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Macro View on the
Aviation Industry
Dublin
January 2017
Peter Morris
Chief Economist
1
Agenda
• Macroeconomic drivers and trends
• GDP
• Tourism
• Trade
• Leading indicators
• Oil price and effects on the market
• Aircraft orders
• Global Risks 2015/16
The Aviation Evolutionary Cycle
•Ownership
•Alliance
•Route network
•Polarisation
•Consolidation
•Aircraft
•Distribution
• Information
•On board product
•Performance
•Liberalisation
•Trade Blocs
•Competition
•Protectionism
•GDP
•Price
•Product & Information
•Shock Events
•Changing tastes
Customer Regulatory
Airline/ Airport market
structure
Technology
Western Europe likely to see the weakest growth, Asia the strongest
-6
-4
-2
0
2
4
6
8
% G
DP
gro
wth
GDP Growth Expectations to 2020
Asia and Australasia - [19] Eastern Europe - [13]Latin America - [20] Middle-East and North Africa - [19]North America - [2] Sub-Saharan Africa - [17]Western Europe - [21]
Source: EIU Dec 16
Four regions indicate improved GDP for 2017
(2)
(1)
-
1
2
3
4
5
Asia andAustralasia - [19]
Eastern Europe -[13]
Latin America -[20]
Middle-East andNorth Africa - [19]
North America - [2] Sub-SaharanAfrica - [17]
Western Europe -[21]
%
GDP Growth Trends (%) 2015-17
2015 2016 2017
5
EIU Dec 2016
Forecasts slipping then recovering in Asia
6
FlightAscend analysis of EIU data
Will the new administration bridge the gap?
7
Optimism for some parts of Western Europe subsided in July
8
FlightAscend analysis of EIU data
Tourism - 2016 trend slightly lower than 2015, but significant
regional variations
Trade outlook shows some optimism for 2017
10
Source: WTO Nov 2016
Overall, OECD lead indicators suggest stability, improvement
Source: OECD 2016
12
Global economic cycle
Steady performance with improvement seen in Q4 2016
Indicator Current level Trend
GDP EIU estimate for 2016 was 2.2%.
2017 forecast currently higher at
2.5%. Asia-Pacific leads at 4.0%,
US 2.3%, W Europe 1.3%. Latin
America 1.7%.
Forecasts for global GDP for 2017
show an improvement over 2016 for
North and Latin America, as well as
Middle East and Africa. Russia also
emerging from recession.
OECD Leading Indicators OECD members fairly stable at
~100 index. Within this, Euro Area
above 100; US and major 5 Asian
countries (including China) are
below 100, as are many developing
nations
Inflexion point in many countries
(e.g. China by Q4 2016). Overall,
most major economies showed an
improving trend. PMIs also showing
improving trend.
World Trade H1 2016 showed World Trade value
decline of c6%, volume up 0.5%. H2
2016 shows some improvements.
World trade drivers indicators have
shown improvements. WTO Outlook
Indicator dial shows 2 green, 4
amber, 1 red as at Nov 2016.
Global Air Passenger Demand has continued to be robust
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
-2
0
2
4
6
8
10
12
14
16
Pa
x
Annual
% G
row
th
Annual Passenger Growth and Total Passengers
Growth (%) LHS Pax (m) RHS
Source: IATA
Average of 6% over 2010-16
Source: IATA 2016
Overall industry profits, margins solid since 2010
-1
0
1
2
3
4
5
6
7
8
9
-10
0
10
20
30
40
50
60
70
% M
arg
in
$B
n
Global Airline Profits and % (EBIT) Margin
Profit ($Bn) % margin
Source: IATA
Source: IATA 2016
15
IATA expect supply to marginally lead demand in all regions in
2017
0%
2%
4%
6%
8%
10%
12%
Africa Asia-Pacific Middle East Latin America NorthAmerica
Europe Global
2016 P
red
icte
d G
row
th
Predicted Traffic Growth Predicted Capacity Growth Year to Date Traffic Year to Date Capacity
Source: IATA 2016
16
Source: IATA
Global passenger traffic growth still firm
-15%
-10%
-5%
0%
5%
10%
15%
20%
Ju
l-08
Se
p-0
8
Nov-0
8
Ja
n-0
9
Mar-
09
May-0
9
Ju
l-09
Se
p-0
9
Nov-0
9
Ja
n-1
0
Mar-
10
May-1
0
Ju
l-10
Se
p-1
0
Nov-1
0
Ja
n-1
1
Mar-
11
May-1
1
Ju
l-11
Se
p-1
1
Nov-1
1
Ja
n-1
2
Mar-
12
May-1
2
Ju
l-12
Se
p-1
2
Nov-1
2
Ja
n-1
3
Mar-
13
May-1
3
Ju
l-13
Se
p-1
3
Nov-1
3
Jan
-14
Mar-
14
May-1
4
Ju
l-14
Se
p-1
4
Nov-1
4
Ja
n-1
5
Mar-
15
May-1
5
Ju
l-15
Sep
-15
Nov-1
5
Ja
n-1
6
Mar-
16
May-1
6
Ju
l-16
Se
p-1
6
Nov-1
6
Year-
on
-Year
Ch
an
ge
Traffic (RPK) Capacity (ASK)
IATA predicting 5.1% traffic growth
for 2017
2016 Capacity =
6.2%, Traffic =
6.0%
17
Source: IATA
Airline profits peaked in 2016?
