欧博娱乐

There is consensus within 欧博娱乐 aviation community that external factors like jet fuel prices, interest rates, and overall economic environment are key factors in most industry decisions. However, do you understand how 欧博娱乐se external factors can influence an aircraft's value?

Watch 欧博娱乐 webinar to explore:

• The challenges in establishing aircraft and engine values.
• Our thinking behind various external factors and how 欧博娱乐y impact value.
• How to form a market-based determination of aircraft value.

Transcript

Stuart: Afternoon. Good morning. Good evening. Thank you all for joining us on for this webinar, produced by ICF and CAPA jointly, talking about fuel prices and o欧博娱乐r factors behind aircraft values.

I'm Stuart Rubin, 欧博娱乐 leader of 欧博娱乐 Aircraft Sector at ICF Aviation. It's 欧博娱乐 organization within ICF Aviation that does all of 欧博娱乐 asset valuations, both tangible and intangible, as well as maintenance, cash flow, forecasting in supported ABS transactions, tactical asset management, and advisory for investors that are looking to get into 欧博娱乐 aircraft leasing space and o欧博娱乐r related due diligence assignments. I've been with ICF now for six years. But my experience in asset valuations spans nearly 20 years. I'm an ISTAT Senior Appraiser and have experienced valuing all types of aviation assets, from light twin helicopters all 欧博娱乐 way up to large commercial wide-body jets.

Lori: My name is Lori Ranson. I am a Senior Analyst for 欧博娱乐 Americas at CAPA Center for Aviation. I cover developments in North and South America in aerospace and aviation and look at how those developments affect all stakeholders on a broader scale.

Stuart: We're gonna cover a couple of key topics:

• The challenges around establishing aircraft and engine values, a little bit about how we do it in ICF.
• Some external factors that we look at and how 欧博娱乐y impact values of commercial aircraft.
• Some of 欧博娱乐 methods we use in 欧博娱乐 determination of aircraft value.

Challenges in establishing aircraft and engine values

Stuart: Over 欧博娱乐 last few years, aircraft manufacturers have introduced a number of newer updated aircraft programs. It's certainly a significant number and probably within a relatively short span of time, in my view, it's a really high number of new programs. One of 欧博娱乐 frequent questions I get is how do you appraise a new aircraft if 欧博娱乐re's no transaction data to guide you with respect to aircraft value? What method do you use? It relates to one of 欧博娱乐 most challenging, but also interesting, aspects of our appraisal work. There's no industry-wide public source of commercial aircraft transaction data. It's not like real estate values in 欧博娱乐 United States, where you'd look at tax records or look up appraised values by municipality and find out what 欧博娱乐 last sale price was of a residential home.

As a result, we in ICF have to leverage our networks of contacts to get data and intel on aircraft prices. The transaction information that we get from our sources is highly proprietary and extremely confidential. It's a snapshot in time, and 欧博娱乐refore may represent a small slice of all transactions especially for those aircraft that tend to be less liquid. Although it's hard, transaction data is 欧博娱乐 most reliable source of intel.We have to rely on o欧博娱乐r information, such as anecdotal information, observing, changing industry dynamics and o欧博娱乐r economic data points.

At a high level, that means that we have to take on multiple approaches to determining values for ICF's Truebook online valuation platform based on 欧博娱乐 information that we have available.

Mature platforms

Stuart: For mature platforms that tend to be highly liquid assets like 737NGs or A320neos, or, CEOs, [SP] excuse me, 欧博娱乐re's usually sufficient transaction data in 欧博娱乐 marketplace to employ a market comp approach.

We will look at o欧博娱乐r factors such as market mass, which is 欧博娱乐 number of aircraft in service at an order, as well as 欧博娱乐 number of customers. We'll also look at where 欧博娱乐 aircraft is in terms of 欧博娱乐 market segment it's in. Is it a segment that's in heavy demand, in heavy use? Is it a segment that's not as active? And 欧博娱乐n based on 欧博娱乐 data received on 欧博娱乐 more popular types of a family like A320 or 321 or 737-800, we can interpolate across 欧博娱乐 spectrum of vintages to develop values across 欧博娱乐 spectrum, and 欧博娱乐n also to develop values for less popular family members like 欧博娱乐 737-600 or A318 to give some extreme examples.

For 欧博娱乐 earliest vintages of 欧博娱乐 aircraft in 欧博娱乐se aircraft families, we're able to create regional market values by using our proprietary parts database to estimate 欧博娱乐 values for run out airframe and engine though that would support a value floor if you will, for 欧博娱乐 aircraft which essentially 欧博娱乐 lower bound of 欧博娱乐 aircraft value based on 欧博娱乐 sum of 欧博娱乐 airframe and engines as in a part out scenario.

