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Commercial Aviation Sector Update

Doric Aviation Day

Rob Morris

Global Head of Consultancy

9th June 2016

On the Menu…..

Introduction to Ascend

The Aviation Demand and Supply Cycles

Aircraft Values

A few final thoughts

2

Ascend is Appraiser of the Year……again

The Ascend Flightglobal Consultancy Team

4

George DimitroffHead of Valuations

Mike LapsonSenior AnalystISTAT Appraiser

Dan HallSenior AnalystASA Appraiser

Rob MorrisHead of Consultancy

Chris WillsValuations ManagerSenior ISTAT Appraiser

Peter MorrisChief Economist

Chris SeymourHead of Market Analysis

Tony BrooksSenior AnalystISTAT Appraiser

Joanna LuHead of Advisory Asia

Thomas KaplanAviation Analyst

Sara DhariwalAviation Analyst

Henk OmbeletSenior Analyst

Evgeny van der GeestSenior Risk Analyst

Richard EvansSenior Analyst

Ben ChapmanAviation Analyst

Eva KaragianniAviation Analyst

Oliver BiddulphAviation Analyst

Gary SzeProject Manager

Dennis LauAviation Analyst

Michael HuiAviation Analyst

Oliver FordAviation Analyst

VacantSenior Risk Analyst

On the Menu…..



Aircraft Values


5

Aviation demand cycle

6

Indicator Current level Trend

Passenger traffic Above trend growth for sixth year running;

6.5% growth in. N America & W Europeseeing strong growth. Q1 2016 saw 7.7%.

Growth rate was above 6% for most of 2015

and >7% during summer. After allowing for Leap Year, Jan-Mar 2016 all above 6.5%.

Freight traffic Traffic reached consistent 5% year-on-year

growth in H1 2015 for first time since 2010, Last few months hovering around 0%.

Growth recovery has slowed since Q1 2015;

capacity exceeding demand; consistent with weak manufacturing data from China

Yields US yields are only readily available monthly

data point; remain high by historic standards. March 2016 @ 9.6c/RPK is below 2011-2015 levels, but fuel price has halved.

Yields have been falling since December

2014; Q1 2016 down around 5%. However, this is not a major concern yet, as costs are down by >10% as a result of falling oil prices

Load Factors Generally very high, exceeding 2008 levels.

Asia much lower – emerging evidence of overcapacity in some areas?

Mixed picture; US stable at very high levels,

European airlines LF has peaked and is declining. Asian airlines falling in some cases

New aircraft orders 2015 saw around 2,050 net orders for

commercial jets. Book-to-bill = 1.4. YTD (to April) saw 318 net orders, with Book-to-bill less than 1.0. This metric may become

Amber shortly.

Order intake has fallen sharply from the

levels of 2011-2014. New programmes are sold out for several years, with limited slots now available, driving downward trend

Deferrals & cancellations Deferrals are at a low absolute level

compared to ten year average, and cancellations around average – however, this is lower if taken as % of a growing fleet

Slight uptick in cancellations towards end of

2015, but too early to conclude if significant yet

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

Airline profits benefitting from low oil prices

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7Source – US EIA / IATA

Global passenger traffic growth remains robust

8Source: IATA

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Traffic (RPK) Capacity (ASK)

IATA predicting 6.2% traffic

growth for 2016

2015 Capacity

= 6.7%, Traffic

= 7.4%

IATA expect supply to lead demand (marginally) in most

regions in 2016

9Source – IATA, Year to Date to end April 2016

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Africa Asia-Pacific Middle East Latin America NorthAmerica

Europe Global

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Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity

Airline profits continue to grow through 2016

Source: IATA

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Commercial jet backlog at record high

11Source: Flightglobal Fleets Analyzer & Ascend Values (2016$ Base Full Life Value)

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Backlog at Year End Backlog as % of Fleet

