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Industry review and outlook: DVB
Bert van Leeuwen
Extracted from Airfinance Annual • 2016/2017Industry review and outlook: DVB
Industry review and outlook
Bert van Leeuwen, managing director, aviation research, DVB, says that,
although the industry is still enjoying growth, there is concern about how,
and when, the boom will end.
T he golden age of commercial
aviation continued during the
first half of 2016. While geopolitical
revision of the 2017 global growth
projection. The IMF also noted some
pick-up in Chinese infrastructure
their customers. According to the
International Air Transport Association
(IATA), the trade association
and economic events caused investments and higher oil prices. representing some 265 airlines or
significant uncertainty in many On 23 June, after the UK voted in 83% of total air traffic, average return
parts of the world, passenger traffic favour of leaving the European Union, fares (before surcharges and taxes)
continued on its growth path. Despite things changed and an important in constant (2015) US dollars will drop
slowly increasing fuel prices, airline downside risk for the world economy from $407 in 2015 to $366 in 2016.
profitability on an aggregated level is materialised. Also the financial While average fares have been
still at very comfortable levels. markets were caught by surprise. falling for decades, it has been the
After an almost unprecedented Because of the expectation that the lower fuel price that enabled airlines
period of relative prosperity in the uncertainty resulting from Brexit to lower ticket prices by such a huge
industry, questions are being asked will take its toll on confidence, in amount. The projected total spend
about the longevity of this boom, general, and in financial conditions, in of air transport in 2016 is anticipated
especially by those observers that particular, the IMF adjusted its World to be about $740 billion, 1.3% lower
had seen how the almost 10-year long Economic Outlook (WEO) in July compared with the $750 billion from
boom in the shipping industry ended. downward by 0.1 percentage point 2015. In real volume terms, both the
In the early months of 2016, some compared with its April forecast. The revenue passenger kilometres (RPK),
aviation industry leaders, mainly from European economies are expected to as well as the number of passenger
the original equipment manufacturers be impacted most, with only modest departures, are projected to increase.
(OEMs), as well as North American effects on the US and China. In its The RPK volume will rise from 6.679
airlines, dismissed concerns that the July WEO, the IMF projected a 3.1% billion in 2015 to an estimated 7.093
aviation business cycle was on the increase in the world output for 2016, billion this year, a 6.2% increase. The
cusp of a downturn. increasing to 3.4% for 2017. number of passenger departures
Airbus’s chief operating officer Another interesting and highly will increase by about 6% to 3.783
customers, John Leahy, was quoted relevant change in the IMF billion. The airline industry is offering
as saying “aircraft manufacturing is projections is the assumed oil price. its customers an increasing range
no longer a cyclical business”, and For 2016, the average projected oil of direct connections. Over the past
American Airlines chief executive price was increased from $34.75 a 20 years, connectivity has doubled
officer Doug Parker as “… it is highly barrel (bbl) to $42.90/bbl and for the and today the world’s airlines offer
unlikely you are going to see losses year 2017 from $40.99 to $50/bbl. connections between more than
again in this business”, later explained In its July report, the IMF concluded 18,000 unique city-pairs.
by the airline that he “was not trying that from a macroeconomic The impact of terrorist actions on
to say that no one will ever lose perspective, Brexit substantially global travel and tourism in 2015
money again in the airline business” increased economic, political and 2016 seems to be relatively
but rather that “down-cycles won’t and institutional uncertainty, with modest, compared with the impact of
look like they did in the past”. projected negative consequences, similar kinds of atrocities in the past.
At the opposite end of the especially in European economies. Despite the apparently increasing
spectrum, reputable analysts Given those economic frequency and high-profile nature of
could be found, including Avitas’s uncertainties, plus the high level of these atrocities, it seems the impact
Adam Pilarski, who questioned the terrorist activities and political unrest on travel and tourism is mainly felt
assumption that “we are entering the (such as in Turkey), it is almost a locally. The World Travel & Tourism
magical world of no aviation cycles”. miracle that passenger traffic has Council (WTTC) expects that for 2016,
More on this later. continued its solid growth path. Over the direct gross demestic product
During the first months of 2016, the the first half of 2016, global revenue (GDP) contribution of the sector will
global economy evolved in line with passenger kilometres increased by still grow by 3.1%.
the International Monetary Fund’s 6%. According to WTTC, only three
(IMF) expectations, and improvements The growth in air transport can countries have seen their outlook
in a few large emerging markets partly be explained by the lower ticket deteriorate during the first months of
suggested a potential modest upward prices, which the airlines are charging 2016. Despite the Olympic Games,
6 Airfinance Annual • 2016/2017Industry review and outlook: DVB
higher load factors and more income
Airline industry – results per region from ancillary services.
Traditionally, when airline
30.00
profitability went up, the new order
[US$ bn] [US$] volume for commercial aircraft also
25.34
25 25
25.00
increased. This link has been broken
22.90
in the past year. While the industry
20 20
20.00 profit doubled between 2014 and
2015, the number of new aircraft
15 15
15.00 orders dropped to 2,400 from about
3,600 (new orders for western-built
10 10
10.00 jets, all commercial operations,
7.80 7.83 7.50 7.83 including type swaps). This trend
5.94
5 5
5.00 seems to have continued in the first
1.60 eight months of 2016, with about 1,100
0.10 0.38
0 0
0.00 orders versus almost 1,400 during the
-0.50 same period in 2015.
-5 Both the Boeing 737 and the
-5.64 Airbus A320 booked decent order
Africa Asia-Pacific Middle East Latin America North America Europe
-10.00 volumes over this period. Airbus sold
Projected 2016 net post-tax profit in US$ billion Projected 2016 net post-tax profit per passenger in US$
Source: IATA "Economic Performance of the Airline Industry, mid 2016"
about 300 Neos and 130 Ceos but
there was a significant number of
type swaps included in this number.
held in Rio, Brazil, turmoil and weak 5.9% to 9.3%, and for 2016 a further Boeing sold about 210 Maxs and 110
macroeconomics have caused increase to 9.8% is projected. NGs. Bombardier finally seemed to
growth to deteriorate from -0.9% It should be noted that the main have hit the jackpot with 130 orders
to -1.6%. Turkey will see the direct source of profitability is the North for the CSeries. Widebody aircraft
contribution of travel and tourism to American market. It is interesting sales were particularly hit in 2016,
the GDP deteriorate from an initially to compare the absolute post-tax with only 125 orders in the first eight
anticipated -0.2% to -3.2%. Obviously, profit per region with the profit per months.
in the case of Turkey, many factors passenger. By both criteria, North It has been suggested that the
play a role: a spate of terrorist attacks, America stands out. Apart from the relatively low fuel price has taken
the failed military coup, changes benefit of lower fuel costs, the North away a major incentive for airlines to
in the internal political climate, the American result can be explained order fuel-efficient new-technology
conflict with Russia and the war in by the increased market power of aircraft. It is difficult to find convincing
nearby Syria. the major airlines after a wave of proof for this. Jet fuel (US Gulf Coast,
The third country to suffer is France. consolidation. This has enabled FOB) reached a low in January
While still in positive territory, the improved pricing power, as well as 2016 at just over $0.80 a gallon but
growth in the contribution of travel
and tourism to the French GDP will be
reduced to 1.1% from 2.9% because of Crude oil and jet fuel price development
the various terrorist acts in the country,
including the atrocities in Nice in July. [US$] [ ]
From a financial perspective, the 300 300
airlines are at a completely different
level compared with years ago. While 250 250
during the first decade of this century
(2000-09) significant losses were
200 200
booked, this changed dramatically
after 2010 when, according
150 150
to International Civil Aviation
Organisation figures, global airlines
100 100
booked a net income of $17.3 billion.
