HongKong,31October2017

PeterMorris,ChiefEconomist

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MacroEconomicsandPoliticalDynamics

FlightGlobal:Pioneeringaviationinsightandanalyticsbusiness

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FlightAscend’s uniqueValuepropositionasanappraiser

TheFlightAscendConsultancyTeam

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George DimitroffHead of ValuationsISTAT Appraiser

Michael LapsonSenior AnalystISTAT Appraiser

Daniel HallSenior AnalystASA Sr. Appraiser

Rob MorrisGlobal Head of Consultancy

Chris WillsHead of Consultancy Ops.ISTAT Sr. Appraiser

Peter MorrisChief Economist

Chris SeymourHead of Market Analysis

Tony BrooksSenior AnalystISTAT Appraiser

Joanna LuHead of Advisory Asia

Thomas KaplanValuations Analyst

Sara DhariwalValuations Analyst

Henk OmbeletSenior Analyst

Richard EvansSenior Consultant

Ben ChapmanValuations ManagerISTAT Appraiser

Eva KaragianniValuations Analyst

Dennis LauAviation Analyst

Michael HuiAviation Analyst

Oliver FordValuations Analyst

Luke SmithValuations AnalystLionel Olonga

Valuations Analyst

Ryan HammacottRisk Analyst

Syed ZaidiAviation Analyst

VacantSenior Consultant

Kevin NgAviation Analyst

Valerie BershovaValuations Analyst

David GriffinSenior AnalystISTAT Appraiser

Outline• IndustryDrivers• RecentTrafficandCapacityTrends• Profitability• PoliticalUncertainty

TheAviationEvolutionaryCycle

• Ownership• Alliances• Routenetworkgrowth• Segmentation• Consolidation

• Aircraftperformance• Distributionoptions• Informationflow• Onboardproduct• ActualPerformance

• Liberalisation• TradeBlocs• Competition• Protectionism

• GDPandpopulation• Price• Product&Information• ShockEvents• Changingtastes

Customer Regulatory

Airline/Airportmarketstructure

TechnologyInvestment

Passengertrafficgrowthhasvaried,butshownrobustrecoveryfromshocks

7

GulfWar NYC GFCAFC

Changesintheworld’seconomiccentreofgravity

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Maturemarketsslipdowntable,developingmarketsrise

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Source:PWCFeb2017

A decade and a half of structural change by region

11%

2%

Changingairlinesharesofworldseatcapacity2002-16

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Source:TurkishAirlines

Steadygrowthexpectationsto2021acrossmostregions

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SteadyImprovementinEuropeangrowthexpectations

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SimilarlyinAsiaPacific

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ChinaGDPgrowthisexpectedtoslowwitheconomicmaturityanddemographics

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0123456789

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2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

ChinaGDPGrowthProjection

ThreemajorregionsandOECDoverallnowover100onCompositeLeadingIndicatorsIndex• USAnowthemajoroneleftmarginallybelow100

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98.0

98.5

99.0

99.5

100.0

100.5

101.0

USA Eurozone Major5Asian OECDTotal

OECDLeadingIndicators,August2017

WTOTradeIndicatornowhighestsince2011

17Source:WTOSeptember2017

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Source: IATA

Globalpassengertrafficgrowthstrongerthanexpectedinearly2017

-15%

-10%

-5%

0%

5%

10%

15%

20%Ju

l-08

Sep-

08N

ov-0

8Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep-

10N

ov-1

0Ja

n-11

Mar

-11

May

-11

Jul-1

1Se

p-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

Sep-

14N

ov-1

4Ja

n-15

Mar

-15

May

-15

Jul-1

5Se

p-15

Nov

-15

Jan-

16M

ar-1

6M

ay-1

6Ju

l-16

Sep-

16N

ov-1

6Ja

n-17

Mar

-17

May

-17

Jul-1

7

Year

-on-

Year

Cha

nge

Traffic (RPK) Capacity (ASK)

2016 Capacity = 6.2%, Traffic = 6.3%

2017YTD Capacity = 6.5% Traffic = 7.9%

Strong growth seen in domesticmarkets

-0.7%

6.0%

3.4%

8.1%

15.3%

14.9%

14.8%

7.4%

-2.1%

3.0%

4.7%

6.6%

12.7%

15.3%

16.7%

7.7%

-5% 0% 5% 10%Domestic revenue passenger kilometres (%year-on-year)

Source: IATA

15% 20%

Apr 2017 Mar 2017

Industry

Domestic Russia

Domestic India

Domestic China

Domestic Japan

Domestic USA

Domestic Brazil

Dom. Australia

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Source: IATA

Freightmarketnowpredictedtogrow7.3%in2017

-30%

-20%

-10%

0%

10%

20%

30%

40%Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

Apr-1

2Ju

l-12

Oct

-12

Jan-

13Ap

r-13

Jul-1

3O

ct-1

3Ja

n-14

Apr-1

4Ju

l-14

Oct

-14

Jan-

15Ap

r-15

Jul-1

5O

ct-1

5Ja

n-16

Apr-1

6Ju

l-16

Oct

-16

Jan-

17Ap

r-17

Jul-1

7

Year

-on-

Year

Cha

nge

Traffic (FTK) Capacity (AFTK)

