reviewing airline performance over the past year ... · source: ascend, boeing current market...

Reviewing airline performance over the past year:

Indicators and trends

Prepared for:

Nikolai Lvov

Director – Aviation Banking, Citi

March 2019 | Citi Global Banking, Capital Markets and Advisory | Global Aviation

Table of Contents

1. Airline Profitability & Traffic Trends 1

2. Recent Airline Trends 13

3. Evaluating the Most Popular Forms of Liquidity 25

© 2019 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and

service marks of Citigroup Inc. or its affiliates and are used and registered throughout the

world.

1. Airline Profitability & Traffic Trends

Global Aggregate Commercial Aviation Net Profits(US$ in Billions)

Strong Airline Profitability Set To Continue

(13.0)(11.3)

(7.5)(5.6)

(4.1)

5.0

14.7

(26.1)

(4.6)

17.3

8.3 9.2

10.7

13.7

36.0 34.2

37.7

32.3

35.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019F

Source: Airline Industry Economic Performance Decemberr 2018

1 Airline Profitability & Traffic Trends

Regional Differences in Profitability

Source: IATA, Flightglobal

Note: IATA outlooks; 2018 and 2019 is forecast, figures for 2017 are revised since June 18 IATA outlook. Other includes net total for Africa, LatAm, Middle East.

Net Profit Margins vary by region: North American Airlines are expected to remain the most profitable ones in 2018 while

airlines based in Asia-Pacific are expected to continue recording stable profitability in 2018 and overtake Europe in terms

of Net Profit Margin in 2019.

Net Profit Margins by RegionUS$’Bn North America

• Strongest financial performance for years

• Net profit margin is forecasted at 6% in 2019,

up from 5.7% in 2018 as low hedging allows

lower fuel prices to impact immediately.

Europe

• Net profit margin is forecasted at 3.4% in 2019,

due from 3.7% in 2018 due to higher

regulatory costs and competitive open aviation

area.

• Growth was damaged in 2016 by terrorist

attacks but has shown rebound in 2018

Asia Pacific

• Net profit margin is forecasted to be stable at

3.8% in both 2018 and 2019 under lower fuel

costs and strong regional economic growth.

0

5

10

15

20

25

2011 2012 2013 2014 2015 2016 2017 2018E 2019E

North America

Asia

Europe

Other


Air Travel Continues to be Supported by Global GDP Growth

Air Travel has Proved to be Resilient to External ShocksAir Traffic and Global GDP Growth; 1990 = 100

Growth Driven by Emerging Markets2016–2036 Annual GDP Growth (%)

Global Air Traffic Demand Growth is a Multiplier of

Underlying GDP Growth

Demand for air transport has historically grown at ~1.5x global GDP growth with only three periods at negative growth

since 1970. Growth will continue to be driven by the Emerging Markets.

Source: Ascend, Boeing Current Market Outlook, Airbus Global Market Forecast, World Bank, Capstats.

1.7

2

2.1

2.8

3

3.5

3.5

3.9

Europe

CIS

North America

World

LatAm

Africa

Middle East

Asia

0

100

200

300

400

500

600

700

800

900

1,000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

Global Real GDP Passenger Traffic (RPK)

First

Gulf

War

9/11 and

Second

Gulf War

Global

Economic

Crisis

1990–2016

CAGR: 5.1%

2016–2034E

CAGR: 4.9%

2016–2034E

CAGR: 2.9%0 2,000 4,000 6,000

Africa

CIS

LatAm

Middle East

North America

Europe

Asia-Pacific

APAC Lead in World Traffic will Increase by 2035RPK Traffic by Airline Domicile (Bn)

2016 – 2035 traffic

2015 traffic


Global Demographics to Underpin Future Demand for Air Travel

Travel propensity increases more than proportionally with income, primarily driven by growth in emerging markets.

Propensity to Travel …

Source: Airbus Global Market Forecast, Oxford Economics.

• Europeans and North

Americans are currently the

most willing to fly given

higher GDP

• By 2037, trips per capita for

China and India will almost

quadruple from 0.4 to 1.4

and 0.1 to 0.4 respectively

0.00

0.01

0.10

1.00

10.00

100.00

0 10 20 30 40 50 60 70 80 90 100

India 2017

0.1 Trips per Capita

China 2017


India 2037E


Europe 2017


China 2037E


Europe 2037E


North America 2017


North America 2037E


Real GDP per Capita (2010 US$ in 000’s at Purchasing Power Parity)Trips p

er

Capita

100.00

10.00

1.00

0.10

0.01

0.00

0 10 20 30 40 50 60 70 80 90 100


Africa - Europe

Africa - Asia

Africa - Middle East

Central - South America

Europe - Central America

Europe - Asia

Europe - Middle East

Europe - North America

Europe - South America

Asia - North America

Asia - Southwest Pacific

Middle East - Asia

Middle East - North America

North - South America

Americas - Southwest Pacific

Within Central America

Within EuropeWithin Asia

Other

Domestic AustraliaDomestic Brazil

Domestic China

Domestic India

Domestic Japan

Domestic Russia

Domestic US

0%

2%

4%

6%

8%

10%

12%

14%

0% 2% 4% 6% 8% 10% 12% 14% 16%

International Route as of Dec 2018 Domestic Market as of Dec 2018

Global RPK Performances by Regions and Countries

Source: IATA

While Domestic US had the largest market share by RPK of 14.1%, Asia Pacific led the global RPK growth by international routes at 8.3% as of

December 2018. Domestic China, the 2nd largest aviation market after Domestic US as measured by total RPK , recorded the highest rate of

RPK growth of 14.1% across the globe.

Share of Total Global RPKs (Year ended Dec2018)

% Y

ear-

on-y

ear,

2018 Y

TD

RPK Growth by International Route and Domestic Market


70

75

80

85

90

95

100

105

2011 2012 2013 2014 2015 2016 2017 2018

Ancillary Revenue an Increasingly Integral Part of the Airline Product

Ancillaries are contributing an ever increasing proportion of the overall airline revenues per passenger in recent years, and

we expect ancillaries to continue to drive the growth of revenues per passenger going forward.

Indices (Jan 2011 = 100), Seasonally Adjusted

Airline Revenue per Passenger

Base Fare

Ancillaries

Economy-class Base Fare Yield

Global Average Passenger Base Fare Yield (US$ Terms)

Premium-class Base Fare Yield

Source: IATA using data from PaxIS.

