20 July 2017 Global Equity Research Aerospace & Defense
Widebody Aircraft Review The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver CONNECTIONS SERIES incisive cross-sector and cross-border thematic insights for our clients. Wide bodies, slim orders Research Analysts Olivier Brochet ■ Deep dive into widebodies: In this Connections Series report, our 44 20 7888 8508 European and US teams take an in-depth look at the various aspects of the [email protected] widebody market – including order book, fleet, regional and programme Robert Spingarn 212 538 1895 splits – for both aircraft and engines. Some investors have cited concerns [email protected] about the prospects for widebody aircraft due to a lack of new orders, Julian Mitchell deferrals and a thin backlog. However, we think strength in Asia should 212 325 6668 offset most of the downside from the Middle East. [email protected] Jose Caiado ■ A resilient sector despite Middle East risks: We see risks concentrated 212 325 6771 in the Middle East, specifically on the larger widebodies (777, A350-1000 [email protected] and A380). Asia (32% of the global backlog) appears resilient, particularly Christopher Leonard in China. We see some signs of softness in Europe and North America. We 44 20 7888 3012 [email protected] believe persistent strength in passenger traffic combined with these Neil Glynn, CFA regional trends provides support for the widebody market overall. 44 20 7883 6929 ■ A broadly sound and stable position for Airbus (Outperform, TP [email protected] €100): Airbus' Middle East exposure is in our view offset by its strong Arthur Truslove 44 20 7883 1079 positions in Asia. A330 and A380 production rates have proactively been [email protected] reduced and recent A350 orders from China should help to absorb Specialist Sales: Andrew Bell deferrals. Our delivery forecasts already reflect a slower demand outlook 44 20 7888 0479 and we leave them unchanged. [email protected] ■ Boeing (Neutral, TP $200) adjusting to softer demand: We expect Boeing to stabilise at 2018E levels after cuts to the 777, down from the 2015 peak. We do not expect the 777X to rise above the 777 rate of 3.5/month for the foreseeable future. We keep the 787 rate at 12/month. ■ Better risk profile for Rolls-Royce amongst widebody engine makers: Although we have an Underperform rating on Rolls-Royce (TP 665p) due to its stretched valuation, we believe its geographic and programme exposure is limiting the risks on its production levels, while GE (Outperform, TP $33) is more exposed to the Middle East and the dwindling 777.
Figure 1: Widebody backlog – # of passenger aircraft, June 2017 280
210
140
70
0 A 7 A A 7 7 O 7 A 7 A O A 7 O A 7 O 7 A A O 8 7 7 7 8 8 8 8 3 3 3 3 3 3 3 3 3 t t t t t h h h h h 7 7 7 7 7 7 7 7 5 3 3 5 8 5 5 5 3 e e e e e X X 0 0 0 0 0 0 0 0 0 r r r r r n c n s s s s s e e e o o o
Asia Middle East Europe North America Lessors / RoW
Source: Flightglobal data
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 20 July 2017
Key charts
Figure 2: Widebody aircraft exposure by company Figure 3: Fleet evolution by programme As % of 2016 revenues Change in number of passenger aircraft in service, as at June
50% 600 45% 500 40% 400 35% 300 30% 25% 200 20% 100 15% 0 10% -100 5% 0% -200 Z B R M A M S U G L H B e o o i a A o T o E T e r o d e b f l n X E g U l r -300 n 7 7 7 7 A A A A A O i s i u a e a g n - a 4 6 7 8 S s 3 3 3 3 3 n y t c i g R t h r 7 7 7 7 w 3 4 5 8 0 y t d o e s 0 0 0 0 0 e o y r t / l e s c 3 l m e 1 0 s Europe US 2011 vs 2005 2017 vs 2011
Source: Credit Suisse estimates Source: FlightGlobal data
Figure 4: Fleet evolution by region – 2005 to 2017 Figure 5: Backlog by programme and region in number of aircraft in service, passenger aircraft, as at June 2017 in number of passenger aircraft, June 2017
40% 787 - Asia 9% 35% A350 - Asia 30% 11% Others 25% 36% A330neo- Asia 20% 3% 787- Europe 15% 5%
10% A350 - Europe 6% 5% A350 - RoW / Unannounced 787 - Middle East 3% 0% 6% A350 - North America 777X- Middle East Africa Asia Pacific Europe Latin America Middle East North America 4% A350 - Middle East 10% 7% Fleet 2005 Fleet 2011 Fleet 2017
Source: FlightGlobal data Source: FlightGlobal data
Figure 6: Fleet evolution by engine maker Figure 7: Engine maker backlog by region in number of engines in service, passenger aircraft, as at June 2017 in number of engines, passenger aircraft, June 2017
4,500
4,000 Lessors 8% GE - Asia 7% 3,500 RoW and other 10% 3,000 Rolls-Royce - Asia 2,500 20%
2,000 Unannounced 7% 1,500 Rolls-Royce - North 1,000 America 5% GE - Europe 3% 500 GE - North America 0 2% GE Rolls-Royce P&W Engine Alliance CFMI Rolls-Royce - (50/50 GE / (50/50 Safran / Rolls-Royce - Middle Europe 10% P&W) GE) East 13% GE - Middle East 15% 2005 2011 2017
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review2 20 July 2017
Table of contents
Key charts 2
Summary 4
The widebody passenger fleet, structure, risks and strengths 10
Is the Middle East at risk of a significant slowdown? 25
Asia should remain an area of strength for widebody deliveries 29
Subdued prospects in Europe 33
North America looks weak again 36
Lessors: a marginal role in the segment 39
A peek into widebody freighters and tankers 40
Programme updates 44
In widebody engines, Rolls-Royce appears to offer the best risk profile 49
Widebody Aircraft Review3 20 July 2017
Summary We believe that the risks to the widebody segment are at their highest since the 2009 financial crisis, in particular due to specific issues in the Middle East (including a slowdown in traffic with the US, financial difficulties at some airlines and political tensions between Qatar and its neighbours). Investors may be unsettled by the dearth of new orders and a recent string of deferrals, after the production of widebodies broadly doubled over 2011- 2017. We share those concerns, but our analysis in this report also leads us to conclude that strength in Asia should offset most of the downside from the Middle East. This is consistent with both our positive rating for Airbus (Outperform, TP EUR100) and our more cautious stance on Boeing (Neutral, TP $200). In particular, we think that a low risk level on widebodies is supportive of the overall Airbus case, protecting the FCF story we are expecting (powered by the growth in A320 profits, A350 ramp-up and FX benefits). Amongst engines makers, Rolls-Royce (which we rate Underperform with a 665p target price, as we view the valuation as too stretched) appears to have a more stable position on widebodies than GE (Outperform, TP $33), but the latter should benefit strongly from growth on the narrowbody side. Middle East weakness should be offset by strength in Asia Our regional review shows that the Middle Eastern risk is concentrated on the A380, 787, 777X and A350. It also highlights that demand from Asian airlines should be supportive of widebody demand, in particular for the A330, A350 and 787. Europe and North America appear mixed, being soft in some areas and stronger in others. This could lead to a few deferrals driven by financial decisions in the context of low fuel prices rather than low traffic demand, in our opinion. We believe that the most recent decision by United to defer the delivery of four A350s from 2018 is a case in point, as in June the airline also ordered four 777s for delivery in 2018.Overall, the absence of incremental demand for the A380, the older 777 and the newer 777X puts pressure on the production rates for these aircraft in our view, while demand for the A330, A350 and 787 appears more resilient.
Figure 8: Fleet by region and airframer Figure 9: Backlog by region and airframer in number of passenger aircraft in service, June 2017 in number of passenger aircraft in service, June 2017
1,000 450
900 400
800 350 700 300 600 250 500
400 200
300 150
200 100
100 50 0 Asia Pacific Middle East Europe North Latin Africa 0 America America Asia Middle East Europe North America Lessors RoW / Unannounced Airbus Boeing Airbus Boeing
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review4 20 July 2017
Most production cuts have already been implemented Additionally, we think that airframers have already taken adaptive measures in response to the deterioration, which can be seen from various angles: production rates have been cut (777, 747, A330 and A380), and ramp-ups have been or could be slowed (A350, 787). Execution issues (A350 and A330neo) have also led to the deferral of some deliveries, effectively buffering some of the demand weakness. Finally, freighters and tanker versions should help support deliveries (freighters for Boeing in particular and tankers for both companies). As a consequence, we have not cut our expectations for Airbus widebodies, as we consider them to be already low. However, we see increased risk on the A380 and A330neo post 2020, with rate cuts possible in case of order deferrals. For Boeing, our model had long anticipated the eventual reductions in 777 production, and it still anticipates that 787 deliveries will not rise further than 12 per month. We are somewhat concerned that 777X backlog is too thin for a full rate recovery and have decided to hold 777 production/deliveries steady at 3.5/month through the transition and beyond in our forecasts (see the Boeing section in our Q2'17 Aerospace & Defense Preview, 17 July 2017), whereas our model previously assumed a 777/777X rate rise to five per month in 2020. Airbus delivery forecasts already cautious Overall, we believe that Airbus' exposure to Asia and past production rate cuts should help to shelter the group from the Middle East difficulties, with the possible exception of the A380. As a result, we leave our 2017E-2020E delivery forecast unchanged. We see risks on the A330neo after 2020E. Growth in widebody deliveries for Airbus is essentially driven by the A350 ramp-up. A350 protected by demand from Asia We leave our expectations for the A350 unchanged, at 74, 96 and 112 aircraft deliveries in 2017E, 2018E and 2019E, respectively. We forecast 124 deliveries in 2020E. There have been some deferrals / cancellations of deliveries from the US and the Middle East, but also new orders and commitments from China. Risk on A330neo, but Asia remains supportive We see a risk of a small cut for the A330 in 2020E or 2021E (production currently expected at a rate of six per month). Our current forecast includes six A330MRTT (tanker aircraft) per annum in 2019-20E, i.e. a production rate of 5.5 per month for passenger transportation purposes. We would not be surprised to see an increase in A330ceo and a small decrease in A330neo, with one offsetting the other with no material impact on earnings. A330neo delivery rates for 2021 and beyond could see some downward pressure, in our view. Downside risk for the A380 We see some potential downside on the A380 to less than our current expectation of one aircraft per month in 2019E and even more in 2020E. Production rates for these two years may be cut to 0.7 per month if Airbus fails to sign new orders in the next six to nine months, in our view. Potentially some upside on narrowbodies to offset widebody cuts Additionally, we believe that Airbus may opt for offsetting a small cut to A330 rates by increasing A320 rates to 63 (targeted at 60/month in mid-2019 from the current 52, possibly with the option of increasing this to 63). Our industry channel checks indicate that the airframer has requested that its supply chain be prepared to increase rates to 63 if need be when they reach 60. We do not expect a decision on any of this before H1 2018.
Widebody Aircraft Review5 20 July 2017
Figure 10: Airbus widebody (WB) deliveries – 2002-2020E Figure 11: Airbus WB deliveries by programme in number of aircraft in number of aircraft, all versions
250 140
120 200 100
150 80
60 100 40
50 20
0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2
0 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 E E E E 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 E E E E A300 A330ceo/A340/A330neo Airbus widebody Airbus passenger widebody A350 A380
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Boeing to stabilise on lower levels Overall, we expect Boeing's widebody deliveries to stabilise on the lower levels reached in 2018E, the reduction from the 2015 peak being mostly driven by the drop in 777 production. Assuming a stable rate of 12 per month for the 787 We maintain 787 production at a rate of 12/month through 2022. We believe that 14/month is firmly off the table at this point (though this is not yet official from Boeing), and while we acknowledge that additional orders are needed to maintain the rate of 12/month beyond ~2020, we do not think Boeing has to make a decision on potentially cutting production (likely to 10/month) just yet, giving it some more time to further shore up the backlog for 2021 and beyond. 777 / 777X expected to stay at 3.5 per month On the 777, while BA's decision to cut the 777 classic to 3.5 per month for 2018/19 was in line with our expectations, we are now less confident that the 777X has sufficient current backlog to warrant a rapid return to an 8.3/month rate. Our latest model holds the 777X at the same 3.5 per month rate indefinitely (vs going back to 5/month previously). This stems from the structure of the backlog, with a significant portion of the orders coming from Middle Eastern airlines. Other programmes 767 production is slated to rise to 2.5/month from 2/month in Q4'17. This implies annual production of 30 units, which we think will be roughly evenly split between the Freighter variant and the USAF's KC-46 Tanker, which is a 767 derivative. We continue to believe that 747 production will terminate at the end of the decade, following the deliveries of the new Air Force One aircraft.
Widebody Aircraft Review6 20 July 2017
Figure 12: Boeing widebody deliveries 2002-2020E Figure 13: Boeing WB deliveries by programme in number of aircraft in number of aircraft
Source: Company data, Credit Suisse estimates, FlightGlobal Source: Company data, Credit Suisse estimates, FlightGlobal
Towards a GE / Rolls-Royce duopoly on widebodies Pratt & Whitney's share of the fleet has steadily declined to the benefit of GE (c.44% in 2017) and Rolls-Royce (c.33% in 2017). Given the existing backlog (31% for GE and 56% for Rolls-Royce), this trend is likely to result in a balanced duopoly in the widebody market between Rolls-Royce and GE, with a strong weighting towards Asia and the Middle East.
