Macro-Economic & Political Dynamics and the Commercial ... · Source: Flight Ascend Consultancy Analysis of ICAO / IATA Data, assumes IATA’s prediction of 6.0% growth in 2019 is

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Macro-Economic & Political Dynamics and the Commercial Aviation Cycle

21st January 2019

Rob Morris, Global Head of Consultancy

1

flightglobal.com/consultancy 2

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The Flight Ascend Consultancy Team

3

Rob MorrisGlobal Head of Consultancy

Chris SeymourHead of Market Analysis

Henk OmbeletHead of Advisory Operations

Alex VathylakisValuations Analyst

Sara DhariwalValuations Analyst

Peter MorrisChief Economist

Chris WillsHead of Consultancy Ops.

ISTAT Sr. Appraiser

Ben ChapmanValuations ManagerISTAT Appraiser

Richard EvansSenior Analyst

Tony BrooksSenior AnalystISTAT Appraiser

Eva KaragianniValuations Analyst

Andrew SavvidesValuations Analyst

Michalina GlapaValuations Analyst

Valerie BershovaValuations Analyst

Lionel OlongaValuations Analyst

Ryan HammacottRisk Analyst

Joanna LuHead of Consultancy Asia

Thomas KaplanSenior Analyst

Dennis LauAviation Analyst

Ken QuanAviation AnalystFebruary 2019

George DimitroffHead of ValuationsISTAT Appraiser

Michael LapsonSenior AnalystISTAT Appraiser

Daniel HallSenior AnalystISTAT AppraiserASA Sr. Appraiser

Syed ZaidiAviation Analyst

David GriffinSenior AnalystISTAT Appraiser

Vivi WeiSenior Risk Analyst

Herman TseAviation Analyst


Macro-economic and geo-politics

The current demand cycle in context

The demand side

The supply side

The aircraft value cycle


Macro-economics and geo-

politics

5


2019 GDP growth forecast to slow marginally over 2018

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 2019

Ye

ar-

on

-ye

ar

ch

an

ge in

GD

P

USA W Europe Asia Pac China Lat America World

Source: EIU, World is calculated at Market Exchange Rates


Source: OECD CLI

OECD leading indicators show consistent decline in all major

economic regions, and overall

98.0

98.5

99.0

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101.0A

pr-

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5

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y-2

015

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15

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015

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5

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r-20

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6

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y-2

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16

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6

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17

Feb

-2017

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r-20

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7

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y-2

017

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7

No

v-1

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c-1

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-18

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r-18

Apr-

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y-1

8

Jun

-18

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8

Oct-

18

USA Eurozone Major 5 Asian OECD Total


30

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60

65Ja

n-0

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l-0

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n-1

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l-1

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n-1

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l-1

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n-1

6

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l-1

6

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n-1

7

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l-1

7

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n-1

8

Apr-

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Ju

l-1

8

Oct-

18

PM

I In

de

x (

Po

sit

ive

le

ss

ne

ga

tive

an

sw

ers

)

US Manufacturing Eurozone Composite China Manufacturing Global Composite

PMIs point to some slowdown in GDP in H1 2019

8

Source: Markit Note: PMI is Purchasing Managers’ Indices

Values > 50 indicate

economic expansion


Source: US EIA / IATA

Oil price concerns easing

0

50

100

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300

350

0

20

40

60

80

100

120

140

Je

t F

uel

Ce

nts

pe

r U

S G

all

on

Cru

de

Oil

(ave

rag

e B

ren

t /

WT

I) $

pe

r B

arr

el

Oil Price Jet Fuel

IATA’s 2019 base case

fuel scenario $1.94 per

USG

Oil prices exceeded $80

briefly in Oct-18 but fallen

back to $50 since

January 14th 2019 Oil Price $54.6 per barrel,

Jet Fuel $1.80 per USG (2018 up 31% year-

on-year but actually down 10% in 2019)


Source: US EIA, US Gulf Coast spot price

Jet fuel up 31% year-on-year in 2018 but actually down 10%

year-on-year in January 2019

-60%

-40%

-20%

0%

20%

40%

60%

80%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5Ja

n-1

0

Apr-

10

Ju

l-1

0

Oct-

10

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n-1

1

Apr-

11

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l-1

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n-1

6

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l-1

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n-1

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l-1

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n-1

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l-1

8

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n-1

9

Ye

ar-

on

-Ye

ar

Ch

an

ge

Je

t F

uel

Ce

nts

pe

r U

S G

all

on

Jet Fuel $ per USG Year-on-Year Change


Downturn in World Trade Outlook Indicator after stable 2017

11

Driver (colour =

direction of change)2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Merchandise trade vol.