In 2015, partly as a result of the low
oil prices, net income doubled from 50 50
the previous year to $35.3 billion. For
2016, preliminary IATA figures indicate 0 0
a potential net post-tax profit of $39.4 Dec 13 Mar 14 Jun 14 Sep 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16
US Gulf Coast Jet Fuel Spot (US¢ per gallon) WTI Spot (US¢ per gallon)
billion. Between 2014 and 2015, the
US Gulf Coast Jet Fuel Spot (euro cent per gallon) WTI Spot (euro cent per gallon)
return on invested capital jumped Source: Energy Information Agency and European Central Bank
from an already unusually positive
8 Airfinance Annual • 2016/2017Industry review and outlook: DVB
subsequently showed a steady climb the German export credit agency, lower pace compared with 2015.
to reach $1.45 in June. Since then, the Euler Hermes, halted all guarantees According to IATA, total revenue
price has fluctuated between about and export support for Airbus passenger kilometres increased by
$1.20 and 1.40 a gallon. aircraft. Reported “inaccuracies” 6.5% year on year for the full-year
Apart from the price of jet fuel, it in applications for export credit 2015, slowing down to 6% during the
seems the new order volume is held financing relating to information first six months of 2016. International
back by the record backlog already provided in respect to consultants traffic – representing 63.6% of total
on order and the resulting significant and other third parties were the traffic – grew by 6.2% compared with
lead times for the delivery of the more reason for this suspension of support. 6.5% in 2015, while domestic traffic
popular jet types. Overall, the backlog In July, Airbus reported that a process – representing 36.4% of total traffic –
for commercial jets is equal to about for the re-establishment of ECA managed only 5.6% against 6.3% last
nine times the production volume of financing had been agreed and was year. The 2016 numbers are broadly
2015. Another stimulating factor that ongoing, and that it was targeting in line with the 10-year average rates,
was absent in 2015 and the first half ECA financing to resume in the fourth which is not too bad given the weak
of 2016 was the launch of a significant quarter of 2016. situation of the global economy.
new aircraft type. Only a few new The timing of these two incidents Predictably, the Middle East carriers
variants, including a minor stretch could not have been better. Boeing (representing 9.4% of world RPKs in
of the 737 Max 7, were announced. reported that the percentage of 2015) showed the strongest growth
Airbus and Boeing were rumoured deliveries supported by Exim reached in international traffic, with an 11%
to be contemplating new aircraft, 30% during the global financial increase in RPKs. Like in previous
such as an A350-2000, a 777-10X, an crisis between 2009 and 2012. In years, load factors stayed behind as
all-new middle-of-the-market aircraft the period 2012-15, this percentage the international airline capacity in the
or a 737 Max 10, but effectively none had come down to a 10-year low of Middle East continued to expand by
of these have been confirmed. Most 11%, probably partly as a result of the an ambitious 14.7%. During the first
developments that were announced 2011 Aircraft Sector Understanding half of 2016, the big three, Emirates,
focused on high-density interiors, that increased the cost of export Qatar and Etihad, took delivery of no
by applying slimline seats, more financing for most borrowers and fewer than 33 large twin-aisle aircraft
compact galleys and lavatories and made commercial funding more – including nine 777-300ERs and
reconfigured emergency exits. attractive. For 2016, Boeing predicts 12 A380s – leaving little doubt their
The stagnant order intake certainly that only 11% of all global commercial expansion plans are still very much
is not caused by a lack of commercial jet deliveries will involve export credit, alive.
funding. Both debt funding, as well down from 13% in 2015. Surprisingly, the runner-up in terms
as equity, is abundantly available of international traffic growth was
at historically low cost by a broad Air transport market – first-half Africa, the continent that carried
range of lenders and investors. The 2016 the red lantern in 2015. Africa is a
only source that could not easily be The good times for the global air relatively small market with a 2.2%
tapped was government export credit transport market continued during the share in world RPKs in 2015. African
financing. Both the US Export-Import first half of 2016, albeit at a slightly carriers saw their international traffic
Bank and the European export credit
agencies (ECAs) had their problems.
While US Eximbank’s charter was IATA passenger market data
reauthorised for five years at the
end of 2015, the US Senate did [RPK growth and pax yield, %] [PLF, %]
not nominate three new board 20 82
members for the export credit agency, 14.9 80.5
15
essentially taking away the bank’s 79.7 79.8
80
79.3
ability to approve big ticket $10 8.9 9.5
10 8.0 8.3 8.0 78.4
million-plus transactions. Reportedly, 6.9 6.6 7.5 6.0 6.5
6.3 5.3 5.7
78.6 78
in July, an amendment as part of 5
77.0
the appropriations bill that funds the 2.8 1.7 2.4
1.0 76.1
State Department and other related 0 76
agencies was approved, effectively 76.0 76.0 -1.2 -1.4
-2.5
allowing the bank board to approve -5 74.9 -3.9
73.5 74
transactions with a quorum of only
-10
two members. For the legislation to
become law, both the Senate and -11.7 72
-15 -13.7
House of Representatives have to
approve the legislation. -20 70
In Europe, the problems are of an 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
entirely different nature. In April, UK Source: IATA RPK growth Pax yield PLF
Export Finance, Coface of France and
www.airfinancejournal.com 9Industry review and outlook: DVB
increase by 9.6% during the first half markets in 2015, and this boom realise the global fleet of maindeck
of 2016, driven by a 10% increase continued in 2016 with an RPK commercial jet freighters (including
in available seat kilometres (ASK) volume growth of 23.3%, ahead of a combis and convertibles) is about
capacity, which is mainly the long- 22.8% production increase. The load one-eighth of the size of the
haul network expansion of Ethiopian factor in the Indian domestic market passenger fleet. Unfortunately, the
Airlines. African carriers paid the reached a record 84.4%, apparently airfreight market is not sharing in the
price of rapid capacity expansion in justifying the huge fleet purchases of good times of the passenger market.
the form of a lower load factor, with Indian carriers in recent years. For the first half of 2016, global air
65.9% the lowest of all regions. The assumed economic slowdown cargo volumes, expressed in freight
The third-highest international RPK in China did not impact the domestic tonne kilometres (FTKs) remained
growth percentage was recorded air transport market. Demand grew in stagnant, with just a 0.5% increase.
by airlines in the large Asia-Pacific line with production, 9.8% and 9.9%, In 2015, the airfreight operators
region, responsible for 31.5% of respectively. The big US domestic benefited from additional demand
world traffic. Asian-Pacific carriers’ market showed a reasonable traffic in the early months of the year as
traffic grew by 8.2%. ASK production increase of 4.6% (more than double a result of the US west coast port
increased more modestly with 7.7%. the pace of US international traffic), strikes.