Backlog Value

Now $952bn

Over 2,050 new aircraft ordered in 2015

12Source: Flightglobal Fleets Analyzer, commercial passenger & cargo jets only

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CRJ Family

MRJ

ARJ21

767

777 Family

787

A330 Family

E-Jet Family

737 Family

A320 Family

(No of aircraft)Current Generation New Generation

Top 10 aircraft type net orders in 2015

35% are A321

• 25 A321 ceo

• 294 A321 neo

Only 540 net new aircraft ordered in 2016 to date

13Source: Flightglobal Fleets Analyzer, commercial passenger & Cargo jets only, as at 6 June 2016

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747

CRJ900Regional Jet

787

777 Family

A350

E-Jet Family

A330 Family

A320 Family

CSeries

737 Family

Net Aircraft OrdersCurrent Generation New Generation

Top 10 aircraft type net orders in 2016

Book to bill above one but below long-run average

in 2015, below one in 2016 to date

14Source: Flightglobal Fleets Analyzer – w estern built jets only, as at 6 June 2016

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Aviation supply cycle

15

Indicator Current level Trend

Aircraft deliveries 2015 had record commercial jet deliveries,

2016 expected to exceed further

Production rates set to increase for A320,

737, 787 & A350, plus CSeries ramp-up; A330 reducing and 777 also to see cuts

Deliveries for replacement/growth

Past 5 years, deliveries for replacement

made up around 50% of the total, around ten points higher than long-run average

Decline since 2008; 2015 has seen share for

replacement falling significantly, towards numbers consistent with peak years of cycles

Deliveries as percentage of fleet

6.5% in 2015, actually marginally down over

2014. The average over the past 25 years has been 7%

Trend is to a higher percentage, with above

7% in 2016 – 2019; such levels could indicate overcapacity based on past history

Stored aircraft Absolute level of stored commercial jets

remains at historic high, though declining since the recession in terms of % of fleet

Single-aisle declining, small increase in twin-

aisle, RJs increasing rapidly, driven by 50 seat jets ex-US market

Used aircraft availability Commercial aircraft offered for sale / lease

currently at lowest point since 2010

Falling numbers of available single-aisle, RJs

stable - many stored 50 seat jets not actively being marketed

Aircraft economic life Average age at retirement is now <25 years,

despite fall in fuel prices

Few very young aircraft continue to part-out,

total continues to decline in 2015

Aircraft utilisation Single-aisle & twin-aisle utilisations are at or

near historic highs

Fairly flat trend since recovering in 2010/11.

Year to June 2015 showed less than 1% decline off post-recession peak.

Despite strong demand, several indicators amber or red

Jet deliveries down year to date in 2016

16Source: Flightglobal Fleets Analyzer, as at 6 June 2016

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Regional Jet Single-Aisle Twin-Aisle

47% of last 7 years passenger jet deliveries have

been for replacement

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Deliveries % of Deliveries for Replacement

Source: Flightglobal Fleets Analyzer - deliveries into passenger airline service only, 2016 as at 6 June

Deliveries represent typically around 7% of global

fleet

18Source: Flightglobal Fleets Analyzer & Flightglobal Fleet Forecast (deliveries into passenger airline service only)

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Deliveries / Forecast Deliveries Deliveries as % of Fleet in Service

Used jet availability declining

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Tota

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Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS)

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

Some element of production “surplus” has driven

increased retirements at reduced age in this cycle

20Source: Flightglobal Fleets Analyzer

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<15 Years Old at Retirement >15 Years Old at Retirement

Average Age at Retirement Average Age at Economic Retirement

32% of single-aisle slots open in next ten-years

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total

Airbus Backlog Boeing Backlog Others Backlog Open Slots

Source: Flightglobal Fleets Analyzer & current / planned production,

Risk of supply exceeding demand in single-aisle

market increasing towards end of decade

22Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast

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Airbus Rate 60

Boeing Rate 57

A comment on single-aisle production rates

Airbus currently headed to rate 50 by 2017 (and then 60 by 2019), Boeing

rate 52 in 2018 (and now 57 in 2019)

This drives ~5.4% single-aisle fleet growth through 2020

Single-aisle productivity (more seats, longer sectors, increased utilisation)

has increased by 2.4% per annum over last ten years

So 5.4% fleet growth equals 7.8% capacity growth

Single-aisle share of global capacity is growing (also by 2.4% per annum)

So current rates actually equate to 5.4% global capacity through 2020

Allowing for load factor increases, traffic will need to exceed this

But…….• …..leaves no room for CSeries, C919 or MC-21

• …..assumes single-aisle share continues to grow

• …..assumes 2,000 single-aisle retirements through 2020

Single-aisle rates 57 / 60 may be an increase too far?