0

10

20

30

40

50

60

0

20

40

60

80

100

120

140

160

180

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Carg

o, A

ncilla

ries U

S$ p

er P

assenger

Base fare

US

$ p

er

Passenger


8.8%

9.4%

9.5%

9.6%

9.7%

9.8%

9.9%

10.6%

10.7%

10.9%

11.2%

11.9%

12.1%

12.2%

12.4%

12.5%

13.1%

13.2%

14.6%

15.2%

15.4%

16.5%

16.9%

17.3%

18.2%

19.5%

20.0%

21.6%

23.2%

25.0%

27.6%

27.7%

28.2%

28.5%

34.2%

39.8%

41.6%

42.4%

43.6%

46.6%

Pobeda

Aeromexico

Azul

Hawaiian

Thomas Cook

WestJet

GOL

Air Canada

Nok Air

Vietjet

Sun Country

flydubai

Qantas Airways

Air Arabia

Aer Lingus

American

Cebu Pacific

Delta

Southwest

United

JetBlue

Norwegian

Alaska Air Group

AirAsia Group

AirAsia X

easyJet

Scoot

Pegasus

Jetstar

HK Express

Jet2.com

Volaris

Ryanair

WOW air

Volotea

Allegiant

Wizz Air

Frontier

VivaAeroBus

Spirit

LCC

Legacy

Sources of Ancillary Revenue

Although LCCs are more reliant on ancillary revenues given their lower base fares, airlines across the board (including

legacy carriers) are now looking to diversify their revenue sources through ancillary businesses.

Ancillaries as a % of Total Revenue 2017Ancillary Revenue Strategies

• Tiered product with first, business, and

economy class

• Increasing unbundling, e.g. thorough

basic faresSeat Allocation

Baggage

Allowance

Frequent Flyer

Programmes

Travel Services,

Commissions

& Advertising

Legacy Carriers Low Cost Carriers

• Traditionally one-class, economy only

operations, however premium options

with larger seats and leg-room have been

introduced

• Baggage allowance included in ticket

price, only excess baggage is subject to

fees. Exceptions are no-frills economy

products

• Charge for every non-hand baggage item

in basic tariffs. Premium tariffs usually

include a checked baggage allowance

• Established frequent flyer programme,

sale of miles to program partners

constitutes a large part of ancillary

revenues

• Subscription based discounts

• Some FFPs, however typically with

limited usability of miles

• Across airline types, revenues are generated by selling advertising (e.g. in-flight

magazines) or commission based sales of travel related products (e.g. insurance, car

rentals, accommodation)

• Some airlines operate their own travel agencies or are part of a travel agency business

Source: The 2018 CarTrawler Yearbook of Ancillary Revenue 2018, IdeaWorksCompany; Company disclosure.


Strong Macro Fundamentals Support Improving Credit ProfilesStrong global airline profitability driven by passenger demand growth and favorable oil price environment has attracted a

number of new investors to the Aviation space. In recent years Airline’s Return on Capital has outstripped WACC and is

projected to continue to do so. Regionally, the improvement in credit profile is more apparent in the US and Europe.

Source: IATA, Economic Performance of the Airline Industry, December 2018.

Return on Capital Invested in Airlines and their Cost of Capital Balance Sheets Improvements for Some RegionsAdjusted Net Debt / EBITDAR

North America

Europe

LATAM

Asia PacificMiddle East

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F

% o

f In

veste

d C

apital

Return on Capital (ROIC) Capital Cost of Capital (WACC)

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

2010 2011 2012 2013 2014 2015 2016 2017

North America Europe Asia-Pacific Middle East LatAm


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Exh

ange R

ate

s, U

S$ p

er

Unit

of

Local C

urr

ency

(Index

to E

qual 1 in

1Q

08)

China

Japan

Eurozone

Indonesia

India

Brazil

Turkey

Argentina

Unit Cost Pressure2018 margin was compressed by a rise in the jet fuel price. However, US oil output is expected to increase in 2019,

lowering the jet fuel price and driving the recovery of industry margin. Rising non-fuel costs, mainly attributable to a higher

interest rate environment and the strengthening of USD, will be a challenge for further margin improvement.Jet Fuel Price Lower as Market Over-Supplied Unit Costs Rising Higher than Unit Revenues

Unit Cost Growth

Unit Revenue Growth

Source: IATA Economics using data from The Airline Analyst, Datastream and Platts.

Problems from a Strong US$ Likely to ContinueInterest Rates will be Pushed Higher

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

10 Y

ear

Gove

rnm

ent

Bond Y

ield

s,

%

US

Eurozone

China

9.2 10.7

13.8

36.0 34.2

37.7

32.3 35.5

0

20

40

60

80

100

120

140

5

6

7

8

9

10

11

12

2011 2012 2013 2014 2015 2016 2017 2018 2019

Jet F

uel P

rice (U

S$ p

er B

arre

l)

US

Oil

Supply

(M

illio

n B

arr

els

a D

ay)

US Oil Supply (LHS) Jet Fuel Price (RHS)Net Profit (US$ in Billions)

0

20

40

60

80

100

120

140

5

6

7

8

9

10

11

12

2011 2012 2013 2014 2015 2016 2017 2018 2019

Jet F

uel P

rice (U

S$ p

er B

arre

l)

US

Oil

Supply

(M

illio

n B

arr

els

a D

ay)

US Oil Supply (LHS) Jet Fuel Price (RHS)Net Profit (US$ in Billions)

(20)%

(15)%

(10)%

(5)%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 2016 2017 2018

YoY

% C

hange


Oil Price Outlook

Source: Bloomberg, Citi Research estimates as of February 2019

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 2018 2019 2020 17' 18' 19' 20'

OECD Demand 47.83 47.16 48.09 48.15 47.95 47.24 48.14 48.18 47.81 47.88 47.71 0.44 0.39 0.07 -0.17

Non-OECD Demand 51.25 51.54 52.13 52.19 52.46 52.74 53.27 53.29 51.78 52.94 54.72 1.28 1.68 1.16 1.78

Total Demand 99.09 98.70 100.22 100.34 100.58 99.98 101.40 101.47 99.59 100.86 102.43 1.72 2.07 1.27 1.57

Supply 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 2018 2019 2020 17' 18' 19' 20'

US 10.23 10.54 11.24 11.74 12.10 12.31 12.42 13.01 10.94 12.46 14.19 0.50 1.59 1.52 1.73

Canada 4.23 4.09 4.07 4.51 4.30 4.60 4.61 4.67 4.23 4.55 4.80 0.30 0.26 0.32 0.25

