commercial aero-engine market analysis & update...widebody jet turboprop regional jet narrowbody...

May 2-3, 2018: London, UK

Commercial Aero-Engine

Market Analysis & Update

Aviation Week Network: Engine Leasing, Trading & Finance

Alton Aviation Consultancy is a boutique consulting firm with deep

domain expertise across the aviation value chain

COMPANY INTRODUCTION

Agile. Global. Objective.

Aircraft Leasing &

Financing AdvisoryAirlines

Aviation &

Aerospace Investors

Business &

General Aviation

Aerospace Manufacturers

& Supply ChainMRO & Aftermarket Airports Specialty Projects

1

Lessors, operators, lenders, and investors

rely on Alton’s professionals to provide

independent, objective advisory support

Market research & analysis

Investment strategy

Commercial due diligence

Maintenance and lease cash flow

forecasting

Appraisals/valuations

Technical advisory

Alton provides guidance and insight required to inform business

strategies, allocate capital, prioritize resources, and manage risk


Aircraft Leasing &

Financing Advisory

2

In China, Alton Aviation Consultancy is known as 德世国际航空咨询（北京）有限公司, or De Shi.

Alton supports a global client base from offices in the U.S., China,

Hong Kong, and Japan


380 Lexington Avenue

17th Floor

New York, New York 10168

USA

+1 212 256 [email protected]

New York

8 Guanghua Dongli

China Overseas Plaza

South Tower, Floor 11,

Suite A053

Chaoyang, Beijing 100020

China


Beijing

136 Des Voeux Road Central

Suite 903

Central

Hong Kong

+852 8191 [email protected]

Hong Kong

Konan

Minato-Ku

Tokyo, Japan


Tokyo

3

4

TODAY’S AGENDA

Commercial Aircraft & Engine Fleet Dynamics

Aircraft & Engine Fleet Outlook

Engine Leasing Overview

Summary & Conclusions

COMMERCIAL AIRCRAFT & ENGINE FLEET DYNAMICS

SECTION 1

Source: IATA, Alton analysis

The airline industry has historically been cyclical; the most recent

eight years have been profitable


$66B(6%)

(4%)

(2%)

0%

2%

4%

6%

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

FINANCIAL CRISISSEPT. 11GULF WAROIL CRISIS

Global Airline Net Profit Margin, 1980-2017F

6 years 6 years 2 years 8+ years

Alton InsightFactors sustaining current

momentum include:

Continued strong growth in air

traffic demand, driven by GDP

Capacity/pricing discipline

from airline consolidation in

mature markets

Relatively stable and moderate

fuel prices

6

2017F

Air traffic demand has long been noted to correlate to GDP growth –

both continue to expand


7Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis

(2%)

0%

2%

4%

6%

8%

10%

12%

14%

0

100

200

300

400

500

600

700

800

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

GD

P G

row

th

Ind

ex

ed

GD

P/ R

PK

GDP Growth

Indexed GDP

Indexed RPK

Global annual passenger

traffic has risen at a

multiple of on average

1.7 times global GDP

over the past 25 years

Demand for air travel

has not wavered long in

the face of exogenous

shocks

Historical Air Traffic and GDP Growth (1980–2017F)

2017F

Fleet growth is driven by increases in air traffic; Middle East and

Asia Pacific have led the world in both over the past 20 years


8Source: USDA ERS, Real GDP Projections, September 2017; ICAO Annual Report; Alton analysis

Fleet and Air Traffic (RPK) Growth by Region (1997 – 2017)

10.0%

7.1% 6.8%

5.7%

4.6%

2.7%

11.0%

6.0%

4.5% 4.6%4.0%

1.4%0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Middle East Asia Pacific Africa Latin America Europe North America

Ave

rag

e A

nn

ua

l G

row

th

% Fleet growth

Air Traffic

9Source: CAPA, Alton analysis

Over the past 25 years, the global fleet has grown at a rate of 5.1%;

Airbus has enjoyed the most significant share expansion


0

5,000

10,000

15,000

20,000

25,000

30,000

1992 1997 2002 2007 2012 2017

Widebody Jet

Turboprop

Regional Jet

Narrowbody Jet

Global Fleet Count (1992 – 2017) Global Fleet Count (1992 – 2017)

