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The Continued Evolution of Commercial Operating Leasing18th January 2017
Rob Morris, Global Head of Consultancy
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Definitions
Operating Leasing Fleet & Dynamics
Competitive Landscape
Operating Leasing Outlook
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Definitions
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Operating leasing is what share of the market?
32.2%
38.4% 37.2%
21.1%
27.3%
45.4%
32.3%
20.5%
42.4% 42.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
All jets, allstatus
All Jets, inservice
All jets,stored
All jets, onorder
RJ, paxonly, in
service &stored
SA, paxonly, in
service &stored
TA, paxonly, in
service &stored
Freighters,in service &
stored
SA & TA,pax only, inservice &
stored
SA & TA,pax only, inservice &stored, by
value
Op
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Typically use single and twin-aisle, in service /
stored, by units = 42.4% todaySource: Flight Fleets Analyzer, 6th January 2017
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Operating Leasing
Fleet & Dynamics
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Operating lessor share of fleet has stagnated since
peak in 2009
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Single-Aisle Twin-Aisle Share of Fleet
Source: Flight Fleets Analyzer (passenger aircraft in service / stored)
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737-800 & A320ceo represent more than half of the
lessor fleet today
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500
1,000
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2,000
2,500
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Source: Flight Fleets Analyzer (passenger single and twin-aisles only, in service / stored)
737-800 and A320ceo actually represent
~35% of the total fleet today
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How do lessors select their assets?
Lessors favour assets that have liquidity
The aircraft most preferred by lessors today are single-aisles
A320 and 737 families
Lessors business model drives portfolio strategy, can differentiate on
Age
Aircraft category (Regional, Widebody, Turboprop, Helicopter)
Volatility of values must be considered in hand with depreciation
Ratings estimate downside risk on future base value
Capital markets are the main financing source to purchase these assets
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The Herfindahl-Hirschman Index (HHI) is a recognised
measure of liquidity
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
HH
I
Source: Flight Ascend Consultancy analysis
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Ratings use historical volatility to forecast a downside
risk envelope
Source: Ascend Values & Ratings, 2008 build A330-200 (PW), 2% future inflation
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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
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Downside Volatility BV CMV
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750 aircraft added to lessor portfolios in 2016….
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Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
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….but 400 aircraft exited the portfolio
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Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
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Operating lessors acquired 43% of new commercial jet
deliveries in 2016
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A320ceo A320neo 737NG CSeries A330 A350 787 777 747 A380
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16
De
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Lessor Direct Delivery Lessor PLB at Delivery Non Lessor Delivery
Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
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Speculative backlog includes >2,300 aircraft
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Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
A320neo and 737 Max 8 dominate the
backlog but A321neo is also significant
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Competitive
Landscape
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The top 20 lessors account for close to 80% of the
total lease fleet today
Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
2017 Ranking (by Fleet +
Backlog)Manager Current Fleet
Order
Backlog
Current Fleet
CMV ($mn)
2016 Ranking (by Fleet
+ Backlog)
1 AerCap 1,150 348 30,713 1
2 GECAS 979 311 23,699 2
3 Avolon (Inc CIT) 571 260 20,217 9
4 SMBC Aviation Capital 446 200 14,677 4
5 Air Lease Corporation 262 365 11,449 3
6 BOC Aviation 276 188 11,260 5
7 BBAM LLC 388 16,531 7
8 Aviation Capital Group 257 126 5,852 8
9 ICBC Leasing Co 266 47 11,769 12
10 AWAS 236 15 6,415 10
11 Macquarie 202 40 5,181 11
12 Aircastle 192 5,447 17
13 ALAFCO 59 125 1,812 14
14 Boeing Capital Corp 177 1,412 13
15 China Aircraft Leasing 82 91 2,888 15
16 CDB Leasing Company 142 23 5,357 18
17 ORIX Aviation 163 4,173 16
18 Standard Chartered 116 12 3,952 20
19 Jackson Square Aviation 119 5,088 19
20 BoCom Leasing 111 4,595 21
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China is a huge source of new lessor capital
Domestic domiciled Chinese lessor
ICBC, CDB Leasing, Minsheng, AVIC International Leasing, Bo Comm Leasing, CMB
Financial Leasing, Changjiang Leasing Company, Ping An Leasing, ABC Leasing,
SPDB Leasing, CITIC Securities, Everbright Financial Leasing, CCB, Industrial Bank,
etc
Chinese money invested offshore
Accipiter, Avolon
ICBC Leasing and Bohai’s “bid” for AWAS
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0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145
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Number of Operating Lessors
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Although the operating leasing market appears highly
competitive it is also highly concentrated
Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
80% of the fleet is managed
by top 20 lessors
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Number of Operating Lessors
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2017
2011
2006
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The competitive dynamic has hardly changed in the
recent past but more competition than 10-years ago
Source: Flight Fleets Analyzer (passenger single and twin-aisles only)
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Operating Leasing
Outlook
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Aviation demand cycle
Demand side weakening, trends suggest may be past cyclical peak
Indicator Current level Trend
Passenger traffic Above trend growth for sixth year running; 6.1 estimate for
2016. Led by India. China. LCCs and y-o-y recovery in Russia.
Growth rate was above 6% for most of 2015 and >7% during
summer. H2 2016 has seen demand lag supply slightly.