Mexico 1.88 1.85 1.81 1.72 1.71 1.70 1.69 1.69 1.81 1.70 1.65 -0.21 -0.14 -0.12 -0.05

Brazil 2.65 2.71 2.88 2.92 2.90 3.05 3.20 3.35 2.79 3.13 3.56 0.11 0.16 0.33 0.44

Russia 10.96 11.00 11.26 11.42 11.33 11.20 11.35 11.50 11.16 11.34 11.53 0.02 0.18 0.18 0.19

Non-OPEC Crude 47.18 47.28 48.08 49.44 49.51 49.81 50.21 51.31 48.00 50.21 52.86 0.38 1.93 2.21 2.65

EX-US Non-OPEC NGLs 3.01 2.85 2.94 2.93 3.01 2.88 2.95 2.93 2.93 2.94 2.96 0.02 0.01 0.01 0.02

US NGLs 4.01 4.30 4.60 4.61 4.52 4.71 4.85 4.91 4.38 4.75 5.15 0.27 0.60 0.37 0.40

Non-OPEC Crude + NGLS 54.20 54.43 55.62 56.98 57.04 57.40 58.01 59.16 55.31 57.90 60.98 0.67 2.54 2.59 3.07

Iraq 4.44 4.44 4.71 4.67 4.72 4.65 4.70 4.70 4.56 4.69 4.81 0.12 0.02 0.13 0.12

Iran 3.68 4.10 3.53 2.83 2.59 2.60 2.50 2.50 3.53 2.55 2.80 0.22 -0.25 -0.98 0.25

Kuwait 2.70 2.71 2.79 2.78 2.76 2.75 2.90 3.10 2.75 2.88 3.08 -0.18 0.04 0.13 0.20

Libya 1.01 0.89 0.90 1.08 0.81 0.95 0.95 0.95 0.97 0.92 0.90 0.44 0.15 -0.06 -0.02

Nigeria 1.66 1.51 1.62 1.64 1.65 1.65 1.65 1.65 1.61 1.65 1.70 0.06 0.08 0.04 0.05

Saudi 9.94 10.13 10.40 10.79 10.12 9.80 10.10 10.10 10.32 10.03 10.00 -0.48 0.36 -0.29 -0.03

U.A.E 2.84 2.88 3.00 3.36 3.14 3.05 3.15 3.25 3.02 3.15 3.20 -0.12 0.09 0.13 0.05

Venezuela 1.54 1.39 1.30 1.26 0.94 0.70 0.58 0.46 1.37 0.67 0.47 -0.27 -0.59 -0.70 -0.20

OPEC Crude 32.14 32.33 32.57 32.69 31.11 30.52 30.88 31.05 32.43 30.89 31.26 -0.39 -0.23 -1.54 0.37

OPEC Condensate & NGLs 6.69 6.68 6.70 6.72 6.72 6.72 6.72 6.72 6.70 6.72 6.89 0.13 0.04 0.02 0.17

Unconventional Inc Biofuels 2.89 3.62 3.90 3.27 3.06 3.72 3.97 3.49 3.42 3.56 3.71 0.05 0.27 0.14 0.15

Processing Gains 2.03 2.04 2.08 2.08 2.03 2.04 2.08 2.08 2.06 2.06 2.06 0.04 0.02 0.00 0.00

Total Supply 97.95 99.11 100.87 101.74 99.96 100.40 101.67 102.49 99.92 101.13 104.90 0.49 2.64 1.22 3.76

Stockbuilds for SPR, infrastructure -0.71 -0.65 -0.44 -1.13 -0.99 -0.71 -0.42 -0.42 -0.73 -0.64 -0.77 - - - -

Error Term/Seasonality Adjustment 2.22 -0.37 -0.54 -0.14 0.96 -0.04 -0.03 -0.12 0.29 0.19 0.19 - - - -

Expected Total Stock Change 0.37 -0.61 -0.33 0.32 -0.65 -0.33 -0.18 0.48 -0.06 -0.17 1.89 - - - -

Call on US Crude 9.87 11.15 11.57 11.43 12.74 12.64 12.60 12.54 11.00 12.63 12.30 - - - -

Call on OPEC crude 31.77 32.94 32.90 32.38 31.75 30.85 31.06 30.57 32.50 31.06 29.37 - - - -

Crude Supply 79.31 79.61 80.65 82.14 80.62 80.33 81.09 82.36 80.43 81.10 84.12 -0.02 1.70 0.67 3.02

Crude Runs 81.43 81.77 84.07 83.56 82.73 83.07 85.07 84.56 82.71 83.86 - 1.42 0.95 1.15 -

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 2018 2019 2020 17' 18' 19' 20'

OECD Demand 47.83 47.16 48.09 48.15 47.95 47.24 48.14 48.18 47.81 47.88 47.71 0.44 0.39 0.07 -0.17

Non-OECD Demand 51.25 51.54 52.13 52.19 52.46 52.74 53.27 53.29 51.78 52.94 54.72 1.28 1.68 1.16 1.78

Total Demand 99.09 98.70 100.22 100.34 100.58 99.98 101.40 101.47 99.59 100.86 102.43 1.72 2.07 1.27 1.57

Supply 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 2018 2019 2020 17' 18' 19' 20'

US 10.23 10.54 11.24 11.74 12.10 12.31 12.42 13.01 10.94 12.46 14.19 0.50 1.59 1.52 1.73

Canada 4.23 4.09 4.07 4.51 4.30 4.60 4.61 4.67 4.23 4.55 4.80 0.30 0.26 0.32 0.25

Mexico 1.88 1.85 1.81 1.72 1.71 1.70 1.69 1.69 1.81 1.70 1.65 -0.21 -0.14 -0.12 -0.05

Brazil 2.65 2.71 2.88 2.92 2.90 3.05 3.20 3.35 2.79 3.13 3.56 0.11 0.16 0.33 0.44

Russia 10.96 11.00 11.26 11.42 11.33 11.20 11.35 11.50 11.16 11.34 11.53 0.02 0.18 0.18 0.19

Non-OPEC Crude 47.18 47.28 48.08 49.44 49.51 49.81 50.21 51.31 48.00 50.21 52.86 0.38 1.93 2.21 2.65