Latin America carriers, good for 5.4% which is about in line with the 4.9% It seems to be generally accepted
of global traffic, came fourth with a ASK expansion. The relatively that, over the past years, the air
7.5% growth in demand (RPK) and small Australian domestic market cargo market has undergone a
6.3% in production (ASK). The gap achieved a 2.8% growth, with 0.4% fundamental change as a result of,
between the growth pace in Latin increase in production. Russia’s what seems, a structural weakness in
America and number five, Europe, domestic demand stagnated at global production and trade growth.
is significant. Europe takes 26.7% of 0.3% but the troubled Russian Compared to the years before the
world traffic. European international airlines produced 5.9% fewer ASKs, financial crisis, global production
traffic increased by 3.9% (RPK) and boosting their load factor to 75.1%. and trade now follow a much lower
ASK production by a 4.3% increase. Despite the preparations for the growth path and even seem to be
European carriers still achieved summer Olympics, the domestic weakening in recent months.
the highest load factor, 80.6%. It is Brazilian market could not escape Air cargo operators are not the only
expected that the wave of terrorist the country’s political and economic ones suffering. Maritime container
acts in Europe will impact traffic crisis. Troubled Brazilian carriers carriers are confronted with the same
growth negatively. WTTC already has produced 6% fewer ASKs but problem. The word “deglobalisation”
indicated a slowdown in spending on demand came down by 6.8%, so load has been mentioned. Danish shipping
tourism and travel. The full impact of factors stayed more or less at the conglomerate AP Møller Mærsk has
these events is not totally clear. same level. voiced concerns over how a potential
North American carriers – Moving on from the passenger shift in global policy in favour of more
accounting for 24.7% of world traffic market to the airfreight sector (air protectionism threatens to reduce
– seem to have given up their bad cargo officially includes airfreight and global trade. Tariff barriers, Brexit and
habits of the past and focused on express/mail, but we use the terms the potential political shift in the US
profitability rather than volume. This interchangeably), it is important to are examples of this. Others refer to
once more highly profitable region
saw an increase in international traffic
of only 2%. During the first half of Global production and global trade (YOY changes)
2016, North American international
production growth outstripped [%]
demand with a 2.4% ASK increase, 25
25.0%
but load factors of 80% on average 20.0%
20
are not bad. 15.0%
15
While much smaller overall,
10.0%
10
compared with international traffic
5.0%5
flows, domestic markets often
reveal interesting developments 0.0%
0
and, during the first half of 2016, -5.0%
-5
showed certainly more extremes. -10.0%
-10
Although the domestic US market
-15.0%
has 15.4% of world traffic and China -15
-20.0%
8.4%, the other domestic markets for -20
which IATA releases monthly figures -25.0%
-25
2001m01
2001m07
2002m01
2002m07
2003m01
2003m07
2004m01
2004m07
2005m01
2005m07
2006m01
2006m07
2007m01
2007m07
2008m01
2008m07
2009m01
2009m07
2010m01
2010m07
2011m01
2011m07
2012m01
2012m07
2013m01
2013m07
2014m01
2014m07
2015m01
2015m07
2016m01
(Australia, Brazil, India, Japan and
Russia) represent between only 1%
and 2% of world traffic each. India World trade Production weighted, seasonally and working day adjusted
Source: CPB Netherlands – World Trade Monitor
surged to the top of the domestic
10 Airfinance Annual • 2016/2017Industry review and outlook: DVB
of 1.1% in AFTKs, Asia-Pacific was up
IATA cargo market data 3.9%, North America 5.1% but Africa
added a staggering 22.4%. Given the
above figures, it is no surprise that
[%]
the already low load factors in the
25
air cargo business (partly explained
19.4 by trade imbalances, forcing nearly
20
14.4
empty return flights) deteriorated
15 even further by 2.3% to 42.5%.
11.6
10
Africa’s freight load factor dropped to
7.0
6.3 24.9% in the first half of 2016.
3.9 4.4 4.7 5.6 5.0
5 2.3 0.8 2.2 Returning to the passenger market
0.5 0.4 0.6 and looking at the relationship
0
-0.9
between traffic growth and capacity
-0.7
-2.0 expansion, the large orderbook
-5
-4.2 -4.9 confirms the continuing expansion
-10 strategy of Middle Eastern airlines
-8.8
-15
despite the decreasing load factor
-15.2 over the first half of 2016. As of
-20 -18.0 August, the orderbook for passenger
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 jets was 85% of its fleet size.
Source: IATA FTK growth Changes in cargo yield Airlines can attract more passengers
by offering more capacity in the form
of more (direct) connections, as well as
Globalisation 2.0, which is the growth but with a modest 6.4% increase in increasing frequency of service. The
in trade of intangibles, services, rather FTKs, which was achieved because of alternative is lowering ticket prices.
than tangible manufactured goods a capacity production of 10.6% AFTKs. Over the past four years, it can be
(Globalisation 1.0). European carriers came second with argued that this has happened on a
Whatever the cause, stagnant 3.7% growth in demand, achieved global scale, but in 2015, the lower
airfreight markets are a problem, with a 6,2% increase in production. fuel cost allowed airlines to lower
because production (in available North America (-0.9%), Africa (-1%), prices significantly, resulting in an
freight tonne kilometres) continues Asia-Pacific (-2.2%) and Latin America 11.7% lower passenger yield. With fuel
to exceed demand by a significant (-5%) lost freight volume in the first prices showing upward tendencies,
margin. While in the maritime industry six months of 2016. It is interesting traffic stimulation by lower ticket prices
this is caused by the huge orderbook to note that in all four regions, may not be a viable option for much
for new container vessels, in aviation production increased significantly. longer, at least not if airlines want to
the increase in capacity is partly Latin America produced an increase maintain current profitability levels.
a by-product of the growth in the
widebody passenger fleet. Modern
twin-aisle passenger aircraft have Traffic growth and capacity on order
huge cargo capacity in the belly of
the aircraft. Against the 0.5% demand
growth during the first half of 2016 [Year-on-year traffic growth and production, %] [Backlog, %]
20 %
18 90 %
stood a 6% growth in production. 85.4
Not only belly-freight can be blamed, 18 %
16 80 %
though. During the first half of 2016, 16 %
14 70 %
14.6
12 new widebody freighters were 66.9
14 %
delivered (mainly 767-300ERFs to 12 60
60 %
58.8
12 % 54.0 55.2
FedEx and 777-200LRFs to Middle 10 10.6 50
50 %
10.0
East carriers), plus eight passenger- 10 %
8 8.4 8.6 8.6 8.4 40.9 40
to-freighter cargo conversions (mainly 7.8 40 %
8%
6.7
767-300ERs). During the same 6 6.5
6.0 6.2 30
30 %
period, only 13 widebody freighters 6% 5.1
4 4.3
15.8 3.8 3.6 3.7 3.7 4.0 20
20 %
were retired (mainly MD-11Fs and 4% 2.9 2.9
2
Fedex A310Fs). The 24 converted 2%
10
10 %
narrowbody freighters, in particular 0 0
0% 0%
the 737-400 and 757-200, are Africa Asia-Pacific Europe Latin Middle East North Global
mainly destined for express freight America and America
Caribbean
operations in the US and China.
