a variety of roles with airlines, operating lessors, arrangers and capital

providers in the disciplines of business strategy, industry analysis and

forecasting, asset valuation, portfolio risk management and airline

credit assessment.

As a founding executive and Head of Strategy at Avolon, his

responsibilities include defining the trading cycle of the business,

primary interface with the aircraft appraisal and valuation community,

industry analysis and forecasting, driving thought leadership initiatives,

setting portfolio risk management criteria and determining capital

allocation targets.

Prior to Avolon, Dick was a founding executive at RBS (now SMBC)

Aviation Capital and previously worked with IAMG, GECAS and GPA

following a 20-year career in the UK airline industry. Dick has a Diploma

in Business Studies and in Marketing from the UK Institute of Marketing

is a member of the Royal Aeronautical Society and also a Board Director

of ISTAT (The International Society of Transport Aircraft Trading).

Dick ForsbergHead of Strategy, Avolon

Disclaimer

This document and any other materials contained in or accompanying this document (collectively, the ‘Materials’) are provided for general information

purposes only. The Materials are provided without any guarantee, condition, representation or warranty (express or implied) as to their adequacy,

correctness or completeness. Any opinions, estimates, commentary or conclusions contained in the Materials represent the judgement of Avolon as at

the date of the Materials and are subject to change without notice. The Materials are not intended to amount to advice on which any reliance should be

placed and Avolon disclaims all liability and responsibility arising from any reliance placed on the Materials.

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IntroductionAvolon’s World Fleet Forecast covers all Western-built passenger and cargo jets in airline service, plus the main Russian and Chinese types. Aircraft deliveries, retirements and passenger-to-freighter (‘P2F’) conversions are projected over a 20 year period. The resulting annual forecast of the in-service fleet is modified by an estimate of the number of aircraft expected to be in storage.

For passenger aircraft, the resulting capacity is compared to a forecast of annual passenger traffic demand. The resulting load factors are used to measure changes in operating efficiency and to estimate the level of capacity surplus or shortfall. Freighter aircraft capacity is benchmarked against forecast demand for air cargo and the proportion of the total that is expected to be transported on dedicated cargo aircraft.

The resulting delivery funding requirements are identified and applied across the range of available financing channels to provide an estimate of the expected evolution of aviation financing over the coming 20 years.

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The industry will continue to secure further operating efficiencies throughout the forecast period.

World Fleet Forecast SummaryAgainst a backdrop of 2.9% average annual growth in global economic

activity over the next 20 years, Avolon is forecasting passenger traffic

to increase by 5.4% per annum (Chart 1), equivalent to an average 1.8x

GDP multiple. Capacity is expected to increase slightly more slowly, by

5.2% annually on average.

Cargo demand is forecast to grow at a rate of 3.9% a year, although

freight carried on dedicated cargo aircraft will increase more slowly, by

3.4% per annum.

Almost 43,000 aircraft will be delivered over the next 20 years,

comprising 42,000 passenger aircraft and 800 factory-built freighters

(Chart 2).

By 2036, the world jet airliner fleet will have doubled, increasing from

25,600 to 51,800 aircraft, of which 2,800 will be dedicated freighters.

P2F conversions will satisfy over 2/3rds of the freighter requirement,

which will total 2,800 additional aircraft over 20 years.

Over 16,000 aircraft will be retired over the period, representing

64% of today’s fleet. Consequently, 40% of all deliveries will support

fleet replacement, with the balance meeting the industry’s growth

requirements.