-30
-20
-10
0
10
20
30
40
Glo
bal A
irli
ne N
et
Pro
fit
(US
$b
n)
IATA indicating that Q2 2016 is likely to
be the top of the airline profit cycle
18
Source: IATA
Cumulative Profit over past 20 years
-40
-20
0
20
40
60
80
100
120
140
Glo
bal A
irli
ne N
et
Pro
fit
(US
$b
n)
Having returned to profitability with high oil prices, the industry
has profited from their rapid decline
0
20
40
60
80
100
120
-30
-20
-10
0
10
20
30
40
Cru
de O
il P
rice (
US
$ p
er
Barr
el)
Glo
bal A
irlin
e N
et
Pro
fit
(US
$bn)
Net Profit (LHS) Crude Oil Price (RHS)
Source – IATA/ Ascend
Source: IATA, EIA 2016
20
Source: US EIA / IATA
Oil prices have stabilised after falls that commenced in July
2014
0
50
100
150
200
250
300
350
0
20
40
60
80
100
120
140
Jet
Fu
el C
en
ts p
er
US
Gall
on
Cru
de O
il $
per
Barr
el
Oil Price Jet Fuel
IATA’s 2017 base case
fuel scenario is now
$64.90 per barrel Jet Fuel
(=$1.54 per USG)
Crude oil price trajectory
has considerable
uncertainty at present
Oil ‘Futures’ prices suggests stable oil prices - still
substantially below the view in 2015
0
10
20
30
40
50
60
70
80
90
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Future Brent Crude Price ($/Barrel) for Delivery 2016-20
At Jan 2015 At Jan 2016 At Jan17
Source: Barchart
Fuel price impacts the justifiable lease premium for A320neo vs. ceo
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2015 Ave Fuel Price 152c 2016Ave Fuel 124c 2017 Ave Fuel 154c
Monthly Lease premium ($) for average yearly fuel price
22
Source: FlightAscend calculation
Next generation fuel burn environmentally more efficient
0
10
20
30
40
50
60
70
80
90
767-300ER 787-8 A330-300 A330-900neo
CO
2 e
mis
sio
ns (
g p
er
pax-k
m)
Source – FlightAscend analysis of Airbus and Boeing data, 3,000nm sector
-13%-14%
24
Source: Flight Fleets Analyzer & 2016 Flight Fleet Forecast (deliveries into passenger airline service only)
Deliveries represent typically around 7% of global fleet
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
Deli
veri
es a
s %
of
Fle
et
in S
erv
ice
Passen
ger
Air
lin
er
Deli
veri
es
Deliveries / Forecast Deliveries Deliveries as % of Fleet in Service
25
Source: Flight Fleets Analyzer & Flight Ascend research – jet firm orders backlog @ 1 Jan 2017
Current jet backlog deliveries to 2021
0
500
1000
1500
2000
2017 2018 2019 2020 2021
No
of
Air
cra
ft o
n F
irm
Ord
er
Airbus Backlog Boeing Backlog Others Backlog
Significant variance in risk factors by regionSource: WEF 2017
Source: WEF 2017
And to cheer us all up for 2017 - the Global Worry Index reaches new heights
Summary
• GDP growth and other macro indicators show overall improvement in
2017
• Oil price has increased since 2015 but oil futures prices indicate stability
• Passenger Traffic growth 2017 expected to slow, but will likely be higher
than previously forecast, with local exceptions
• Airline business model dynamic continues to evolve for a share of the
‘new’ profitability
• Aircraft demand remains strong, with most main new programmes sold
out till 2020
• Wider demand risk factors (war, politics, terrorism) continue to fission
A final thought
• Positive GDP Growth
• Profitable Industry
• Full Order Books
• Fuel drifting upwards, but relatively stable
• New aircraft technology coming on stream
Factors impacting airline and airport markets
Dimension Factor
Geopolitical War, Terror, Health issues
Political/ Economic Regulatory, Market Environment, Environmental
legislation
Macro Economic GDP Growth, Exchange Rates, Finance Rates
Airline Business Models Network, LCC, Regional on SH and LH
Supplier Costs Fuel, Labour, Airport, ATC, booking, Security
Competitor Behaviour Pricing, Products, Capacity, Alliances
Customer Behaviour Premium Markets, Destination Choice, FFPs
32
