Aircraft Economic Lives

Transcription

1 Aircraft Economic Lives Trends and Implications Prepared for: AeroPodium Embry-Riddle Aviation Symposium Yong Kang TAY, Associate February 9, 214

2 ICF SH&E OVERVIEW ICF SH&E Is One Of The World s Largest And Most Experienced Aviation And Aerospace Consultancies Airports Airlines Aerospace & MRO Asset Advisory Safety & Security 48 years in business (founded 1963) 85 professional staff Dedicated exclusively to aerospace and aviation Recruited from the industry Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 6, private sector and public sector assignments Backed by parent company ICF International ($841M revenue) Global presence six major offices Ann Arbor Boston New York London Singapore Beijing 1

3 Today s Agenda Changing economic lives: the arguments Economic lives: the evidence Conclusions & stakeholder implications 2

4 THE ARGUMENTS Many industry observers believe that the economic lives of aircraft are declining. When a person can retire young, it is a good thing, but the early retirement of aircraft has consequences for the aviation industry when it occurs in larger numbers, as is the case now for commercial jets. Aircraft Retirement Age Drops Again, Aviation Week, July 212 Lessors tend to depreciate their aircraft over 25 years to a 15% residual value. The typical depreciation schedule has an aircraft depreciating in a straight line over the expected 25-year life. That means that when a new A32 worth $4 million should be worth $6 million after 25 years. According to a part out source, 2-year old A32s are trading for between $3 million and $4 million. Airfinance Journal, December quote - the argument has been around a while! Current aircraft depreciation assumptions -- a 25-year economic life with a 15% residual, or 3.4% per year -- are simply too low. Depreciation assumptions need to change to reflect the reality of 5% to 6% actual depreciation each year. Airfinance Journal, December 24 3

5 THE ARGUMENTS Headlines from industry press create a perception that economic lives are shortening reinforced by 4

6 THE ARGUMENTS escalating levels of aircraft retirements Air Transport Aircraft Retirements Retirements Source: Airline Monitor, 213 5

7 Aircraft Value, USD millions Monthly Lease Rate Thousands THE ARGUMENTS and depressed values and lease rates of older equipment. $5 $45 $4 $35 $3 $25 $2 $15 $1 $5 $ 22 Vintage A32-2 Value Current Market Value Book Value (25 Years, 15%) A32-2 Lease Rates $5-3 Yr Old 4-7 Yr Old $ Yr Old 12+ Yr Old $4 $35 $3 $25 $2 $15 $1 $5 $ Sep-91 Jul-93 May-95 Apr-97 Feb-99 Dec- Oct-2 Aug-4 Jul-6 May-8 Mar-1 Jan-12 Source: ICF SH&E Analysis 6

8 THE ARGUMENTS However, another group of industry stakeholders believe that economic lives are not decreasing Aircraft lives have been steadily increasing. Boeing, January 211 "We have seen no evidence that modern day aircraft built today would have a useful life of less than 25 years There's just no evidence pointing to that. Steven Udvar-Hazy, CEO, Air Lease Corporation, Q2 212 Earnings Call Whilst a small number of individual aircraft may suffer value impairment through early retirement, there is strong evidence that the broader patterns of fleet operation and ownership will continue to support current industry value retention and depreciation assumptions. Avolon, October 212 7

9 THE ARGUMENTS There are several key questions that today s presentation will address Are economic lives genuinely decreasing, i.e., are they retiring sooner than anticipated by survivor curves? If so, which aircraft models are most affected? Is there a structural shift at work in the industry that will impact economic lives of current and future aircraft models? What are the implications of ICF SH&E s conclusions for stakeholders?` 8

10 Today s Agenda Changing economic lives: the arguments Economic lives: the evidence Conclusions & stakeholder implications 9

11 Average Age of Retirement THE EVIDENCE ICF SH&E s analysis shows the average age of retirement has broadly increased over the last two decades 35 Trends in Average Age of Aircraft Retirements Narrowbody Widebody Year Retired Increases in the average retirement age have certainly slowed, however, and more recently appear to have slightly declined. 1

12 In Service Probability THE EVIDENCE Long-term commercial jet aircraft survivor curves show average economic lives around 25-3 years in age 1% 9% 8% 7% 6% 5% 4% Historical Survivor Curves: In-Service Probability vs. Age Aircraft Class Regional Jet Narrowbody Widebody The age where 5% of the fleet is retired 3% 2% 1% % Aircraft Age Note: Survivor curves represent delivery-weighted curve fits. Source: ICF SH&E Analysis; ACAS 11