Export orders

Air freight

Container port throughput

Auto.prod/sales

Electronic components

Agricultural raw materials

Source: WTO

96

97

98

99

100

101

102

103

104

2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4

Wo

rld

Tra

de

Ou

tlo

ok

Ind

ica

tor

(WT

OI)

Ind

ex


Source: policyuncertainty.com

Global worry index reaching unprecedented levels

0

50

100

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350

Jan

-97

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97

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-98

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Jan

-99

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-00

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00

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-01

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-15

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-18

Jul-

18

Global Economic Uncertainty Index


Geo-political and economic threat to growth cycle increasing

13

US – China trade dispute escalates globally

Tariff increases fully implemented, compounded

Wider targets of EU, USMCA become drawn in

Oil price volatility

OPEC Supply restrictions and impact of 2020 IMO agreement

Supply disruptions from Middle East (Iran, etc)

Demand weakness and incentive for excess supply

US Monetary policy tightening

Chinese economic slowdown

High levels of domestic debt

Transition from manufacturing to services

Knock on effect on emerging markets

Brexit uncertainties increase with potential for major impact on UK and European economies

Aerospace, aviation, tourism are premium sectors at risk


Global economic cycle - today

Growth cycle continues but some uncertainty over outlook

Indicator Current level Trend

GDP 2018 forecast to be 3.0%. Asia-Pacific leads at

4.4%, US 2.9%, W Europe 2.0%, Latin America

recovery delayed – only 1.2%.

Forecasts for global GDP for 2019 show a slight decline

relative to 2018. World = 2.7%. Some recovery in Latin

America, but slower growth in Europe & the US.

Global Economic

Uncertainty (‘Worry Index’)

At highest level since index created, driven by US-

China tensions over trade.

Trend has been upwards since mid-2017.

Purchasing Managers

Indices

Major indices between 50-55 level. Consistent with

modest economic growth expansion. Services

indices better than Manufacturing.

Most manufacturing indices showing steady fall since

early 2018. Eurozone composite sharply down. Services

indices show more smaller reductions.

OECD Leading Indicators OECD total around 99.5 index. All major indices

below 100.

Overall OECD trend downwards, influenced by

Eurozone, and US. Asia stable.

World Trade World merchandise trade was up 4.7% in 2017, the

best since 2011. 2018 has seen slower growth,

with Q1-Q3 up 3.5% y-o-y. Trade Indicator levels

now show 3 Ambers and 4 Reds.

World trade drivers show slowing in Q4 2018. 6 of 7

indicators show declines since Q3. Potential for

disruption from tariffs = poor policy decisions


The current demand cycle in

context

15


Source: IATA

2018 saw ninth consecutive year of above average passenger

traffic growth

-15%

-10%

-5%

0%

5%

10%

15%

20%Jul-0

8

Oct-

08

Jan-0

9

Apr-

09

Jul-0

9

Oct-

09

Jan-1

0

Apr-

10

Jul-1

0

Oct-

10

Jan-1

1

Apr-

11

Jul-1

1

Oct-

11

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Ye

ar-

on

-Ye

ar

Ch

an

ge

Traffic (RPK) Capacity (ASK)

IATA estimating 6.5% traffic growth

for 2018 on 6.0% capacity growth

2017 Traffic = 8.0%,

Capacity = 6.6%


Source: Flight Ascend Consultancy Analysis of ICAO / IATA Data, assumes IATA’s prediction of 6.0% growth in 2019 is achieved

Demand growth trajectory in this cycle closely follows prior

cycles but has gone on for longer and thus gone higher

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Glo

bal P

assen

ge

r T

raffic

(in

dexed

to

yea

r pri

or

to g

row

th c

om

me

nce

me

nt)

1983-1990 1994-2000 2003-2008 2010-2019?