Traffic growth 2015 (YoY) Traffic growth H1 2016 (YoY)
Middle East carriers also lead the Source: IATA Ascend Fleets Production (ASK) H1 2016 Backlog as % pax fleet
way in the air cargo sector, market,
www.airfinancejournal.com 11Industry review and outlook: DVB
demand for air transport, a more
Worldwide airline profitability bottom-line focused airline policy
in general and the consolidation of
[US$ bn] the North American airlines were
45
other contributing factors. It will be
45.0
39.4 interesting to see what the next
35.3
35
35.0 chapter will bring.
The outlook for 2016 is still
25
25.0 positive, although there seems
14.7 17.3
15 13.7 to be an upward trend in fuel
15.0 10.7
8.3 9.2 cost. Traditionally, when airlines
5.0
5.05 make money, a number of other
stakeholders start to exercise
-5.0
-5 pressure to get a bigger piece of
-5.6 -4.1 -4.6
-15 the pie. Already we see labour
-15.0
costs becoming the largest biggest
-25
-25.0 expense for the airlines, a position
-26.1 that was previously taken by fuel.
-35
-35.0 Especially in North America, airlines
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F
have had to agree to significant pay
Net airline profit E = estimate; F = forecast
rises, partly responding to the aim of
Source: IATA "Economic Performance of the Airline Industry (Jun 2016)
the pilots’ unions to restore salaries
to pre-Chapter 11 levels. American
The softness of the air cargo be for the global airlines. In 2015, reportedly reached an agreement
markets is vividly illustrated by the commercial airlines booked a record with the pilots’ union about a 42%
fact that even an 18% decrease profit. The net result by far exceeded salary raise over a period of five
in cargo yield hardly resulted in a anything that the industry had seen years. Rival United and its pilots’
significant increase in demand. The before. The latest numbers published union agreed a two-year contract
latest monthly cargo figures (June by IATA indicates profit of $35.3 with a 13% raise in 2016, followed
2016) looks slightly better compared billion, a 9.3% return on invested by a 3% increase in 2017 and a 2%
with earlier months, but not enough capital and, probably for the first time rise in 2018. At the time of writing,
realistically to expect a turning point in aviation history, a percentage that Delta, Hawaiian and Southwest
in the market. exceeds the weighted cost of capital. were negotiating but it looks like
As we are only halfway through Clearly, the unexpected fall in fuel the outcome will be a double-digit
the year, it is not yet clear what the cost was the main reason for this pay rise over a number of years. The
final financial results over 2016 will profit boom, but a robust growth in risk with this structural increase may
Airline net profit (post tax) by IATA region
[US$ bn]
45
39.4
40
35
30
22.9
25
20
15
7.8
10 7.5
5
1.6
0.1
0
-0.5
-5
Africa Latin America Middle East Europe Asia/Pacific North America Global
E = estimate; F = forecast Net profit 2012 Net profit 2013 Net profit 2014 Net profit 2015(E) Net profit 2016(F)
Source: IATA
12 Airfinance Annual • 2016/2017Industry review and outlook: DVB
manifest itself should fuel cost move
up again. This may cause a significant IATA – net airline profit – (post tax) per region
increase in the airlines’ costs and the
[US$ bn]
trigger another round of Chapter 11
45.00
reorganisations. 39.40
40.00
IATA estimates that $22.9 billion
35.00
– 58% of the net global airline profit
30.00
in 2015 – was generated by airlines 22.90 25.34
25.00
from North America. Asia-Pacific and
20.00
Europe each took about 20% of the
15.00
global result, with $7.8 billion and $7.5 7.83 7.50 7.83 7.80
10.42
10.00
billion, respectively. The expanding 5.94
5.00
1.60
Middle East carriers generated $1.6 0.10 0.38
0.00
billion, while Latin American carriers -0.50
-5.00
scored a marginal $100 million net -5.64
-10.00
profit. Africa once more ended in the Africa Latin America Middle East Europe Asia-Pacific North America Global
F = forecast
red with a consolidated loss of $500 Source: IATA Net profit 2016(F) Net profit per passenger 2016(F)
million.
On a per passenger basis, the
result of North America is even more
spectacular. With a realized net profit IATA estimates – net post tax profit H1 2015 and
of $25.34, this continent is more than H1 2016
three times as profitable as the joint Preliminary estimates based on sample of 22 airlines
runners-up Europe and Middle East
10,000
10000
with $7.83 per passenger.
Based on a sample of 22 airlines, 8,000
8000
IATA has published some very early Q1 Q2
results for 2016. While overall profit 6,000
6000
was up about 12% for the first quarter,
the result was 15% lower for the 4,000
4000
second quarter, resulting in a 2016
first-half profit about 7% lower than 2,000
2000
the same period last year.