EX-US Non-OPEC NGLs 3.01 2.85 2.94 2.93 3.01 2.88 2.95 2.93 2.93 2.94 2.96 0.02 0.01 0.01 0.02

US NGLs 4.01 4.30 4.60 4.61 4.52 4.71 4.85 4.91 4.38 4.75 5.15 0.27 0.60 0.37 0.40

Non-OPEC Crude + NGLS 54.20 54.43 55.62 56.98 57.04 57.40 58.01 59.16 55.31 57.90 60.98 0.67 2.54 2.59 3.07

Iraq 4.44 4.44 4.71 4.67 4.72 4.65 4.70 4.70 4.56 4.69 4.81 0.12 0.02 0.13 0.12

Iran 3.68 4.10 3.53 2.83 2.59 2.60 2.50 2.50 3.53 2.55 2.80 0.22 -0.25 -0.98 0.25

Kuwait 2.70 2.71 2.79 2.78 2.76 2.75 2.90 3.10 2.75 2.88 3.08 -0.18 0.04 0.13 0.20

Libya 1.01 0.89 0.90 1.08 0.81 0.95 0.95 0.95 0.97 0.92 0.90 0.44 0.15 -0.06 -0.02

Nigeria 1.66 1.51 1.62 1.64 1.65 1.65 1.65 1.65 1.61 1.65 1.70 0.06 0.08 0.04 0.05

Saudi 9.94 10.13 10.40 10.79 10.12 9.80 10.10 10.10 10.32 10.03 10.00 -0.48 0.36 -0.29 -0.03

U.A.E 2.84 2.88 3.00 3.36 3.14 3.05 3.15 3.25 3.02 3.15 3.20 -0.12 0.09 0.13 0.05

Venezuela 1.54 1.39 1.30 1.26 0.94 0.70 0.58 0.46 1.37 0.67 0.47 -0.27 -0.59 -0.70 -0.20

OPEC Crude 32.14 32.33 32.57 32.69 31.11 30.52 30.88 31.05 32.43 30.89 31.26 -0.39 -0.23 -1.54 0.37

OPEC Condensate & NGLs 6.69 6.68 6.70 6.72 6.72 6.72 6.72 6.72 6.70 6.72 6.89 0.13 0.04 0.02 0.17

Unconventional Inc Biofuels 2.89 3.62 3.90 3.27 3.06 3.72 3.97 3.49 3.42 3.56 3.71 0.05 0.27 0.14 0.15

Processing Gains 2.03 2.04 2.08 2.08 2.03 2.04 2.08 2.08 2.06 2.06 2.06 0.04 0.02 0.00 0.00

Total Supply 97.95 99.11 100.87 101.74 99.96 100.40 101.67 102.49 99.92 101.13 104.90 0.49 2.64 1.22 3.76

Stockbuilds for SPR, infrastructure -0.71 -0.65 -0.44 -1.13 -0.99 -0.71 -0.42 -0.42 -0.73 -0.64 -0.77 - - - -

Error Term/Seasonality Adjustment 2.22 -0.37 -0.54 -0.14 0.96 -0.04 -0.03 -0.12 0.29 0.19 0.19 - - - -

Expected Total Stock Change 0.37 -0.61 -0.33 0.32 -0.65 -0.33 -0.18 0.48 -0.06 -0.17 1.89 - - - -

Call on US Crude 9.87 11.15 11.57 11.43 12.74 12.64 12.60 12.54 11.00 12.63 12.30 - - - -

Call on OPEC crude 31.77 32.94 32.90 32.38 31.75 30.85 31.06 30.57 32.50 31.06 29.37 - - - -

Crude Supply 79.31 79.61 80.65 82.14 80.62 80.33 81.09 82.36 80.43 81.10 84.12 -0.02 1.70 0.67 3.02

Crude Runs 81.43 81.77 84.07 83.56 82.73 83.07 85.07 84.56 82.71 83.86 - 1.42 0.95 1.15 -

($/bbl) 1Q18 2Q18 3Q18 4Q18 1Q19E 2Q19E 3Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 2018E 2019E 2020E 2021E 2022E 2023E

Brent 67 75 76 68 64 60 63 67 62 57 53 50 72 64 56 50 60 65

WTI 63 68 69 58 55 48 51 58 57 52 48 45 64 53 51 45 55 60

Brent-WTI 4 7 7 10 9 12 12 9 5 5 5 5 7 11 5 5 5 5

Brent Scenarios ($/bbl) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 2018E 2019E 2020E 2021E 2022E 2023E

Bull (30%) 67 75 76 68 67 71 76 80 75 70 65 60 72 74 68 60 65 70

Base (55%) 67 75 76 68 64 60 63 67 62 57 53 50 72 64 56 50 60 65

Bear (15%) 67 75 76 68 61 53 55 58 54 50 47 44 72 57 49 45 55 60

Futures 67 75 76 68 63 66 66 65 65 65 64 64 72 65 64 61 62 63


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

2017/1 2017/7 2017/12 2018/6 2018/12 2019/6 2019/12 2020/6 2020/12

Global Interest Rates Outlook10-year Benchmark Yields

Global Economic Outlook and Forecast

Citi Forecast (1) Market Forecast (2)

Current 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20

US

Policy Rate 2.50 2.50 2.75 3.00 3.00 0.50 3.00 3.00 2.50 2.60 2.70 2.80 0.30 2.80 2.80

CPI YoY 1.60 1.30 1.20 1.30 1.50 0.10 1.90 2.00 1.80 1.90 2.00 2.20 0.60 2.30 2.20

Core PCE YoY 1.90 -- -- -- -- -- -- -- 1.90 1.90 2.00 2.00 0.10 2.10 2.10

3m LIBOR 2.61 3.00 3.20 3.20 3.20 0.59 3.20 3.20 2.72 2.81 2.89 2.95 0.34 2.99 2.99

2Y UST 2.46 2.75 2.75 2.75 2.75 0.29 2.75 2.75 2.63 2.74 2.81 2.86 0.40 2.88 2.91

5Y UST 2.43 2.70 2.70 2.70 2.70 0.27 2.70 2.70 2.65 2.77 2.83 2.87 0.44 2.92 2.96

10Y UST 2.64 2.85 2.85 2.85 2.85 0.21 2.85 2.85 2.82 2.91 2.99 3.03 0.39 3.08 3.09

30Y UST 3.02 3.05 3.05 3.05 3.05 0.03 3.05 3.05 3.10 3.17 3.25 3.29 0.27 3.36 3.39

Euro

Policy Rate 0.00 0.00 0.00 0.00 0.25 0.25 0.25 0.50 0.00 0.00 0.00 0.10 0.10 0.10 0.20

