Avolon, the international aircraft leasing company, today issued its 2018 New Year Industry Review written by its Head of Strategy Dick Forsberg. The report is attached above for your reference and some of the key findings include:
2018 Forecast
Looking out over the next 12 months, then, a number of predictions can be made with a reasonably high degree of confidence:
Ø Passenger traffic growth will continue to perform measurably above trend, led by emerging markets
Ø OEM deliveries will get back on track and continue to increase in number and value
Ø Lessors will remain the largest funding channel, although SLBs will remain largely the domain of emerging, or recently emerged, players
Ø Liquidity from private and fixed income investors will continue to increase, with Asian capital playing a growing role
Ø Further modest increases in interest rates will have little immediate impact on aircraft supply and demand
Market Fundamentals
Ø Despite the steady rise in aircraft deliveries, capacity is still increasing more slowly than traffic.
Ø Load factors continue to rise, with average passenger seat utilisation above 81% for the year, peaking at 84.5% during July and August
Ø IATA estimates that US$34.5 billion net profit for the year, close to the levels of 2015 and 2016
Ø Almost half the profit is still earned by North American carriers and tat, apart from Europe, margins in other regions are below – in some cases well below – the average.
Ø Two factors having the greatest influence on driving demand are:
· Rising availability of affordable seats through rapid growth of LSSs, especially in emerging markets
· Populations and demographics with growing economic wealth and the so-called middle classes are increasingly looking for “experiences” as they spend their discretionary income
Industry Cycle
Ø Current economic cycle has now lasted over eight years, two years more than the average of all post war recessions.
Ø Lower growth rates in this economic cycle imply that “economic slack” is being absorbed more slowly relative to previous cyclces, suggesting that this cycles will continue; with remaining lifespan measured in years, not quarters.
Ø The economic growth cycle does not have a bearing on aircraft leasing for as long as lessors can continue their capital commitments
Ø Additionally, long-term nature of lease contracts - which extent beyond the normal business cycle – insulating them from low periods of growth
OEMs
Ø Unofficial data for orders placed during the year indicate an increase of around 10%
Ø Mainstream single aisle types netted 20% more orders, whilst widebodies orders declined 20%
Financing Trends
Ø Liquidity remains plentiful, with demand for delivery financing approaching US$140 billion in 2018
Ø Asset Backed Securities exceeded US$6.6 billion in 2017, financing 331 aircraft and 56 engines in 12 transactions
Ø Expect to see a further increase in the levels of assets under management for third party investors