13 In Service Probability Deliveries THE EVIDENCE The aircraft appear to be on track for an average economic life in excess of 25 years Survivor Curve 1% 9% 8% Deliveries (RHS) Survivor Curve (LHS) Average Narrowbody (LHS) 12 1 Oldest aircraft nearly 3 years; median retirement age now at 27 years 7% 6% 8 Widespread adoption by US majors who have been slow to re-fleet 5% 4% 3% 2% 1% Limited replacement aircraft with similar payload/range available Freighter conversion optionality has supported many aircraft remaining in service % Years Since Delivery Note: Survivor curves represent delivery-weighted curve fits. Source: ICF SH&E Analysis; ACAS 12

14 In Service Probability Deliveries THE EVIDENCE The also appears on track to reach an average 25- year economic life, but retirements are increasing quickly Survivor Curve 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Deliveries (RHS) Survivor Curve (LHS) Average Widebody (LHS) Previously lowest CASM aircraft; now challenged by 777-3ER and A38 Amid high fuel prices, many carriers have started retiring the JAL retired (44) in 211 Singapore retired fleet in 212 Cathay fleet retirement by 214 Values and lease rates have fallen considerably since 29, particularly for late-build aircraft % Years Since Delivery Note: Survivor curves represent delivery-weighted curve fits. Source: ICF SH&E Analysis; ACAS Current softness in cargo market has restrained demand for P2F conversions, driving increased partout activity 13

15 In Service Probability Deliveries THE EVIDENCE The CRJ-2 aircraft appear to be on track for just over a 15-year average economic life CRJ-2 Survivor Curve 1% 9% 8% 7% 6% 5% 4% 3% 2% Deliveries (RHS) Survivor Curve (LHS) Average Regional Jet (LHS) Oldest aircraft nearly 2 years; median retirement age just over 15 years Scope clauses generated artificial demand for the aircraft in the US; relaxation of scope clauses in high fuel price environment exposed poor economics 1% 2 % Years Since Delivery Note: Survivor curves represent delivery-weighted curve fits. Source: ICF SH&E Analysis; ACAS 14

16 In Service Probability Deliveries THE EVIDENCE The early models of the A32-2 aircraft with less fuel efficient engines are retiring fast A32-2 (CFM56-5A/V25-A1) Survivor Curve 1% 9% 8% 7% Deliveries (RHS) Survivor Curve (LHS) Average Narrowbody (LHS) Oldest aircraft nearly 25 years; median retirement age around 22 years 6% 5% 4% 8 6 Driven largely by early replacement from re-engined (CFM56-5B and V25-A5) aircraft 3% 4 2% 1% 2 % Years Since Delivery Notes: (1) Survivor curves represent delivery-weighted curve fits. (2) Early A32-2 aircraft powered by CFM56-5A and V25-A1 engines. Source: ICF SH&E Analysis; ACAS 15

17 In Service Probability Deliveries THE EVIDENCE Analysis of limited data shows current engine A32-2 aircraft may have shorter than anticipated economic lives A32-2 (CFM56-5B/V25-A5) Survivor Curve 1% 9% 8% 7% 6% 5% 4% Deliveries (RHS) Survivor Curve (LHS) Average Narrowbody (LHS) Oldest aircraft approaching 2 years; median retirement age appears on track for less than 25 years In time as more aircraft age, we anticipate the curve shifting to the right 3% 2% 1% % Years Since Delivery 1 5 A key variable will be how airlines react to arrival of replacement technology (i.e. A32neo / 737 MAX) Notes: (1) Survivor curves represent delivery-weighted curve fits. (2) Late A32-2 aircraft powered by CFM56-5B and V25-A5 engines. Source: ICF SH&E Analysis; ACAS 16

18 In Service Probability Deliveries THE EVIDENCE In contrast, there are relatively few retirements for the younger 737NG fleet Survivor Curve 1% 9% 8% 7% Deliveries (RHS) Survivor Curve (LHS) Average Narrowbody (LHS) Oldest aircraft nearly 15 years; now trending above average survivor curve 6% 5% 4% 3% 2% 1% Widespread adoption by airlines (majors and LCCs) and lessors alike; single engine (CFM56) supports liquidity As with A32, replacement technology may shorten lives % Years Since Delivery Note: Survivor curves represent delivery-weighted curve fits. Source: ICF SH&E Analysis; ACAS 17

19 Average Retirement Age THE EVIDENCE Importantly, the economic lives of individual aircraft are highly influenced by proximity to replacement technology 4 Age of Aircraft at Retirement vs. Delivery Position DC Delivery Position (Years Since Initial Production) Aircraft manufactured nearer replacement technology have considerably shorter economic lives. Source: ICF SH&E Analysis; ACAS 18

20 Today s Agenda Changing economic lives: the arguments Economic lives: the evidence Conclusions & stakeholder implications 19