10Y Bund 0.07 0.10 0.20 0.35 0.55 0.48 0.70 0.85 0.34 0.48 0.59 0.71 0.64 0.77 0.84

Q219

2.91%

1.51%

0.48%

2.64%

1.19%

0.07%

Q419

3.03%

1.70%

0.71%

Current Q220

3.09%

1.89%

0.84%

Q420

3.08%

1.98%

1.03%

Interest Rate Hike Probability

Meeting Date

Policy Rate (Current: 2.25-2.50)

≤2.25 2.25-2.50 2.50-2.75 ≥2.75

3/20/2019 2.3% 97.7% 0.0% 0.0%

5/1/2019 2.3% 97.7% 0.0% 0.0%

6/19/2019 6.9% 93.1% 0.0% 0.0%

7/31/2019 6.9% 92.4% 0.7% 0.0%

9/18/2019 11.0% 88.3% 0.6% 0.0%

10/30/2019 12.4% 87.0% 0.6% 0.0%

12/11/2019 20.5% 78.9% 0.6% 0.0%

T

G

B

Source: Citi, Bloomberg, as of Mar 12, 2019; Note: 1. Citi Forecast as of Feb 20, 2019 2. Recent Market Consensus Forecast as of Mar 12, 2019

-10

10

30

50

70

90

110

130

150

2013/1/1 2014/1/1 2015/1/1 2016/1/1 2017/1/1 2018/1/1 2019/1/1

2s/5s Yield Sprd 7s/10s Yield Sprd 10s/30s Yield Sprd

The Movement of Treasury Yield Spreads


Citi FX Forecasts

The US Dollar is expected to depreciate against most major currencies in the next two years.

Currency Spot 19-Mar 19-Jun 19-Sep 19-Dec 20-Mar 20-Jun 20-Sep 20-Dec

G10

Euro EURUSD 1.13 1.14 1.16 1.17 1.19 1.22 1.24 1.26 1.29

Japanese Yen USDJPY 111 109 106 104 102 100 98 96 94

British Pound GBPUSD 1.29 1.3 1.32 1.33 1.36 1.38 1.41 1.44 1.46

Swiss Franc USDCHF 1.01 1 0.99 0.99 0.98 0.96 0.95 0.94 0.93

Australian Dollar AUDUSD 0.71 0.71 0.71 0.72 0.72 0.73 0.74 0.75 0.76

New Zealand Dollar NZDUSD 0.68 0.68 0.68 0.68 0.68 0.68 0.67 0.67 0.67

Canadian Dollar USDCAD 1.32 1.31 1.3 1.29 1.28 1.26 1.24 1.23 1.21

Swedish Krona USDSEK 9.21 9.1 8.96 8.83 8.6 8.3 8 7.71 7.44

Norwegian Krone USDNOK 8.61 8.47 8.3 8.13 7.92 7.69 7.46 7.24 7.02

EM Asia

Chinese Renminbi USDCNY 6.76 6.8 6.82 6.84 6.82 6.77 6.72 6.67 6.62

Hong Kong Dollar USDHKD 7.85 7.84 7.84 7.85 7.85 7.84 7.83 7.83 7.82

Indonesian Rupiah USDIDR 14059 13822 13933 14046 14184 14343 14502 14662 14823

Indian Rupee USDINR 70.6 71.7 70.4 69.1 68.9 69.6 70.3 71 71.7

Korean Won USDKRW 1122 1120 1122 1124 1122 1117 1112 1107 1102

Malaysian Ringgit USDMYR 4.07 4.08 4.07 4.06 4.03 4 3.97 3.94 3.91

Philippine Peso USDPHP 52.1 52.3 52.5 52.7 52.8 52.9 52.9 52.9 53

Singapore Dollar USDSGD 1.36 1.35 1.34 1.33 1.33 1.32 1.31 1.31 1.3

Thai Baht USDTHB 31.3 31.9 32.2 32.6 32.7 32.6 32.4 32.2 32.1

Taiwan Dollar USDTWD 30.8 30.8 30.8 30.9 30.8 30.7 30.6 30.5 30.4

EM Europe

Czech Koruna USDCZK 22.8 22.5 22.1 21.7 21.2 20.7 20.1 19.6 19.1

Hungarian Forint USDHUF 280 281 276 271 266 260 255 250 245

Polish Zloty USDPLN 3.82 3.75 3.69 3.63 3.56 3.48 3.41 3.33 3.26

Israeli Shekel USDILS 3.64 3.63 3.62 3.61 3.6 3.59 3.59 3.59 3.58

Russian Ruble USDRUB 65.6 66.7 66 65.3 65.5 66.5 67.5 68.5 69.5

Turkish Lira USDTRY 5.25 5.46 5.88 6.3 6.53 6.59 6.65 6.71 6.77

South African Rand USDZAR 13.77 14.03 13.92 13.8 13.76 13.78 13.8 13.82 13.84

EM LatAm

Brazilian Real USDBRL 3.71 3.7 3.68 3.66 3.64 3.63 3.62 3.61 3.6

Chilean Peso USDCLP 661 659 653 648 647 650 653 656 659

Mexican Peso USDMXN 19.2 19.8 20 20.2 20.4 20.5 20.7 20.8 20.9

Colombian Peso USDCOP 3128 3124 3094 3064 3040 3020 3000 2980 2960

Source: Foreign Exchange Forecasts When Will the USD Turn? Citi Research, February 2019


2. Recent Airline Trends

Shift in Leverage: Airlines, Then vs. Now

B / B2 / B- B / B2 / B- B / B2 / BB+ / B1 / --BBB- / Baa3 / --

Source: Company Financials, FactSet; Note: Adj. Debt calculated as LT+ST debt (incl. capital leases) + 8 x Rent Expense.

(1) Ratio calculated as: (Total Debt – Lease Debt + FY17 Rent Expense x 8) / (EBITDA + FY17 Rent Expense).

B- / B2 / B- B- / -- / B-A- / Baa1 / A -- / -- / ---- / -- / -- -- / -- / --

Adjusted Debt / EBITDAR

FY 2007

BB / B1 / --

The aviation industry has seen a noticeable decline in Adjusted Leverage from an average of 5.1x in 2007 to 3.0x in 2018,

leading to improvements in external ratings as well as encouraging more airlines to seek inaugural ratings.

