icf.com/aviation
Industry Overview
David Louzado, Principal Consultant 06 December 2018 § Background § The Role of Operating Lessors § Rationale for Aircraft Leasing § New Chinese Lessors
Agenda
ICF proprietary and confidential. Do not copy, distribute, or disclose. Background
ICF proprietary and confidential. Do not copy, distribute, or disclose. 3 BACKGROUND Global passenger traffic has doubled every 15 years in the commercial jet era… HISTORICAL WORLD TRAFFIC (RPKS) AND GLOBAL GDP GROWTH, 1990-2017 (INDEXED 1990 = 100)
Financial Crisis 7% September 11 500 450 6% Asian Crises 400 5% 1st Gulf War 350 4% 300 3% 250 2% 200
1% 150
0% 100
Source: ICAO;-1% IATA Airline Industry Economic Performance June 2018; IMF, World Economic Outlook, October 2018 50 World GDP Growth Indexed GDP Indexed RPKs
ICF proprietary and confidential. Do not copy, distribute, or disclose. 4 BACKGROUND ..And demand for air travel is expected to continue growing… AIR PASSENGERS ANNUAL FORECASTED GROWTH RATE
16% 14% § Current trend in traffic growth is anticipated to 12% continue over the near term, with strong traffic 10% growth, anticipated to slow down in 2019-2020 8% 6% § Regionally, traffic growth is expected to be 4% uneven, ranging between 3.5% and 7.8% 2% through 2020. 0% § The strongest growth is predicted in Africa, -2% Asia, the Middle East, and Latin America. The 2015 2016 2017 2018 2019 2020 overall world trend is forecasted around the North America Europe Asia-Pacific 4.8% average through 2020. Middle East Latin America Africa Global
Source: IATA Passenger Forecast, 2016/2018
ICF proprietary and confidential. Do not copy, distribute, or disclose. 5 BACKGROUND ..Which has propelled the need for aircraft worldwide
ACTIVE COMMERCIAL JET FLEET HISTORY BY CLASS
30,000
25,000
20,000
15,000
10,000
5,000 NumberAircraftof
0
1990 1991 1992 1993 1994 1995 1996 Narrowbody1997 1998 1999 2000 2001 Widebody2002 2003 2004 Regional2005 2006 2007 Jet 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Airline Monitor June 2018
ICF proprietary and confidential. Do not copy, distribute, or disclose. 6 BACKGROUND The worldwide demand for aircraft is anticipated to continue experiencing sound growth 2017 – 2027 AIRCRAFT FORECAST § Aircraft orders have created an all-time high 45,000 2017 – 2027 backlog for aircraft manufacturers. 40,000 CAGR § Boeing and Airbus have a combined backlog of more than 12,000 aircraft, and a wait of up to Africa, 3.5% 35,000 seven years for the most popular types. Middle East, 5.6% 30,000 § Need for new aircraft will vary by region. South America, 3.6% § ICF projects that the Middle East will have the 25,000 Europe, 2.5% highest growth in aircraft demand, with a CAGR of over 5% in the between 2017 and 2027 20,000 North America, 0.8% § The global fleet is expected to grow by 3.1% per Asia Pacific, 5% 15,000 year on average over the next decade § Boeing forecasts deliveries of 41,030 jet aircraft TOTAL = 3.1%
Number of Aircraft of Number 10,000 (including regional jets) between 2017 and 2036, while Airbus forecasts 34,900 deliveries 5,000 (excluding regional jets) 0 2017 2027
Source: ICF analysis
ICF proprietary and confidential. Do not copy, distribute, or disclose. 7 BACKGROUND Several sources of financing will be required to meet that volume INDUSTRY AIRCRAFT DELIVERY FINANCE OUTLOOK, BOEING
$200 $189 $172 $185 $180 $153 $160 $139 $140 $122 $122 $122 $115 $120 $104 $96 $100 24% 23% 28% $77 25% 26% $80 $62 25% 30%
TotalFinancing 28% (in USD(in billions) 18% 19% 34% $60 26% 15% 20% 14% $40 15% 25% 21% 24% 28% 27% 31% 28% 33% $20 33% 33% 34% 33% 26% $0 15% 13% 8% 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F Export Credit Bank Debt Capital Markets Cash Tax Equity Manufacturer
Source: Boeing Capital Corporation 2018 Outlook
ICF proprietary and confidential. Do not copy, distribute, or disclose. 8 The Role of Operating Lessors