The industry will continue to secure further operating efficiencies

throughout the forecast period. Fuel efficiency is the most significant

area of improvement, with a 24% reduction in fuel burn per ASK over

20 years, equivalent to an annual reduction of 1.4% (Chart 1), achieved

GDP 2.9%

RPKs 5.4%

ASKs 5.2%

Cargo Traffic 3.9%

Fleet Size 3.6%

Fuel burn per ASK -1.4%

Chart 1: Average 20 year growth rates

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Avolon also expects fleet utilisation to increase by 7% and average seat capacity will rise by 14% over 20 years, maintaining the trend to up-gauge within aircraft families.

through the migration of the in-service fleet to new technology

equipment. Avolon also expects fleet utilisation to increase by 7% and

average seat capacity will rise by 14% over 20 years, maintaining the

trend to up-gauge within aircraft families. System load factor will end

the 20 year forecast period close to where it began, just above 80%, and

will remain in a narrow range around that level throughout, although the

occupancy rate for widebody aircraft is expected to come under more

pressure in the medium term than that for narrowbodies.

The 20 year financing cost of new deliveries will amount to more than

$4.2 trillion in delivery prices and the annual requirement will rise from

$110 billion to over $200 billion over the next ten years, averaging

$170bn per annum (Chart 3). At the end of the forecast period, Airbus

and Boeing will still account for over 90% of total delivery dollars.

Chart 2: Components of Avolon’s 20 year world fleet forecast

42,000

14,450

New deliveries

42,800

Conversions

2,000Passenger

Fleet

Freighter

Fleet

Retired

16,250

800

1,800

2016: 23,700

2036:49,000

2016: 1,900

2036: 2,800

Chart 3: Ten year delivery financing outlook

Airbus Boeing Other

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Key forecast themes and assumptions

Airbus and Boeing single aisle

— We continue to give Boeing close to 50% of single aisle deliveries

over the next 20 years, despite the current market share situation. At

the market sweet-spot around 180 seats, the A320neo and 737MAX

are clearly able to share the market equally

— However, whilst the A321neo has already proved to be a strong seller,

the equivalent 737Max product remains unconfirmed. The launch

of the -10MAX has led to a reallocation of future demand across the

family members, with the -8 still taking the lion’s family share (66%)

and the -10 replacing the -9 as the growth model of choice, with 20%

of deliveries, compared to the A321’s 40% share of the family

— The smallest single aisle family members account for less than 2% of

A320 and 737 deliveries

— Boeing’s NMA has not been included in the analysis

Airbus and Boeing twin aisle

— Both Boeing and Airbus have now taken the necessary measures to

taper widebody production ahead of new model introductions. The

forecast assumes a gradual ramp up again, from 2018 for the A330 and

from 2021 for the 777. A350 and 787 rate increases will also be measured

— The past 12 months has seen a marked decline in backlog for

very large widebodies and the forecast assumes that meaningful

passenger production will end in the near future for the 747 and

before the middle of the next decade for the A380

— Boeing will continue to own the dedicated freighter space, delivering

over 80% of factory built cargo aircraft

Other OEMs

— The C-Series is performing well in service and, assuming that the Airbus

deal closes and the US penalty tariff requirement goes away, is now well

placed to pick up future orders, although not a mass market contender.

The larger CS300 is expected to account for 70% of deliveries.

— Sales of Embraer’s E2 family have been slower than expected over

the past two years and the delivery forecast has been moderated

accordingly. The E175E2 is expected to be the strongest family

member with around half the total sales, mostly within North

America despite the currently scope-busting MTOW

— Another setback in the MRJ’s program momentum has resulted in

a lower medium-term delivery forecast. Sales are assumed to be

limited to the MRJ90 and no stretch model has been assumed

— COMAC’s C919 is not expected to enter service before 2020, with

deliveries of around 600 aircraft forecast through to the end of

the period

The C-Series is performing well in service and now well placed to pick up future orders...

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— The Russian MC21 is also forecast to deliver around 600 aircraft from

2021 onwards, with 2/3rds of sales going to the larger -300 variant.

Industry cycles

Avolon remains a firm believer in the industry cycle and, whilst factors

other than GDP play an increasingly important role in the generation of

air travel demand, the notion of a ‘super cycle’ is over-stated on both the

supply and demand sides of the equation.

Assumptions regarding the timing and amplitude of economic and

industry cycles are therefore included in this forecast. Avolon’s

expectation of 2.9% average GDP1 growth over the 20 year period

(which incorporates the IMF’s near-term projections) includes two

global economic down-cycles. The cycles for aircraft orders and

deliveries move in line with the broader economic cycle, with lags that

reflect typical industry behaviour.