Figure 14: Engine share by OEM across major platforms globally % of engines in service and backlog as of June 2017 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GE Rolls-Royce P&W CFMI (50/50 Safran / GE) Engine Alliance (50/50 GE / P&W) Rolls-Royce fleet + backlog GE fleet + backlog
Source: FlightGlobal data
Rolls-Royce: an attractive geographical profile in large engine deliveries We believe Rolls-Royce's geographical spread and platform exposure limits the risk to its delivery skyline. This comes from its large diversified backlog in Asia and the A350 ramp- up. The Trent XWB for that aircraft effectively leads the growth in deliveries, further boosted by the Trent 7000 for the A330neo.
Widebody Aircraft Review7 20 July 2017
Figure 15: Rolls-Royce large engine deliveries by model in number of engines
700
600
500
400
300
200
100
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E2018E2019E2020E
Total Trent XWB (A350) Trent 700 (A330ceo) Trent 7000 (A330neo) Trent 900 (A380) Trent 1000 (787)
Source: Company data, Credit Suisse estimates
GE: Exposure to Middle East and 777 We estimate that one-third of GE’s Aviation sales relate to Commercial widebody aircraft. GE has a one-third share of the backlog for widebody engines (including aircraft orders without engine decision), which is slightly more weighted towards the Boeing 777 / 777X relative to the 787. GE is really only tied to new Boeing platforms at this stage, and also has a high concentration of its orders in the Middle East, which comprises ~47% of its global backlog. This exposure is a source of risk given the slowdown in traffic and the high customer concentration in the region. This is consistent with our assumption that GE widebody engine deliveries are due to fall by ~50% over 2017E-2020E. However, we think that overall GE Aviation sales can still grow at a least at a mid-single digit CAGR through 2020E, due to ongoing NB OE strength (LEAP), Aftermarket, and the Military business.
Figure 16: GE large engine deliveries by model in number of engines
700 3500
600 3000
500 2500
400 2000
300 1500
200 1000
100 500
0 0 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
GEnx GE90 + GE9x CF6 Total Widebody Total Commercial Engine (RHS)
Source: Company data, Credit Suisse estimates
Widebody Aircraft Review8 20 July 2017
Exposure to widebodies by company At an industry level, we estimate that broadly one-third of revenues are driven by widebodies. In Europe, the most sensitive stock to widebodies is Zodiac, with nearly half of revenues driven by this market segment (exit slides, electrical systems, seats, galleys, etc.). Rolls- Royce, MTU and Airbus all derive about a third of their revenues from widebodies. Growth in the A350 and its Trent engine will push up that number for Rolls-Royce and Airbus by the end of the decade. Safran and Meggitt generate only 20-25% from this market (including sizable aftermarket revenues). In the US, we estimate that up to 40% of Boeing's total revenues are driven by widebodies. This segment accounts for 5-10% of revenues for large US conglomerates, such as GE, Honeywell or United Technologies, including some significant aftermarket revenues.
Figure 17: Widebody exposure by company in % of total 2016 revenues – OE and aftermarket
60%
50%
40%
30%
20%
10%
0% Z B R M A M S U G L H B e o o i a A o T o E T e r o d e b f l n X E g U l r n i s i u a e a g n - a S s n y c i g R t r w y t d o s e o y t l e c l m e Europe US s
Source: Credit Suisse estimates
Widebody Aircraft Review9 20 July 2017
The widebody passenger fleet, structure, risks and strengths Structure of the widebody passenger fleet This report focuses on passenger aircraft, which account for 78% of the existing widebody fleet in service; i.e. 4,200 aircraft out of 5,500 in total (based on FlightGlobal data). We exclude the rest of the fleet from most of our calculations, comprising freighters (17% of the global fleet) and military and other applications (5% of the fleet, including VIP). In addition to the in-service fleet, about c.550 aircraft – i.e. 10% of the total existing fleet – are in storage (c.9% for passenger aircraft). In later sections of this report we review the fleet and prospects for widebodies in each of their four main regions of operation: Asia, Europe, the Middle East and North America.
Figure 18: Total widebody fleet – in service and in Figure 19: Widebody fleet by region – passenger storage aircraft in number of aircraft – as at June 2017 in number of aircraft in service – as at June 2017
6,000
Africa 5,000 North America 4% 16%
4,000
Asia Pacific 3,000 Middle East 37% 16%
2,000
Latin America 3% 1,000
Europe 0 24% Fleet Passenger aircraft Freighters Military and others
In service In storage
Source: FlightGlobal data Source: FlightGlobal data
The programmes we have included in our review cover aircraft from Airbus (A300, A310, A330, A340, A350 and A380), Boeing (747, 767, 777, 787, MD-11, DC-10), Lockheed (Tristar) and Ilyushin (Il-86, Il-96). Airbus and Boeing account for nearly 100% of the passenger fleet today (up from 97% in 2005).
Widebody Aircraft Review 10 20 July 2017
Figure 20: Current widebodies programmes Seats and range in nm
9,000
777-8X 8,500 777-200LR
A380 A350-900 8,000 A350-1000 e g
n 747-8i a A330-800 787-9
R 777-9X 7,500 787-8 777-300ER A330-200 7,000
A330-900 C929 6,500 787-10 A330-300 6,000 200 250 300 350 400 450 500 550 600 Seats
Source: Company data
China and Russia have jointly launched the design of a widebody, the C929. It is due to enter in service in 2023, but we see this as overly optimistic. We would expect something closer to the end of next decade and would not consider that programme in our market share development forecasts for the time being. Engine-wise, it may be offered with both Western (e.g., Rolls-Royce or GE) and 'domestic' engines (source: Flight International, 10 July 2017). For example, Russia is working on the PD-35 (77lb of thrust) for this aircraft. An RfP is due in the next 12 months.
A strong increase in the widebody fleet since 2011 The in-service widebody passenger fleet has increased significantly since 2005 (+40%), but most of the growth was concentrated in 2011-2017 (+27%). This is illustrated in Figure 21, which highlights the split of the fleet by age (measured as average age since year of build excluding aircraft in storage). We see the part of the fleet aged 16-21 years (17% of the in-service fleet) as prime feedstock for retirement in the coming 4-6 years (i.e. from 2022). We believe that this part of the fleet already would have been retired if oil prices had not been so low and air traffic so strong (largely fueled by low oil prices). In our view, this corresponds to aircraft that have seen their lives extended but will be retired either when they reach a heavy shop visit choice (for example, a middle-aged widebody might be valued at USD10-15m and maintaining its two engines will cost USD8-10m over the lifetime of the aircraft) or if oil prices rebound.
Widebody Aircraft Review 11 20 July 2017
Figure 21: Passenger widebody fleet by age in number of aircraft and age in years – measured in June 2005, 2011 and 2017
400
350
300
250
200
150
100
50
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37
Fleet 2017 Fleet 2011 Fleet 2005
Source: FlightGlobal data A much younger fleet in 2017 Figure 21 shows that about 90% of the 2005, 2011 and 2017 fleets were 20 or fewer years old (suggesting that long-term retirement patterns have not changed significantly). However, 38% of the 2017 fleet is less than 6 years old, vs 25% in both 2005 and 2011. This is offset by the fleet aged 11-15 years (just above 25% in both 2005 and 2011, vs 14% in 2017). Overall, the average age of the global passenger widebody fleet is currently 9.7 years. This suggests that we should see a wave of retirements starting in 2022-2023. It should then be followed by a phase of equipment, as a lower-than-usual number of aircraft are 12-15 years old.
Figure 22: Age split of the widebody fleet in 2005, Figure 23: Age split of the widebody fleet in 2005, 2011 and 2017 2011 and 2017 – cumulative in number of aircraft by age block, as at June 2017 in number of aircraft by age block, as at June 2017
45% 100%
40% 90%
80% 35% 70% 30% 60% 25% 50% 20% 40% 15% 30% 10% 20%
5% 10%
0% 0% y1-5 y6-10 y11-15 y16-20 y21-25 y26-30 >y31 y1-5 y6-10 y11-15 y16-20 y21-25 y26-30 >y31
Fleet 2005 Fleet 2011 Fleet 2017 Fleet 2005 Fleet 2011 Fleet 2017
Widebody Aircraft Review 12 20 July 2017
Source: FlightGlobal data Source: FlightGlobal data The recent fleet increase has been driven largely by capacity additions We think that the fleet increase over 2011-2017 has been driven largely by capacity additions rather than by replacement needs. This reflects, in our opinion: 1) the strong increase in deliveries registered since 2011 for widebodies in many markets, boosted by the delayed ramp-up of the 787, A380 and A350; and 2) lower retirements than planned as a result of strong traffic and low fuel prices. The higher retirement rate of the 2011-2017 period vs 2005-2011 has been more than offset by higher delivery rates. Indeed, the fleet has grown much more between 2011 and 2017 than between 2005 and 2011. As illustrated by Figure 24, the net additions difference of the six youngest years comes to 820 aircraft vs a difference of 135 for the eight higher years of retirements, i.e. 6x more.
Figure 24: Net additions / retirements to the widebody passenger fleet in number of aircraft by age (years) – 2017 vs 2011 and 2011 vs 2005
400
350
300 +820 aircraft 250
200
150
100
50 -135 aircraft 0
-50
-100 1 2 3 4 5 6 7 8 9 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0
2017 vs 2011 2011 vs 2005
Source: Company data
787, A330 and 777 have driven the growth of the fleet since 2005 For the 2011-2017 period, the main driver of fleet growth has been the 787, with over 540 deliveries (the first aircraft entered in service in late 2011, after around three years of delays). It has been followed by the A330 (just over 400 deliveries during this period) and the 777 (360 deliveries). At the other end of the spectrum, the 747, 767 and A340 have seen the largest decreases over this period (each at or close to 200 aircraft).
Widebody Aircraft Review 13 20 July 2017
Figure 25: Evolution of passenger widebody fleet by Figure 26: Contribution to passenger widebody fleet programme growth by programme in number of aircraft in service – as at June 2005, 2011 and 2017 in number of aircraft added / removed – as at June 2005, 2011 and 2017
1,250 1,000 777 A330 800 1,000
600
750 400
787 500 767 200
0 250 A380 747 A340 -200 A350 A300/310 0 A783750 2005 2011 2017 Others -400 7 7 7 7 A A A A A O T 4 6 7 8 o 3 3 3 3 3 t h 7 7 7 7 t 3 4 5 8 0 a e 0 0 0 0 0 l r / s 747 767 777 787 3 1 0 A300/310 A330 A340 A350 A380 Others 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
Fleet growth has been driven by Asia and the Middle East Much of the growth in the widebody passenger fleet is attributable to Asia and the Middle East (accounting for 39% and 34%, respectively, of the expansion over 2005-2017), with some more moderate growth in Europe (17% of the fleet growth in 2005-2017). The North American fleet has started to grow again, but at a very slow pace compared with emerging markets. Note that Russia and Turkey are included in Europe, which explains about 4ppts of the expansion of the European fleet. The Asian fleet accounts for a stable 36-37% of the world widebody passenger fleet while the Middle East has grown from 9% to 16% of the total since 2005. On the other end of the spectrum, the European fleet has decreased slightly as a percentage of the total fleet (to just under 25%), but the North American fleet has fallen from 21% of the world fleet to 16% (and is in fact now slightly smaller than the Middle East fleet).
Widebody Aircraft Review 14 20 July 2017
Figure 27: Growth driven by Asia and Middle East Figure 28: Relative decrease in Europe and America in number of passenger widebody aircraft in service in % of total passenger widebody fleet in service
4,500 40%
4,000 35%
3,500 30%
3,000 25%
2,500 20% 2,000 15% 1,500 10% 1,000 5% 500 0% 0 Africa Asia Pacific Europe Latin Middle East North Fleet 2005 Fleet 2011 Fleet 2017 America America
Africa North America Europe Latin America Asia Pacific Middle East Fleet 2005 Fleet 2011 Fleet 2017
Source: FlightGlobal data Source: FlightGlobal data
The top five carriers account for 23% of the widebody fleet for passenger use, with three of them based in Europe. The largest operator of widebodies for passenger use is Emirates, with over 240 aircraft in service. Two-thirds of the global fleet is concentrated with the top 24 carriers.
Figure 29: Main passenger widebody fleet – top 24 = 67% of the world fleet in number of aircraft, as at June 2017
300 7.0% Top 24 = 67% of the world fleet 6.0% 250 Top 14 = 50% of the world 5.0% 200
4.0% 150 3.0%
100 2.0%
50 1.0%
0 0.0% E I U A L A D A Q C J S A A K S T E T C C Q C H A a u u h m i m N i i i o a t n e a h h h a a a r n r r G i p f r h a r u i l t i i i i t n t A g i t F e t C C k n n n n h e a a h r a i e a d t
a i a r a a a a r a a r n a h a a s A d d i i a
p a t c A n y n h s n A i n
e i S E A n A n a o A r A
i a s s i P w A r A c a A o a i n r i r i r i a r d w e r r e L a u s l i i a l i w i r l r i a r A n i t G i c n t l a y l n A K n e i h i
a e n i i e n s y G e r f r e r i e L y i s e l r o s s e n c s i s l r r M s n s i s u o n n e p u e s p s
Fleet As a % of global fleet
Source: FlightGlobal data
Widebody Aircraft Review 15 20 July 2017
When looking at the number of seats offered, Asia Pacific accounts for 45% of the total (vs 37% of the global fleet), while the Middle East is 20% of the total (vs 16% of the fleet). This results from very different business models and fleet evolutions following the fragmentation of the international transport market, with Asian carriers including Japanese domestic 777s and 747s as well as many medium-haul routes in China (with a lot of seats in mid- to large-sized aircraft). Middle Eastern carriers are more focused on business class travelers as well as longer routes, with large to very large aircraft. The gap between share of seats and fleet share implies that aircraft in Asia and the Middle East are about 20% larger than the average global widebody aircraft.