0

5,000

10,000

15,000

20,000

25,000

30,000

1992 1997 2002 2007 2012 2017

OtherEmbraerBombardierBoeingAirbus

57%

20%

10%

13%

33%

7%

8%

43%

8%

10

Today’s commercial air transport fleet consists of approximately

28,000 aircraft, with Asia Pacific equaling North America in size


Narrowbody JetRegional JetTurbopropWidebody Jet

51%

24%

9%

16%

8,400

61%

11%

10%

18%

6,600

63%

5%

10%

22%

8,400

59%

17%

14%

10%

2,10041%

17%

28%

14%

1,300

39%

7%

3%

51% 2,100

Source: CAPA, Alton analysis

Alton Insight

Turboprop aircraft have outperformed

other aircraft classes

Regional jets as a whole have

underperformed – but much of this

has historically been driven by the 50-

seat regional jets


Aircraft have historically retired between 20-30 years or age


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 5 10 15 20 25 30 35 40 45 50

% R

em

ain

ing

in

Se

rvic

e

Age of Aircraft, in Years

Narrowbody Jet Regional JetTurbopropWidebody Jet

Aircraft Survivor Curves

Alton Insight Narrowbody retirement ages have

compressed from a peak at the top of

the prior cycle

Boeing 787 entry-into-service delays

kept older widebody aircraft in the

fleet through the downturn

Despite headline news reports,

retirement ages for narrowbody

aircraft is close to 25 years today

12Note: Trailing three year average


Retirement ages for narrowbody and widebody jets have

compressed in recent years, but are still near 25 years


0

5

10

15

20

25

30

35

1997 2002 2007 2012 2017

Ave

rag

e A

ge

@ R

eti

rem

en

t

Narrowbody Jet

Widebody Jet

Retirement Age Trends, 1997-2017


Fleet retirements have now declined from previous peak levels


$66B

Alton Insight

Peak retirements in 2007-2012 were

driven by (i) a soft demand

environment, (ii) high fuel prices, and

(iii) marginalized 50-seat regional jets

The surge in aircraft retirements

spawned advancements in the tear-

down/part-out industry

Low fuel prices and a strong traffic

growth environment have driven the

recent slowdown in retirements rates

The end-of-life market is highly

competitive today

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1992 -1997

1997 -2002

2002 -2007

2007 -2012

2012 -2017

% o

f F

leet

To

tal A

ircra

ft

Aircraft Retired

% Fleet

Avg.

601

Avg.

294

Aircraft Retirements

Avg.

144

Avg.

464


Over the course of the last decade, more than 5,000 aircraft and

12,000 engines have left the in-service fleet


Aircraft Retirements, 2008-2017

Most retirements have been what are now considered “prior generation” aircraft & engines

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

En

gin

es

Re

tire

d CFM56-5ACF6-50C2RB211-524PW4000-94PW100CF6-80C2JT9DJT8D-200CFM56-3JT8D

Engine Retirements, 2008-2017

Top 10 Engines

0

1,000

2,000

3,000

4,000

5,000

6,000

Air

cra

ft R

etr

ied 747-400

757A300/A310DC9747-1/2/300737 OriginalA320MD80727737 Classic

Top 10 Airfames

COMMERCIAL AIRCRAFT & ENGINE FLEET OUTLOOK

SECTION 2


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Fle

et

Siz

e

Widebody Jet

Turboprop

Regional Jet

Narrowbody Jet

Over the next decade, Alton projects the commercial fleet will grow

at 3.8% per year, reaching over 44,000 aircraft by 2028


17Source: Alton analysis

Over 22,000 aircraft and 44,000 engines are projected to be delivered

through 2028


Aircraft Delivery Forecast, 2018-2028

0

10,000

20,000

30,000

40,000

50,000

En

gin

es

De

live

red Trent 7000

Trent 1000

GE9X

PW1500G

GEnx -1B

PW100

Trent XWB

PW1100G

CFM56-LEAP-1A

CFM56-LEAP-1B

Engine Delivery Forecast, 2018-2028

Top 10

0

5,000

10,000

15,000

20,000

25,000

Air

cra

ft D

eli

ve

red MRJ

A330neo

E-Jet E2

777X

C Series

ATR72

A350

787

737 MAX

A319/320/321neo

Top 10

New technology platforms will comprise the vast

majority of the next decade’s deliveries

Demand for new aircraft deliveries will be driven by the combination

of aircraft needed for growth & replacement



30,000

22,000

8,000

14,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2018 2028

# o

f A

irc

raft

22

,00

0

44,000

Growth

Retained

Replacement

Fleet Projection (2018 – 2028)