ICF proprietary and confidential. Do not copy, distribute, or disclose. 9 THE ROLE OF OPERATING LESSORS Over 40% of Global Fleet Owned by Operating Lessors
§ In 2017, airlines operated more than 27,000 commercial jet aircraft valued at over $696 billion (active and parked aircraft); more than 45% (by value) were owned by operating lessors § Historic aircraft operating lease penetration rate have grown from 0.5% in 1970 to approximately 41% in 2014, but has not increased significantly towards the previously anticipated estimate of over 50%, levelling out below 45% (by volume) § This represents an average annual growth rate for the leasing sector of approximately 15%, compared to overall fleet growth of 4% over the same period
EVOLUTION OF OPERATING LEASE PENETRATION BETWEEN 1970 AND FORECAST BY 2020
Source: Boeing Capital Corporation 2014 Outlook Note: Active fleet includes narrowbody, widebody and regional jet aircraft in commercial service. Excludes Russian manufactured aircraft
ICF proprietary and confidential. Do not copy, distribute, or disclose. 10 THE ROLE OF OPERATING LESSORS The aircraft leasing industry has grown significantly in value in the past five years
ESTIMATED MARKET VALUE OF LEASED AIRCRAFT
450
400 § Since 2014, the value of the portfolio of leased aircraft 350 across the industry has grown at over 15% CAGR, equivalent to a doubling of the size of the industry every 300 5 years § This increase has been driven by a continuous increase in the 250 worldwide aircraft fleet, boosted by large OEM orders from lessors for new technology aircraft 200 § The number of large lessors, with a fleet value of over $1 150 billion, has also grown to become more than double that of 10 years ago. 100
50
- 2014 2015 2016 2017 2018
Source: CAPA; ICF Truebook, ICF Analysis
ICF proprietary and confidential. Do not copy, distribute, or disclose. 11 THE ROLE OF OPERATING LESSORS This growth has been facilitated by the emergence of new entrants TOP LESSORS BY NUMBER OF CURRENT AIRCRAFT
1,400 $40 Aircraft New Lessors (<10 yrs) Value 1,200 $35
$30 1,000 $25 800 $20 600 $15
CurrentAircraft 400
$10 Aircraft Value, Billions
200 $5
0 $0
Source: CAPA, ICF Truebook, ICF Analysis
ICF proprietary and confidential. Do not copy, distribute, or disclose. 12 THE ROLE OF OPERATING LESSORS While almost half of narrowbody jets are on operating lease, penetration remains lower in the widebody and regional markets
VALUE DISTRIBUTION OF GLOBAL JET FLEET BY AIRCRAFT TYPE AND OWNERSHIP (# OF AIRCRAFT) Narrowbody Widebody RJ 100% 90% 80% 9,223 Other 70% 4,132 3,118 60% 50% Ownership 40% 30% 8,420 Operating 20% 2,213 1,444 Lease
Source: ICF Analysis; CAPA, November 2018 10% Note: Includes narrowbody, widebody and regional jet aircraft in commercial service or inactive. 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Aircraft Type
ICF proprietary and confidential. Do not copy, distribute, or disclose. 13 THE ROLE OF OPERATING LESSORS Regional differences: Latin America has the largest proportion of leased aircraft
Region Owned Leased Fleet Fleet § Latin American airlines have the largest proportion of Latin America 36% 64% leased aircraft, with 64% of their total fleet on operating Europe 50% 50% lease § Europe also has a significant level of penetration, driven Middle East 79% 21% by a large number of prominent LCCs (Ryanair, easyJet, Wizz Air, etc.) Asia/Pacific 55% 45% § As North American airlines have a wider access to capital Africa 68% 32% markets, the proportion of leasing is one of the lowest in the world North America 77% 23%
Source: ICF Analysis; CAPA Fleets, November 2018 Note: Includes narrowbody, widebody and regional jet aircraft in commercial service or inactive.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 14 Rationale for Aircraft Leasing