23

Current single-aisle production rates exceed OEM’s

long-term demand forecasts

24Source: 2015 Flightglobal Fleets Forecast, Airbus GMF, Boeing CMO; Ascend Analysis

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Announced / EstimatedProduction Rates

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2015 –

2034)

Airbus Boeing CSeries MC-21 C919 Single-Aisle

Airbus & Boeing total

@ sustained Rate 60

/ 57 post-2019

45% of twin-aisle slots open in next ten-years

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total

Airbus Backlog Boeing Backlog Open Slots

Source: Flightglobal Fleets Analyzer & current / planned production,

Twin-aisle production surplus looks to be higher risk

in near-term

26

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Airbus Backlog Boeing Backlog Planned Production Forecast Deliveries

Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast

Significant open demand in regional jet market

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Sukhoi Backlog Planned Production Forecast Deliveries

Source: Flightglobal Fleets Analyzer, 2015 Flightglobal Fleet Forecast

New & emerging aircraft programmes - scorecard

28

Type Order success

Marketposition

Execution / delivery

Comment

A320neo Hitting cash-flow. Recovery by end 2016 key.

A321neo winning at airlines and leasing co’s.

737 Max Good programme execution, but wobbles on

family strategy in face of A321neo and CSeries.

A330neo Steady order progress. Production gap bridged

successfully. Lower fuel prices help vs. 787.

777X EIS now late 2019. No new customers

announced since 2014. Is it too big?

CSeries Boosted by new orders and route proving. Can

BBD sell at sustainable prices?

E-Jet E2 Large established operator base. Programme

appears on time. E190/195 need more orders.

MRJ Programme delays problematic. Vulnerable to

lack of change to US scope clauses.

C919 Huge domestic market, but no evidence

aircraft will be competitive or on-time.

MC-21 Dependence on Russian orders. Behind

schedule.

Demand & supply cycle summary

Mixed messages from the global economic cycle – “geopolitical risk”

• China remains on watch

• Brazil, Russia!!!

Aviation demand cycle remains strong – “still as good as it gets”

• Fuel prices are helping a lot on the cost / yield side

• Watching closely for signs of evolving capacity surplus

Some amber / red indicators in aviation supply cycle – “OEM capacity!”

• Deliveries trending towards higher % of installed fleet

• Average age of retirement continues to decline

• Utilisations flattened since recovering post-2008

29

On the Menu…..



Aircraft Values


30

50% of today’s jet fleet has CMV > BV

31Source – Ascend Values

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Single-Aisles skew the distribution


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Market Value Changes since January 2016

▼ 737-700 10%

▼ 747-8F 0-12%

▼ 757-200 6-8%

▼ 757-200F 7-9%

▼ A320neo 3%

▼ 777-200ER 5%

▼ ATR Freighters 0-18%

▼ Dash 8-100 3-10%

▼ Dash 8-200 5%

▼ Dash 8-300 9-13%

▼ EMB-120 28-36%

▼ Fokker 50 3%

► CSeries new values added

33Images sourced from avionvale.com and Bombardier press release respectively

Market Lease Rate Changes since January 2016

▲ A321-200 (post-2000) up to 11%

▲ A321-200 Sharklets 1.5%

▼ 767-300ER 3-10%

▼ A321-200 (pre-2000) up to 11%

▼ A320neo 3%

▼ 747-8i 4-5%

▼ 747-8F 6-10%

▼ 777-200ER 18-20%

▼ CRJ700/900 15-20%

▼ Dash 8-1/2/300 5-13%

34Images sourced from Airbus and Bombardier press releases respectively

Key Aircraft on Watch

737-700

• potential for more value drops

737-800 Lease Rates

• lots of [re]marketing activity in progress

A330 Lease Rates

• keeping an eye on remarketing activity.. Offers not too high

ATR 72-600

• market appears somewhat oversupplied

• both Values and Lease Rates on watch

35

The last cycle saw significantly better CMV / BV

improvement than the current cycle


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Jul-10 (Trough of Current Cycle)

Current Position

On the Menu…..