Adjusted Debt / EBITDAR

FY 2018

BBB- / Baa3

/ BBB-

BBB- / Baa3

/ --

BB / Ba2 / BB BB- / Ba3

/ BB-

BBB+ / A3

/ BBB+

BBB+ / Baa1 / --BBB+ / -- / BBB+ -- / -- / -- B+ / B1 / --

2.2x 2.3x3.4x 4.0x 4.3x 4.8x 5.1x 5.3x

6.2x 6.6x 7.0x

10.0xAverage: 5.1x

1.0x

2.0x2.5x 2.6x 2.6x 2.8x 3.0x

4.9x 5.0x

2.9x (1)Average: 3.0x

13 Recent Airline Trends

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjkpOCeyO7YAhUS2qQKHWUIAVoQjRwIBw&url=http://spotters.wikia.com/wiki/File:SAS-Scandinavian-Airlines-Logo.svg.png&psig=AOvVaw3D0yILLl2tsaeVJVbFSykQ&ust=1516813314192882

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjkpOCeyO7YAhUS2qQKHWUIAVoQjRwIBw&url=http://spotters.wikia.com/wiki/File:SAS-Scandinavian-Airlines-Logo.svg.png&psig=AOvVaw3D0yILLl2tsaeVJVbFSykQ&ust=1516813314192882

Improved Creditworthiness of Global Rated AirlinesMoody’s

Issuer Name Rating Outlook Rating Outlook Rating Outlook

-- -- -- -- A Stable

A3 Stable BBB+ Stable A- Stable

-- -- BBB+ Stable BBB+ Stable

Baa1 Stable BBB+ Stable -- --

Baa2 Stable -- -- -- --

Baa2 Stable -- -- -- --

Baa3 Stable -- -- BBB Stable

Baa3 Negative BBB- Negative -- --

Baa3 Stable BBB- Stable BBB- Stable

Baa3 Stable BBB- Positive -- --

Baa3 Stable BBB- Stable BBB- Stable

-- -- BB+ Stable BBB- Stable

-- -- BB- Stable BB+ Negative

Ba1 Stable BB Stable BB Positive

Ba2 Stable BB Stable BB Stable

Ba2 Stable BB Positive BB- Positive

Ba3 Stable BB- Stable BB- Stable

Ba3 Under Review BB- Stable -- --

Ba3 Stable BB- Stable -- --

Ba3 Stable B+ Stable -- --

-- -- -- -- BB- Stable

Ba3 Stable BB- Stable BB- Stable

Ba3 Stable BB- Stable B+ Positive

B1 Stable B+ Stable -- --

B2 Stable B+ Stable -- --

-- -- B Stable B Stable

B2 Stable B- Stable B Stable

Source: Bloomberg, Factset as of March 2019.


Ratings ∆ Market Cap (USD MM)

2013 2014 2015 2016 2017 2018 over period Dec-2013 March-2019 ∆

S&P B- B B+ BB- BB- BB- +3

13,302 14,922 12%Moody's B1 B1 Ba3 Ba3 Ba3 Ba3 +1

Fitch B+ B+ BB- BB- BB- BB- +1

S&P BB- BB BB+ BB+ BBB- BBB- +3

23,389 33,757 44%Moody's B2 B1 Ba3 Baa3 Baa3 Baa3 +5

Fitch -- -- -- -- BBB- BBB- --

S&P B B BB- BB- BB BB +3


Fitch B+ B BB- BB BB BB +2

S&P BBB- BBB- BBB- BBB- BBB- BBB- --9,840 12,132 23%

Moody's Ba1 Ba1 Ba1 Ba1 Baa3 Baa3 +1

S&P BB BB BB BB BB+ BBB- +2

13,554 14,953 10%Moody's B1 Ba3 Ba2 Baa3 Baa3 Baa3 +4

Fitch -- -- BB+ BB+ BBB- -- N/A

S&P BBB- BBB BBB BBB BBB+ BBB+ +2

13,197 29,751 125%Moody's Baa3 Baa2 Baa1 Baa1 A3 A3 +3

Fitch BBB BBB BBB+ BBB+ BBB+ BBB+ +1

S&P BB+ BB+ BBB- BBB- BBB- BBB- +12,732 6,196 127%

Moody's Baa3 Ba2 Ba1 Baa3 Baa2 Baa2 +1

S&P B- B B+ BB- BB- BB +4

1,984 6,828 244%Moody's B3 B2 B1 B1 Ba3 Ba2 +4

Fitch B B B+ B+ BB- BB- +2

S&P -- -- BB BB- BB- B+ -24,134 3,657 -12%

Moody's -- -- Ba1 Ba3 Ba3 Ba3 -2

S&P BB BB BB BB- BB- BB- -1

8,406 6,775 -19%Moody's -- -- Ba2 B1 Ba3 Ba3 -1

Fitch BB BB BB- B+ B+ B+ -2

Fitch -- -- A A A A -- -- -- N/A

Fitch BB- BB- B+ B+ B+ BB- -- 2,693 1,625 -40%

S&P -- BBB+ BBB+ BBB+ BBB+ BBB+ --11,037 16,412 49%

Fitch -- BBB+ BBB+ BBB+ BBB+ BBB+ --

S&P B B BB- BB- BB BB +3


Fitch B B+ BB- BB- BB BB +3

S&P -- -- -- BBB+ BBB+ BBB+ --8,211 6,431 -22%

Moody's -- -- -- Baa1 Baa1 Baa1 --

S&P BB+ BBB- BBB- BB+ BB+ BB+ --5,044 7,325 45%

Fitch -- BBB- BBB- BBB- BBB- BBB- --

Average +1.8 +50%

Airline Rating Improvement Since 2013A significant number of top performing airlines in the world have obtained public international credit ratings. On average, these airlines have

benefited from a ~2 notch rating uplift and 50% increase in market capitalization since 2013, reflecting an improved operational & financial

performance during that time.

Source: Bloomberg, FactSet. Market Caps from Bloomberg (31 December 2013) and FactSet (6 March 2019), and translated into USD based on the exchange rate at these respective dates.

(*) Market Cap data represents the IAG group level data. Credit ratings from 2013-2017 are for British Airways specifically and 2018 ratings are for IAG (the group is not currently rated by Fitch).