ICF proprietary and confidential. Do not copy, distribute, or disclose. 15 RATIONALE FOR AIRCRAFT LEASING The financial and operational benefits of aircraft leasing make it attractive to both airlines and investors TO AIRLINES Financial Benefits: § Low ownership costs/ risks – No capital outlay – No residual value risk § Higher liquidity availability and cash preservation (sale-leasebacks or unencumbered aircraft) – Avoid pre-delivery payments for new aircraft – Capital freed to finance business and growth § Diversification of funding Operational Benefits: § Fleet planning flexibility — Airlines can meet short-term demand or variations § Access to key slot deliveries from lessors’ order book and flexibility in deliveries § Access to new technology aircraft with more fuel-efficient engines
TO INVESTORS § Predictable cash flows § Stable asset value over time — dominated by young, narrowbody fleet § Availability of aircraft debt financing § High risk-adjusted returns — diversified customer base and generally well managed fleet portfolio
ICF proprietary and confidential. Do not copy, distribute, or disclose. 16 RATIONALE FOR AIRCRAFT LEASING Airlines — The Growth of Low-Cost Carriers (“LCCs”) — a Large Consumer of Operating Leases
LCC SHARE BY WORLD REGION, 2017
20% 80% Africa 14% 86% § LCC penetration varies depending on region, but has 18% 82% Middle East reached about a third or more of the airlines in North 12% 88% America, Latin America, Asia, and Europe 32% 68% Asia/Pacific § LCCs are often startup airlines with little capital available 23% 77% and/or no credit history to benefit from lending 26% 74% opportunities or capital markets. Latin America 33% 67% § With the reduced availability of export credit financing, many LCCs have turned to Sale Lease-Backs (SLBs) to 58% 42% North finance new deliveries of aircraft. America 33% 67% 31% 69% Europe 37% 63% LCC 0%LLC Aircraft10% 20%Full Service30% Aircraft40% 50%LCC Airlines60% 70%Full Service 80% Airlines 90% 100%
Source: CAPA; ICF Analysis, 2018 Note: Includes in-service passenger narrowbody, widebody, and regional jets. Excludes aircraft with unknown operator region.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 17 RATIONALE FOR AIRCRAFT LEASING Sale-leaseback transactions (SLBs) have allowed many LCC to grow their fleet
CURRENT AND HISTORIC FLEET ON SLB (40 OR MORE), 2018
140 § In trying to avoid pre-delivery payments that may be 120 difficult to finance, airlines sell their positions earlier in the 100 delivery process. 80 § While still placing volume orders to benefit from scale and 60 reduced pricing, SLBs have allowed some airlines to raise funding and make trading gains as they sell the aircraft 40 upon delivery to lessors. 20 § Without the demand of the SLBs market, many LCCs 0 would not have been able to cope with fast growth and benefit from new and efficient modern aircraft. New LCCs Azul GOL IndiGo
AirAsia such as Lion Air, VietJet, Wizz Air, Indigo, Volaris, and Air LATAM Garuda Lion Air Frontier Aeroflot EasyJet Wizz AirWizz Emirates VietJetAir
TUI Travel TUI Asia are among the top airlines leasing aircraft. Air Canada Jet Airways Jet Qatar Airways Qatar ChinaEastern Delta Air Lines TurkishAirlines AmericanAirlines
Source: Airfinance Journal, November 2018 Note: Count includes all historic transactions for aircraft, which may be currently retired.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 18 RATIONALE FOR AIRCRAFT LEASING Investors have supported lessors with large volumes of equity and debt, seeing attractiveness in aircraft leasing PREDICTABLE CASH FLOWS § Competition: Historically less competitive industry compared to airlines, even though competition is on the rise in recent years § Nature of assets: Subject to long-term lease. Not as impacted by short-term changes such as fuel price changes and passenger demand fluctuation, as in the case of airlines, providing stability.