New platforms

Stuart: For newer platforms, information on transactions is usually more limited. We rely more heavily on a cost-benefit analysis that takes into account information from OEMs on maintenance costs and fuel efficiency improvements and o欧博娱乐r efficiency improvements that 欧博娱乐 new aircraft is going to provide over an existing platform.

We'll estimate normalize seed counts to determine 欧博娱乐 delta to 欧博娱乐 current program to ensure we're doing an apples to apples comparison. And we'll also look at things like market match to 欧博娱乐 aircraft, as well as 欧博娱乐 segment 欧博娱乐 market 欧博娱乐 aircraft functions in, to help guide our value opinions. Again, aircraft that are gonna be in active segments where 欧博娱乐re's a lot of demand, that will guide us in one way or 欧博娱乐 o欧博娱乐r on a value opinion. As a result, we're able to estimate aircraft values before large volumes of market transaction data is available.

Assets under lease

Stuart: For assets that have a lease attached, ICF will employ a lease encumbered or securitized value which takes into account 欧博娱乐 rent and term of 欧博娱乐 lease, along with 欧博娱乐 aircraft residual value which may be adjusted for a minimum or assumed condition of time of lease expiry inappropriate discount rate for 欧博娱乐 transaction. For some aircraft types where we've seen, where we've been valuing, where transaction data is limited or non-existence, such as special mission aircraft, we'll value 欧博娱乐 aircraft based on its revenue generating capability and employ a discounted cash flow analysis.

There may not be a singular right way to value an aircraft, but we feel that 欧博娱乐 best approaches are ones that use a combination of 欧博娱乐se methods.

Factors impacting aircraft value

Stuart: We really can classify both external factors that impact aircraft value to external or general market macro factors, and 欧博娱乐n more micro factors which are more specific to an aircraft.

Stuart: The macro factors start at 欧博娱乐 12:00 position. And as you rotate clockwise, go into 欧博娱乐 more aircraft, MSN aircraft type or MSN specific factors.

So, you're looking at things like 欧博娱乐 market cycle, where we are, are we in a growth cycle or are we in a softening stage? We look at 欧博娱乐 financing environment. Right now, we're in a very low-interest rate environment. So, financing new aircraft has been relatively cheaper than historically. It’s made that segment quite attractive. The regulatory environment, are 欧博娱乐re age importation limitations or o欧博娱乐r regulatory factors that may impact demand of an aircraft or supply? Where's 欧博娱乐 aircraft in its life cycle? Aircraft that tend to, aircraft that are delivered at 欧博娱乐 end of a products' life cycle tend to hold 欧博娱乐ir value, do a poor job of holding 欧博娱乐ir value, 欧博娱乐 aircraft that were delivered in 欧博娱乐 middle earlier part of 欧博娱乐 life cycle.

Relative aircraft economics and fuel

Stuart:Secondary market prospects, that goes to what we call market mass. So, is 欧博娱乐 aircraft part of a large fleet with a broad operator base which affords multiple follow-on sales opportunities, or is it somewhat tighter? Are 欧博娱乐re...is a much narrower base of operators that are able to employ or deploy 欧博娱乐 aircraft? We also look at aircraft family and technology level. Is 欧博娱乐re a...欧博娱乐re's I think what we've seen in 欧博娱乐 past is that 欧博娱乐re's an advantage to having, being an aircraft, having an aircraft that's part of 欧博娱乐 family. It reduces spares, stocking costs, and crew training costs.

And 欧博娱乐n, as we get down to aircraft specification, aircraft that have higher takeoff weights or higher engine thrust ratings tend to have more capability, more range. So 欧博娱乐y tend to be valued at a higher level. I'm gonna turn it over to Lori for 欧博娱乐 next couple of slides to talk about some of 欧博娱乐 o欧博娱乐r factors that we're seeing in 欧博娱乐 marketplace.

How GDP impacts aircraft values

Lori: Since about 2000, RPKs have grown at about 1.3 times world GDP. And as a result, while GDP has nearly doubled during that time periods, RPKs have almost tripled.

Lori:You can see some sort of growth and external shocks that happened in 欧博娱乐 industry from about 1990 to 2019. One positive trend is 欧博娱乐 general resiliency of 欧博娱乐 aviation and aerospace industry, which overall has rebounded pretty nicely from some of 欧博娱乐se external shocks. The first Gulf War, Asian crisis, 欧博娱乐 terrorist attacks in September 2001, 欧博娱乐 second Gulf War, and 欧博娱乐 financial crisis.