Figure 30: Asia and Middle East combined account Figure 31: Shifts in market structure, but Asian for 65% of seats airlines remain dominant in number of aircraft or seats offered, as at June in number of seats offered
50% 60%
45% 50% 40%
35% 40% 30%
25% 30%
20% 20% 15%
10% 10%
5% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Asia Pacific Europe Middle East North Latin RoW America America Asia Europe Middle East Fleet Seats North America Latin America
Source: FlightGlobal and Diio data Source: Diio data
Figure 32 shows that the Middle East and North America (c.30% of the total of the fleet in service) have seen material slowdowns in their pace of new seat additions in 2017 vs their four-year trends. The other regions (c.70% of the fleet) have registered only marginal decreases or no decrease in their pace of growth.
Figure 32: Growth vs share of the fleet Fleet in number of aircraft, growth in number of seats offered
12.0% 2014-2017 seat growth CAGR Middle East 2017 seat growth 10.0% s t
a Latin America e s
8.0% d e r e f f o
n
i 6.0%
h Europe t w o r
G 4.0% Asia Pacific North America 2.0%
0.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% As a % of fleet in service in 2017
Source: Diio and FlightGlobal data
Widebody Aircraft Review 16 20 July 2017
Traffic data remain very strong in 2017 so far, and stronger than expected, even if North America and the Middle East appear to be slowing down somewhat. IATA found that industry- wide RPKs rose +7.7% in May after +10.7% in April, bringing the YTD performance to +7.9%. ASKs have remained in check, increasing only 6.0% to end-May 2017. International traffic has been the strongest by far, with an 8.3% YoY increase in RPKs in May, after a 12.5% increase in April. As of the end of May, most of the world markets using widebodies (including domestic Japan and China) were growing faster than the overall air transport market.
Figure 33: Most international markets growing faster than the market average in % RPK change
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0% Domestic China Latin America Asia Pacific Europe Middle East Domestic Japan North America International International International International International
YTD to May IATA total traffic
Source: IATA data
Airbus slowly catching up to Boeing Airbus has contributed most of the net growth in widebodies since 2005, broadly split between pre- and post-2011. Boeing has faced a strong decrease in the in-service fleet of its older programmes in 2005-2011, offset by the deliveries of the 777. This is a reflection of the existing market shares in the in-service fleet: 65% for Boeing in 2005 vs 60% in 2017. The US airframer was also impacted by the delay of the 787, with deliveries starting only in 2012 after a roll-out in 2008.
Figure 34: Widebody passenger fleet by aircraft Figure 35: Net additions to passenger widebody manufacturer fleet by manufacturer and period in number of aircraft, as at June in number of aircraft added / removed, as at June
4,500 500
4,000 400 3,500
3,000 300
2,500 200 2,000
1,500 100
1,000 0 500
0 -100 2005 2011 2017 Boeing Airbus Lockheed Martin Ilyushin
Boeing Airbus Lockheed Martin Ilyushin 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 17 20 July 2017
Over 2005-2011, Airbus led in fleet expansion owing to the fleet build-up in Asia and the Middle East, while Boeing's success with the 777 in the Middle East was partially offset by the 747 fleet reduction in Asia. The 2011-2017 period looked significantly different. Airbus continued to increase the fleet in the Middle East and Asia (A330, A380). Boeing started to ramp up 787 production and overall managed to substitute 777 for the 747s being retired in Asia while increasing 777 deliveries to the Middle East.
Figure 36: Fleet evolution by region – 2005 to 2011 Figure 37: Fleet evolution by region – 2011 to 2017 in number of aircraft added / removed in number of aircraft added / removed
200 200
150 150
100 100
50
50 0
0 -50
-100 -50 A A E L M N A A E L M N a a f s u f s u o o i i r r d d t t i i r r i r i r a i a i c c o o n d t n d t h h
a a p p l l P P e e A A e e A A a a
m m E E m m c c a a i e i e f f e e i s i s r r c c r r i i t t c c i i c c a a a a
Airbus Boeing Others Airbus Boeing Others
Source: FlightGlobal data Source: FlightGlobal data
The current backlog situation As of June 2017, the overall backlog for widebodies amounted to 2,415 units, including 117 freighters (5% of the total) and 55 tankers (2%). The backlog of passenger widebody aircraft was 2,236, or 53% of the existing fleet and c.6.5 years of production. Airbus accounted for 53% of this and Boeing for 47%. Excluding aircraft still in development (the A330neo and 777X) the backlog amounts to 1,720 aircraft, or just under five years of production.
Widebody Aircraft Review 18 20 July 2017
Figure 38: Widebody aircraft backlog – total Figure 39: Widebody aircraft backlog – passenger in number of aircraft, as at June 2017 in number of aircraft, as at June 2017
800
700
600
500 Military and others 400 2% Passenger Freighter 300 93% 5%
200
100
0 A350 787 777X A330neo A330ceo A380 777 747
Airbus Boeing
Source: FlightGlobal data Source: FlightGlobal data
Boeing accounts for 97% of the freighters on order (spread between the 767, 777 and 747) and 70% of the tankers (thanks to the KC-46 order for the USAF in particular). Overall, the 767 and its derivatives account for 59% of the non-passenger widebodies. A strong increase in the 2000s The backlog for widebody aircraft increased rapidly from nearly 700 aircraft in 2005 to around 2,200 aircraft in 2011, a level which it has broadly maintained up to 2017, despite the strong increase in deliveries described above.
Figure 40: Passenger widebody backlog – total Figure 41: Passenger widebody backlog – by region in number of aircraft, as at June 2005, 2011 and 2017 in number of aircraft, as at June 2005, 2011 and 2017
2,500 900
800
700 2,000 600
500 1,500 400
300
1,000 200
100
0 A A E U L M N L a e f s u n o i r d t s i
500 r i a r a i c o n d t s n h a p o l n e A e r A o s m E m u a e n e s r c r i t c e i c a d a 0 2005 2011 2017 2005 2011 2017
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Widebody Aircraft Review 19 20 July 2017
Asia and Middle East fueled the growth of the backlog Most of this strong increase came from Asia and the Middle East (61% of the backlog today), but also from Europe, which accounted for a sizable c.15% of the backlog in 2011 and as of June 2017. Unannounced customers account for about 5% of widebody orders, with lessors accounting 8% of the total (as much as in North America).
Figure 42: Backlog by region Figure 43: Backlog by programme / region in number of aircraft, as at June 2017 in number of aircraft, as at June 2017
Lessors 787 - Asia 8% 9% Africa Latin America 2% 2% A350 - Asia Unannounced 11% 5% Asia Pacific Others 32% 36% A330neo- Asia North America 3% 8% 787- Europe 5%
A350 - Europe 6% A350 - RoW / Unannounced 787 - Middle 3% East Middle East Europe A350 - North 777X- Middle 6% 29% 14% America A350 - Middle East 4% East 10% 7%
Source: FlightGlobal data Source: FlightGlobal data
Overall, as described in the geographical sections later in this report, we see the Middle East backlog as being at risk of deferrals due to overcapacity, while Asia appears well protected and set to continue expanding. Europe and North America appear likely to see some deferrals as airlines push back fleet renewals in a low oil price context.
Delivery skyline data offer visibility on some programmes Based on FlightGlobal delivery skyline data, it appears that no 777 passenger aircraft will be delivered in 2019E, before the newer 777X kicks in. The 787 deliveries would also peak in 2019, based on the existing orderbook. In particular, the backlog of the 787-9 will need reinforcing, with a 40 aircraft drop in the 2020E backlog, according to FlightGlobal. The current backlog data suggest a steady decrease in A330 deliveries when the A330neo enters into service (we believe that the programme order drought results from the low fuel price, which makes the economics somewhat unattractive against older generation aircraft). The existing backlog for the A380 points towards stable deliveries to 2022E, but we think that the Middle Eastern difficulties will actually trigger further production cuts (as hinted by the head of programmes at Airbus in June – Reuters, 5 June 2017).
Widebody Aircraft Review 20 20 July 2017
Figure 44: Delivery skyline by programme Figure 45: Delivery skyline by region in number of aircraft, as at June 2017 in number of aircraft, as at June 2017
180 180
160 160
140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 2017 2018 2019 2020 2021 0 2017E 2018E 2019E 2020E 2021E 2022E Asia Pacific Europe
747 777 787 North America Middle East A330 A350 A380 Latin America / Africa Unannounced customers
Source: FlightGlobal data Source: FlightGlobal data
Order intake remains slow We believe that order intake and book-to-bill as a whole are not particularly relevant for assessing production levels at Airbus and Boeing for the next couple of years. This is a consequence of the very high level of backlog and overbooking on narrowbodies. Airbus, for instance, has a backlog of over 6,800 aircraft overall, representing 9.4 years of production at current production rates (the company guides for 720 deliveries in 2017). However, we feel that order intake is more relevant for widebodies, with a slowdown for the past few years and no pick-up in sight, in particular for the larger widebodies, in the absence of a new programme. Slow order intake consistent with a reduction in production Order intake is currently largely concentrated on 'producible' aircraft (i.e. aircraft where production is on-going or about to start, effectively in a position to feed short-term delivery needs). It likely corresponds in our view more to airframers trying to fill their production slots than to a general trend of airlines trying to find new capacity or replace their existing fleets. This is likely to come with pricing pressure on these new orders (largely advertised for the A330s, for instance). The backlog of "producible" widebody passenger aircraft (calculated as removing the 777X and A330neo) reaches c.1,700 units, i.e. 77% of the total backlog. The book-to-bill of "producible" aircraft has been between 0.7x and 0.5x since 2014, implying a 30-40% decrease in volumes (in line with cuts implemented by both airframers).
Widebody Aircraft Review 21 20 July 2017
Figure 46: Order intake (gross) and book-to-bill in number of aircraft, passenger version only – to end-June 2017
1,000 6.0x 900 5.0x 800 700 4.0x 600 500 3.0x 400 2.0x 300 200 1.0x 100 0 0.0x 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD
Airbus Boeing Book-to-bill Book-to-bill producible
Source: FlightGlobal data, Credit Suisse research
Limited demand for large aircraft Order intake also points towards limited demand for new large widebodies, with no new orders for the 777X after H1 2015 until a 20-unit order in June 2017 (for an undisclosed customer), five orders for the A380 since 2014 and only 24 for the A350-1000 since 2014.
As at end-June, only the A350 and the 787 have seen meaningful order inflows this year (with a few 777 and 777X), which is surprising given that low oil prices should make these new aircraft less appealing. At the Paris Air Show in June, firm orders for 49 passenger widebodies were announced (33 787s, 10 A350s, 4 777s and 2 A330ceos), excluding commitments and MoUs.
Figure 47: New orders by programme - 2013-2017 YTD in number of aircraft – to end-June
300
250
200
150
100
50
0 A330ceo A330neo A350 A380 777 777X 787
2013 2014 2015 2016 2017 YTD
Source: FlightGlobal and company data
Widebody Aircraft Review 22 20 July 2017
GE and Rolls-Royce on course for shared segment dominance GE and Rolls-Royce power about 75% of the world fleet of widebodies for passenger transport in service. The third-largest player in the sector (Pratt & Whitney) is seeing and should continue to see a steady decline in its fleet, with no recent and no new programmes. GE powers the 747, 767, 777 and 787, the A300/A310 and A330. Rolls-Royce is on the 747, 787, A330, A340-500/600, A350 and A380. The now out-of-production A340-200/300 is powered by the CFM56-5C and the A380 is also powered by the GP7200 of Engine Alliance (a JV between GE and Pratt & Whitney). We discuss the main engine makers by programme and region in detail later in this report.
Figure 48: Fleet in services shows GE and Rolls- Figure 49: A steady drop for Pratt & Whitney in the Royce domination fleet in service in number of aircraft / engines, as at June 2017 in number of engines, as at June
4,500 4,500
4,000 4,000
3,500 3,500
3,000 3,000
2,500 2,500
2,000 2,000
1,500 1,500
1,000 1,000
500 500
0 0 GE Rolls-Royce P&W Engine CFMI GE Rolls-Royce P&W Engine CFMI Alliance (50/50 Safran / Alliance (50/50 Safran / (50/50 GE / GE) (50/50 GE / GE) P&W) P&W)
Number of aricraft equipped Number of engines in service 2005 2011 2017
Source: FlightGlobal data Source: FlightGlobal data
Recent drop in widebody retirements driven by freighters Following the 2009 crisis, the number of widebodies being retired has increased steadily driven mainly by a traffic slowdown (due to the crisis), an ageing fleet and the ramp-up of new aircraft (in particular 787s, after the initial delays to the programme). The dynamics changed in 2016, with a significant fall in the number of widebody retirements (166 in 2016 vs 195 on average over 2013-2015, or -15%). As of early June this year, 59 widebody aircraft had been retired, but we note a lag between actual retirement and FlightGlobal capturing the data. The details of the aircraft retired show that the drop has been much more significant in freighters than in passenger aircraft: -42% vs -1% respectively (2016 vs average of 2013- 2015). Freighters accounted for 30% of widebody retirements over 2009-2015 and only 20% in 2016 and 6% on average over 2000-2008.