STABLE ASSET VALUES OVER TIME § In general, lessors’ fleets are dominated by newer, fuel-efficient aircraft that are still in production, such as the Airbus A320 and Boeing 737NG with large fleet commitments for the NEO and MAX aircraft. § These have strong market penetration and a broad base of operators with good geographic distribution. Consequently, liquidity and value retention for these aircraft tend to be better than older, out-of-production, and technically inferior types
AVAILABILITY OF AIRCRAFT DEBT FINANCING FOR LESSORS § Aircraft lessors are able to secure long-term debt financing, given the industry’s operating cash flows, stable risk-adjusted returns, and superior asset value retention over time. § Lenders take comfort from the lower risk profile presented by lessors with a diversified pool of lessee credits, together with the underlying mobility of aircraft assets, which lessors can redeploy and re-lease to other airlines, including those in other geographic regions, should the need arise.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 19 RATIONALE FOR AIRCRAFT LEASING Sound risk-return profile of leasing, relative to other public and private alternatives, make it attractive to equity investors, principally via investment in lessors
RISK VS. REWARD 2007-2016 (ESTIMATED)
16%
14% Small-cap Equities 12%
10% Mid-cap Equities International Equities 8% Airline Stock Aircraft Leasing Commercial Real Estate 6%
Historical returns 4% US CPI 2% Risk-free assets High-yield Bonds IG Bonds 0% 0% 5% 10% 15% 20% 25% 30% 35% Standard deviation
Source: Radar Asset Management LLC
ICF proprietary and confidential. Do not copy, distribute, or disclose. 20 NEW CHINESE LESSORS A large number of outright lessor acquisitions have taken place, with a focus on young assets REPRESENTATIVE LARGE LESSOR MERGERS/ACQUISITIONS
Year Target Acquirer Seller Portfolio Value Portfolio Focus 2018 Sky Aviation Leasing International Goshawk Aviation SKY Leasing ~9.1B New
2017 AWAS DAE Terra Firma -$14B New/Mid 2016 CIT Aerospace HNA/Bohai/Avolon CIT ~$10B New/Mid 2015 Milestone GECAS Jordan Co. ~$3.0B Helicopter 2015 Avolon HNA/Bohai Public ~$8.0B New 2014 AerGo CarVal Private N/A Mid/Old 2013 ILFC AerCap AIG ~$40B New/Mid/Old 2012 Jackson Square MUFJ Oaktree ~$4.0B New 2012 RBS Aviation Sumitomo Mitsui RBS ~$7.3B New/Mid 2010 Genesis AerCap Public ~$1.8B New/Mid 2007 Pegasus AWAS Oaktree ~$5.0B New/Mid 2007 Pembroke Standard Chartered Medulla ~$0.5B New/Mid 2006 AWAS Terra Firma Morgan Stanley ~$2.5B New/Mid 2006 GATX Air Macquarie/Och Ziff GATX ~$1.5B New/Mid 2005 Debis Cerberus Daimler ~$1.3B Mid +Others
Representative large lessor mergers/acquisitions
ICF proprietary and confidential. Do not copy, distribute, or disclose. 21 RATIONALE FOR AIRCRAFT LEASING Many new lessors have been set up by well established management teams, backed by equity REPRESENTATIVE START-UPS Year Startup Management Equity Portfolio Focus
2018 Zephyrus Diaz/D’Agostino Virgo Investment Group/Seabury End of life
2018 Centrus Aviation Capital Bowyer/Cumberlidge/Taylor TBD Mid-life
2018 Kayan Nayak/Kathuria/Moonjelly TBD New SLB
2018 Elevate Capital Adema/Dowell TBD Mid-life
2017 SkyWorks Landess Elliott Management TBD
2017 Altavair Rimmer TBD TBD
2017 Avi8 Sisson / Wegel / Tingey TBD TBD
2016 Chorus Aviation Ridolfi Fairfax Financial Regional