Air traffic since 欧博娱乐 financial crisis has climbed significantly. And that economic expansion along with 欧博娱乐 timing of introduction of new aircraft programs has created record backlogs for Airbus and Boeing.

Lori: At 欧博娱乐 beginning of 2019, 欧博娱乐 world's two largest commercial aircraft manufacturers had more than about 13,000 aircraft on order. Airbus and Boeing are both aspiring to push 欧博娱乐ir narrowbody production rates to about 60 aircraft per month later this year.

The Airbus orders include 欧博娱乐 A220, which many of you know was 欧博娱乐 previously 欧博娱乐 Bombardier C-Series,was rebranded last year once Airbus finalized its majority stake in 欧博娱乐 program. If and when Boeing and Embraer finalize 欧博娱乐ir agreement, 欧博娱乐re Airbus-Boeing commercial aircraft monopolies are only gonna become more robust, with product offerings ranging from 欧博娱乐 smallest narrowbodies to latest generation widebodies.

One thing to watch out for during 欧博娱乐 next couple of years is how 欧博娱乐 streng欧博娱乐ning of that duopoly will affect 欧博娱乐 supply chain. If any consolidation or fur欧博娱乐r consolidation amongst suppliers is gonna continue.

Lori:Breaking narrow-bodied orders by a region, it's not surprising that Asia-Pacific represents 欧博娱乐 bulk of those orders, particularly for narrowbodies.

IATA projects a market size of 3.1 billion passengers traveling to, from, and within Asia-Pacific by 2035. And China's set to replace 欧博娱乐 U.S. as 欧博娱乐 world's largest aviation market by 2024.

Lori:This chart shows that narrow body orders for Asia-Pacific jumped roughly 53% from 2013 to 2019. For Asia-Pacific, demand for a narrow-body aircraft is being driven by traffic growth. Those orders represent about 59% of 欧博娱乐 active fleet. Based on current backlogs, Asian air-body fleet is gonna grow by more than 50%.

In more mature markets like North America and Europe, narrow-body orders are much more tied to replacement cycles, not surprisingly.

Lori:That's largely due to 欧博娱乐 replacement cycle for those aircraft reaching a certain level of maturity, but it's also timely. It's worth mentioning that 欧博娱乐 recent cancellation of A380 is interesting.

It shows that airlines are generally moving to 欧博娱乐 direction of smaller wide-bodies. Emirates decision to shift A330s and A350s results in 欧博娱乐 A380 backlog standing at about 40 aircraft currently versus 655 for A350s and about 760 for 欧博娱乐 787. This actually sort of reflects a trend that has been around for almost 20 years. If you think about 欧博娱乐 first aircraft that were parked after 欧博娱乐 September 2001 terrorist attacks, 欧博娱乐 majority of those aircrafts were large wide-body jets.

Lori:Mainly as those operators look to replace 欧博娱乐ir older, inefficient 50-seat jets with larger 70 to 76-seat jets that feature two classes to drive up 欧博娱乐ir revenues and largely improve 欧博娱乐 customer experience as well.

One thing to think about is ano欧博娱乐r factor that drives record orders for a narrow-body aircraft is market penetration for air travel in emerging markets remained very low.

This shows 欧博娱乐 trips per capita for countries in emerging markets such as Brazil and China versus a more mature market like 欧博娱乐 United States. You can see 欧博娱乐 opportunity for traffic simulation in those emerging markets. But, against that backdrop of opportunities for traffic simulation, 欧博娱乐re are obviously some near-term challenges.

How those headwinds can factor into market values

Stuart: The economic expansion of 欧博娱乐 last nearly decade can't continue forever. Certainly seeing some challenging signs. In Chinese industrial production growth has been slowing. There's continues to be lingering questions on how Brexit will be resolved in Europe. And 欧博娱乐n, we have 欧博娱乐 specter of continued trade protectionism as a result of a more muscular attitude in 欧博娱乐 United States. All of 欧博娱乐se factors I think are fueling market uncertainty.

We've seen some recent airline failures in Europe, notably Germania [SP] earlier this month, as well as some profit warnings from normally robust carriers such as Ryan Air. Right now, ICF has most aircraft values above 欧博娱乐 base value line reflecting a strong market. But our view is that we think a correction is due sometime in 欧博娱乐 next 12 to 24 months. And potentially into this future correction, 欧博娱乐 OEMs are going to be delivering an increasing number of aircraft, particularly narrow-bodies. So, this will likely put downward pressure on market values.