Demand

Passenger demand, measured in RPKs, is forecast on a global basis.

Growth rates follow the economic cycle, with GDP remaining strongly

correlated with demand and accounting for around two-thirds of the

movement in traffic levels. As noted, the GDP multiplier for passenger

traffic averages 1.8x, which is below the recent trend, which has

averaged 2.5x over the past decade. A buoyant RPK growth forecast

of 5.4% per annum is underpinned by the strong economic and

demographic dynamics of emerging markets, where liberalisation

and the new low cost airline business models provide affordable travel

opportunities to large and expanding middle-class populations. The

industry’s centre of gravity will continue to move away from the mature

markets of North America and Europe towards emerging markets,

particularly in Asia, with China becoming increasingly important in its

own right.

Cargo demand is assumed to increase at 1.25x the rate of GDP growth

over the period, a significantly lower multiple than prevailed prior to the

global financial crisis. This results in an average 3.9% annual increase in

FTKs, which reflects the behaviour of global trade flows, which the IMF

forecasts will slow from a recent average of 5% per annum since 2002 to

less than 4% over the next five years.

The share of air freight carried on dedicated cargo aircraft is forecast to

decline by 0.5% per annum over the coming years, to reflect the rising

level of belly-hold capacity available on large passenger aircraft. This

diversion of traffic has the effect of reducing overall average traffic

growth to 3.4% for dedicated freighter operations, which is still ahead

of capacity growth and produces a gradual improvement in cargo load

factor over the period.

1: World GDP at constant prices, as measured by the IMF

A buoyant RPK growth forecast of 5.4% per annum is underpinned by the strong economic and demographic dynamics of emerging markets...

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Capacity

Avolon forecasts total industry seat capacity to grow on average by

5.2% per annum over the next 20 years, slightly slower than RPK growth.

Consequently, average passenger load factor will end the period close

to where it started, at slightly more than 80%.

Airline fleet and network efficiencies help to raise annual fleet utilisation

by 7% over the 20 year period. Average aircraft size is also expected

to increase, reflecting the efficiencies of operating larger aircraft as

markets grow as well as the pressures of airport and ATC congestion.

Average seat count is expected to rise by 13% to 200 seats by 2036,

achieved through a combination of up-sizing the mix of aircraft within

fleet families and initiatives by OEMs to find ways to increase seat count

within existing cabin confines. This combines with the introduction of

new technologies to improve fuel efficiency by over 20%, equivalent to

a 1.4% annual reduction in fuel per ASK.

Cargo capacity on all-freighter aircraft is expected to increase on

average by 2.8% per annum, more slowly than demand, allowing load

factors to rise once again.

Aircraft Delivery Forecast

Avolon expects 42,000 new passenger jets and 800 widebody

freighters to be delivered over the next 20 years. Single aisle aircraft will

account for 78% of deliveries, including 1,800 regional jets with less than

100 seats. 22% of the total (8,700 units) will be wide-bodies.

Airbus will deliver over 18,000 aircraft during the period and Boeing

around 1,000 more. Together they account for 87% of all deliveries by

units (Chart 4a) and over 94% by value.

Airbus will have a slight market share advantage over Boeing in the

single aisle segment (42% vs 41%), whilst Boeing substantially out-

delivers Airbus in twin aisles (58% vs 42%) – including a significant

freighter imbalance. 1,800 RJs and 3,600 other OEMs’ narrow-bodies

will also be delivered, accounting for 16% of the single aisle market

(Chart 4b). Measured by delivery dollar value, Boeing will take 52% of

total deliveries to Airbus’s 42%.

Chart 4a: 20 year deliveries by OEM Chart 4b: OEM share by body ($)

Airbus Airbus SA

Bombardier Airbus TA

Boeing Boeing SA

Other Boeing TA

Embraer Other SA

Avolon expects 42,000 new passenger jets and 800 widebody freighters to be delivered over the next 20 years.