2016 TrueNoord Turner/ Tieleman Bregal/ Blackrock/ Aberdeen Regional
2016 Cross Ocean Wilson Stone Point Capital Mid/End
2015 Goshawk Kelly/Carlisle New/ Mid
2015 Elix Panagopoulos Oaktree Turboprop
2014 Accipiter Sheridan Cheung Kong Holdings New/Mid
2013 Waypoint Washecka MSD/Cartesian Helicopter
2012 Merx Aviation Rothschild/Van Dorn Apollo Investment Corp Diversified
2010 Jackson Square Wiley Oaktree New SLB
2010 Avolon Slattery Cinven/CVC/Oak Hill/GIC New SLB
2010 AerSale Finazzo/Nichols Leonard Green End of Life
2010 Milestone Santulli Jordan Co./Nautic Helicopter
+Others Source: ICF Analysis
ICF proprietary and confidential. Do not copy, distribute, or disclose. 22 New Chinese Lessors
ICF proprietary and confidential. Do not copy, distribute, or disclose. 23 RATIONALE FOR AIRCRAFT LEASING Among these new entrants, Chinese lessors have played a significant role and now have strong presence in the top 10 lessors worldwide
TOP LESSORS BY NUMBER OF CURRENT AIRCRAFT 1,400 $40 Aircraft 1,200 $35 $30 1,000 $25 800 $20 600 $15
Current Aircraft Current 400 $10
200 $5 Billions Aircraft Value, 0 $0 … … … … … … … … … … Elix ALC ALM DAE NAC CDB BOC BOC CMB ICBC CALC Tokyo Cargo Apollo BBAM SMBC SMBC Avmax Avmax Avolon AerCap GECAS Aviation Jackson Aircastle Accipiter Bocomm Bocomm ALAFCO Standard Goshawk Macquarie CastleLake
Source: CAPA, ICF Truebook, ICF Analysis Orix Aviation
ICF proprietary and confidential. Do not copy, distribute, or disclose. 24 NEW CHINESE LESSORS Chinese lessors have now reached the critical mass to compete with mature lessors, and strong order books set expectation for continuing growth along with the Asian air transport market
CHINESE LESSORS BY TOTAL UNITS, 2018
Lessor Fleet Units Value Order Units Value Total Units Value
Avolon 618 $ 21.97 308 $ 19.64 926 $ 41.61 BOC Aviation 345 $ 16.02 165 $ 9.60 510 $ 25.62 Industrial and Commercial Bank of China (ICBC) 352 $ 16.74 149 $ 5.98 501 $ 22.72 CDB Leasing Company Ltd 203 $ 7.70 172 $ 8.69 375 $ 16.39 China Aircraft Leasing Company (CALC) 117 $ 4.29 204 $ 9.69 321 $ 13.98 Goshawk Aviation 140 $ 5.99 40 $ 1.97 180 $ 7.96 Bank Of Communications Financial Leasing (Bocomm Leasing) 130 $ 5.75 2 $ 0.09 132 $ 5.85 CMB Financial Leasing 83 $ 4.30 0 $ - 83 $ 4.30 CCB Financial Leasing 57 $ 2.39 26 $ 1.04 83 $ 3.43 AVIC International Leasing 46 $ 1.07 45 $ 2.15 91 $ 3.21 ABC Financial Leasing 0 $ - 65 $ 2.60 65 $ 2.60 Accipiter Holdings Ltd 60 $ 1.92 0 $ - 60 $ 1.92 China Aviation Supplies Holding Company (CASC) 0 $ - 13 $ 1.11 13 $ 1.11 Dragon Aviation Leasing Company Ltd 29 $ 0.91 0 $ - 29 $ 0.91 Minsheng Financial Leasing 28 $ 0.90 0 $ - 28 $ 0.90 Everbright Financial Leasing 17 $ 0.83 1 $ 0.05 18 $ 0.88 Ping An Leasing 4 $ 0.46 0 $ - 4 $ 0.46 SkyCo International Financial Leasing 8 $ 0.35 0 $ - 8 $ 0.35
Source: CAPA; ICF Analysis; ICF Truebook
ICF proprietary and confidential. Do not copy, distribute, or disclose. 25 NEW CHINESE LESSORS The Chinese lessor landscape has seen several new entrants grow and proliferate over the past few years TOP CHINESE LESSOR FLEETS AND MARKET SHARE MAIN CHINESE LESSOR PROFILES
1000 27% 900 § Launched in 2010, Avolon became the world’s third largest lessor after its acquisition by HNA Group in 2016 and its merger with CIT in 800 2017. As of today, Avolon has 156 customers in 64 countries.
