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Leasing and M&A Market Overview Leasing and M&A Market Overview October 30, 2018 Professor David Yu, CFA, ISTAT Certified Aviation Appraiser Managing Director www.iba.aero IBA - Enhancing Decision Making Full service Leading analysis and Aviation Intelligence, Asset Management, Advisory valuations around Mapped the risks CDD around acquisition and Only aviation consultancy that also appraises (7 ISTAT commercial aircraft, engines, surrounding 100+ airlines investments Appraisers), manages (130+ assets, $4bn), and remarkets helicopters, freighters, Global approach business jets and slots Independent No vested interest in a deal progressing No conflict in treatment of assets Maintenance costs analysis Cash flow forecasting and Stress-testing of investment and benchmarking mapping opportunities and returns Diversified talent pool and inputs Imaginative solutions from a breadth of backgrounds Appraiser of the year 2018 30 years of trading experience Quantitative and qualitative approach Lease rate and residual risk Route analysis and asset Transition Management Unique access to critical data and human intelligence analysis selection www.iba.aero www.iba.aero www.iba.aero IndiaChinaJapanArea Euro UKUSAEmergingEconomies AdvancedEconomies 7.3% Slightprediction moderation 7.4% infrom 6.6%expected World 6.4% in 2019 4.9% 2.2%in Slowing2019 1.9% to 1.0% Figures previousGrowth GDP Downgraded a from 2.4%prediction of1 inApril 2.5% from Down 1.4% Recentlyindowngraded1.6% April 2.9%reform Tax Source: IMF Source: Landscape Economic GDP GDP growth. GDP tra of risk to world trend protectionism, Increasing US is increasing. Index Uncertainty Policy Economic downgraded. and Argentina India Brazil, strengthening. exporters oil Outlook for regions. – global forecast maintains IMF balanced lessacross - China China Trade Trade 3.9% War. April .2% de and US$ / Barrel 105 115 25 35 45 55 65 75 85 95 Brent now at around $85 $85 per barrel. around at now Brent up. istrending pricing Oil continues volatility Oil Growth and consumption and Growth expo oil supply, restrict to sanctions related Iran Jan -12 Apr -12 Jul -12 Oct -12 Jan -13 Price Oil Crude Apr -13 Jul -13 Oct -13 Jan -14 Apr -14 Jul -14 Oct -14 Evolution Jan -15 Apr -15 Jul -15 Oct -15 ( Jan12 Jan -16 Apr -16 - Jul -16 Present Oct -16 Jan -17 ) Apr -17 rts declining. Jul -17 Oct -17 Jan -18 Apr -18 Jul -18 Oct -18 Interest Rates US Prediction – small increases to continue 3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar, Percent, Monthly, Not Seasonally Adjusted Increased to 2% - 2.25% late September 6% A possible further increase may be implemented towards the end of the year. 5% 4% e e UK view – similar pattern to the US g g aa tt nn ee 3% In August 2018, the UK Monetary Policy Committee (MPC) raised cc rr ee the interest rate from 0.5% to 0.75%. PP 2% UK rate increase lagged US rise. Future rises planned to be limited and gradual. 1% GDP growth remains subdued and the UK forecast has once again 0% been downgraded. Source: ICE Benchmark Administration Limited (IBA) www.iba.aero Yields Yields Average passenger yields stabilised in mid-2017. Recent developments point to renewed pressure – despite rising input costs. Premium yield performance has lagged economy class yields. High load factors and ancillaries are supporting revenues (figures include base airfares only.) Global trade uncertainty could pose greater risk to premium traffic and yields. www.iba.aero Traffic Growth PAX Load Factors continue to rise… Freight Load Factors trending downwards YoY growth in RPKs increased to 6.4% in August. Industry-wide FTKs increased in August to by 2.3% YoY. Unchanged from the rate in July and India's domestic traffic grew the most, with a 22.6% YoY increase. less than half the five-year average pace (5.1%) Internationally the Asia Pacific carriers continue to show the Growth in air freight volumes outpace that of largest growth in passenger traffic. global goods trade by a large margin. Passenger load factors hit an all-time high in the month of August 2018. www.iba.aero Airline profitability. A little more challenging Positive Trends Clouds gathering Traffic growth remains robust DOCs increasing (Fuel, wages, US$ costs) GDP growth remains strong New aircraft supply limited New routes are proving profitable New aircraft reliability challenges High Load Factors Interest rates increasing Low Lease Rates Trade Wars and Economic Policy uncertainty increase GDP downside risk Buoyant Sale Leaseback Market Many new passengers very price sensitive Renewed pressure on passenger yields New markets stuttering www.iba.aero Emerging Markets - Characteristics China India www.iba.aero Emerging Markets - Characteristics Turkey Brazil www.iba.aero Global Market & Aviation Market Indicators Global Climate Regional GDP Demand Trends Supply Trends Deliveries Oil Europe Pax Traffic (>150 seats) Interest Rates North America Freight Traffic