Airline Ratings At Year-End

(*)


RankingAirline / Group Country

Passenger traffic (RPK)Seat capacity

(ASK)Load factor Passenger number

2017 2016 Million Change % Million Change % Percent Million Change %

11 (11) China Eastern Airlines China 183,152 9.3 225,967 9.6 81.1 110.8 8.9

19 (23) Hainan Airlines China 121,223 23.3 140,843 24.4 86.1 71.7 18.3

43 (43) Sichuan Airlines China 42,285 10.3 50,441 11.7 83.8 24.5 6.5

46 (41) China Airlines China 40,171 3.8 50,189 1.6 80.0 15.1 2.9

60 (67) Shandong Airlines China 32,984 24.8 39,665 16.7 83.2 23.2 24.6

65 (68) Spring Airlines China 30,248 22.2 33,400 23.7 90.6 17.2 20.9

69 (73) Juneyao Airlines China 27,411 24.1 31,529 22.3 86.9 16.7 25.2

71 (76) Capital Airlines China 25,662 23.3 28,687 24.9 89.5 15.4 17.6

Chinese Airlines Rising in World Rankings

RankingAirline / Group Country

Passenger traffic (RPK)Seat capacity

(ASK)Load factor Passenger number

2017 2016 Million Change % Million Change % Percent Million Change %

1 (1) American Airlines US 364,191 1.3 444,877 1.1 81.9 199.6 0.5

2 (2) Delta Air Lines US 350,299 2.2 409,209 1.0 85.6 186.4 1.4

3 (3) United Continental US 347,963 2.8 422,179 3.5 82.4 148.1 3.4

4 (4) Emirates Airline UAE 292,221 5.6 377,060 2.4 77.5 58.5 4.3

5 (7) Lufthansa Germany 261,156 15.2 322,821 12.7 80.9 130.0 18.6

6 (5) IAG UK 252,819 3.8 306,185 2.6 82.6 104.8 4.1

7 (6) Air France-KLM France 248,476 4.3 286,190 2.6 86.8 83.9 4.7

8 (8) China Southern Airlines China 230,697 11.9 280,646 9.6 82.2 126.3 10.2

9 (9) Southwest Airlines US 207,802 3.4 247,731 3.6 83.9 157.8 3.9

10 (10) Air China Group China 201,090 6.9 247,872 6.4 81.1 101.6 5.2

Top 10 passenger airlines ranked by RPK

Other Chinese Airlines in the Top 100 ranked by RPK

There are now 10 Chinese airlines in the World’s top 100. Their average traffic growth from 2016 to 2017 is approximately

16%.

Source: FlightGlobal, World Airline Rankings 2018


75%63% 64%

25%37% 36%

2008 2013 2018

72% 70% 68%

28% 30% 32%

2008 2013 2018

Low Cost Carriers Continue to Shift the Airline Landscape

Source: CAPA.

Note: Measured by seats.

North AmericaSeats in mm, % change

EuropeSeats in mm, % change

Asia – PacificSeats in mm, % change

Latin AmericaSeats in mm, % change

Full Service Carrier

Low Cost Carrier

+2.2% +7.6%

+10.1%+12.2%

+2.3%

(1.2%) +5%

+1.8%

NE Asia

97% / 3%

SE Asia

63% / 37%

NE Asia

86% / 14%

SE Asia

45% / 55%

935 1,347 1,823

846 900 1,095970 908 975

222 308 319

(2.2%) (2.3%) (760) (180)

(10.1%) (5%)

(12.2%) +1.2%

Low Cost Carriers Continue to Shift the Airline LandscapeDeveloping regions across the globe, particularly in the Asia-Pacific region, have seen a large shift in the market share by

low cost carriers. South East Asia has the far more significant LCC penetration than North East Asia which increased from

37% in 2008 to 55% in 2018.

68%60% 59%

32%40% 41%

2008 2013 2018

86%76% 71%

14%24% 29%

2008 2013 2018


EuropeAsia Pacific

FSCs and LCCs are Moving towards the Center

Product offerings and price point of FSCs and LCCs are increasingly converging towards center as competition intensifies.

Low Product Offering / Service Level

A Move to the Centre

Price P

oin

t

High

Hig

hLow

Source: Company Press Release, Flightglobal Ascend articles, Multi-brand airline groups: A winning approach in the hyper-competition era?, Arthur D Little, 2018

Low Product Offering / Service Level

A Move to the CentreP

rice P

oin

t

High

Hig

hLow


Emergence of a Low Cost Long Haul Business Model

Widebody Aircraft Numbers in Service With LCCs, January 2018

… With South East Asia leading in terms of capacity

Source: CAPA, FlightGlobal, Boeing

Airline designations as “Mainline”, “Leisure” and “Low-cost” as per FlightGlobal / CAPA / Boeing definitions

Today, we see 23 Low Cost airlines operating 169 Widebody aircraft on Long Haul routes. The majority of these airlines are complemented by

a short haul feed network using Narrowbody aircraft. Pure Low Cost Long Haul airlines such as Air Asia X and Level are fed via sister airlines

(e.g. Air Asia, Vueling)

…It still represents a small portion of mainline capacity

Transatlantic Capacity share from September 2003 to 2017ASK based on twin-aisle, long-haul (over 3,000 nm) operation only

Whilst Low Cost Long Haul capacity is surging…

Widebody Aircraft Numbers in Service With LCCs, January 2018

Currently, there are 23 airlines with a LCLH offering..

0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 2013 2014 2015 2016

0%

25%

50%

75%

100%

2004 2006 2008 2010 2012 2014 2016 2018

Mainline Leisure Low-cost Other

0%

20%

40%

60%

80%

100%

0

5

10

15

20

25

Wid

eb

od

ies a

s %

of T

ota

l Fle

et

Wid

eb

od

y A

ircra

ft

Widebody Aircraft Widebodies as % of Total Fleet

62

33

28

1411

8 73

1

0

10

20

30

40

50

60

70

South EastAsia

WesternEurope

NorthAmerica

North EastAsia

SouthwestPacific

Eastern/CentralEurope

UpperSouth

America

NorthAfrica

MiddleEast


Increasing Demand Drove Asian LCCs Order Backlog

Source: Airbus Reinforces Its Market Lead in Asia-Pacific Region, February 2018; Boeing, CAPA

Note: Ratio of Order to In-Service Fleet = Fleet on order/ (Owned Fleet + Operating Lease)

To cater for the rising passenger demand, airlines in the Asia Pacific have kept strong order books, particularly

the LCCs.