700 § In 2006, Bank Of China acquired Singapore Aircraft Leasing to form 600 17% BOC Aviation, a now top 10 aircraft lessor which IPOed in 2016. As of 15% December 2017, BOC Aviation had more than 150 airlines customers 500 in 52 countries.
400 10% 300 § ICBC Aviation is the leasing arm of Industrial and Commercial Bank of China. With a delivered fleet in service exceeding 300 units and 7% 7% total fleet exceeding 500 units, ICBC is among the top 3 lessors in 200 4% China, serving over 60 customers around the world. 100 2% 2% 2% 2% 2%
0 § With some of the largest order books in China, CDB and CALC are Avolon BOC Aviation Goshawk Bocomm Leasing AVIC Accipiter lessors expanding operations rapidly, working with 52 and 28 lessees Narrowbody Regional Jet Widebody respectively, skewed towards Asia Pacific.
Source: CAPA; Companies websites; ICF Analysis Note: Includes in service, inactive, and on order aircraft.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 26 NEW CHINESE LESSORS The fast growing Asia-Pacific region (including China) concentrates more than 60% of the fleet leased by Chinese lessors
Europe China
20% North America Middle East 33% 8% 3%
1% 28% Asia Pacific Latin America (China exc.) Africa 7%
Source: CAPA fleets as of April 2018. Note: Includes In Service and Inactive Narrowbody, Widebody and Regional Jets
ICF proprietary and confidential. Do not copy, distribute, or disclose. 27 NEW CHINESE LESSORS Chinese lessors have grown their market shares domestically but are starting to expand their footprint in the broader region
PENETRATION OF CHINESE LESSORS AMONG MAJOR CHINESE PENETRATION OF CHINESE LESSORS AMONG MAJOR ASIA AIRLINES (% FLEET ON LEASE) PACIFIC AIRLINES (% FLEET ON LEASE)
IndiGo China Southern Airlines 201 201 China Eastern Airlines 8 Garuda Indonesia 8 Air China Jet Airways Hainan Airlines Malaysia Airlines AirAsia Shenzhen Airlines Lion Air Xiamen Airlines Air India Sichuan Airlines Virgin Australia Shandong Airlines EVA Air Shanghai Airlines Asiana Airlines Tianjin Airlines Philippine Airlines Spring Airlines Citilink Beijing Capital Airlines Cathay Pacific Juneyao Air VietJet Air
0% 25% 50% 75% 100% 0% 25% 50% 75% 100%
Average China owned lessor penetration among major Chinese Average China owned lessor penetration among all Asia Pacific airlines in 2018: 54% of total fleet on lease (29% in 2013) airlines (excl. China) in 2018: 25% (15% in 2013)
Source: CAPA fleets as of April 2018 Note: Includes In Service and Inactive Narrowbody, Widebody and Regional Jets.
ICF proprietary and confidential. Do not copy, distribute, or disclose. 28 Takeaways
ICF proprietary and confidential. Do not copy, distribute, or disclose. 29 § Growth continues, though more moderately § Forecast for 2020 of 50% leased fleet not likely to be reached, but levelling out § Leasing is still proving popular, especially with LCC’s § Chinese lessors diversifying fleets, but staying regional ……a more cautious approach for 2019?
ICF proprietary and confidential. Do not copy, distribute, or disclose. 30 ICFICF proprietary proprietary and and confidential. confidential. Do Donot notcopy, copy, distribute, distribute, or disclose. or disclose. 31 Let’s get started.
For questions regarding this presentation, please contact:
David Louzado Principal Consultant [email protected]
ICF proprietary and confidential. Do not copy, distribute, or disclose. 32