2016 traffic = 3.8%, capacity = 5.3%

IATAhasmarkedlyupdatedforecasts for 2017

2.5

0

5.1

3.3

5.66.6

2.9

-2-2

-4

7.4 7.3 77.7

0

2

4

6

8

10

GDP Paxyields RPKs Freight tonnes ASKs Operatingmargins

Percentage

change

or%

revenu

es PreviousforecastCurrent forecast

Source: IATA

2017 industryprofits down butupgraded

0

2

4

6

8

104035302520151050-5-10

%revenu

es

US$billion

Net profits and operating margins

Net profits - currentOperating margin - current

Net profits - previousOperating margin - previous

2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: IATA

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GlobaleconomiccycleSteady performance with improvement seen since late 2016

Indicator Current level Trend

GDP EIUestimatefor2016was2.2%. 2017forecastcurrently higherat2.9%.Asia-Pacificleadsat4.4%,US2.2%,WEurope2.1%,LatinAmerica1.1%.

ForecastsforglobalGDPfor2017 showanimprovementover2016forNorthandLatinAmerica,aswellasMiddleEastandAfrica.Russiaalsoemergingfromrecession.

OECDLeadingIndicators OECDmembersstableover100index.Withinthis,EuroAreaabove100;Major5Asiancountries(includingChina)nowabove100,asaremanydevelopingnations.USjustbelow100.

Inflexionpointinmanycountries (e.g.ChinabyQ42016).Overall,mostmajoreconomiesshowedanimprovingtrend.PMIsalsoshowingimprovingtrend

WorldTrade Tradein1st 2Q2017up3-4% WorldtradedriverscontinuetoshowmomentumintoQ32017.WTOOutlookindicatorshowing3Green,3Amberand1RedinAugust2017

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AviationdemandcycleDemand side stable, traffic trends positive, but some yield pressures Indicator Current level TrendPassenger traffic Abovetrendgrowthforsixthyearrunning, 2017

predictedtobe7.4%. LedbyIndia.China.LCCsandyear-on-yearrecoveryinRussia.

Trafficgrowthacceleratingsincelate 2016.Q22017uptoover7%comparedto2016.

Freighttraffic Jan-July 2017up10.6% Improvingtrendinrecentmonths.Freightloadfactorsincreasingthroughout2017.

Yields USsawdeclinesof5-10%formostof2016,reflectinglowerfuelprices.IATAestimate-8%globally.Costsarenowincreasingagain,andUSyieldsareflattoup2%year-on-year

Yields fellfromDecember2014;However,costsweredownby>10%asaresultoffallingoilprices.Nowcostsareincreasing,yieldshavestabilised.

LoadFactors Stillnearhistoricallyrecordlevelsinallmarkets.IndiaandChinaatrecordhighs

AllregionsexceptMiddleEastshowingimprovementsinrecentmonths

Newaircraftorders YTD2017book-to-billaround0.7forallcommercialjets,evenlowerforRJs

Orderintakefallensharplyfromthelevelsof2011-2014. However,thiswasexpectedgivenrecordbacklogof14,000aircraft($900bn)andlimitedopenslotsthrough2020

Deferrals&cancellations

Deferralshavetickedupfollowingrecentairlinecapacityadjustmentsfrompriorlowlevel.Cancellationsnowjustaboveaverage,althoughthisislowerifnormalisedforfleetsize

Bothcancellations anddeferralrateincreasedin2016,butslowingin2017.MostcancellationsduetoOEMscleaningorderbookbutdeferralsreflectfleetplaniteration(Southwest,AA,Turkish,Qantas).

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Source: Flight Schedules data

ForwardschedulesshowsomeslowingofASKgrowthforwinter2017/18,butstillabove6%

0%

2%

4%

6%

8%

10%

12%

Year

-on-

Year

Cha

nge

Nov 2016 Schedule Jan 2017 sched Mar 2017 schedLeap Year adj. Jun 2017 sched Aug 2017 schedSep 2017 Sched

Feb 2016 was a Leap Year

Capacity ran at 6% growth during Q2/Q3 2016

ForecastHistory

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Source: ICAO, IATA, Flight Ascend Consultancy Analysis

GlobaltrafficwillneedtobewellabovetrendtoabsorbOEMoutputthrough2020

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1980

1981

1982

1983

1984

1985

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1987

1988

1989

1990

1991

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2020

Glo

bal P

asse

nger

Tra

ffic

Gro

wth

1982hadworstglobalGDPsince1945,butstill

2%trafficgrowth 1991and2001saw3%trafficfall,exacerbated

by'shock'events

Trafficgrowthof7.7%2017-2020impliedbyOEMproductionrates

Period CAGR1983-1990 8Years 6.6%1994-2000 7Years 6.6%2003-2008 6Years 6.6%2010-2016 7Years 6.5%2010-2020?? 11Years 6.9%

Andtocheerusallupfor2017- theGlobalWorryIndexreachesnewheightsbuthasrelentedtolevelofGFC

Source:Policyuncertainty.com

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PeterMorrisChiefEconomist

+44(0)2085646790+44(0)7725496758peter.morris@ascendworldwide.com

Thankyou!