Widebody Aircraft Review 23 20 July 2017
Figure 51: The most recent wave of retirements has Figure 50: Retirements per aircraft usage been driven by freighters in number of aircraft, to end 2016 As a % of the number of aircraft retired, to end 2016
160 120%
140 100%
120
80% 100
80 60%
60 40%
40
20% 20
0 0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Passenger aircraft Freighter Others Passenger aircraft Freighter Others
Source: FlightGlobal data Source: FlightGlobal data
As a result of its dominance in the widebody freighter market (powering 72% of the fleet), GE is particularly affected by the retirements seen on both the 747 and the 767 (CF6 engine). However, Pratt & Whitney and Rolls-Royce have benefited from the 2016 drop in retirements, with retirements of GE's engines remaining high.
Figure 52: Engines retired on widebody aircraft Figure 53: Retirements by engine manufacturer in number of engines for retired aircraft, June 2017 in number of engines for retired aircraft
300
Trent 1% RB211 250 17%
200 CF6 37% PW4000 150 9%
100
GE90 0.2% 50 CFM56 JT9D 5% 31% 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
GE CFMI P&W Rolls-Royce
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 24 20 July 2017
Is the Middle East at risk of a significant slowdown? The Middle East market accounts for 16% of the world fleet as at mid-2017 and 29% of the backlog of widebodies (not accounting for lessors and undisclosed customers). This makes the slowdown in air traffic in and to/from the region an area of risk for Airbus and Boeing. Middle Eastern traffic has slowed (8.0% for international traffic YTD, down from c.12% on average over the past three years, based on IATA data at end May). The risk is compounded by the fact that the fleet is highly concentrated around a limited number of carriers. We believe this warrants a small cut to delivery expectations for the larger aircraft on order (probably with deferrals, not cancellations).
Large aircraft make up most of the Middle Eastern fleet The 777 currently accounts for 41% of the Middle Eastern fleet, more than the A380 and A330 combined. The larger 777-300ER in particular is 33% of the Middle Eastern fleet. The 747 was 14% of the fleet in 2005 and has now dropped to 2%. The A380 deliveries have been concentrated on this region (53% of the A380 fleet in service in June 2017), with more than 110 in service (o/w 95 with Emirates). The aircraft accounts for 17% of the total Middle Eastern fleet in service.
Figure 54: Middle Eastern passenger widebody fleet Figure 55: Net changes in Middle Eastern fleet by by programme programme in number of aircraft, as at June 2017 in number of aircraft added / removed, as at June 2017
300 140
120 250 100
200 80
60 150 40
100 20
0 50 -20
0 -40 7 7 7 7 A A A A A O 7 7 7 7 A A A A A O 4 6 7 8 4 6 7 8 3 3 3 3 3 3 3 3 3 3 t t h h 7 7 7 7 7 7 7 7 0 3 4 5 8 0 3 4 5 8 e e 0 0 0 0 0 0 0 0 0 0 r r / / s s 3 3 1 1 0 0
2005 2011 2017 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
The Middle Eastern fleet is heavily concentrated on four carriers, with Emirates alone accounting for 36% of the total. Emirates also accounts for 9% of the total seats offered on the market worldwide because of its widebody fleet comprising large 777s and A380s.
Widebody Aircraft Review 25 20 July 2017
Figure 56: Middle Eastern passenger fleet – top 10 carriers in number of aircraft, as at June 2017 As a % of 747 767 777 787 A300/310 A330 A340 A350 A380 Total total Emirates 147 0 95 242 36% Qatar Airways 43 30 0 26 4 19 8 130 19% Saudia 7 45 7 0 32 91 14% Etihad 24 13 0 24 7 10 78 12% Mahan Air 1 21 10 32 5% El Al 6 7 6 0 19 3% Kuwait Airways 9 0 5 3 17 3% Oman Air 6 0 10 16 2% Iran Air 8 2 10 1% Royal Jordanian 7 0 7 1% Top 10 14 7 274 63 29 99 24 19 113 642 96% Others 2 4 1 0 9 12 2 0 0 30 4% Total 16 11 275 63 38 111 26 19 113 672 100% Top 10 as a % of total 88% 64% 100% 100% 76% 89% 92% 100% 100% 96% Aircraft as % of region fleet 2% 2% 41% 9% 6% 17% 4% 3% 17% 100% Source: FlightGlobal data
The backlog remains highly concentrated The Middle East backlog is highly concentrated, with 80% coming from Emirates, Qatar and Etihad. 40% of the orderbook is on programmes that are in development (52% if we include the A350-1000 in that number). Emirates and Qatar account for about half of the total backlog reported by Airbus on the A380. When adjusting for the phantom orders in Airbus's backlog (Virgin, Amedeo, Qantas), they account for almost 100%.
Figure 57: Middle Eastern backlog in number of aircraft, as at June 2017 As a % of 777 777X 787 A330ceo A330neo A350 A380 Total total Emirates 20 150 47 217 33% Qatar Airways 10 60 30 65 2 167 25% Etihad 25 58 62 145 22% Iran Air 8 28 16 52 8% Gulf Air 16 16 2% Kuwait Airways 3 10 13 2% Iraqi Airways 10 10 2% Saudia 1 4 5 10 2% Yemenia 10 10 2% Oman Air 7 7 Top 10 34 235 125 13 28 163 49 647 98% Others 0 0 10 0 2 0 0 12 2% Total 34 235 135 13 30 163 49 659 100% Top 10 as a % of total of total 100% 100% 93% 100% 93% 100% 100% 98% Aircraft as % of region fleet 5% 36% 20% 2% 5% 25% 7% 100% Source: FlightGlobal data
Widebody Aircraft Review 26 20 July 2017
Risk to the 777X and the A380 The backlog for the 777X (306 aircraft on firm order) appears robust. However, recent events have raised some concerns around the health of this backlog. The majority of these orders (235 aircraft; 77% of total) are from the Big 3 Middle Eastern carriers – Emirates (150 aircraft), Qatar (60) and Etihad (25). The situation is similar with the A380, accounting for half of the official backlog in the region (and probably about 80% of the 'real' backlog). Emirates is said to be looking at buying a new batch of 20 A380Plus (source: Aviation Week, 21 June 2017). When considering the limited customer base for aircraft of this size, it will be difficult to backfill any early delivery slots that might be affected by deferrals, meaning the production rate for either programme is likely to remain under pressure.
Figure 58: Main Middle Eastern airlines' fleet and their backlog in number of aircraft, as at June 2017
300 30.0
250 25.0
200 20.0
150 15.0
100 10.0
50 5.0
0 0.0 E Q S E M E K O I R G I r r a a m a t l u o a m u a
i h A n q u w y t l h i f a a r a i d a l a a A a A r n A d i l n i a t i t A i J e r i A r
r A A o s i w r i r r i w i r a r d w a y a a s y n s y i a s n
Fleet Backlog Age (rhs) Regional fleet average age (rhs)
Source: FlightGlobal data
Widespread concerns All of these carriers have been experiencing a variety of issues recently. They have all been feeling the pinch from the low price of oil (impacting demand), the Trump administration's attempts to implement a travel ban on certain countries in the region (with the US most likely seen as the main source of growth potential by these carriers), the recent ban on personal electronic devices (partially lifted now), general geopolitical uncertainty, a campaign by US airlines against alleged subsidies to Gulf carriers (with the latest example being American terminating its codeshare agreement with Etihad and Qatar Airways) and political tensions between Qatar and its neighbours. In addition, Etihad has suffered heavy losses from a series of what many consider to be misguided investments in struggling European airlines (Alitalia and AirBerlin, for instance), which also hampered its balance sheet position and is likely to put its orderbook at risk. In particular, while its 777X order is the smallest of the three, we can't completely discount the possibility of deferrals. Emirates appears to be the healthiest of the three, and it alone accounts for 50% of the 777X and A380 backlogs. But a slowdown in the delivery profile is also possible here considering the airline recently trimmed capacity due to the demand slowdown. The company is also said to have stopped hiring crew members (Reuters, 23 January 2017) and has even started to make cuts (Bloomberg, 10 July 2017).
Widebody Aircraft Review 27 20 July 2017
Lastly, Qatar Airways (20% of 777X backlog) shares all of the economic pressures that face the other two, and in addition is currently facing a diplomatic crisis that has seen traffic to its neighboring countries completely cut off (airlines think-tank CAPA estimates that they account for 18% of Qatar's traffic), as well as restrictions on most neighboring airspace. Should this diplomatic crisis prove to be protracted, deferrals and/or cancellations would be almost inevitable, in our view. Qatar announced the cancellation of four A350-900 in late June (not reflected in the data we have been using). The aircraft are either in flight tests (MSN63 and 78) or in final assembly (MSN90 and 100). While the airline attributed this decision to cabin issues, we think it also relates to a capacity management decision in the context of the difficulties in the region. Airbus indicates that it will continue discussions with Qatar to try to reverse the decision in the next few months and, if unsuccessful, remarket the aircraft.
Widebody Aircraft Review 28 20 July 2017
Asia should remain an area of strength for widebody deliveries Asia accounts for 37% of the widebody passenger fleet and 32% of the backlog (excluding undisclosed customers and lessors). We believe it will remain an area of strong deliveries for widebodies, with expansion in international destinations, growth in domestic China on high-volume routes as well as renewal of the Japanese fleet ahead of the 2020 Olympics. We also believe it is an area of interest for the middle-of-the-market aircraft contemplated by Boeing, with many high-volume medium-haul routes. The main areas of risk that we see in the backlog are Singapore Airlines and Cathay, which appear to be facing a significant slowdown in growth and may have to reduce their orders for new widebodies (both have said they are already planning the retirement of some of their fleet).
Current Asian fleet expansion driven by A330 and 787 In Asia, the leading widebody for passengers has been the A330 (36% of the fleet), just ahead of the 777. The 787 is now ramping up strongly and accounts for 14% of the overall Asian widebody fleet. A significant number of 747 and 767 (a combined 49% of the 2005 fleet) have been retired (down to 11% in 2017).
Figure 59: Asian passenger widebody fleet by programme Figure 60: Net changes in Asian fleet by programme in number of aircraft, as at June 2017 in number of aircraft added / removed, as at June 2017
600 250
200 500 150
400 100
50 300 0
200 -50
-100 100 -150
0 -200 7 7 7 7 A A A A A O 7 7 7 7 A A A A A O 4 6 7 8 4 6 7 8 3 3 3 3 3 3 3 3 3 3 t t h h 7 7 7 7 7 7 7 7 0 3 4 5 8 0 3 4 5 8 e e 0 0 0 0 0 0 0 0 0 0 r r / / s s 3 3 1 1 0 0
2005 2011 2017 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
The Asian fleet has a lower level of concentration than other regions, with more widebody carriers than anywhere else (as a result of the fragmented market in the region along national frontiers). Chinese operators (excluding HK) account for about 24% of the total Asian fleet and 27% of seats, while Japanese airlines are 17% of the fleet and 19% of the seats offered (with many widebodies used on domestic flights). The average age of the fleet in Asia is eight years.
Widebody Aircraft Review 29 20 July 2017
Figure 61: Asian passenger fleet – top 10 carriers in number of aircraft, as at June 2017 As a % of 747 767 777 787 A310 A330 A340 A350 A380 Total total ANA 37 53 58 148 9% Cathay Pacific 70 38 15 123 8% Japan Airlines 37 40 33 110 7% Singapore Airlines 53 23 14 19 109 7% Air China 10 28 8 56 102 7% Korean Air 14 38 2 29 10 93 6% Thai Airways 10 32 6 17 3 6 74 5% China Southern 12 10 39 5 66 4% China Eastern 18 43 61 4% Qantas 11 28 12 51 3% Top 10 45 74 344 117 0 273 0 32 52 937 60% Others 16 43 142 104 2 284 11 14 11 627 40% Total 61 117 484 221 2 557 11 46 63 1,562 100% Top 10 as a % of total 74% 63% 71% 53% 0% 49% 0% 70% 83% 60% Aircraft as % of region fleet 4% 7% 31% 14% 0% 36% 1% 3% 4% 100% Source: FlightGlobal data
A diversified backlog, with A350 driving future deliveries The Asian backlog is dispersed, with the top 10 carriers accounting for only 65% of the total of the region (once again the result of the absence of a regional 'open skies' agreement). These numbers do not take into account the share of the undisclosed customers backlog going to Asian operators. 58% of this backlog is for Airbus programmes, in particular the A350. AirAsia X accounts for about 31% of the total A330neo backlog, allowing Airbus to benefit from the current long-haul low-cost push. The backlog of the 787 is highly dispersed, with only 50% concentrated among the Top 10, a testament to the strength of the programme.