Source: Flight Fleets Analyzer (passenger single and twin-aisle aircraft in airline service)

Airline fleet growth has been significantly stronger in this cycle

1.0

1.1

1.2

1.3

1.4

1.5

1.6

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Glo

bal P

assen

ge

r A

irlin

e F

lee

t (i

nd

exed

to

ye

ar

pri

or

to g

row

th c

om

me

nce

me

nt)

1983-1990 1994-2000 2003-2008 2010-2019?


Source: FlightGlobal Schedules

China now represents more than 11% of the global airline

schedule

1.0

1.5

2.0

2.5

3.0

3.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Passen

ge

r C

ap

acity

Africa Asia-Pacific China Europe Middle East North America Latin America

3%

25%

11%

23%

7%

25%

5%


Source: Flight Fleets Analyzer, single & twin-aisle aircraft only

Chinese operators accounted for almost 25% of all new jet

deliveries in past four years

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sh

are

of

Glo

ba

l D

eli

ve

rie

s

Co

mm

erc

ial J

et

De

live

rie

s t

o C

hin

es

e A

irli

ne

s

China Deliveries Share of Global Deliveries


Source: IATA

Cumulative airline profits exceed $200 billion in this cycle which

will see ten consecutive years of global airline net profits

-30

-20

-10

0

10

20

30

40

50

Glo

bal A

irli

ne

Net

Pro

fit

(US

$b

n)

2019 profit

outlook base on

crude oil price of

$65 per barrel


Source: IATA

North America driving global net profits

Net profit, US$ Bn

-0.3

0.5

0.7

8.2

9.9

18.7

-0.4

0.4

0.6

7.5

9.6

14.7

-0.3

0.7

0.8

7.4

10.4

16.6

Africa

Latin America

Middle East

Europe

Asia-Pacific

North America

2019F

2018E

2017

$36 billion net profit

forecast for 2019


Source: Flight Fleets Analyzer & Flight Ascend Analyzer Values (2018$ Full Life Base Value); 2018 @ Dec 31

Commercial jet backlog remains at high levels into 2019

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Bac

klo

g a

s %

of

Fle

et

Co

mm

erc

ial J

et

Ord

er

Bac

klo

g

Backlog at Year End Backlog as % of Fleet

End 2018 Backlog Value

$938bn


Bubble or balloon?


The demand side outlook

25


Operating margins remain under some pressure

26

North America Europe Asia Pacific

Airline Latest Margin Airline Latest Margin Airline Latest Margin

American Q3 5.6% Lufthansa Q3 13.6% China Southern Q3 7.4%

Delta Q4 10.4% AF/KLM Q3 14.1% Air China Q3 11.9%

United Q4 6.2% IAG Q3 20.4% ANA Holdings Q3 15.4%

Southwest Q3 14.3% Turkish Q3 22.7% China Eastern Q3 8.7%

Air Canada Q3 15.5% Aeroflot Q2 1.9% Cathay Group H1/18 1.3%

Alaska Q3 13.4% Easyjet H2 15.9% JAL Q3 17.6%

JetBlue Q3 4.1% Ryanair Q3 33.9% Qantas H2 17/18 10.5%

WestJet Q3 6.2% SAS Q4 7.4% Singapore Gp Q3 5.7%

Hawaiian Q3 15.3% Norwegian Q3 13.6% Korean Air Q3 11.5%

Spirit Q3 16.1% Finnair Q3 13.5% Hainan Airlines Q3 1.2%

Revenue


Source: IATA

Traffic growth predicted to slow in 2019 but only marginally so

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Africa Asia-Pacific Middle East Latin America North America Europe Global

20

19

Pre

dic

ted

Gro

wth

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


Source: Flight Schedules data

December 2018 schedule still indicates 6% capacity growth in

March 2019

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19

Ye

ar-

on

-Ye

ar

Ch

an

ge

Sep-18 Nov-18 Dec-18


Aviation demand cycle

Demand side still positive, but several weakening trends, and some cost pressures


Passenger traffic Above trend growth for seventh year running, 2018 (to

Nov) growth was 6.6%. Led by India, China, LCCs.

Europe also very strong.

Growth rate slowing slightly in H2 2018, but still > 6% y-

o-y. Forward scheds indicate 6-7% capacity growth in

Q1 2019. IATA forecasts 6.0% RPK growth in 2019.

Freight traffic Full year 2017 up 9.0%. 2018 YTD (to Nov) is 3.9%.Considerable slowdown since Q4 2017. Q4 2018 growth

below 3%.