Of course, the sample is too small 00
to draw any conclusions, but it looks
like airline profitability this year will -2,000
-2000
2015 2016 2015 2016 2015 2016 2015 2016 2015 2016
not be much higher than that for 2015. Source: IATA North America Asia-Pacific Europe Latin America Sample total
Equipment market
After several years of increasing sales
volumes, the commercial jet order Commercial jet orders
intake slowed down in 2015, and this (western-built, all civil operators, type swap)
trend seems to have continued into
2016. According to the latest figures [Number, %]
from Ascend, which provides advisory 4,000
4,000
and valuations services to the aviation 3,555 3,577
3,500
3,500
industry, western-built jet sales (all
civil operation, including type swaps) 3,000
3,000
collapsed by about one-third between 2,630
2,441 2,356 2,366
2014 and 2015. At the time of writing, 2,500
2,500
and after the Farnborough air show, (extrapolated based on
1,900 orders per 1/9)
2,000
2016 sales are down another 24%. 2,000
A simple mechanical extrapolation 1,434 1,354 1,396
1,500
1,500
of the sales total (as reflected in our
1,067
database) of 1,067 at 1 September 1,000
1,000
would result in sales of about 1,900 652
over full-year 2016. Obviously, a 500
few mega-orders can change this
0
dramatically (at the time of writing, the
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2016 2016
big AirAsia order for 100 A321neos Source: Ascend Fleets
(P) 1/1–1/9 1/1–1/9
was not yet officially confirmed). Low-
14 Airfinance Annual • 2016/2017Industry review and outlook: DVB
cost carriers speculating on large-
scale sale and leasebacks in the near Orders placed by all civil operators (1 Jan–1 Sept 2016)
future can gain confidence from the
Western single aisles New Swaps Western regional jets New
continuing favourable climate in the 737MAX-200 100 E170/175 30
airfinance and investment markets. 737MAX-8 56 E190 E2/195 E2 5
737MAX BBJ 3 E190/195 5
Over the first eight months of 737MAX TBD 48 CRJ900 21
2016, a total of 1,135 commercial 737-700 65 CS100 75
737-800 44 CS300 52
aircraft were sold, of which 26 were A320ceo 30 9 ERJ-135 1
for eastern aircraft (including 10 A321ceo 69 25 MRJ 90 10
A319neo ACJ 1 9 Subtotal 199
Sukhoi Superjet 100s) and 42 were A320neo 160 10 SSJ 100 - 95 10
for western turboprops According to A321neo 36 78 Total 209
Total 612 131
Ascend. The remaining 1,067 aircraft Western turboprops
are western-built jets. This number Western twin aisles Do-228 4
747-8 4 Q400 15
includes 131 type swaps, in this case 767-300ERF 7 DHC-6 Twin Otter 3
mainly changes in the versions that 777-200F 2 ATR72-600 20
777-300ER 10 Total 42
were ordered within the A320 family. 787-9 23
Out of the remaining 936 new orders, A330-200 11 Eastern aircraft
A330-300 17 An-178 10
western regional jets took 199, single A330-900neo 14 L-410 4
aisles 612 and twin aisles 125. The split A350-1000XWB 8 Y-12 2
A350-900XWB 27 Total 16
of aircraft types is shown in the table. A380 2
While the already full orderbook, Total 125
Source: Ascend
as well as the low fuel price, can
be used to explain the softening of
the new equipment market, the fact Rumours persist about a few new In terms of sales successes, while
that during 2015, as well as 2016, no versions of existing aircraft types, but the A320neo (and Ceo) family, as
new aircraft types were announced neither an A350-2000XWB, nor an well as the 737 Max (and NG) booked
did not help. Generally, new aircraft A380neo, a 737 Max 10, a 777-10X or decent order volumes, the only
introductions significantly stimulate a CS500 were announced. manufacturer that had real reason
sales volumes. Obviously, Boeing The much-debated Boeing middle- to celebrate was Bombardier. With
announced a stretched version of of-the-market aircraft also remains orders from Air Canada and, maybe
the 737 Max 7 (sometimes dubbed a long-term project. The dilemma even more important, Delta Air Lines,
the Max 7½), but this effectively is a seems to be that on the one hand, the Canadian manufacturer regained
redefinition of the Max 7, so not an this aircraft should be Boeing’s some much needed sales momentum.
additional version. Airbus announced successor to the 757 and an answer The biggest order this year (as of
the ultra long range version of its to the success of the A321neo; on the 1 September) was placed by VietJet
A350-900XWB in October 2015, other hand, it would be positioned Air for 100 of the high-density interior
but also that is only a minor variant, in the market niche below the 787-8, 737 Max 200 aircraft, almost half of
featuring a higher capacity fuel where once the not very successful the total 737 Max orders. Malaysia
system within the existing fuel tanks. 767-200 and A310 could be found. Airlines Berhad, slowly emerging
Commercial aircraft orders 2016 YtD (all civil operators, as of 1 Sept, incl. 131 type swaps in A320 family)
350
294
300
250
207
200
133
150 127
109
100
35 35
50 28 23 21 20
14 10 10 10 15
7 5 4 2 2 1 4 3
0
Source: Ascend
www.airfinancejournal.com 15Industry review and outlook: DVB
from the ashes of Malaysian Airline Embraer’s largest order came from Lease for one A350-900XWB brought
System Berhad, was the second- the Pacific Northwest as Horizon Air this type to the top of the twin-aisle
largest customer with 25 new 737 signed up for 30 Embraer E175s. The table. Virgin Atlantic compensated its
Max orders. Eastern Air Lines, Tui remaining new E-Jet orders came from loss of interest in the A380 by placing
Travel, Arik, Norwegian and Okay J-Air (one) and Nordic Aviation (four) an order for eight of the stretched
were the other customers for the 737 for the E190 model. Only five E2s were A350-1000XWB aircraft. Excluding
Max. All orders where the version of sold, when Indonesia’s Kalstar Aviation the military MRTT, Airbus sold
the aircraft was announced went to signed up for five E190-E2s. seven A330-200s to unannounced
the Max 8 and its high-density variant Embraer’s competitors, MRJ from customers, plus 17 A330-300s to,
the Max 200. Surprisingly, the good Japan and the Italo/Russian Superjet among others, IAG (two) and Cebu
old 737NG received another 109 100, each booked 10 orders from Pacific (two). Garuda placed an order
orders, including 40 for the shorter US leasing company Aerolease for 14 A330-900neos.
-700 version from United. The other and Russian flag carrier Aeroflot, The dry spell continued for the
customers were for the -800 and respectively. Sukhoi also revealed A380, although a small order for two
included Xiamen and Pegasus. plans for a stretched 120-seat version of these big quads from Emirates
The second-largest single order of the SSJ100. The new version would (apparently taking cancelled aircraft)
came from Delta Air Lines when be able to use the existing PowerJet saved the honour. Mixed messages
it ordered 75 CS100 aircraft from SaM-146 engines, but would need a reached the market, but it seems the
Bombardier. Air Canada preceded new wing design. revamped A380neo is still far away
it with an order for 45 CS300s, the ATR received the biggest turboprop from a launch announcement.
same version airBaltic had ordered in order as the changes in the political Boeing’s remaining quad, the
a smaller-sized transaction – seven climate allowed Iranian airlines to 747-8, only appealed to Russian
aircraft. As Bombardier announced buy western aircraft, under certain cargo operator Volga-Dnepr Airlines,
an onerous contract provision of conditions. Iran Air seized the which confirmed its intention to take
about $500 million shortly after the opportunity and ordered 20 ATR72- 20 freighters. The announcement
Delta order, many industry observers 600s. Bombardier added 15 orders for resulted in four additional firm orders.
started speculation about heavy the Q400 model, nine from WestJet Boeing’s bestseller, however, was
discounting that must have been a Encore, three from Porter Airlines, the 787-9 with a total of 23 orders:
condition to get the two big orders. plus two from Air Tanzania and one six from Riuli Airlines, one each from
One of Bombardier’s older types, the from Ilyushin Finance Company. The Thomson and Air Lease and 15 from
CRJ900, could add orders from lessor Viking/DHC-6 Twin Otter is the aircraft unannounced customers. The 787-9
Falko (four), Canada’s Jazz (five) and that reportedly has shown the best has completely overshadowed the
unannounced customers (12). residual value performance over the 787-8. Hardly any additional orders
The third-largest single order past decades. Tara Air ordered three have been booked for this shorter
went to Airbus when Avianca Brazil of these sturdy little props. version of the Dreamliner for some
ordered 62 A320neos, despite the Meanwhile, 2016 has not been a time and it looks like this type will
stellar year for the twin-aisle segment, follow the scenario of the 767-
political and economical crisis in the
with only 125 orders over the first 200ER, which was also eclipsed by
South American country. Germania
eight months. its bigger sister, the -300ER. This is a
ordered 25 A320neos and Spirit
Orders from China Eastern for unexpected development for such a
ordered 10. The order total for
20, Philippine Airlines for six and Air revolutionary new aircraft design.