Deliveries GDP Asia Pacific Yields (<130 seats) Parked Fleet World Trade China Load Factors (PAX) Bankruptcies USD India Load Factors (Freight) Geopolitical Mood Japan Orders Economic Mood World = Trend = Absolute Good/OK/Bad www.iba.aero OEM Backlogs Airbus Backlog extending beyond Boeing in recent years. Regional backlogs have remained relatively stable at around 1,000+ aircraft. Narrowbody backlogs equate to around 6-8 years of production. www.iba.aero Retirement Trends Retirements have trended downward since 2015. Low Fuel Costs have kept older aircraft flying. Engine issues have aided older Narrow and Widebody models. Widebody retirements have declined steadily since 2015. www.iba.aero Number of Freighter Conversions (Per Year) 2000 - 2018 Freighter conversions have tracked closely with cargo traffic growth. However, the balance has shifted towards narrowbody with emphasis on the newer generation aircraft. 757-200s continue to convert. 767-300ERs dominate WB conversions. A330s are building, slowly. www.iba.aero Narrowbody Demand: Where are we? Orders: Airbus A320 & Boeing 737 Airbus and Boeing Narrowbody Orders - Last 15 Years * Farnborough Airshow Orders Excludes Options ** Farnborough Airshow Gross Orders Include MoUs and LOIs $100 2,000 $80 1,500 $60 1,000 Number Number Number of of Aircraft Aircraft $40 500 2018 FAS $20 Historical Average FuelFuelPricePriceAverageUS$/Barrel) AverageUS$/Barrel) (Brent(Brent Historical Historical Record Period of Oil Oil Oil PeriodPeriod Highs Highs of of PricePrice RecordRecord Eurozone Crisis Eurozone Financial Crisis Financial 0 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 NG Family MAX Family CEO Family NEO Family A220 Family MAX Family Firms (FAS) MAX Family MoUs (FAS) NEO Family Firms (FAS) NEO Family MoUs (FAS) A220 Family MoUs (FAS) Brent US$/Barrel www.iba.aero Widebody Demand: Where are we? Airbus and Boeing Widebody Orders - Last 15 Years *Farnborough Airshow Orders Excludes Options ** Farnborough Airshow Gross Orders Include MoUs and LOIs 1,000 $100 800 $80 600 $60 400 $40 Number Number Number of of Aircraft Aircraft 200 2018 FAS $20 Historical Average FuelFuelPricePriceAverageUS$/Barrel) AverageUS$/Barrel) (Brent(Brent Historical Historical Eurozone Crisis Eurozone Oil Oil PeriodPeriod Highs Highs of of PricePrice RecordRecord Financial Crisis Financial 0 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 A330 CEO Family A330 NEO Family A380 Family A350 Family B777 Family B787 Family 787 Family Firms (FAS 2018) 787 Family MoUs (FAS 2018) 777 Family Firms (FAS 2018) A350 Family Firms (FAS 2018) A350 Family MoUs (FAS 2018) A330 CEO Family Firms (FAS 2018) A330 NEO Family Firms (FAS 2018) A330 NEO Family MoUs (FAS 2018) Brent US$/Barrel www.iba.aero Impact of Used Aircraft Values on Fuel – 12 Year Old Narrowbody Values Older aircraft values suffered in the high fuel environment. Both the Boeing 737-800 and Airbus A320-200 saw values decline. Values have recovered since 2014/15. www.iba.aero Trends in the Lessor Space – SLB vs Order The sale leaseback space is expected to remain competitive amongst new investors but margins are still weak. Top lessors are shifting towards speculative orders for growth. www.iba.aero Direct and Sale Lease Back Pricing in the Narrowbody Space SLB lease rate factors have dropped below 0.6 LRF for A320s and 737s. For many, a LRF of 0.6 does not make financial sense. These returns will appeal more to funds under pressure to get critical growth and who can take a hit on the margin. www.iba.aero Leasing Asset Overview www.iba.aero Airbus A319-100 Secondary Market Activity Overview Through the past three years we have seen a large Airbus A319-100 Market Activity 2016 – 2018 YTD number of secondary market transactions 200 involving Airbus A319 aircraft. 180 However, the number of new leases in 2018 is somewhat skewed by easyJet Europe leasing 160 aircraft from parent company easyJet, which 140 accounts for 36 of the 79 transactions. 120 Discounting those leases involving easyJet Europe would bring the number of leases agreed so far in 100 2018 to levels which are more in line with 2016 and 2017. 80 The number of retirements in 2018 is an area to 60 monitor, as this may represent an increase over 40 previous years. 20 The Airbus A319-100 is trading between lessors, 0 though we have seen a decline in sold with lease 2016 2017 2018 activity as 2017 was bolstered by Avolon and DAE Sold with lease M&A transactions, sold off lease activity remains 27 69 7 consistent with 2018. Sold to ABS 26 36 12 Sold off lease 27 29 22 The type is popular within the ABS market. Retired 13 12 11 Lease start 43 43 79 www.iba.aero Airbus A320-200ceo Secondary Market Overview Airbus A320-200ceo Market Activity 2016 – 2018 YTD The Airbus A320-200ceo is a highly liquid asset and has seen strong performance across a range 700 of transaction types, in particular operating leases and sales to ABS.
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