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Almost 80% (33,300) of the passenger jets delivering over the next 20

years will be single aisle, of which 4% will be regional jets with less than

100 seats.

14% of deliveries (6,000 aircraft) will be intermediate widebodies

(A330s, A350-900s, 787s) and 6% (2,700 aircraft) will be large

widebodies (747s, 777s, A350-1000s, A380s). 50% of the total, and

2/3rds of narrowbodies, will be in the 160-180 seat category, which

includes A320neos and 737-8MAXs (Chart 5).

Chart 5: 20 year deliveries by aircraft segment

<100 seats Intermediate WB WB Freighter100–210 seat NB Large WB

Chart 6: Passenger deliveries % of world fleet

Over the next 20 years, the size of the stored fleet ebbs and flows around the industry cycle but is forecast to remain, on average, at 2,100 aircraft, down to 5.5% of the expanded delivered fleet.

Passenger aircraft deliveries represent 5.9% of the installed fleet,

which is in line with the past 15 years’ average of 6%. Whilst passenger

deliveries over the next decade are at an elevated average of 6.9%, this

is not an extreme run rate and is measurably lower than previous peaks,

which have surpassed 8% (Chart 6).

Storage, Retirement and Cargo Conversion

Around 2,100 commercial jets are currently in temporary or permanent

storage, representing 8% of the delivered fleet. Over the next 20 years,

the size of the stored fleet ebbs and flows around the industry cycle but

is forecast to remain, on average, at 2,100 aircraft, down to 5.5% of the

expanded delivered fleet. This trend reflects the gradual elimination

of the remaining aged and non-airworthy aircraft – over 500 stored

commercial jets are over 25 years old and over 500 have been in storage

for more than 3 years – and a more focussed approach to tear down and

recycling in the future.

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2,000 passenger aircraft are forecast to be converted for cargo use

over the next 20 years, over 80% of which will be narrowbody types,

predominantly from A320, 737 and 757 families, a level boosted by

demand from China.

More than 16,000 aircraft will be retired from airline service over the

next 20 years, comprising around 14,500 passenger aircraft and 1,800

freighters. Consequently, 40% of all deliveries over the next 20 years will

be used to replace current fleet retirements (Chart 7).

Chart 7: Passenger deliveries for growth & replacement

- All aircraft

The average retirement age of both single aisle and twin aisle jets is forecast to decline in the near term...

Chart 8: Average retirement age

All NB WB RJ Ex RJ

The average retirement age for regional jets continues to rise as the

installed fleet migrates from 50-seat RJs to new generation types such

as E-Jets with economic life characteristics that more closely resemble

those of mainline jets.

The average retirement age of both single aisle and twin aisle jets is

forecast to decline in the near term as the remaining first generation

commercial jets become a dwindling proportion of the active fleet.

Retirement age then stabilises around a median average age of around

25 years, with a cyclical pattern that includes an expectation that the

weakest points in each cycle present value opportunities for owners to

part-out small numbers of younger aircraft (Chart 8).

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Global trends towards tighter capacity management have resulted in

average industry load factors hitting 80% on a consistent basis. Whilst

further moderate increases are achievable, the forecast anticipates

a medium-term decline, more noticeable across the single aisle fleet,

which is linked to the accelerating rate of aircraft deliveries. By the end

of the next decade, however, this trend will have begun to reverse and

load factors are forecast to recover to current levels by the end of the

forecast period (Chart 10).

Load Factor Development

The long term development of the industry, as represented by the

supply of seats and demand for passenger travel, is expected to

continue to follow long-term trends, broadly in balance through the

cycles and maintaining an average system load factor within a narrow

band around the current 80% level (Chart 9).

Chart 9: Supply, demand and load factor

Chart 10: Industry load factor trends

...the forecast anticipates a medium-term [load factor] decline, more noticeable across the single aisle fleet, which is linked to the accelerating rate of aircraft deliveries.