Freight traffic Recovery seen in 2015 slowed in H1/2016. YTD to Nov 2016 =
3.2%. Express/regional freight performing better.
Capacity significantly exceeding demand YTD. However,
October and November showed much better growth. May
have turned corner?
Yields US has seen declines of 5-10%, but still well above 2008/09
levels. Aug-Nov 2016 showed decline of c5%. Costs are
increasing (US labour, jet fuel up 50% in Jan 2017), so yields
need to increase.
Yields have been falling since December 2014; However, this
has not been a major concern yet, as costs are down by
>10% as a result of falling oil prices. Now costs are
increasing, yields have stabilised.
Load Factors Still near historically record levels. Asia much lower – emerging
evidence of overcapacity in some areas?
US, Middle East load factors showing slight decline. Europe
mixed. China and India at historic highs.
New aircraft orders Around 1,570 net orders for commercial jets. In 2016 with book
to bill around 1.0. 2016 Single-aisle still >1.0 (GREEN), but
twin-aisle and RJ around 0.5 (AMBER)
Order intake fallen sharply from the levels of 2011-2014, but
new programmes sold out for several years, with limited slots
now available, driving downward trend
Deferrals &
cancellations
Deferrals have ticked up following recent airline capacity
adjustments from prior low level. Cancellations now just above
average, although this is lower if normalised for fleet size
Both cancellations and deferral rate increasing in H2 2016.
Most canx due to OEMs cleansing order book but deferrals
reflect fleet plan adjustments (Southwest, American, Turkish,
Emirates, etc)
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Passenger jet fleet forecast to increase by 10,600
units in next ten years
Source: Flight Fleets Analyzer, Flight Fleet Forecast
If leasing share remained at today’s 42.4%
share then the portfolio would grow by a net
4,000 aircraft over the next ten years
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50% penetration is unlikely to be achieved any time
soon
Global passenger fleet at end of 2022 (excluding RJs) is predicted to be ~25,500 aircraft
Leasing fleet in service would need to be ~12,750 aircraft
Equivalent leasing fleet today is 7,220 aircraft
So net addition of 5,530 aircraft required over next seven years
Flightglobal Fleet Forecast predicts delivery of 11,500 commercial passenger jets through 2022
~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates
to 3,100 aircraft that could be expected to exit the leased fleet in the next seven years
So to achieve 50% fleet market share by 2022, under this scenario lessors would need to add 8,450 new
aircraft (5,530 growth plus 3,100 replacement) to their portfolios over the next seven years – that’s
equivalent to 75% of new deliveries predicted over that period (and worth US$643 billion in 2015EC)
Even to maintain today’s 42% market share under this scenario would require ~6,600 new
deliveries – 57% of all new deliveries (US$490 billion)
2016 Analysis
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50% penetration is still unlikely to be achieved any
time soon
Global passenger fleet at end of 2026 (excluding RJs) is predicted to be ~28,900 aircraft
Leasing fleet in service to achieve 50% would need to be ~14,470 aircraft
Equivalent leasing fleet today is ~8,300 aircraft
So net addition of ~6,200 aircraft required over next ten years
Flight Fleet Forecast predicts delivery of ~17,100 commercial passenger jets through 2026
~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates
to 3,300 aircraft that could be expected to exit the leased fleet in the next 7-10 years
So to achieve 50% fleet market share by 2026, under this scenario lessors would need to add 9,500 new
aircraft (6,200 growth plus 3,300 replacement) to their portfolios over the next ten years – that’s
equivalent to 55% of new deliveries predicted over that period
Even to maintain today’s market share under this scenario would require ~7,300 new deliveries –
43% of all new deliveries
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Operating lessors acquired 43% of new commercial jet
deliveries in 2016
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A320ceo A320neo 737NG CSeries A330 A350 787 777 747 A380
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Lessor Direct Delivery Lessor PLB at Delivery Non Lessor Delivery
Source: Flight Fleets Analyzer (passenger aircraft only)
Lessor direct delivery in 2016 was 20%,
backlog for 2017 indicates same level of
delivery expected
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Conclusions
The share of the commercial passenger fleet managed by operating lessors is
unlikely to achieve 50% within the next ten years
The net leasing portfolio growth is estimated to be around 6,200 >100 seat
aircraft over the next ten years
Further portfolio additions (estimated around 3,300) will be required to replace
aircraft that will exit the fleet through sale at end of lease and retirement / part-
out
At current delivery levels the portfolio is expected to remain at ~42% - 43% of the
overall fleet
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Rob Morris
Head of Consultancy
+44 (0)20 8564 6735
+44 (0)7730 213189