Aircraft Values


37

Some final thoughts about oil prices

Low oil prices stimulate opportunities in the demand side

$50 - $70 per barrel seems to be the latest outlook

Low oil prices degrade the immediate advantage of next generation

aircraft

Next generation aircraft backlogs are huge, with most commitments

placed in the prior high fuel price scenario

Unwinding these commitments will be expensive

There are a finite number of current generation opportunities

So for next generation, demand will remain strong but it’s now all about

the price

38

Around 4% points more of 15+ year old aircraft in service

today than three years ago

39Source – Flightglobal Fleets Analyzer

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Fleet of 15+ year old aircraft is 1,350 aircraft larger

than it was three years ago

40Source: Flightglobal Fleets Analyzer, as at 6 June 2016

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Next generation lease rate premiums are sensitive to fuel

price

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US Gulf-Coast Jet

Kerosene presently

at $1.16 per USG

Technology upgrades have an impact on values of

legacy models

42

Impact of 737NG introduction on 737 Classics values

Source: Flightglobal Fleets Analyzer & Ascend Values from Flightglobal (in service = airline passenger aircraft only)

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737-300 (0-Year) 737-300 (5-Year) 737-300 (10-Year)737-300 (15-Year) 737-300 (20-Year) 737-300 (25-Year)737 Classic Fleet 737NG Fleet

First 737NG

Delivery

Boeing 737NG fleet projected to remain larger than

737Max through 2027

43Source: Flightglobal Fleet Forecast

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737NG Fleet Project 737NG Fleet Projected 737Max Fleet

Depreciation significantly accelerated for later build

aircraft in Ascend Base Values

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737-800 Base Value, US$ Mn

Source: Ascend Values from Flightglobal

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1998 1999 2000 2001 2002 2003 20042005 2006 2007 2008 2009 2010 20112012 2013 2014 2015 2016 2017

Early build aircraft depreciate less steeply

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HL Base Value, US$ Mn

Source: Ascend Values from Flightglobal, note values are uninflated

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A320S A320neo

First A320neo takes five more years to get to 25%

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HLBV as ratio of initial HLBV

Source: Ascend Values from Flightglobal, note values are uninflated

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90%

100%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A320S A320neo

Used aircraft transactions have been increasing

since 2012

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Used c

om

merc

ial j

et

air

cra

ft s

ale

s

0-4 Years 5-9 Years 10-14 Years 15-19 Years 20-24 Years 25+ Years

Source: Flightglobal Fleets Analyzer, Western jets for passenger usage

Typically around 8% of the global fleet is transacted

as used aircraft annually

2%

4%

6%

8%

10%

12%

0

500

1000

1500

2000

2500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% o

f F

leet

Tra

nsacte

d

Used C

om

merc

ial Jet A

ircra

ft S

ale

s

0-4 Years 5-9 Years 10-14 Years 15-19 Years 20-24 Years 25+ Years

Source: Flightglobal Fleets Analyzer, Western jets for passenger usage, PLBs at delivery excluded

Final thoughts summary

Lower oil prices are a short-term positive for demand

There are more older aircraft in service today then three years ago

Aircraft values are most fundamentally driven by demand and supply,

but values aren’t necessarily reflective of the current strong demand

environment

Technology transition is potentially a factor here

Aircraft value behaviour through technology transition is well understood

Provided the accelerated depreciation of late-build models is factored in,

there is little to be nervous about

49

The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is

supplied on the understanding that no legal liability whatsoever shall attach to AscendFlightglobal Consultancy, its offices, or employees in respect of any error or omission that may have occurred.

Question time…..

Rob MorrisGlobal Head of Consultancy

+44 (0)20 8564 6735+44 (0)7730 213 [email protected]

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