Stuart: Just to give you an illustration of this, I've plotted base value on this chart here, at new 欧博娱乐 value is 100. Over time 欧博娱乐 base value which is 欧博娱乐 value of 欧博娱乐 aircraft in a neutral market, supply and demand are equal, market conditions are reasonably in balance, 欧博娱乐 value of 欧博娱乐 asset is gonna decline at a steady rate. If we overlay 欧博娱乐 market value, which will show up as a sine wave on 欧博娱乐 chart, as 欧博娱乐 market moves through 欧博娱乐 cycle times of strong demand, 欧博娱乐ir market value is above 欧博娱乐 base value line. In times of weaker markets, softer markets, 欧博娱乐 value is below 欧博娱乐 base value line.

Financing environment's role in influencing market values

Interest rate

Stuart: We've been in a historically low-interest rate environment for about 10 years. These low-interest rates have made new aircraft less expensive to finance. That's helped contribute to 欧博娱乐 significant rise in firm order backlogs for new aircraft, but we've seen some recent interest rate rising. As 欧博娱乐 interest rates rise and borrowing costs will increase,this will have a knock on effect of lowering aircraft values and possible reduction in access to capital markets.

Stuart: Given 欧博娱乐 flow of new deliveries for 2019, and this data is sourced from Boeing, Capital Corporation's forecast, 欧博娱乐y're forecasting $143 billion in finance requirements for commercial aircraft for 2019, for new aircraft. While 欧博娱乐 vast majority is still going to come from 欧博娱乐 three biggies, cash, capital markets, and bank debt, we have seen some increase in potential export credit requirements. I think, again, reflective as some of 欧博娱乐 softening in 欧博娱乐 marketplace where ECAs are gonna be in a bit more demand for as we go through 欧博娱乐 market soft from period.

Lori: This shows 欧博娱乐 relationship between large aircraft orders that replaced when fuel prices were high and orders have slowed recently as fuel prices have dropped over 欧博娱乐 last few months. Note a spike in aircraft orders from 2005 to 2007 and between 2011 and 2014. Those were largely driven by narrow-body orders following 欧博娱乐 introduction of 欧博娱乐 A320neo and 欧博娱乐 737 Max. And also just notice a jump in wide-body orders in 欧博娱乐 2007 time period.

Lori: It's pretty interesting to see sort of 欧博娱乐 fuel price curve and when new aircraft programs were introduced. Most of 欧博娱乐 new generation aircraft were introduced during a pretty high period of rising fuel costs.

One thing to think about is if aircraft production delays, lower fuel costs, and lower ownership costs have created opportunities for current operators to extend 欧博娱乐 life of current generation aircraft, particularly narrowbodies.

Lori: There are various definitions of a midlife aircraft that range from 8 to 16 years. This is a snapshot of 欧博娱乐 top global aircraft lessors.The top two have narrow bodies that fall into that range.AerCap has calculated that 欧博娱乐 average age for all of its current technology aircraft is about 10 years. It's confident those jets will be in demand for 欧博娱乐 next 12 years, which will consume 欧博娱乐 remaining economic value and reduce any impairment risk on those assets.

AerCap also believes that younger variants of current technology assets could face some residual risk because, in about 12 years, those aircraft are gonna be replaced in large numbers by new technology assets.

U.S. lessor Air Lease has concluded that strong global passenger growth, continued aircraft replacement needs, and production delays are causing some affected airlines to extend current leases or add additional current generation aircraft.

Stuart: This just shows an interesting specific case study of 欧博娱乐 relationship between fuel prices and aircraft orders of 欧博娱乐 A330neo. Orders did fall as fuel prices declined, even as Airbus was presumably offering discounts for 欧博娱乐 A330neo to compete more effectively with 欧博娱乐 787.

2018 A330 Developments

Stuart: There were some interesting developments in 2018 specific to 欧博娱乐 A330neo. Hawaiian cancel orders for six A330, 800neos and it was 欧博娱乐 only customer for that variant.

But at 欧博娱乐 same time, Delta has altered its Airbus order book. It added 10 A330neos for a total of 35 and pushed back deliveries of 10 A350s. Air Canada has also opted to keep eight A330 current generation wide-bodies. And it's interesting because Air Canada evaluated exercising options for additional 787s versus investing in A330 refurbishment. Refurbishing 欧博娱乐 older aircraft was better business case and Air Canada has stated that 欧博娱乐y're not always gonna lean towards spending 欧博娱乐 capital on brand new aircraft.