A320neos came out at 170.
While Boeing kept struggling to
book Max 9 orders, Airbus continues Cumulative orders for regional jets
to be successful selling its largest Incl. type swaps (1 = year of 1st order; recorded on date of original order)
single-aisle aircraft. The order total
400
came to 114 A321neos, including 30
from Norwegian, 15 from JetBlue and 350
12 from Avianca. Lessors AerCap, Air
300
Lease, Alafco and ACG also placed
additional orders, underlining their 250
confidence in the A321neo. Avianca
200
also ordered nine of the less popular
A319neo. The older A320 scored 150
orders for another 133, of which 94
100
were for the A321. Delta ordered
37 of the type, JetBlue 15 and 50
several lessors and airlines placed
0
single-digit orders. Allegiant Air and 0 1 2 3 4 5 6 7 8 9 10 11 12 13
Awas ordered 12 and 15 A320s, MRJ Cseries E-Jets E2 E175E2 E190E2 E195E2 Superjet 100
respectively. Source: Ascend Fleets
16 Airfinance Annual • 2016/2017Industry review and outlook: DVB
A reasonably encouraging start that
Cumulative orders for single-aisle jets stagnated after about four years
Incl. type swaps (1 = year of 1st order; recorded on date of original order) had many observers doubting the
viability of the type. As the graph
5000
5,000
shows, the 2016 orders brought
the Canadian aircraft back on track,
4,000
4000
albeit reportedly at the expense of
significant discounting.
3,000
3000 In the mainstream market of single-
aisle aircraft, the battle between the
2,000
2000 A320neo and the 737 Max continued.
Potential competition may come
1,000
1000
from the East, as China’s Comac and
Russia’s Irkut continue to develop the
00
C919 and MS-21, respectively. In the
0 1 2 3 4 5 6 7 West, Airbus seems to have taken
737MAX Family 737MAX-7 737MAX-8/-8-200 737MAX-9 737MAX TBD
a lead over Boeing in sales volume,
A320neo Family A319neo A320neo A321neo Source: Ascend Fleets
even adjusting for the fact that the
737 Max was launched about eight
months after its European competitor.
The stretched -10 version did not in terms of market acceptance for the Short term, the A320neo is struggling
find any new customers either, but different new programmes. with deliveries and performance.
as the youngest member of the 787 In the regional market segment, the Unfortunately, the all-new Pratt &
family, there should be plenty of sales contrast between the order patterns Whitney PW1100G-JM engines are
potential in years to come. of the Sukhoi Superjet and the suffering some technical problems.
The order total for Boeing’s new Embraer E2 family is striking. While The manufacturer is working
777X did not change, because only the Superjet has been struggling to on solutions, both software and
orders for the current versions of the get some order momentum for about hardware related.
777 were announced: two for the five years since its launch customers Both families are struggling to sell
-200 Freighter model from FedEx committed, the E2 order volume took their smaller versions, the A319neo
and six from Air China (plus four off like a rocket, but (temporarily) and the now slightly stretched
unannounced) for the -300ER version. slowed down after about two years’ 737 Max 7. The sweet spots of the
FedEx also added an order for seven progress. It is interesting to note families are the A320neo and the
767-300ERFs to its book. An exotic that the current E175 (not in the slightly larger 737 Max 8. The Airbus
order came from Silk Way Airbus for chart) maintained sales momentum. product also seems to be outselling
10 Russian Antonov An-178 freighters. There are questions about whether its American rival. Adding the high-
The smaller Lockheed LM-100J the new E175-E2 will meet the all- density Max 200 version to the Max
freighter did not book any firm orders important scope clause criteria in the 8’s order tally and assuming most
but signed a commitment with Bravo US market. Scope clauses limit the of the orders where the version
Industries for 10 of these rugged number and capacity, as well as the is undecided will go to the Max 8
machines. Bravo is a logistics and maximum take-off weight (MTOW), version, the sales gap between two
defence group in Brazil. Overall, the of aircraft that can be operated by rivals is not that significant anymore.
first months of 2016 did not bring commuter airlines on contracts with As has been widely debated in
too much spectacular news from the the US major operators. These scope the industry, the main difference is
commercial jet market, at least not clauses are negotiated between between the larger versions of the
in terms of new orders. Some of the the US major airlines and the pilots’ two families, with the A321neo clearly
aircraft that were announced a few unions. With the Embraer E2 series overshadowing the Max 9, unless all
years ago with a lot of fanfare did now flight-testing, it should be well undecided versions would eventually
not book to many sales successes positioned for a second wave of turn out to be Max 9s, which is
beyond the original group of launch orders. unlikely.
customers. The Mitsubishi MRJ took about Given the physical limitations
In the regional market, effectively three years to gain a decent order of the 737 Max airframe, it seems
only the CSeries could break through volume, but could not maintain this challenging (albeit not impossible)
the 300 orders glass ceiling that momentum and recent sales progress for Boeing to further stretch the
seemed to have existed for several has been slow. At the end of 2015, Max 9 to a Max 10. To do this, while
years in this segment. the Japanese manufacturer had to maintaining almost full commonality
Looking beyond the most recent announce a one-year delay in its with the other members of the Max
(lack of) sales successes, how are the delivery schedule because it had to family, seems virtually impossible.
various programmes progressing? strengthen the airframe and upgrade Maybe, eventually, the solution will
The cumulative order charts give a the software of the aircraft’s systems. be in the form of an all-new middle-
good indication of what is going on The CSeries is an interesting story. of-the-market aircraft, often referred
www.airfinancejournal.com 17Industry review and outlook: DVB
to as the “new 757”, but this will
require careful positioning, because Cumulative orders for medium/large twin-aisle jets
a standalone design between the Incl. type swaps (1 = year of 1st order; recorded on date of original order)
Max 9 and the 787-8 twin aisle seems
difficult to justify. Given the age of the 1,400
1400
Max design and the huge orderbook,
1,200
1200
it is unlikely that Boeing will launch an
all-new single-aisle aircraft anytime 1,000
1000
soon.