Economic and

middle-class

expansion,

particularly in

emerging markets

Stimulation from

low fares

Market deregulation

& liberalization

Growth Drivers

Demographics, and

attainment of

economic life

Supply/demand

balance

Interest rates

Fuel prices

Emissions

regulations

Replacement Drivers

18

19Source: CAPA, Alton analysis; OEM announcements

Aircraft OEMs presently enjoy large order books and are ramping-up

production of the most in-demand aircraft


0 2,000 4,000 6,000 8,000

A320ceo (Current)

A320neo (Next)

737NG (Current)

737 MAX (Next)

A330ceo (Current)

A330neo/A350 (Next)

777 (Current)

787/777X (Next) In ServiceInactiveBacklog

Select Aircraft Fleet & Backlog

46

14

44

20

60

15

57

24

0

10

20

30

40

50

60

70

80

NB WB NB WB

Ra

te/m

o

Current rate/moFuture rate/mo (2019)

Airbus Boeing

OEM Production Rates


The majority of the backlog is held by Airbus and Boeing


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,00010 Year Backlog by OEM

Others

Embraer

Bombardier

Boeing

Airbus

Alton Insight

Airbus and Boeing combined hold

about 85% of the backlog and their

relative proportions are fairly steady

in the coming years

Bombardier and Embraer have

smaller and shorter backlogs

Remainder of backlog distributed

amongst ATR and some emerging

manufacturers


Asia Pacific accounts for the largest portion of the backlog,

although a substantial portion is not yet allocated


Alton Insight

Asia Pacific accounts for 29% of firm

backlog – true figure is likely more

given unallocated orders region’s

high demand for narrowbodies

Europe and North America account

for the next highest shares of the

backlog at 15% and 14% respectively

Approx. 4,000 aircraft on backlog

have not yet been allocated to an

operator or region – many of these

aircraft have been ordered by lessors

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Backlog by Region

Widebody Jet

Turboprop

Regional Jet

Narrowbody Jet

22Source: Alton analysis

Over 8,000 aircraft and 18,000 engines are projected to leave the

in-service fleet through 2028


Aircraft Retirement Forecast, 2018-2028

0

5,000

10,000

15,000

20,000

En

gin

es

Re

tire

d CF34-8CAE3007CF34-3CFM56-3PT6APW100CF6-80C2V2500-A5CFM56-5BCFM56-7B

Engine Retirement Forecast, 2018-2028

Top 10

0

2,500

5,000

7,500

10,000

Air

cra

ft R

etr

ied

CRJ7/9/1000E-JetMD-80/90ERJ135/145767777CRJ1/200737 Classic737NGA320

Top 10

The next decade’s retirements will include many of

today’s “current generation” aircraft & engines

23Source: Alton Analysis, all figures constant dollars ($2018 USD)

Today’s commercial air transport MRO market demand is approx.

$69B, growing to $103B by 2028 – an annualized growth rate of 4.1%


$0 $20 $40 $60 $80 $100 $120

World Total

Asia Pacific

North America

Europe

Middle East

Latin America

Africa

$103B

10yr CAGR

5.0%

5.0%

6.5%

2.2%

1.6%

5.7%

$0 $20 $40 $60 $80 $100 $120

World Total

Engine

Components

Line

Airframe Heavy

Modifications

10yr CAGR

$103B

6.1%

2.9%

3.9%

3.1%

4.4%

$0 $20 $40 $60 $80 $100 $120

World Total

Asia Pacific

North America

Europe

Middle East

Latin America

Africa

$69B

$3.8B

$7.4B

$16.4B

$16.9B

$22.6B

$2.4B

$0 $20 $40 $60 $80 $100 $120

World Total

Engine

Components

Line

Airframe Heavy

Modifications

$69B

$6B

$8B

$13B

$14B

$29B

ENGINE LEASING OVERVIEW

SECTION 3

25Note: 1\ Engines assumed to be valued at spare engine market values

Source: Source: CAPA Fleet Database, December 2017, Alton analysis and estimates

The commercial jet fleet is valued at nearly $650 billion; of the total

aircraft value, as much as 45% may be attributed to installed engines1


Global Commercial Aircraft Fleet Value

by Aircraft Type and Age

$0

$50

$100

$150

$200

$250

$300

$350

$400

< 5years

5-10years

10-15years

15-20years

> 20years

Air

cra

ft F

lee

t V

alu

e(U

SD

Bil

lio

n)