RPMs Load factor

NB & RJ WB Combined

ASMs

The load factor compression is the mathematical consequence of

modelling the combination of demand, delivery and retirement

forecasts. In reality, the airlines are likely to absorb much of the excess

capacity through capacity and yield management, thus maintaining

high load factors, but at a cost to yields and profitability.

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Financing Requirements

Over the next 20 years, new deliveries will require financing amounting

to $4.2 trillion in delivery dollars, with $700 billion needed over the next

5 years and an average of $170 billion annually over the next decade

(Chart 11). 51% of this funding will be required for narrowbody aircraft,

with 44% needed for passenger widebodies, 4% for freighters and 1% for

RJs (Chart 12).

Chart 11: 20 year delivering financing

The mix of new delivery funding sources is expected to continue to

evolve over the next number of years (Chart 13), with a reduction in

the proportion of direct commercial debt utilised by airlines and a

commensurate increase in the level and share of funding coming from

the operating lessor channel, supported by growth in capital markets

and from new sources that will be developed and expanded. A modest

resurgence in the use of ECA support is also anticipated as Exim and the

European ECAs come back on line.

The ‘true’ sources of capital – which reflect the extent to which lessors

in particular access external funding sources in addition to their internal

resources – will evolve in a similar manner, with reductions in the shares

Chart 12: 20 year delivery dollars by segment

NB WB Pax WB Frtr RJA modest resurgence in the use of ECA support is also anticipated as Exim and the European ECAs come back on line.

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(although not in the absolute dollar volumes) of commercial banks,

offset by increases for the capital markets and the new classes of

investors now expanding their presence in the sector (Chart 14).

Chart 13: Delivery financing forecast

*Lessors include internal & external financing

Chart 14: True source delivery financing mix

Lessors*

Lessors (self)

Banks

Banks

ECAs

ECAs

OEMs

OEMs

Airline cash

Airline cash

Cap. mkts

Cap. mkts

New sources

New sources

As the lessor landscape continues to change, the equity/balance

sheet element of the lessors’ own funding is expected to decline from

an estimated industry average of 40% currently to around 35% in 10

years’ time reflecting increased use of capital markets and new investor

sources. The primary funding deployment channel for new investors

entering the sector is expected to be operating leasing, which will

also help to support an increase in the lessors’ share of new delivery

financing from 40% to 45% by the end of the decade and towards 50%

before the end of the 2020s (Chart 15).

Over the coming decade, lessor financing volume is forecast to grow

at an average rate of 9% a year, with total lessor funding reaching $105

billion by 2026. The key factors driving this growth, in addition to an

increasing lessor market share, are the underlying traffic demand,

…the equity, balance sheet element of the lessors’ own funding is expected to decline from an estimated industry average of 40% currently to around 35% in 10 years’ time...

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partly offset by airline operating efficiencies, escalation of delivery

prices, up-gauging of aircraft size within families and the transition to

new generation models priced at a premium to the current generation

aircraft that precede them (Chart 16).

Chart 15: Lessor share of delivery financing

Chart 16: Lessor channel growth drivers

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Summary

The delivery of almost 43,000 aircraft requiring $4.2 trillion of delivery

funding confirms the strong airline industry growth fundamentals and

the scale of incremental aircraft production required over the coming

two decades to service growth and fleet replacement. 90% of deliveries

will be future technology models.

The financing challenge remains substantial, with an average of $170

billion annually required over the next decade to fund new deliveries.

The roles of the various liquidity providers will continue to evolve, with

operating lessors’ market share increasing from 40% to 50%, supported

by increased participation by capital markets and new investor classes.

Key points of note within the forecast are

i. at 5.4%, average RPK growth is higher than industry consensus,

but supported by strong economic and demographic trends in

emerging markets

ii. Airbus will take a slightly larger share of single aisle deliveries than

Boeing, but will account for only 42% of twin aisle deliveries, and

iii. the number of freighter conversions is forecast to be above

consensus, driven by demand from China

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Shelbourne Road

Ballsbridge, Dublin 4

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