800
Moving to the twin aisles, also here
the A350XWB and the 787 seem 600
to maintain equilibrium. Both types
have family problems, as well. While 400
Boeing had to cancel its Japanese
200
domestic version, the -3, at an early
stage, Airbus had to do the same 0
0 1 2 3 4 5 6 7 8 9 10 11 12 13
for the -800XWB, which eventually
787 787-8 787-9 787-10 A350XWB
was replaced by the A330neo. In the
A350-800XWB A350-900XWB A350-1000XWB A330NEO Source: Ascend Fleets
A350 range, the stretched A350-
1000XWB is not booking spectacular
sales successes either. Boeing’s not reporting financial results that are are struggling to find new orders.
787-10 made a strong start, but sales too encouraging? The Boeing product survives for the
volume thereafter remained fairly The A330-900 is doing better time being on a few orders for the
stagnant. The -10 design is still young and enjoyed a very strong start. The -8F freighter version, but Boeing
and volume can still pick up. Clearly, current orderbook is made up of announced that 747 production will
the A350-900XWB is by far the most 176 orders from three lessors (total be reduced to half an aircraft a month
important version of the A350 for 55 orders) and five airlines (total 121 from the current one a month, and
Airbus, in terms of sales volume. orders), of which Delta, with 25 orders, even admitted it was reasonably
This is less clear in the case of the is the most prestigious. But AirAsia X’s possible that it could end production
787. Initially, the 787-8 was selling order is by far the largest, a whopping of the 747.
like hot cakes, but it seems that 66 of these twin aisles. Arkia, Garuda Airbus announced it would reduce
momentum for this version is lost. and TAP are the other A330-900 A380 deliveries from 27 last year to
Apart from a few reworked early customers. During its ownership 12 in 2018 to prevent a glut of unsold
aircraft (dubbed “terrible teenagers” change, TAP replaced its original order aircraft. A revamped version, dubbed
after their line numbers), no more new for A350s with A330neos. Iran Air has the A380neo, increasingly seems a
-8s have been sold during the past signed a letter of intent for 18 aircraft. long-term project if launched at all. An
two to three years. In a number of In the top segment of very large improved version of the superjumbo
cases, the customers even converted aircraft Boeing has two contenders, is needed to remain competitive,
existing orders from the -8 to the the 747-8 and the new 777X. Airbus in terms of cost per ASM, against
-9 and, in the remaining backlog puts the mighty A380 against this the large twin-engined competition,
of about 111 aircraft, it can only be duo. Both the 747-8I and the A380 especially the 777-9X.
speculated whether Aeroflot (18) and
Delta (18, former Northwest order) will
maintain their orders. Cumulative orders for (very) large twin-aisle jets
The future of the -8 does not look Incl. type swaps (1 = year of 1st order; recorded on date of original order)
too bright. Recent problems with
Rolls-Royce Trent 1000 B and C 350
engines in Japan do not help the 787.
300
The 787-9 has effectively overtaken
the -8 as the main model in the 787 250
range.
With the A330neo, Airbus launched 200
a second new type into the medium/
150
large twin-aisle segment. The shorter
-800 version is not setting the world 100
on fire, with just two customers for
a total of 10 aircraft. Does it really 50
make sense to build an aircraft for
0
effectively one strong customer 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(Hawaiian) and a customer that Source: Ascend Fleets 777X 777-8X 777-9X 747-8 A380
already suffers overcapacity and is
18 Airfinance Annual • 2016/2017Industry review and outlook: DVB
has sold 243 units plus 50 options
Aircraft on order, option and LoI as well as in to the same Middle Eastern carriers,
as well as Cathay Pacific, All Nippon
storage as % of fleet Airways, Lufthansa and unannounced
[%] customers. The 787-8 has been
100 %
compared to the 767-200ER, but the
777-8X seems to resemble the 777-
90 %
84.7% 200LR ultra-long-haul niche aircraft.
80 %
Boeing once more dominates
70 % the top end of the market with
60 %
57.3%
the 777-9X, although that could
50 % change if Airbus decides to launch
40 %
the stretched A350-2000. Such
an aircraft would partly undermine
30 %
the current A380, which makes this
20 %
a tough decision for the Toulouse
10 % 8.8% based manufacturer.
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Despite the disappointing sales
Orders as % of in-service fleet Stored aircraft as % of total fleet
1/9 volumes in the first months of
Orders, option and LoI's as % of in-service fleet
2016, the manufacturers do not
have to worry too much because
the global fleet is still growing fast.
While several customers have 8.3 a month to seven next year and Stepping back and looking at the
reduced or cancelled their orders for 5.5 in 2018 and 2019. This will be a big picture, the rise of Airbus has
the current A380, Emirates is eager mix of 777-300ER and 777-200LRF been spectacular and it would be
to see production continue. Airbus models. Today, 777 production is interesting to know whether 25 years
seems to be focusing on increasing believed to be suffering because of from now a major Russian or – more
the seat density of the current A380 a combination of supplier issues and likely – Chinese manufacturer will
and improve its efficiency based on a teething troubles in the new robotic be in a similar position. Shorter term,
higher seat count. Boeing’s large twin, production line called fuselage Airbus, Boeing, Embraer, Bombardier
the 777, is not immune to the trouble automated upright build (FAUB). This and the other original equipment
in the large aircraft market either. Its FAUB is seen as critical technology manufacturers can enjoy a backlog
current best seller, the 777-300ER, will to produce the upcoming 777X. Like equal to 8.8 years of deliveries at
be succeeded by the 777-9 towards other aircraft families, the shorter 2015 production levels.
the end of the decade and this is version (777-8X) is not selling too well. As mentioned before, the limits
affecting demand. With orders from Emirates, Etihad in production capacity can be seen
Reportedly, Boeing will reduce and Qatar for a total of 53 aircraft, it as the saving grace for the aviation
777 production from the current is staying far behind the -9X, which industry and one of the main
Western-built, in-service commerial jets and turboprops by manufacturer
30,000
30000
25,000
25000
20,000
20000
15,000
15000
AIRBUS
10,000
10000
BOEING McD.D..
5,000
5000
BOEING
00
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Boeing Boeing McDonnell Douglas Airbus Bombardier
Embraer ATR Fokker BAe Systems
Lockheed Fairchild/F.Dornier SAAB Others Source: Ascend Fleets
www.airfinancejournal.com 19Industry review and outlook: DVB
months of the year, Ascend recorded
Commercial jet backlog development 991 deliveries, slightly down on the
996 over the same period last year.
% [Backlog, %]
16,000
16,000 1,000
1000%
Much of this seems to be because of
887
881 delays in A320 and A350 deliveries.
900
900%
14,000
14,000 820 Statements from Airbus indicate that
800
12,000 721
746 800%
the company expects to “catch up” on
12,000
672 673 738 700
700% deliveries during the rest of the year.