Airline operating

marginsNorth American & European airlines saw margins above

10% in Q3. This is good by historic standards, but cost

increases not being reflected in sufficient yield gains.

Margins peaked in 2016 at 8.6%. IATA forecast global

margin of 7.5% in 2018, but this appears to be

overstated based on Q3 figures & cost trends.

Load Factors At record global high. India and China also at record

highs.

Some regions still showing slight increases, but may be

peaking. Pressure on Middle East carriers. India now

above US levels.

New aircraft orders 2018 book-to-bill around 1.0 YTD. Higher for SA, lower

for RJs. This is a little below the long-run average book-

to-bill average of 1.3:1.

Orders saw good intake in Q4, but not as high as in late

2017. Single-aisles still lead the way.

Deferrals &

cancellationsDeferrals at modest. Cancellations higher than average

levels compared to recent years, driven by E-Jets.

Deferrals and cancellations increasing, but latter

primarily driven by E-Jet order book changes. Red

reflects RJs, Amber for remainder of market.


Conclusions

30

Airline operating margins seeing some pressure across all regions and types of airline

Competition and high capacity growth rates make it more difficult to raise fares

Competitive pressures mentioned by airlines in Asia, European low-cost sector and on some

transatlantic markets as contributing to lower results.

Economic outlook has some risks, but forecasts are still for relatively strong growth

Past experience suggests that airlines will lower capacity plans to gain pricing power, but little

sign of action as yet

Oil prices are easing but volatility is not helpful to airlines whilst outlook doesn’t appear

positive

Demand indicator traffic lights featuring increasing incidence of amber and red, particularly in

trend which is indicative of outlook


…and the Supply Side?

31


Source: Flight Fleets Analyzer

Almost 2,000 commercial passenger deliveries scheduled for

2019

0

100

200

300

400

500

600

700

800

900

1,000

Airbus Boeing Bombardier Embraer COMAC Sukhoi ATR Bombardier

20

19

Sc

he

du

led

Deli

ve

rie

s


Source: Flight Fleets Analyzer – western passenger jets only

Monthly stored passenger jets at low point for cycle

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Co

mm

erc

ial J

et

Air

cra

ft i

n S

tora

ge

2016 2017 2018


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

Used jet availability at lowest level since 2010

0

100

200

300

400

500

600

700

800

900

0

50

100

150

200

250

300

350

400

450

Ja

n-1

0

Apr-

10

Ju

l-1

0

Oct-

10

Ja

n-1

1

Apr-

11

Ju

l-1

1

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-1

2

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-1

3

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-1

4

Oct-

14

Ja

n-1

5

Apr-

15

Ju

l-1

5

Oct-

15

Ja

n-1

6

Apr-

16

Ju

l-1

6

Oct-

16

Ja

n-1

7

Apr-

17

Ju

l-1

7

Oct-

17

Ja

n-1

8

Apr-

18

Ju

l-1

8

Oct-

18

Ja

n-1

9

To

tal C

om

me

rcia

l J

et

Mo

nth

ly A

va

ila

bilit

y

Tw

in-A

isle

/ S

ing

le-A

isle

/ R

eg

ion

al J

et

Mo

nth

ly

Ava

ila

bil

ity

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


Source: Flight Fleets Analyzer

Retirement volumes down in 2018, economic life stable

0

5

10

15

20

25

30

35

40

0

100

200

300

400

500

600

700

800

Ave

rag

e A

ge

at

Air

cra

ft R

eti

rem

en

t

Air

cra

ft r

eti

red

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

Average Age at Retirement Average Age at Economic Retirement


Aviation supply cycle

Increased supply is justified by the current demand scenario


Aircraft deliveries 2018 deliveries set another new record, both at

Airbus and Boeing. However, regional jet

deliveries fell to lowest level since 2013.

Deliveries increased 6% in 2018, with Airbus/Boeing up 8%.

2019 will see further increases on 737, A320, A220, 787 and

A350 and A220.

Deliveries for

replacement/growth

Past 7 years, deliveries for replacement average

47% of the total, around five points higher than

long-run average

Still relatively high levels of replacement (at long-run

average) given strength of demand. But in 2018 to date only

12% of deliveries are for replacement.

Deliveries as percentage of

fleet

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

2018 was around or slightly above this level.