21 Annual Deliveries CONCLUSIONS & IMPLICATIONS Fleet demographics will ensure escalating retirements in the decade ahead. Air Transport Aircraft Deliveries 1,8 1,6 1,4 1,2 1, Source: ICF SH&E Analysis; ACAS Production surge in the early 199s will drive an increase in retirements over the next several years Year 2

22 CONCLUSIONS & IMPLICATIONS For example, hundreds of CRJs are candidates for retirement in the near future Number of Aircraft 18 CRJ-1/2/44 Fleet Concentration By Age years 63 aircraft 63% of fleet years 214 aircraft 22% of fleet Source: ICF SH&E Analysis; ACAS Aircraft Age 21

23 CONCLUSIONS & IMPLICATIONS High levels of production and slower air travel growth will also be a catalyst for increased retirements Development of Fleet Narrowbody Widebody 18, +1.1% surplus +182 aircraft 7, +9.9% surplus +554 aircraft 16, 6, 14, 12, 1, 1,221 4,459 5, 4, 57 1,93 8, 6, 4, 2, 13,33 Retirements based on traditional survivor curves 16,89 3, 2, 1, 4,777 Projected aircraft demand based on global RPK growth 5,619 Aircraft Demand 212 Projected Retirements - Traditional Curve Expected Production Projected Demand 217 Aircraft Demand 212 Projected Retirements - Traditional Curve Expected Production Projected Demand 217 Source: ICF SH&E Analysis 22

24 CONCLUSIONS & IMPLICATIONS ICF SH&E has therefore moved to a more sophisticated approach to project aircraft economic lives Median Economic Life Economic Life Assumptions Retirement age based on traditional survivor curves What ICF SH&E is currently using for retirement assumptions Economic Life Legend Early Vintage Median for A/C Class Last Off The Line CRJ-2 A32-2 (-5A/-A1) A32-2 (-5B/-A5) Source: ICF SH&E Analysis Significant risk exists in making business decisions on simplified or generic assumptions. 23

25 CONCLUSIONS & IMPLICATIONS Using the new assumptions, retirements are projected to average 8 aircraft per year versus ~25 last decade ICF SH&E Air Transport Retirement Forecast # of Aircraft , Total Others, 3,217 A32 Family, 1, Classic, /3/4, 53 CRJ-1/2/4, NG, MD-8, 432 ERJ-135/14/145, , /3, Total = 8,129 Source: ICF SH&E Analysis Note: Includes turboprops and regional jets 24

26 CONCLUSIONS & IMPLICATIONS OEMs production rates are underpinned by early retirements, but aftermarket revenue streams will be hit Key OEM Implications 45%+ deliveries now for replacement underpins production ramp-up New parts sales reduced by surplus for affected mature aircraft MRO and spares activity for vulnerable aircraft/engines reduced by short-term leases, inventory burn-down and consumption of spares New aftermarket opportunity for OEMs sell surplus / pre-owned parts Growing surplus makes OEM earnings projections more challenging! 25

27 CONCLUSIONS & IMPLICATIONS OEMs will be challenged by growing surplus parts usage Airframe Component Engine ICF SH&E Air Transport Surplus Market Growth Forecast $2.B Source: ICF SH&E Analysis Forecast in constant 212 US$ $3.1B $4.B $4.8B Scenarios $5.3B Significant increase in interest rates Decrease in fuel price Delays in new aircraft introduction Successful OEM surplus strategies 2% Low Nominal Moderate increase in interest rates Fuel prices slightly lower than current Minor delays to new aircraft programs OEM have limited impact on surplus High Ultra low interest rates Fuel price remains high Increased retirements On time aircraft delivery No OEM counter measure 26

28 CONCLUSIONS & IMPLICATIONS Independent MRO Suppliers face challenges and opportunities from the new environment Key Independent MRO Implications Adapt capabilities to align with shifting aircraft utilization patterns and demographics Migration of fleet to new technology aircraft strengthens position of OEMs Downward pricing pressure where in competition with surplus aircraft, components and engines Leverage availability of surplus parts to reduce maintenance costs and prices Develop value propositions to help airlines cope with sunset aircraft 27

29 CONCLUSIONS & IMPLICATIONS As owners of more than 4% of the fleet, the implications for lessors are significant Key Lessor Implications Asset selection remains critical to lessors Aircraft acquisition prices for late-delivery slots need to account for shorter economic lives Longer-term leases critical to more marginal assets Generalized depreciation policies may not be most prudent, and may present book value challenges to lessors Longer term, if economic lives were to generally compress, lease rates would need to increases For some lessors an opportunity (or necessity) to move downstream into parts trading, asset management and MRO 28

30 29