10,000
10,000
557 624 600
600%
While not everything is good
542
500
482
news in 2016, the bad news is fairly
8,000
8,000 455 500
500%
390
419
393
414 limited in terms of order deferrals
363
6,000
6,000 344
360 358 400
400% and cancellations, which seems to
338 338
353
344 300
300% indicate fundamentally the equipment
4,000
4,000
200
200%
market is still healthy.
2,000
2,000
Obviously, there is not complete
100
100%
transparency regarding order
0 0 0
0% deferrals and cancellations, and it is
unlikely all agreements to cancel or
End-of-year order backlog Deliveries during the year Backlog as multiple of deliveries during the year
Source: Ascend Fleets
defer are included in the published
industry statistics. In the past, orders
from, for example, defaulted carriers
such as Kingfisher Airleines stayed
Annual deliveries of western-built commercial jets on the orderbooks for a long time,
(all civil operators)
probably for legal reasons. Based
1,800
1800 on available data, the number of
1,600
1600 cancellations fell from 481 in 2014 to
1,400
1400 250 in 2015. With still four months
1,200
1200 to go, the 2016 tally is less than half
1,000
1000 the 2015 number, with 116 reported
800 cancellations. These include: Ilyushin
600 Finance for 12 CSeries aircraft;
400 Eastern Air Lines and Malaysia
200 Airlines, each for 10 737-800s; and
0 Philippine Airlines and TransAsia
for A321s. In several cases, the
cancellations of A320s or 737NGs
Passenger Freight/cargo Others All
Source: Ascend Fleets
were compensated by orders for
new-generation single aisle models.
differentiators from a shipping market a substantial lower order volume While the number of cancellations
that still is in crisis. The shipping in 2015, the book-to-bill ratio was was relatively low, the number of
crisis seems not so much caused by still more than 1.5. In 2016, up to 1 deferrals increased from 56 for the
falling cargo volumes, but more by September, the book-to-bill ratio had full-year 2015 to 117 for the first eight
unlimited shipping tonnage ordered come down to 1.07, the lowest level months of 2016. Main contributors
by the shipping lines and pushed into in many years. For the first eight were reportedly Southwest for 66
the market by dozens of (subsidised)
shipyards, eager to maintain jobs
and keep their production going. Cancellations and deferrals commercial jets
At the end of 2015, the commercial (Western-built, all civil operators)
jet backlog stood at 59.3% of the 500
in-service fleet; as of September, this
number has come down slightly to 400
56.7%.
300
Whatever the cause – huge
backlogs, low fuel prices, over-
200
ordering or economic headwinds
– there are now strong indications 100
that the new equipment market has
passed its peak. This is not dramatic 0
and had to happen one day. For the 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1/1–1/9
time being, deliveries have far from Asia-Pacific Europe North America Latin America Africa International Middle East Deferrals (all regions)
kept pace with new orders. Despite
20 Airfinance Annual • 2016/2017Industry review and outlook: DVB
not take into account the value effect
Commercial jets – storage and retirements of the physical ageing of an aircraft.
(Western built, all civil operators) As airline-to-airline transactions
with naked aircraft seem to have
3,000
3000
become a minority of the transactions
2,610
2,500
2,438
2,557 2,540
2,428 2,507 2,476 involving commercial jets, a debate
2500 2,348 2,271 2,282
has started about the relevance of
2000
2,000
appraised values that do not reflect
the value of the attached lease. It
1500
1,500 seems that especially aircraft lessors,
investors and traders are eager to see
1000
1,000 736
appraised value, including the value
671 631 624
498 504 518
580
487 of the lease and even the contractual
500
500 239 return conditions.
0
As the market has become
0
2008 2009 2010 2011 2012 2013 2014 2015 2015 2016 more competitive, it is important to
1/1–1/9 1/1–1/9
Source: Ascend Fleets Retirements In storage recognise every dollar of value in a
transaction. It is, however, challenging
to appraise an aircraft with lease
Max 8s, American for 34 A350-900s aircraft, aircraft with a solid longer- attached, without including all
and Thai Airways for A350s and 787s. term lease currently command a relevant details of the contract and
Flybe deferred some E-Jets. premium. The potential buyers group applying an adjustment factor for
For mid-life and ageing aircraft, for these income-generating assets the potential risk that an airline or
the solid demand and low fuel cost is significantly larger compared with lessee is not willing or able to meet
limited the number of retirements the number of potential buyers for off- all its contractual obligations. As an
from 624 in 2014 to 487 in 2015 and lease aircraft. Off-lease aircraft sales example, a 10-year lease contract
probably further down this year: at may be targeted at airlines that are with Lufthansa clearly has more value
1 September, the retirements had looking for short-term fleet expansion compared with a similar contract with
totalled only 239 commercial jets. The or sophisticated lessors and traders, a carrier on the verge of bankruptcy.
same trend is reflected in the storage which have the capability to arrange a Given the various forms of
number of 2,277 aircraft, which is new lease for the aircraft. transactions, it is difficult to quantify
about the same level as a year ago. To analyse used equipment the size of the used equipment
prices, we have compared Ascend’s market. It seems simple airline-
Used equipment market published current market value to-airline metal transactions are a
For investors and financiers, it is estimates for the mid-year points minority now. In the lessor/investor
important to analyse what the impact in 2013, 2014, 2015 and 2016. In market, individual aircraft with lease
of the ongoing generation change is the graphs, we have used constant attached are traded, but also control
– or will be – on the used equipment age values for hypothetical over the asset-owning entity (eg, a
market and, in particular, on aircraft aircraft of an age that can be seen special purpose company) can be
values. If a new aircraft design offers as representative for the type. transferred, leaving the legal owner
better fuel burn and/or maintenance Consequently, the value dynamics do unchanged. Next to individual aircraft,
cost levels, the only way the older
technology aircraft can remain
competitive is by lower capital costs Market value dynamics – single aisles
– ie, lower purchase prices or lower Aircraft of hypothetical constant age, changes in mid-year CMV’s
lease rates. [%]
When it comes to new aircraft 15 %
pricing, there is no public domain data 10 %
with respect to, for instance, average 5%
3.8
0.8 0.3
net transaction price levels. As a 0%
N.A.
proxy, we use independent appraiser -5 %
-1.3
-3.5
data for zero-year-old aircraft, in this -5.4 -5.5 -6.2
-10 %
case from Ascend. We have reflected
-15 %
the difference between estimated
-20 %
mid-year market values. In the used
-25 %
equipment market, it seems an
increasing gap is developing between -30 %
aircraft with leases attached and -35 %
A319-100 A320-200 A320-200 A321-200 B737-300 B737-800 B757-200 CRJ200 Embraer
naked aircraft. (10 yr) (0 yr) (10 yr) (10 yr) (15 yr) (10 yr) (15 yr) (15 yr) 170 (5 yr)
With significant appetite among Source: Ascend 2013 2014 2015 2016
financial investors for commercial
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