Figure 62: Asian backlog in number of aircraft, as at June As a % of 747 777 777X 787 A330ceo A330neo A350 A380 Total total Singapore Airlines 30 53 5 88 12% AirAsia X 66 10 76 11% ANA 6 20 25 3 54 8% Cathay Pacific 21 33 54 8% Japan Airlines 12 31 43 6% China Southern 20 2 20 42 6% Asiana 29 29 4% EVA Air 3 24 2 29 4% China Eastern 2 2 20 24 3% Hong Kong Airlines 9 15 24 3% Top 10 0 11 41 111 15 66 211 8 463 65% Others 1 19 0 112 35 14 56 8 245 35% Total 1 30 41 223 50 80 267 16 708 100% Top 10 as a % of total 0% 37% 100% 50% 30% 83% 79% 50% 65% Aircraft as % of region backlog 0% 4% 6% 31% 7% 11% 38% 2% 100% Source: FlightGlobal data
Widebody Aircraft Review 30 20 July 2017
When looking at the backlog and fleet by carrier, it would seem that there is substantial replacement planned at Singapore Airlines (benefiting both the 787 and the A350), with 777 and A380 looking set to be phased out. The current slow traffic experienced by Singapore and Cathay may put their replacement plans at risk, in our view. However, Cathay is incentivised to continue introducing new A350s by noise rules at the Hong Kong airport, with new slots made available for airlines reducing noise emissions. Qantas, Japan Airlines, Korean and Thai Airways operate the oldest fleet among the Top 10 Asian airlines (but slow traffic and competition from AirAsia X may limit the need for new planes), while Air China, China Southern and China Eastern have the youngest. The upcoming arrival of the A350 should help rejuvenate the fleet of Asiana.
Figure 63: Main Asian airlines' fleet and their backlog in number of aircraft, as at June 2017
160 12.0 140 10.0 120 8.0 100 80 6.0 60 4.0 40 2.0 20 0 0.0 A C J S A K T C C Q E A A H a h N i i o V s i a h h o a n r r p a i r A t i i n n A A a g C n n h e a i g t s n a a a a a n a h A A i a p a y n K s i i S E i A n o r r
o P w X A a o a i r r n e a u s i a l r i g
t c n t y A e h
i e s A f r i e i r s n c i l r r i n n l i n e e s s
Fleet Backlog Age (rhs) Regional fleet average age (rhs)
Source: FlightGlobal data
China's persistent strength RPKs in China increased 16.8% in May and are up 14.7% YTD. A significant number of this domestic transport is arranged with widebodies (in particular A330s).
Figure 64: Air traffic persistently outpacing GDP Figure 65: 15% growth YTD for air traffic in China, at growth in China a similar pace as in 2016 in %, y/y change in %, y/y change
45% 4.5x 800
40% 4.0x 700 35% 3.5x 600 30% 3.0x 500 25% 2.5x
20% 2.0x 400
15% 1.5x 300 10% 1.0x 200 5% 0.5x January March May July September November
0% 0.0x 2007 2008 2009 2010 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018E 2011 2012 2013 2014 PK growth GDP growth PK/GDP multiplier (x) - rhs 2015 2016 2017
Source: Thomson Reuters, World Bank, Credit Suisse estimates Source: Thomson Reuters
Widebody Aircraft Review 31 20 July 2017
We note China's current plans to open the new Beijing Daxing airport in 2019, where China Eastern will be able to base 150-200 aircraft, with the aim of operating routes to the US, Europe, Australia, Southeast Asia and North Asia from there. Flight International reports that China Eastern will have a c.40% share of this airport traffic (vs a marginal one on the current Beijing airport, dominated by Air China). China Southern is the other operator to be positioned in Beijing Daxing. It initially ordered five A380s to serve international destinations, but it has been blocked from operating from Beijing and has to use its aircraft on domestic routes. The opening of the new airport could allow it to revisit its A380 plans. Airbus and China announced a framework agreement for the purchase of 140 aircraft on 6 June. It includes 40 A350s. The split by airlines is still to be determined.
Widebody Aircraft Review 32 20 July 2017
Subdued prospects in Europe The European fleet accounts for 24% of the world fleet and 14% of the backlog today. Europe as a region includes Russia and Turkey in these calculations, which has been supportive of what appears to be European fleet expansion. (Removing these countries from the data would take 4 percentage points off the growth rates shown here, with a fleet of 140 aircraft accounting for 14% of the European fleet today and a fleet of about 60 in 2005 accounting for 7%.)
Still many old-generation aircraft in the European fleet The fleet in Europe has been driven by the addition of A330s (the most widely used aircraft in the region), 777s and, more recently, 787s. Over the past six years, they have been replacing a large number of 747s, 767s and A340s. In Russia, the old Il-86/96 have largely been retired in the 2000s and replaced with Western jets.
Figure 66: European passenger widebody fleet by Figure 67: Net changes in European fleet by programme programme in number of aircraft, as at June 2017 in number of aircraft added / removed, as at June 2017
350 150
300 100 250
50 200
150 0
100 -50 50
0 -100 7 7 7 7 A A A A A O 7 7 7 7 A A A A A O 4 6 7 8 4 6 7 8 3 3 3 3 3 3 3 3 3 3 t t h h 7 7 7 7 7 7 7 7 0 3 4 5 8 0 3 4 5 8 e e 0 0 0 0 0 0 0 0 0 0 r r / / s s 3 3 1 1 0 0
2005 2011 2017 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
Half of the European fleet is with the three main legacy carrier groups, with a large number of A340s and 747s still in operation (accounting for a combined 21% of the European fleet).
Widebody Aircraft Review 33 20 July 2017
Figure 68: Europe passenger fleet – top 10 carriers in number of aircraft, as at June 2017 As a % of 747 767 777 787 A310 A330 A340 A350 A380 Total total IAG (BA/Iberia/Aer Lingus) 36 7 58 24 29 17 12 183 18% Air France KLM 15 96 10 28 9 10 168 17% Lufthansa Group 32 6 13 43 43 3 14 154 15% Turkish Airlines 33 51 4 88 9% Virgin Atlantic 8 14 10 7 39 4% Aeroflot 15 22 37 4% Alitalia 11 14 25 3% Air Europa 7 13 20 2% TAP Portugal 15 4 19 2% Condor 18 18 2% Top 10 91 31 226 55 0 225 84 3 36 751 75% Others 16 59 20 37 3 84 20 9 0 248 25% Total 107 90 246 92 3 309 104 12 36 999 100% Top 10 as a % of total 85% 34% 92% 60% 0% 73% 81% 25% 100% Aircraft as % of region fleet 11% 9% 25% 9% 0% 31% 10% 1% 4% 100% Source: FlightGlobal data
Only 14% of the existing backlog for Europe Europe's backlog is largely concentrated at the top, with the first five carriers accounting for 72% of the total. In particular, the three main legacy carriers account for 52% of the total. Europe is 18% of the A350 orders and 20% of the 787. We note a near absence of orders from European airlines for the 777, 777X, A330 or the A380 (the only order for this plane is a phantom order, Virgin having made clear it was not keen on getting the aircraft).
Figure 69: European backlog in number of aircraft, as at June 2017 As a % of 747 777 777X 787 A330ceo A330neo A350 A380 Total total IAG 18 3 43 64 20% Air France KLM 27 28 55 17% Lufthansa Group 2 20 22 44 14% Aeroflot 1 22 14 37 11% Norwegian 26 26 8% Virgin Atlantic 3 12 6 21 7% Air Europa 15 15 5% TAP Portugal 14 14 4% Finnair 10 10 3% SAS 8 8 Top 10 0 3 20 111 3 14 137 6 294 94% Others 3 0 0 12 0 4 0 0 19 6% Total 3 3 20 123 3 18 137 6 313 100% Top 10 as a % of total 0% 100% 100% 90% 100% 78% 100% 100% 94% Aircraft as % of region fleet 1% 1% 6% 39% 1% 6% 44% 2% 100% Source: FlightGlobal data
Widebody Aircraft Review 34 20 July 2017
A number of European airlines are considering plans to extend the life of older aircraft, following the persistent stagnation in the oil price. For instance, British Airways is reviewing its orders for newer widebodies, with the expectation of some degree of deferral of either the A350 or the 787 (or both). The Turkish and Russian growth drivers have been stalling following political unrest in or around both countries, which, combined with fleet plan reviews, suggests that the prospects for the European market are relatively subdued. We note that most of the orderbook in Europe is concentrated on smaller aircraft, such as the 787 and the A350-900, rather than on the larger 777 and A380, possibly a reflection of the perceived economic risk (to fill the aircraft) and despite airport congestion issues.
Figure 70: Main European airlines' fleet and their backlog in number of aircraft, as at June 2017
200 25.0 180 160 20.0 140 120 15.0 100 80 10.0 60 40 5.0 20 0 0.0 I A L T V A A A T C F S R T N A u u A i h i i e l i A o o o n r r i r G f t r o g r P n s r S t a n F k E o w h m i s d l a i n r f i u a s P i e l a o a i y s o h r r n A o g r n a o o t
s r i t c A p n a l t a A a e u a i n
r A i n g G r l K i l t i a n i r i r n L c w l o e e M s u a s p y s
Fleet Backlog Age (rhs) Regional fleet average age (rhs)
Source: FlightGlobal data
Widebody Aircraft Review 35 20 July 2017
North America looks weak again North America is now 16% of the world fleet for widebody passenger aircraft and 8% of the backlog. The fleet is highly concentrated on the four main carriers, as is the backlog. However, the decisions made to postpone some deliveries of 787s and A350s and the limited level of the overall backlog is a headwind for the segment. We do not expect the focus in the US on smaller widebodies to change, with probably an interest for a middle-of- the market aircraft as considered by Boeing (with still some 220 767s in service and only about 50 787s on order). Overall, after the recent rejuvenation phase, we expect demand in North America to weaken somewhat again.
A fleet concentrated on smaller aircraft The North American fleet is characterised by a shift from 767 to 787 (essentially between 2011 and 2017), and to a lesser extent, A330 and 777.
Figure 71: North American passenger widebody Figure 72: Net changes in North American fleet by fleet by programme programme in number of aircraft, as at June 2017 in number of aircraft added / removed, as at June 2017
350 100
80 300 60
250 40
20 200 0 150 -20
100 -40 -60 50 -80
0 -100 7 7 7 7 A A A A A O 7 7 7 7 A A A A A O 4 6 7 8 4 6 7 8 3 3 3 3 3 3 3 3 3 3 t t h h 7 7 7 7 7 7 7 7 0 3 4 5 8 0 3 4 5 8 e e 0 0 0 0 0 0 0 0 0 0 r r / / s s 3 3 1 1 0 0
2005 2011 2017 2011 vs 2005 2017 vs 2011
Source: FlightGlobal data Source: FlightGlobal data
The North American fleet is concentrated on the four main carriers (c.85%). We note very few 747 in operation and a sharp decrease in the number of 767s used for passenger operations in the US; 82% of the US fleet is made of Boeing programmes.
Widebody Aircraft Review 36 20 July 2017
Figure 73: North American passenger fleet – top 10 carriers in number of aircraft, as at June 2017 As a % of 747 767 777 787 A310 A330 A340 A350 A380 Total total United Airlines 16 51 82 32 181 27% American Airlines 31 67 28 24 150 23% Delta Air Lines 7 82 18 42 149 23% Air Canada Group 34 25 28 8 73 11% Hawaiian Airlines 8 23 31 5% Air Transat 9 15 24 4% Omni Air 9 2 11 2% Atlas Air 4 5 9 1% Dynamic International 5 5 1% Westjet 4 4 Total 27 229 194 88 9 112 659 100% Top 10 as a % of total 100% 100% 100% 100% 100% 100% 100% Aircraft as % of region fleet 4% 35% 29% 13% 1% 17% 0% 0% 0% 100% Source: FlightGlobal data
Some adjustments to fleet plans The North American backlog is highly concentrated on the A350 and 787, but it has faced some recent deferrals on the A350 from American (with no delivery before 2020), Delta (10 units by 2-3 years from 2019-20) and United (4 aircraft pushed from 2018, after it ordered 4 777s in June), as they adjust capacity forward (in particular with the increased competition from low-cost long-haul carriers such as Norwegian) and keep older aircraft longer in the context of low fuel prices. After its announcement on 18 July that it was deferring 4 A350s from 2018, United also indicated that it will continue to review the rest of its A350 order.
Figure 74: North American backlog in number of aircraft, as at June 2017 As a % of 747 777 787 A330 A330neo A350 A380 Total total United Airlines 5 19 35 59 35% Delta Air Lines 25 25 50 29% American Airlines 14 22 36 21% WestJet 10 10 6% Air Canada 9 9 5% Hawaiian Airlines 1 6 7 4% Total 0 5 52 1 31 82 0 171 100% Aircraft as % of region fleet 0% 3% 30% 1% 18% 48% 0% 100% Source: FlightGlobal data
Despite the recent recovery, the US fleet is today the oldest of the world's main regions, with an average age of nearly 15 years (14 years in 2011 and 11 years in 2005). United and Delta nonetheless appear firm in their commitment to retiring their remaining 747s by end-2017. United will replace them with a few 777-300ERs (with the new Polaris seats from Zodiac, which will also be used for retrofitting some of the existing 777 and 767 fleet). Delta will replace the 747s with the five A350s it has not deferred (the first one has been in flight test since late May).