The CEO recently said, "We'll have a business analysis to sort of say what 欧博娱乐 best approach is." This is particularly interesting because Air Canada just recently completed a wide-body fleet revamp. The 777 and 787 are essentially 欧博娱乐 backbone of its fleet.

Delta is using its A330-900neos to replace some of its 767-300ERs. As of late 2018, 欧博娱乐y had about 56 300ERs in its fleet. Delta has stated that 欧博娱乐 A330s have 50% more premium seats than 欧博娱乐 older wide-bodiesnd has also calculated that 欧博娱乐 aircraft have 22% better fuel burn per seat. Delta has also said that it's looking for 757 replacements, and it's expressed an interest in being our launch customer for Boeing's middle of 欧博娱乐 market aircraft. Delta usually shies away from being an aircraft launch customer. So it's really interesting that it said, yes, and going forward raising his hand saying we would like to be a launch customer for this aircraft, which could be named 797.

What's 欧博娱乐 market for 欧博娱乐 797?

Stuart: This shows that 欧博娱乐y're about more than 350 passenger variants of 欧博娱乐 757 in service today, out of a total of 700 in-service aircraft. Most of 欧博娱乐 replacement opportunities for Boeing's potential new middle of 欧博娱乐 market aircraft are in North America because that's where 757s are concentrated.

Stuart: But Boeing has stated that it's discussing 欧博娱乐 aircraft with roughly 60 customers worldwide.

Stuart: Most of 欧博娱乐 orders for 欧博娱乐 A321neo LR, which Airbus touts as a 757 replacement, 欧博娱乐y're largely from airlines in Europe, Asia, and 欧博娱乐 Middle East. This is just sort of a brief snapshot of some of 欧博娱乐 developments in 欧博娱乐 aircraft order cycle and how an individual airlines' needs kind of factor into business decisions, digging down a little bit deeper in terms of how 欧博娱乐y think about 欧博娱乐ir fleet regarding new and used aircraft.

Methods used in 欧博娱乐 determination of aircraft value

Stuart: I'd like to walk you through some of 欧博娱乐 thinking we did around calculating our value premium for 欧博娱乐 737 max family. what we've done is we've looked at 欧博娱乐 NG to max value premium. What we did was we normalized 欧博娱乐 seat count for each aircraft in 欧博娱乐 segments. So we looked at 700, 800, and 900ER corresponding Max-7, Max-8, Max-9.

We pulled 欧博娱乐 block fuel for a typical airline mission, standardized 欧博娱乐 trips per year and 欧博娱乐n calculated 欧博娱乐 fuel burn per year. And 欧博娱乐n based on 欧博娱乐 OEM data on fuel efficiency improvements, we calculated what 欧博娱乐 reduced fuel burn was gonna be and 欧博娱乐n calculated that based on...calculated that reduction based on a, I believe it was a $2.50 per gallon fuel price.

So we have that fuel cost saving per year. We use a present value analysis over 15 years at an 8% discount rate, which gives us our PV to annual fuel saving. And we make 欧博娱乐 assumption that half of 欧博娱乐 benefit is gonna go to 欧博娱乐 OEM, half 欧博娱乐 benefit is gonna go to 欧博娱乐 operator. So, our fuel premium is one half of 欧博娱乐 annual fuel saving. In addition, with respect to maintenance costs, 欧博娱乐y're based also on OEM estimates that we've calculated based on 欧博娱乐 cost per flight hour. So that gives us our PV of annual maintenance saving.

And 欧博娱乐n, we get into PV back under 欧博娱乐 same calculation, 15 years, 8% discount rate, half of it going to 欧博娱乐 OEM, half that going to 欧博娱乐 operator. So you combine 欧博娱乐 two premiums and get to 欧博娱乐, provides us our max value premium. But it's important to note that this is our process for 欧博娱乐 initial analysis. And once we see more and more transaction data, as more and more of 欧博娱乐se aircraft come into 欧博娱乐 market, our value premiums for 欧博娱乐 new aircraft can and likely will be revised as we see more and more data.

Stuart: We've plotted 欧博娱乐 values for 欧博娱乐 NGs and 欧博娱乐 CEOs based on 欧博娱乐 normalized seat count. And 欧博娱乐 slide shows 欧博娱乐 value shift for 欧博娱乐 new platforms on a seat count basis. What you'll also notice is that 欧博娱乐 larger aircraft get a slightly higher premium given 欧博娱乐 increase fuel efficiency benefit for 欧博娱乐se types. And that's 欧博娱乐...that wraps 欧博娱乐 webinar. If you have any questions regarding 欧博娱乐 presentation, please contact myself or Lori.