Regional Jet

Widebody

Narrowbody

Global Commercial Aircraft/Engine

Value by Aircraft Type and Age

$0

$50

$100

$150

$200

$250

$300

$350

$400

Narrowbody Widebody Regional Jet

Va

lue

(US

D B

illi

on

) SpareEngines

InstalledEngines

Airframe

Spare engines are around 10% of the installed

engine base, with a value on the order of $25 billion

Source: Alton analysis

Trading Volumes: a complex web of primary, secondary, and tertiary

aircraft transactions take place between market participants


AIRCRAFT

/ ENGINE

OEM

AIRLINE

AIRCRAFT/

ENGINE

LESSOR

AIRLINE

AIRCRAFT/

ENGINE

LESSOR

PRIMARY (NEW) SECONDARY (USED)

SA

LE-L

EA

SE

BA

CK

OU

TR

IGH

T

OUTRIGHT

LEASE

ATTACHED

OUTRIGHT

PART-OUT

TERTIARY (RETIRE)

SA

LE-L

EA

SE

BA

CK

OUTRIGHT

OUTRIGHTOUTRIGHT

OUTRIGHT

Transaction Schematic: Installed & Spare Engines

Alton Insight

Buyers of aircraft with

installed engines include

airlines, aircraft lessors, and

part-out specialists – at

different phases of the life

cycle

Similarly, purchasers of spare

engines include airlines,

engine lessors, and part-out

specialists

26

27Source: Alton estimates

There are an estimated ~50,000 total engines in the global fleet;

~10% of installed base are spares, of which ~1,500 (35%) are leased


0 10,000 20,000 30,000 40,000 50,000

Global Fleet

Spare Fleet

Spare Leased Spare Owned In-Service

Leased Proportion of Spare Engines in Global Fleet Alton Insight

While there is overlap in the

various categories, engine

lessors fall into three general

categories:

OEM (or OEM-affiliated)

Independents (including End-

of-Life specialists)

MROs (or MRO-affiliated)

Source: Airfinance Journal Engine Investor Poll, 2017

Participants in the engine market form a view on the attractiveness of

various engines, yet there is a buyer and seller on each side of a deal


0 2 4 6 8 10 12 14 16 18 20

PW6000Trent 500

CFM56-5CCFM56-5ARB211-524

Trent 800CFM56-3CTrent 900

GP7200PW4000

RB211-535PW2000CF6-80

CF34-8CTrent 1000

CF34-8EGE90

Trent 700CF34-10EPW1100G

GEnxCFM56-5B

Leap-1ALeap-1B

CFM56-7BV2500-A5

Investor Appeal Remarketing Potential Residual Value

2828

29

As with aircraft leasing, the industry consensus is a strong outlook

for engine leasing in the foreseeable future


Narrowbody Preference

OEM Aftermarket Prominence

Fuel Price

Production Rates

Technology Improvements

Innovation of Services to Compete

Development of Chinese Engine Lessors

Outlook Trends

Growth in the spare engine leasing

industry is dependent on two

fundamental drivers:

Number of commercial aircraft, and

therefore engines in the market, and

correspondingly determining the

volume of spares needed

Proportion of engines that are leased

by operators, forecast to grow

SUMMARY & CONCLUSIONS

SECTION 4

31

SUMMARY

Overall, the state of the aviation industry is strong:

• Airlines profitable

• Manufacturers raising production rates

• Aftermarket demand volumes up

The industry remains susceptible to exogenous events

Demographics will drive increased retirements in the coming decade – most

will be today’s current generation equipment – as new technology platforms

form a greater share of the global fleet

Strong growth expected in the engine leasing market on basis of overall

fleet growth and expanding share of leased engines

ALTONAVIATION.COM

NEW YORK | HONG KONG | BEIJING | TOKYO

Adam Guthorn

+1 212 301 0572

[email protected]

commercial aero-engine market analysis & update...widebody jet turboprop regional jet narrowbody...

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