Widebody Aircraft Review 37 20 July 2017
Figure 75: Main North American airlines' fleet and their backlog in number of aircraft, as at June 2017
200 30.0 180 160 25.0 140 20.0 120 100 15.0 80 60 10.0 40 5.0 20 0 0.0 U A D A H A O A D W m i i t n e a y m r r l e a n i l w t e t C T s n s e a a a t r r i a
j d m i a A e i c A A n i
a n t a A i i i a i r c r n s r n i d r a L I
l A a n A i t i n n t
i i G r . e r e l l i s i s r n n o e e u s s p
Fleet Backlog Age (rhs) Regional fleet average age (rhs)
Source: FlightGlobal data
Widebody Aircraft Review 38 20 July 2017
Lessors: a marginal role in the segment Lessors are usually not very involved in widebodies – a more complicated, less liquid market than narrowbodies (in particular when it comes to transitioning from one operator to the next). When they are involved, it is therefore not surprising to see them focused on liquid assets such as 787, A330 and A350. We consider the 20-aircraft A380 order from Amedeo (effectively more an asset manager than a lessor) to be a phantom order, with no airline customer so far.
Figure 76: Lessors' backlog in number of aircraft, as at June 2017 As a % of 747 777 777X 787 A330ceo A330neo A350 A380 Total total Air Lease Corporation 15 23 18 56 33% Avolon 17 26 8 51 30% Amedeo 20 20 12% AerCap 14 1 15 9% ALAFCO 8 6 14 8% GECAS 10 10 6% Hong Kong Int'l Aviation Leasing 5 5 3% Total 0 0 0 64 5 49 33 20 171 Aircraft as % of region fleet 0% 0% 0% 37% 3% 29% 19% 12% 100% Source: FlightGlobal data
Widebody Aircraft Review 39 20 July 2017
A peek into widebody freighters and tankers Freighters account for 17% of the in-service fleet and other applications (including military and a few VIP) for another 5%. We looked at the widebody freighter fleet and briefly at the air tanker market. Boeing dominates the widebody freighter market The large aircraft freighter market is dominated by Boeing (78% of the fleet as of June 2017). The 747 and 767 in particular will together account for about 50% of the fleet (excluding aircraft in storage). Airbus accounts for only 22% of the fleet of large freighters, mostly with the A300. The A330F has not been a great commercial success (3% of the total), contrary to the 777F, which today represents 12% of the aircraft in service. A significant number of older DC-10s (delivered in the 70s) and MD-11s (in the 1990s) are still active in the fleet, respectively 4% and 12% of the total in service.
Figure 77: Widebody freighter fleet by airframer Figure 78: Widebody freighter fleet by aircraft type in number of aircraft, June 2017 in number of aircraft in service, June 2017
900
800 A330 3% 700 A300/A310 747 19% 27% 600
500
400
300 DC-10/MD-11 16% 200
100 767 23% 777 0 12% Boeing Airbus
In service In storage
Source: FlightGlobal data Source: FlightGlobal data
North America operates half of the fleet of widebody freighters, while Europe and Asia will account for 17-18% each. Unsurprisingly, Airbus's largest fleet is in Europe. Boeing's largest fleet is in Asia, with 37% of the total 747 freighters in service (an aircraft that accounts for 56% of the Asian freighter fleet).
Widebody Aircraft Review 40 20 July 2017
Figure 79: Widebody freighter fleet by region Figure 80: WB freighter fleet by airframer and region in number of aircraft in service, June 2017 in number of aircraft in service, June 2017
450
Latin America Africa 400 2% Middle East 2% 8% 350
300
Europe 250 17% 200 North America 53% 150
100
Asia Pacific 50 18% 0 North Asia Pacific Europe Middle East Latin Africa America America
Boeing Airbus
Source: FlightGlobal data Source: FlightGlobal data
The average age of the widebody fleet comes to 21 years and c.50% of the fleet is 18 or more years old. In particular, 25% of the fleet is 22-28 years old. Prime candidates for storage are likely found in this part of the fleet, with the average age of the stored fleet at 27.6 years.
Figure 81: The freighter fleet is old in number of aircraft in service and storage
80 50% of the fleet 70
60
50
40
30
20
10
0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 41 43 45 48
Freighters total fleet In Service
Source: FlightGlobal data
The revival of freight traffic (which, in our view, has triggered the decrease in retirements of freighters in 2016, as detailed earlier in this report) has also generated a small uptick in conversions of passenger aircraft into freighters, as illustrated in Figure 82. All conversions are currently based on Boeing aircraft. A few A330 conversions are planned.
Widebody Aircraft Review 41 20 July 2017
Figure 82: Small rebound in freighter conversions in number of aircraft converted by year
50 45 40 35 30 25 20 15 10 5 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1 1 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7
Y T D
Conversion to freighter
Source: FlightGlobal data
Despite the revival of freight traffic, the backlog for new freighters remains rather small, with only 117 aircraft on order. Most of them are 767s for FedEx (57% of the backlog). The 777F is the other aircraft with a material backlog (31 aircraft based on FlightGlobal data). This version of the 777 accounts for 27% of the backlog of the current 777 and is material to protecting deliveries until the 777X comes into production. The lack of success of the A330F is confirmed by its minimal backlog (four aircraft). Boeing's dominance should therefore continue.
Figure 83: Backlog of widebody freighter aircraft by Figure 84: Backlog of widebody freighter aircraft by aircraft type airline in number of aircraft, as at June 2017 in number of aircraft
80 90
80 70
70 60 60 50 50
40 40
30 30
20 20
10 10
0 0 FedEx UPS Hong Kong EVA Air Qatar Others 767 777 747 A330 Airlines Airways
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 42 20 July 2017
Air tankers supporting older programmes into the next decade Air tankers account for a small portion of the world's widebody fleet (2%) but they will provide a steady source of production for a number of older widebody programmes well into the next decade, both at Boeing and at Airbus. Boeing currently accounts for 75% of the fleet, essentially with the DC-10 derivatives used by the US Air Force (58% of the total). The A330 accounts for about 20% of the existing fleet, in service in the UK, Australia, Saudi Arabia and the UAE. From a backlog point of view, the KC-46 (a 767 derivative) will be the largest programme, with a 179-aircraft requirement for the US Air Force (of which 38 are on order), with planned annual delivery rates of 18 aircraft. The A330 dominates the market outside of the US, with every competition won since the end of the 2000s: in France, for NATA, in Korea, Singapore, as well as having been selected in India, Qatar, Spain, Belgium, Germany and the Netherlands. There are 17 A330MRTT on firm order, but we expect the underlying need and intent to be at twice that level.
Widebody Aircraft Review 43 20 July 2017
Programme updates The Paris Air Show in June offered an occasion to update the market on various programmes. Looking at widebodies, newsflow has been focused on 777X development, 777 order intake / backlog, A350 ramp-up and order deferrals, in particular on the A350- 1000, and of course the A380. 777: the X factor With deteriorating orders and backlog for the 777 classic, BA has had to lower the production rate more than once. The latest plan is to drop from seven a month to five a month beginning in August 2017. While the production rate will likely hold at five, we estimate deliveries will decline further to 3.5 per month in 2018 and 2019 to allow 777X to feather into the production line. The development of the 777X seems to be on schedule. With ~70% of the design work complete, production is slated to begin this year, final assembly of the early test articles next year, and first flight in 2019E ahead of first deliveries later that year or early 2020. GE has tested the first full engine to test (FETT) to 105,000lbs of thrust, and will fly the first GE9X later in 2017. At 306 firm orders (according to FlightGlobal, see table below), the backlog is a little thin, and also highly geared to Middle Eastern carriers, which account for 77% of total orders, and Emirates in particular (more than 50% of the backlog). For this reason, we think the recovery ramp for the programme will be slower than we had previously expected, and we are not sure the rate can recover to the prior peak of 8.3/month. As a result, we have decided to hold 777 production/deliveries steady at 3.5/month through the transition and beyond (see the Boeing section in our Q2'17 Aerospace & Defense Preview, 17 July 2017), whereas our model previously assumed a 777 rate rise to five per month in 2020.
Figure 85: 777X backlog in number of aircraft, as at June 2017 8X 9X X Series TBD Grand Total Emirates Airline 35 115 150 Qatar Airways 10 50 60 Etihad Airways 8 17 25 Cathay Pacific 21 21 ANA 20 20 Lufthansa 20 20 Unannounced commercial customer 10 10 Grand Total 53 243 10 306 Source: FlightGlobal data
Widebody Aircraft Review 44 20 July 2017
Figure 86: 777 bridge in number of aircraft converted by year
Source: Company data, Credit Suisse estimates, Flightglobal
787: the Y factor The third variant of the 787, the 787-10, was presented at the recent Paris Air Show and has been in flight test since 31 March 2017. This 330-seat aircraft in two classes (the largest in the family) is scheduled to enter service in H1'18. Boeing has high expectations that the shift towards a mix of the higher-priced and more profitable 787-9s and -10s will accelerate the recovery of the $26bn+ in deferred production on the balance sheet. Q1 saw modest continued progress on this front, with a reduction of $316m in deferred, equating to $10m in unit cash profit on each aircraft produced in Q3, up from $6.5m per unit in Q4. For Q2'17, we look for further profit improvement to ~$13m per aircraft.
Figure 87: 787 bridge Figure 88: 787 orders placed summary in number of aircraft in number of aircraft
Source: Company data, Credit Suisse estimates, Flightglobal Source: Company data, Credit Suisse estimates, Flightglobal
Widebody Aircraft Review 45 20 July 2017
One potential wrinkle in the deferred recovery is the somewhat dwindling backlog. Although the programme garnered 50 orders in Paris, demand has been largely quiet for the past couple of years, which has been calling into question BA's plan to raise the production rate from the current 12/month to 14/month. The current deferred recovery accounting relies on this late-decade boost to 14 to allocate cash unit costs. Consensus in general expects BA to rein back the plan, and hold at 12 per month. Bears actually think backlog will continue to shrink too quickly for 12, and expect an eventual decline to 10, which would further impair deferred recovery. We model the middle case, holding at 12, and believe the company will recover nearly all of its deferred at this rate, though we think it will take a little longer than expected by Boeing. One side note is that there are some concerns that a future mid-sized aircraft (797?) could take some share from the smallest 787, the -8. We think this is largely irrelevant since, as noted above, the demand for -8 had already shifted towards the larger variants and they only have a small share of the remaining backlog.
Figure 89: 787 backlog by variant in number of aircraft
Source: Company data, Credit Suisse estimates, Flightglobal
A380: from plush to Plus Airbus announced in late 2016 that it would reduce production to one aircraft per month as a result of the low order book and lack of new orders (from November 2017 at the final assembly line level). Unions at the time indicated that the group would progressively redeploy 2,100 of the 6,100 employees working on the programme over 2017-2018 to limit the financial consequences of the slowdown. As at mid-2017, Airbus continues to struggle to find new orders for the A380 and a further reduction to below one is now being envisaged. We think nearly half of the backlog of 104 aircraft is probably phantom orders (i.e. orders that will fail to materialise as deliveries). In particular, Amedeo, Qantas and Virgin appear to be prime candidates for not taking the aircraft they have ordered, both airlines having indicated they are no longer keen on taking new 4-engine widebodies. Most the firm backlog of 57 consists of the Emirates order for 47 units.
Widebody Aircraft Review 46 20 July 2017
Figure 90: A380 orders in number of aircraft, as at June
50 45 40 35 30 25 20 15 10 5 0 E A U Q V S A A Q m m i i i N n a a r n r g a n t A g i e A a r i n t n a a d c a r n
p t e c s A A e o o o o s i t u r r r l a e w n d n c a A e t y i i c d r s l
i c n u e s s t o m e r
Firm credible order Phantom order
Source: FlightGlobal data, Credit Suisse research
Evolution, not revolution for the A380 The group is considering a variety of changes for the aircraft, aimed at improving the seat mile costs to boost sales. The group confirmed that it will not develop an A380neo for the time being (i.e. with new engines) in the absence of a viable business plan. At the Paris Air Show, Emirates was mentioned as a potential candidate for a batch of 20 A380Plus. The airline has indicated that it does not want to commit unless Airbus commits as well to an improvement plan, while Airbus has indicated that in the absence of a new order, it will consider cutting production to below one aircraft per month. Some of the planned changes do not require significant investment (a less grand staircase and elimination of the bar for instance, potentially making the aircraft less plush) and have already been launched. Combined with moving to 11-seats abreast vs 10 today, it will add about 80 seats to the existing capacity. We believe this is unlikely to change the order situation, with airlines being more cautious about how to fill such a large aircraft than about the seat mile costs. Airbus is also increasing the maintenance intervals to reduce the support costs. Another upgrade being considered (A380Plus) is the addition of winglets, to cut fuel burn by 3-4%. It would require some investments and Airbus is unlikely to commit to it unless a customer places an order for this upgraded version. One issue seems to be that these winglets will not be offered for retrofit on existing aircraft. We also understand that Airbus is trying to convince Chinese airlines to order the aircraft (so far only five have been taken by China Southern). We think Airbus may offer to set up a completion centre in China, as Airbus did for the A320 (including a final assembly line as well) and the A330.
Widebody Aircraft Review 47 20 July 2017
A350: focusing on production costs Last year, we had been expecting Airbus to launch an upgrade of the A350 (sometimes dubbed A350-2000). We now believe that this has moved to the right quite substantially (if not dropped altogether) in the absence of market demand for large widebodies and possibly also due to the complexity of designing an aircraft with the right capacity from the point of view of its economics while not being oversized for airport operations and also not cannibalising potential A380 sales. The programme focus looks set to be on execution more than anything else, with the convergence of actual costs towards the learning curve now appearing to be the main area of effort. As indicated in our Winter is coming Ideas Engine report (4 May 2017), Airbus has teamed up with big data specialist Palantir to cut costs on the A350. We are not overly worried by deferrals of A350 deliveries, as new customers have signed for the aircraft this year as well (43 firm orders announced since January, not including another 40 announced by China in early July). Overall, the current backlog covers 6.1x the 2020E deliveries.