Trend is to a higher percentage, marginally above 7% but no

concerns if OEMs halt their single-aisle production increases

at Rate 57 / 60

Stored aircraft Absolute level of stored commercial jets has fallen

since 2012, and now is at lowest level since before

the recession in terms of % of fleet

Single-aisle declining to lowest share since 1998. RJs also

falling, though some due to retirements. Twin-aisles and

freighters at similar levels to 2017.

Used aircraft availability Commercial aircraft offered for sale / lease

currently at lowest point since 2010

Falling numbers across all categories. Many stored 50 seat

jets not actively being marketed

Aircraft economic life Average economic life is stable at around 23

years. Preliminary data for 2018 shows

stabilisation

Average age stabilised in 2016/17, consistent with stronger

demand environment, but still some young aircraft parting

out

Aircraft utilisation Single-aisle & twin-aisle utilisations at historic

highs. Freighters and Pax.

Continues to improve, to higher-than-expected levels. Twin-

aisles helped by cargo market recovery.


Conclusions

37

Supply is justified by demand at present

Execution issues caused temporary drag in 2018 but now seem to be largely solved

Concerns about airline performance as we head into 2019

Backlog is causing OEMs to consider further increases in Rate beyond those already

committed this year

Unprecedented long and high cycle already required to efficiently assimilate output already

committed from OEMs and further Rate increases exacerbate this challenge

IF demand doesn’t justify the supply then OEMs will have to hope for

Sustained high fuel prices rendering new output more efficient than current installed fleet (but this has

potential for negative impact on mid-life and older aircraft life cycle)

Continued availability of finance to allow airlines to accept delivery

Subsidiary implication for aftermarket where new deliveries will be used for replacement rather than growth

(in this scenario), meaning installed fleet of current generation types will potentially retire earlier than

hypothesised



38


Source: Flight Ascend Values, commercial passenger jets in service & stored

~60% of today’s jet fleet has CMV > BV

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

Cu

mu

lati

ve

% o

f F

lee

t

CMV / BV

Jul-08

Jul-10

Jan-19

70% of commercial jet fleet

has MV within 10% of BV


Single-Aisles skew the distribution for values

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

Cu

mu

lati

ve

% o

f F

lee

t

CMV / BV

Regional Jet

Single-Aisle

Twin-Aisle

Source: Flight Ascend Values, commercial passenger jets in service & stored




Market To Base Value ratios60% of the fleet has CMV > BV, 70% have CMV

within 10% of BV

January 2019 value reviews driven 20% more of

the fleet into positive CMV / BV territory

Single-Aisle Values80% of single-aisle fleet have CMV greater than

BV

More than 70% of fleet saw no CMV change in

2018, only 390 aircraft have seen average 8%

reduction, 3,900 aircraft increased by 5% average

Single Aisle Lease RatesSimilarly stable with 80% of fleet having CMLR

higher than BLR

Almost 50% of the fleet saw average increases of

3% in 2018

Twin-Aisle Values 75% of twin-aisle fleet have CMV less than BV

Stable in 2018 with 97% of fleet seeing no CMV

change since start of year, 130 aircraft saw

average of 2% increase

Twin-Aisle Lease RatesSignificant declines in 2015 and 2016 arrested

since but 75% of fleet still have CMLR lower than

BLR

Also stable in 2018 with relatively few changes

across global fleet although balance in marginally

to small increases

Lease Rate FactorsRecord lows on new aircraft driven by highly

competitive PLB market. Better LRFs available for

aircraft placed from lessor backlog, and used a/c.

Stabilising as some lessors move away from PLB

and focus on placement of their OEM backlog

Values & Lease Rates seem to be in peak of cycle territory


A Final Summary

42

Global economics weakening with perception of increased geo-political risk

driving uncertainty

Airline financial performance weakening (profit cycle has turned?) which in

turn is likely to drive considerations of capacity reductions (demand cycle is

turning?)

Significant capacity committed for delivery from OEMs production lines -

backlog exposure is highest in Asia-Pacific and China

Values and lease rates remain stable for now

It’s a long cycle!


Rob Morris

Global Head of Consultancy

+44 (0)20 8564 6735

+44 (0)7730 213189

[email protected]

Documents

Macro-Economic & Political Dynamics and the Commercial ... · Source: Flight Ascend Consultancy Analysis of ICAO / IATA Data, assumes IATA’s prediction of 6.0% growth in 2019 is