Figure 91: A350 backlog and deliveries skyline in number of aircraft
900
800
700
600
500
400
300
200
100
0 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Backlog as at year-end A350-900 deliveries A350-1000 deliveries
Source: FlightGlobal data and estimates
Widebody Aircraft Review 48 20 July 2017
In widebody engines, Rolls-Royce appears to offer the best risk profile Looking at OEM engine producers' exposure to widebodies (on the passenger market and measured in number of engines), we believe Rolls-Royce offers an attractive risk profile in terms of geographical spread and platform diversification. This comes from its large Asian backlog coupled with growth in the Middle East and expansion in Europe and North America on the back of what is effectively a single-source supply for the A350.
Figure 92: Engine share by OEM across major platforms globally % of engines in service and backlog as of June 2017 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 GE Rolls-Royce P&W CFMI (50/50 Safran / GE) Engine Alliance (50/50 GE / P&W) Rolls-Royce fleet + backlog GE fleet + backlog
Source: FlightGlobal data
P&W’s share declined sharply across the period in question to the benefit of GE (c.44% in 2017) and Rolls-Royce (c.33% in 2017), as shown in Figure 92. This trend is likely to be exacerbated given a developing duopoly in the widebody market with GE (31% of backlog) and Rolls-Royce (56%) (as Figure 93 indicates), weighted strongly towards Asia and the Middle East (Figure 94).
Figure 93: OEM share of the total backlog Figure 94: Backlog by region and OEM share % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines
Engine Alliance Lessors 8% GE - Asia 7% (50/50 GE / P&W) RoW and Unannounced 1% other 10% 12% Rolls-Royce - Asia 20% Unannounced GE 7% 31% Rolls-Royce - North America 5% GE - Europe 3% GE - North America 2% Rolls-Royce Rolls-Royce - 56% Rolls-Royce - Europe 10% Middle East 13% GE - Middle East 15%
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 49 20 July 2017
On a platform level Figure 95 shows GE is skewed almost entirely towards the 777/777X (c.53%) and the 787 (44%). The heavy dependence on the Middle East, which represents 47% of GE’s backlog, is a potential risk given the uncertainty in the region potentially leading to deferrals.
Figure 95: GE split of the backlog by platform Figure 96: GE geographical split of the backlog % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines
747 - GEnx A330 - CF6 Lessor 1% 2% Other 5% 8% Asia 24%
North America 8% 777 - GE9X 787 - GEnx 42% 44%
Europe 8%
Middle East 777 - GE90 47% 11%
Source: FlightGlobal data Source: FlightGlobal data
In contrast, Rolls-Royce effectively has half of the exposure of GE to the Middle Eastern region (24% in Figure 98), and a greater emphasis on Asia with 35% of its backlog demand compared with GE’s 24%. In relative terms, this protects Rolls-Royce and suggests its performance may be more robust if there were Middle Eastern deferrals. But there remains a high dependence on the Trent XWB for the A350 accounting for 58% of Rolls-Royce’s backlog (Figure 97).
Figure 97: Rolls-Royce backlog by platform Figure 98: Rolls-Royce geographical backlog split % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines
Lessor A380 - Trent 900 10% 787 - Trent 1000 Other 10% 15% 4% Asia North America 35% 9% A330 - Trent 700 17%
Middle East A350 - Trent XWB 24% 58%
Europe 18%
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 50 20 July 2017
Asia: Rolls-Royce dominance coming Asia represents 35-36% of total engines in service and as we have mentioned before constitutes 32% of the widebody backlog (not including undisclosed customers and lessors). Rolls-Royce and GE each hold 40% of the Asian market today, but we expect Rolls-Royce to dominate in the long term with c.65% of the backlog, as highlighted in Figure 99.
Figure 99: Market shares in Asia by engine OEM Figure 100: Share of backlog by OEM in Asia % of engines in service and backlog as of June 2017 % of backlog as at June 2017, in number of engines 55% 80%
70% 45% 60% 35% 50%
25% 40%
30% 15% 20%
5% 10%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% -5% 2017 2018 2019 2020 2021 GE Rolls-Royce P&W GE Rolls-Royce Unannounced CFMI (50/50 Safran / GE) Rolls-Royce fleet + backlog GE fleet + backlog
Source: FlightGlobal data Source: FlightGlobal estimates
A resilient position for Rolls-Royce in Asia Rolls-Royce has made great strides in the Asian market, with its market share doubling between 2005 and 2017. We expect fleet enlargement to be driven by the A350, 787 and the A330, with the orderbook indicating that Rolls-Royce has further scope to create a dominant position with 64% of the future deliveries (o/w 37% from the A350). In addition, Rolls-Royce has c.70% of total firm orders for 2021, which bodes well for the company’s resilience on widebody platforms globally given the weight Asia has as the largest and strongest widebody market. The fragmentation of Rolls-Royce’s exposure via four separate platforms across a large number of customers is another positive for the group.
Figure 101: Orderbook by OEM in Asia Figure 102: Orderbook by platform and OEM % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines A380 - Rolls- Unannounced - Royce A330 777 - GE Unannounced - 4% 787 4% 10% 7% 787 - GE 13% A350 - Rolls- GE Royce 37% 24% 787 - Rolls- Royce 11%
Rolls-Royce 787 - 65% Unannounced 7% A330 - A330 - Rolls- A330 - GE Unannounced Royce 1% 4% 13%
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 51 20 July 2017
Middle East: GE and Rolls-Royce battle it out This region has been characterised by the rise of GE’s market share owing largely to the deliveries of the 777 and to some extent the A330. The rise of the GP7200 in Figure 103 is likely to be substituted by the Trent 900 in the future, with only one aircraft outstanding on the orderbook to be powered by the Engine Alliance (for Qatar Airways).
Figure 103: Market share in the Middle East by OEM Figure 104: Share of backlog by OEM % of engines in service and backlog as of June 2017 % of backlog as at June 2017, in number of engines 60% 70%
50% 60%
40% 50%
40% 30%
30% 20%
20% 10% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% GE Rolls-Royce 2017 2018 2019 2020 2021 P&W CFMI (50/50 Safran / GE) Engine Alliance (50/50 GE / P&W) Rolls-Royce fleet + backlog GE Rolls-Royce Unannounced GE fleet + backlog
Source: FlightGlobal data Source: FlightGlobal estimates
A question of differing timeframes Overall, the Middle Eastern landscape will likely be fairly balanced between GE and Rolls- Royce, as shown in Figure 105 and 103. GE has the dominant share in the market currently at c.50%, but we would expect it to be under pressure in the short term as Rolls- Royce benefits from the Trent 900 on the A380 and the ramp-up in A350 deliveries where it is the sole supplier (60% of its backlog). GE will likely catch up when deliveries on the 777X and the 787-10 begin to set in. The prospective orderbook for Rolls-Royce indicates that the Trent 900 on the A380 could reach c.216 engines based on current orders, making good ground on the Engine Alliance GP7200 that has 432 engines in service currently and a 96% share of this platform in the region.
Figure 105: Orderbook by OEM in the Middle East Figure 106: Orderbook by platform and OEM % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines A380 - Engine Unannounced - Alliance Unannounced - A380 - Rolls- 1% 787 A330 Royce 6% 1% 13% Engine Alliance (50/50 GE / P&W) 777 - GE 1% 38%
A350 - Rolls- Royce Rolls-Royce 23% 44%
GE A330 - 48% A330 - Rolls- Unannounced Royce 1% 787 - GE 5% 787 - Rolls- 10% 787 - Royce Unannounced 3% 6%
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 52 20 July 2017
This may cushion GE against short-term consequences of the geopolitical turbulence in the Middle East, in case of deferrals for near-term orders. Rolls-Royce still appears to offer diversification and the potential for strong market share gains in the short-to-medium term against the more stable profile for GE.
Figure 107: Platform and total engines in service by OEM in the Middle East in number of engines in service
600
500
400
300
200
100
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
777 - GE90 787 - GEnx A380 - GP7200 A380 - Trent 900 A350 - Trent XWB A330 - Trent 700 A330 - CF6
Source: FlightGlobal data
Europe: Rolls-Royce in the ascendancy This region presents a historical split between the major engine OEMs similar to the one in the Asian market, with Rolls-Royce increasingly closing the gap to the dominant GE. Equally, the implied short-term strength of Rolls-Royce in terms of the orderbook remains consistent with Asia and may also result in the group usurping GE as the market leader.
Figure 108: Market share in Europe by OEM Figure 109: Share of backlog by OEM in Europe % of engines in service and backlog as of June 2017 % of backlog as at June 2017, in number of engines
50% 90%
45% 80% 40% 70% 35% 60% 30% 50% 25% 40% 20%
15% 30%
10% 20%
5% 10%
0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 2018 2019 2020 2021 GE Rolls-Royce P&W GE Rolls-Royce CFMI (50/50 Safran / GE) Rolls-Royce fleet + backlog GE Fleet + backlog
Source: FlightGlobal data Source: FlightGlobal estimates
Widebody Aircraft Review 53 20 July 2017
Rolls-Royce is strengthened by the Trent 1000 and Trent XWB This European strength is driven by the A350 for Rolls-Royce (Figure 111) in tandem with the dominance of the Trent 1000 on the 787 versus the GEnx. This helps to explain Rolls- Royce’s 74% share of the backlog in Europe, as shown in Figure 110, which alongside the orderbook also highlights that the 777 has not sustained its previously high level of demand.
Figure 110: Orderbook by OEM in Europe Figure 111: Orderbook by platform and OEM % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines
Unannounced - A380 - Rolls- 787 Royce 747 - GE 777 - GE 7% 4% 2% 7% GE 787 - GE 19% 9%
A350 - Rolls- Royce 787 - Rolls- 42% Royce 22%
Rolls-Royce 74% A330 - GE 787 - 1% A330 - Rolls- Unannounced Royce 7% 6%
Source: FlightGlobal data Source: FlightGlobal data
Consequently, although the European fleet has been characterised by the growth of the 777 platform in recent years and the GE90 engine (Figure 112), the Trent XWB on the A350 and the Trent 1000 on the 787-10 will likely be the new drivers of the market. Hence, we expect Rolls-Royce to have a tighter grip on Europe in the future.
Figure 112: Platform and total engines in service by OEM in Europe In number of engines in service
450
400
350
300
250
200
150
100
50
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 777 - GE90 A350 - Trent XWB A330 - CF6 A330 - Trent 700 A380 - Trent 900 787 - Trent 1000
Source: FlightGlobal data
Widebody Aircraft Review 54 20 July 2017
North America: Rolls-Royce should benefit from A350 Compared to the other regions, North America has historically been an area of relative strength for P&W (Figure 113) with engines on 747s, 767s and A330s, but GE has taken the lead over the past three years and Rolls-Royce has been growing since 2009. With no ongoing programme, P&W will likely continue to decline to the advantage of the emergent duopoly of GE and Rolls-Royce.
Figure 113: Market share in N. America by OEM Figure 114: Share of backlog by OEM in N. America % of engines in service and backlog as of June 2017 % of backlog as at June 2017, in number of engines
60% 80%
70% 50% 60% 40% 50%
30% 40%
20% 30%
20% 10% 10% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 2017 2018 2019 2020 2021 GE Rolls-Royce P&W GE Rolls-Royce CFMI (50/50 Safran / GE) Rolls-Royce fleet + backlog GE fleet + backlog Source: FlightGlobal data Source: FlightGlobal estimates
A350 and 787 look set to change the landscape The high share of the North American orderbook for GE over the next two years (Figure 114) stems from its strength on the 787 platform, with the GEnx engine accounting for 91% of GE’s backlog in the region. However, this looks set to be overtaken by demand for the A350 and the Trent XWB. Consequently, Rolls-Royce holds two-thirds of the orderbook for widebodies in the region with GE taking the other third.
Figure 115: Orderbook by OEM in N. America Figure 116: Orderbook by platform and OEM % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines 777 - GE 3% GE 33% 787 - GE A350 - Rolls- 30% Royce 48%
Rolls-Royce 67%
A330 - Rolls- Royce 19%
Source: FlightGlobal data Source: FlightGlobal data
US carriers have been deferring orders recently for the 787 and A350, which adds risk to both GE and Rolls-Royce. In addition, an announcement for a new middle-of-the-market aircraft could alter this dynamic somewhat, given the preference towards smaller widebodies in the US.
Widebody Aircraft Review 55 20 July 2017
This view is somewhat reinforced by Figure 117, which shows the decline of the 767 that is yet to be fully met by the accelerating deliveries of the 787 with the GEnx engine. Significantly, the chart shows the absence of the A350 in the fleet. Therefore, Rolls-Royce is likely to gain share in the region when this platform ramps up given its 48% of the backlog today. We also note the absence of the Trent 1000-powered 787 in the region, both in the current in-service fleet and the backlog.
Figure 117: Platform and total engines in service by OEM in N. America In number of engines in service
500
450
400
350
300
250
200
150
100
50
0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
A330 - Trent 700 787 - GEnx 767 - CF6 777 - GE90
Source: FlightGlobal data
Lessors: Rolls-Royce takes the lead again The charts below show the prevalence of the unannounced engine variants, with the A380 taking the predominant share due to the previously mentioned order for 20 aircraft from Amedeo. Taking this into account Rolls-Royce still has a commanding position with 47% of this small section of the market, which accounts for 8% of the total global backlog (even less if we view Amedeo as a phantom order).
Figure 118: Orderbook by OEM Figure 119: Orderbook by platform and OEM % of backlog as at June 2017, in number of engines % of backlog as at June 2017, in number of engines
A380 - 787 - GEnx Unannounced 19% GE 19% 21% Unannounced 34% 787 - Trent 1000 4%
787 - A350 - Trent unannounced XWB 17% 11%
A330 - Rolls-Royce unannounced 47% 2% A330 - Trent 700 26%
Source: FlightGlobal data Source: FlightGlobal data
Widebody Aircraft Review 56 20 July 2017
Freighter engines dominated by GE Widebody freighters are powered by GE engines to a large majority (72%), with Pratt & Whitney following with nearly a quarter of the market. Rolls-Royce has a market share of only 5%.
Figure 120: Widebody freighter engine fleet by Figure 121: Widebody freighter engine fleet by manufacturer manufacturer and airframer in number of engines in service in number of engines in service
2,000
1,800 Rolls-Royce 5% 1,600
1,400 P&W 23% 1,200
1,000
800
600
400 GE 72% 200
0 GE P&W Rolls-Royce
Boeing Airbus
Source: FlightGlobal data Source: FlightGlobal data
On passenger-to-freighter conversions, GE has consistently maintained a clear lead on P&W (63% vs 36% measured in number of aircraft and 58% / 40% in number of engines). Rolls-Royce is nearly absent from this market.
Figure 122: Rolls-Royce nearly absent of widebody freighter conversions in number of aircraft
35
30
25
20
15
10
5
0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
CF6 PJT9D/PW4000 RB211
Source: FlightGlobal data
Widebody Aircraft Review 57 20 July 2017
Companies Mentioned (Price as of 19-Jul-2017) ANA Holdings (9202.T, ¥388) AerCap Holdings (AER.N, $48.27) Air Asia X (Unlisted) Air Canada (AC.TO, C$20.2) Air China (0753.HK, HK$7.59) Air China (601111.SS, Rmb9.39) Air France-KLM (AIRF.PA, €13.3) Air Lease (AL.N, $39.03) Airbus Group (AIR.PA, €72.46, OUTPERFORM, TP €100.0) American Airlines Group Inc. (AAL.OQ, $53.15) Asiana (ASIC.PK, $1.0E-4) BAE Systems (BAES.L, 613.0p) Boeing (BA.N, $208.24, NEUTRAL, TP $200.0) Cathay Pacific (0293.HK, HK$12.42) China Airlines Ltd (2610.TW, NT$9.28) China Eastern (0670.HK, HK$4.65) China Eastern (600115.SS, Rmb6.88) China Southern (1055.HK, HK$6.51) China Southern (600029.SS, Rmb8.63) Delta Air Lines, Inc. (DAL.N, $53.96) Eva Airways Corp (2618.TW, NT$15.25) FedEx Corporation (FDX.N, $211.04) Finnair (FIA1S.HE, €7.24) General Electric (GE.N, $26.89, OUTPERFORM, TP $33.0) HNA Holding (600221.SS, Rmb3.27) International Airlines Group (ICAG.L, 621.0p) Japan Airlines (9201.T, ¥3,654) Korean Air (003490.KS, W37,400) Leonardo (LDOF.MI, €15.36) Lockheed Martin Corporation (LMT.N, $286.79) Lufthansa (LHAG.F, €20.907) MTU Aero Engines (MTXGn.DE, €129.8) Meggitt (MGGT.L, 493.0p) Norweg Air Shut (NWC.OL, Nkr184.9) Qantas (QAN.AX, A$5.5) Rolls-Royce (RR.L, 916.0p, UNDERPERFORM, TP 665.0p) SAS (SAS.ST, Skr20.6) Safran (SAF.PA, €81.65) Singapore Airlines Limited (SIAL.SI, S$10.1) Thai Airways International (THAI.BK, Bt19.6) United Continental Holdings, Inc. (UAL.N, $78.9) WestJet Airlines (WJA.TO, C$24.71) Zodiac Aerospace (ZODC.PA, €23.82)
Disclosure Appendix Analyst Certification Olivier Brochet, Robert Spingarn, Julian Mitchell, Neil Glynn, CFA and Arthur Truslove each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Airbus Group (AIR.PA)
AIR.PA Closing Price Target Price Target Price Closing Price AIR.PA Date (€) (€) Rating 100 18-Nov-14 46.74 42.00 U * 16-Feb-15 50.45 59.00 O 12-Mar-15 62.08 69.00 80 10-Sep-15 56.50 68.00 30-Oct-15 63.36 80.00 60 08-Jun-16 53.61 79.00 28-Jul-16 53.57 74.00 40 13-Mar-17 69.95 76.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 04-May-17 75.03 100.00 * Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM O U T PERFO RM
Widebody Aircraft Review 58 20 July 2017
3-Year Price and Rating History for Boeing (BA.N) 300
BA.N Closing Price Target Price Target Price Closing Price BA.N Date (US$) (US$) Rating 250 23-Jul-14 126.71 162.00 O 23-Oct-14 122.03 133.00 N 28-Jan-15 139.64 152.00 200 22-Jul-15 146.47 156.00 18-Dec-15 139.58 158.00 150 27-Jan-16 116.58 144.00 12-May-16 134.42 148.00 100 27-Oct-16 143.31 152.00 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 19-Jan-17 159.00 165.00 17-Apr-17 179.02 175.00 O U T PERFO RM N EU T RA L 26-Apr-17 181.71 200.00 * Asterisk signifies initiation or assumption of coverage.
3-Year Price and Rating History for General Electric (GE.N)
GE.N Closing Price Target Price Target Price Closing Price GE.N Date (US$) (US$) Rating 35 18-Aug-14 26.07 30.00 O 26-Jan-15 24.59 29.00 12-Apr-15 28.51 31.00 30 23-Nov-15 30.59 34.00 06-Jan-17 31.61 35.00 25 22-Jan-17 30.53 34.00 09-Jul-17 26.15 33.00 20 * Asterisk signifies initiation or assumption of coverage. 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017
O U T PERFO RM
3-Year Price and Rating History for Rolls-Royce (RR.L)
RR.L Closing Price Target Price Target Price Closing Price RR.L Date (p) (p) Rating 1,150 18-Nov-14 801.78 778.06 U * 18-Feb-15 886.70 754.34 05-Aug-15 786.26 812.71 N 900 13-Nov-15 500.69 516.78 04-Apr-16 643.05 526.53 U 650 01-Jul-16 701.15 581.42 28-Jul-16 818.91 601.12 400 12-Sep-16 707.55 589.89 01- Jan- 2015 01- Jan- 2016 01- Jan- 2017 06-Apr-17 777.26 659.28 07-Apr-17 790.15 665.00 U N D ERPERFO RM N EU T RA L * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Widebody Aircraft Review 59 20 July 2017
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (65% banking clients) Neutral/Hold* 40% (59% banking clients) Underperform/Sell* 14% (53% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit- suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit-suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf .
Target Price and Rating Valuation Methodology and Risks: (12 months) for Airbus Group (AIR.PA) Method: We use a sum of the parts to value Airbus, with different prospects and cycles in each of its three business lines. It also captures some adjustments to assets & liabilities not well captured at the operating earnings level (stake in Dassault Aviation and JVs, launch aids, etc). We are using a 2020E SOTP with a recurring mid-cycle multiple to better capture the possibility of a structural improvement in profitability as a result of technology disruption, yielding a EUR100 target price. Our Outperform rating reflects the strong upside we see to the stock, on the back of the prospects of a strong FCF generation later in the decade and reduced earnings volatility. Risk: The main risks to our target price of EUR100 and Outperform rating are a euro strengthening, due to the group's significant EUR/USD net exposure, and a failure to profitably implement technology disruptions in its production process (automation, additive manufacturing, digitalisation), preventing the group to reduce its earnings volatility. A deterioration in the aerospace cycle (order cancellations/deferrals) would hit the group's prospects and could result in a rating change if severe enough, as would a problematic production ramp-up for the A350 or the A320neo or the launch of an A380neo. Cancellations of A330ceo orders would be a small negative as would be large new A400M charges. Target Price and Rating Valuation Methodology and Risks: (12 months) for Boeing (BA.N) Method: For Boeing we apply a target FCF yield of 7.0% to our 2017 FCF/share estimate. This yields a $200TP. Our Neutral rating is a result of macro headwinds that will likely prevent Boeing from trading on its fundamental valuation in the near-term. Risk: Risks to our $200 BA target price and our Neutral rating include a weaker-than-expected commercial aircraft outlook; deferrals or cancellations of defense contracts, credit, and residual exposure at Boeing Capital; and erosion of commercial margin.
Widebody Aircraft Review 60 20 July 2017
Target Price and Rating Valuation Methodology and Risks: (12 months) for General Electric (GE.N) Method: Our $33 target price for GE is a blend of a DCF and a P/E multiple method. On a DCF basis, we estimate GE is worth $31. On a P/E multiple basis (18x 2018E EPS), we estimate GE is worth $33 We rate GE Outperform as its expected upside is consistent with our top performers. Risk: Risks to our $33 target price and Outperform rating for GE are (1) a slower than expected recovery for its Industrial businesses, which could pressure earnings; (2) overpaying for deals in the Medical segment, which was a problem in the last upcycle; (3) additional losses in GE Capital, including the potential for additional claims associated with its sale of GE Money Japan through GE's loss sharing agreement; (4) lack of cost control in its Industrial businesses could reduce incremental margins; (5) a prolonged downturn in the thermal power generation market; and (6) corporate costs volatility. Target Price and Rating Valuation Methodology and Risks: (12 months) for Rolls-Royce (RR.L) Method: We value Rolls-Royce at 665p per share using a SOTP based on our 2018E EBIT forecasts (pre-IFRS15 to maintain comparability with history). We adjust our numbers for capitalised R&D costs. We use samples of Aerospace, Defence, Marine, Energy and Mechanical cap goods stocks for each of the divisions. We use EV/EBIT for all but Marine and Nuclear & Energy, where we used EV/sales. We include cost benefits from the current operational review launched by the group's new management. Our Underperform rating reflects our sense that the current price level anticipates too much of the hoped for recovery in earnings and cash flow. Risk: Risks to our 665p target price and Underperform rating include: A further drop in GBP would boost Rolls-Royce earnings. Acceleration of services revenues would increase volumes of profitable businesses. Stronger than expected cash-flows would be a significant positive. Increased order intake in Marine or Power Systems would boost the prospects of these branches. Conversely, a deterioration of the group's end markets would impact both iyr TP and rating, as would the deferall of the FCF improvement (not to occur before 2019). A potential takeover bid on Rolls-Royce would require a premium to be paid, which would undermine our Underperform rating and our valuation of 665p.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): AIR.PA, BA.N, GE.N, RR.L, ZODC.PA, BAES.L, MGGT.L, SAF.PA, LMT.N, AIRF.PA, ICAG.L, SIAL.SI, 0753.HK, AL.N, AER.N, 601111.SS Credit Suisse provided investment banking services to the subject company (GE.N, SAF.PA, SIAL.SI, AL.N, AER.N) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment- banking, securities-related: GE.N, BAES.L, LMT.N, SIAL.SI, AL.N Credit Suisse has managed or co-managed a public offering of securities for the subject company (GE.N, AL.N, AER.N) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): GE.N, SAF.PA, SIAL.SI, AL.N, AER.N Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AIR.PA, BA.N, GE.N, RR.L, ZODC.PA, BAES.L, MGGT.L, SAF.PA, LMT.N, AIRF.PA, ICAG.L, SIAL.SI, 0753.HK, 1055.HK, 0670.HK, AL.N, AER.N, 600115.SS, 600029.SS, 601111.SS) within the next 3 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): GE.N, BAES.L, LMT.N, SIAL.SI, AL.N As of the date of this report, Credit Suisse makes a market in the following subject companies (GE.N, 0293.HK, 1055.HK, 600029.SS). A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (AIR.PA, GE.N, RR.L, ZODC.PA, MGGT.L, SAF.PA, AIRF.PA, 0293.HK, SIAL.SI, 0753.HK, 0670.HK, 2610.TW, 2618.TW, AL.N, AER.N, 600115.SS, 601111.SS) within the past 12 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (RR.L, ZODC.PA, QAN.AX). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (QAN.AX). As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AL.N). As of the date of this report, Moshe Orenbuch had a long position in the common equity of the company. For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=309969&v=6688p7bjvq6ctws0i1u350151 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Widebody Aircraft Review 61 20 July 2017
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (BA.N, GE.N, SIAL.SI, 0670.HK, AL.N, AER.N, 600115.SS) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (USA) LLC ...... Robert Spingarn ; Julian Mitchell ; Jose Caiado Credit Suisse International ...... Olivier Brochet ; Christopher Leonard ; Neil Glynn, CFA ; Arthur Truslove To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ...... Olivier Brochet ; Christopher Leonard ; Neil Glynn, CFA ; Arthur Truslove Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.
Widebody Aircraft Review 62 20 July 2017
This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Sekuritas Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
Widebody Aircraft Review 63