Full Service CarrierNo. of Aircraft

0%

50%

100%

150%

200%

250%

300%

350%

0

200

400

600

800

1000

1200

CHINASOUTHERNAIR LINES

CHINA EAS TER NAIR LINES

AIR C HINA AIR ASIABE RHAD

QANTASAIR WAYS

ALL NIPP ONAIR WAYS CO

LTD (ANAHOL DINGS)

SINGAPOREAIR LINES

JAP AN AIRLINESCOMP ANYLIMITED

PE RUSAHAANPE NE RB ANGAN

GAR UDA P T

CATHAY P AC IF ICAIR WAYS

KOR EANAIR LINES C O

LTD

JET AIR WAYS AIR INDIA VIET NAMAIR LINES

ASIANAAIR LINES

AIR NEWZE ALAND

EVA AIR WAYS MALAY SIAAIR LINES B HD

THAI AIRWAY S CHINA AIRLINES Sh enzh enAirl in es

Owned Fleet Operating Lease

Total Firm Order Backlog Ratio of Order to In Service Fleet

0%

50%

100%

150%

200%

250%

300%

350%

0

200

400

600

800

1000

1200

AIRASIA BERHAD INDIGO VIETJET SPRING AIRLINES CEBU AIR INC JEJU Lion Air

Owned Fleet Operating Lease

Total Firm Order Backlog Ratio of Order to In Service Fleet

Low Cost Carriers No. of Aircraft


45

11

89

4

6

44

1

35

10

5, 2

3

63

2

6

78

12

7

35

2

8

81

35

7

6

8

130

26

6

68

4

35

2 38

29

21

607

Asia Pacific ex Greater China: Convergence between FSCs and LCCs

FSC

LCC

Source: Ascend, Company reports & filings

As the Asian aviation competition is intensified by the rapid growth of Asian LCCs, many Asian flag carriers have set up their LCCs to retain

customers without diluting their premium brand image. Meanwhile, LCC groups have expanded beyond the traditional business model to

include long-haul routes or premium services in order to enhance their competitiveness against FSCs.

Zip Air

Bubble size: FY2017 RPK (mm)

Minority owned / JV airlines

Majority owned airlines

Majority owned airlines (To be established)

FSC Group LCC Group

5


147

2

33

50

112

15

150

23

9

176

4 5

42

44

40

2

2

46

48

Mainland Chinese airlines operate various regional airlines for strong domestic demand and enjoy favorable resource allocation given their

indirect government ownership but seldom employ LCC model. Hong Kong and Taiwanese airlines, on the contrary, have stronger international

travel demands and thus operate separate regional airlines targeted at Greater China destinations.

China market is dominated by the Big Three which set up regional

hubs to cater for strong domestic traffic demand:

– Bohai-Rim (Headquartered in Beijing);

– Chengdu-Chongqing Economic Rim

(Regional Base in Chengdu)

– Yangtze River Delta (Headquartered in Shanghai)

– Northwest (Regional Base in Xi’an)

– South (Regional Base in Kunming)

– Pearl River Delta (Headquartered in Guangzhou)

– Northeast (Regional Base in Shenyang)

– West (Regional Base in Urumqi)

They are all indirectly owned by the State-owned Assets

Supervision and Administration Commission (SASAC) of the

State Council, resulting in favorable resources allocation (e.g

routes, slots and flight schedules) and financial support (e.g

government grants and subsidies)

Under such government control, they also control or affiliate most

regional, state-owned airlines (e.g Sichuan Airlines, Shandong

Airlines, Xiamen and Henan Airlines)

Hong Kong and Taiwan aviation market have stronger demand for

international routes so airlines tend to operate separate domestic

airlines for operation and revenue control

– March 2019: Cathay Pacific is in talks on a potential

acquisition of low-cost rival Hong Kong Express

Greater China: LCC Model Not Yet Fully Embraced

Source: Ascend, Company reports & filings

FSC

LCC

China

9

?




Potential AcquisitonLCC


92

28

13

2

145

103

112

15

46

3

147

21

55

29

1

153

465

1553

160

Lufthansa Group is a conglomerate consisting of several hundred

subsidiaries that range from catering to aircraft maintenance. The success

of multibrand strategy by Lufthansa is driven by below two factors:

– To be flexible with Network Airlines. For example, the close geographic

proximity of its major hubs allows Lufthansa Group to modulate any

overlapping traffic flows based on demand

– Sufficient investment in LCC subsidiaries so that they can develop their

own personality and brand value without dependence on the established

FSC associates

Ryanair Holdings Plc announced to restructure the group structure into four

airline subsidiaries: Ryanair DAC, Laudamotion, Ryanair Sun and Ryanair

UK with below objectives:

– Deliver cost and operating efficiencies by promoting subsidiaries to

compete actively for capital and aircraft

– Allow small scale M&A opportunities, similar with the Laudamotion

acquisition

– Each subsidiary has their own CEOs and management teams so as to

encourage people to progress within various corporate levels

These objectives are different from the goal of network planning as Ryanair

focuses on low unit costs and stimulates demand for new routes at very low

fares. .

European flag carriers have implemented Multi-brand strategies for network planning by operating various FSCs to develop a hub-and-spoke

model and creating LCCs for point-to-point routes to under-served and/or over priced markets. However, instead of network planning, Ryanair

announced to restructure Ryan Holdings Plc into four subsidiaries for cost and operating efficiencies

Europe: Different Strategic Objectives between FSC and LCC Groups

Source: Ascend, Company reports & filings; ANALYSIS: Ryanair matures with IAG-style structure, Ascend, 5 February 2019; The CEO of Europe's largest airline reveals how his company is thriving in the world's toughest airline

market, Business Insider, 19 January 2019

+

FSC




Majority owned airlines (To be established)LCC


277 90

46

3 36

33

146

4 12

176

131

253

Middle East: Multiple Strategic Investments

FSC

LCC

?

Emirates has grown codeshare relationships with various airlines and network coordination with sister company Fly Dubai, while Etihad and

Qatar have been evaluating and/or exiting cross-holding positions.

Emirates has maintained modest growth as the leading super-connector between west

and east: expanding loyalty program partners, codeshares, and continued plans to

double capacity in 10 years.

– October 2017: Emirates and flydubai started codeshare flights since and expanded

the coverage to 84 cities. Codeshare flight network will further expand in 2019 with

the launch of new Flydubai destinations.

Exiting/restructuring partnerships and reducing capacity to curtail losses from

underperforming investments and competition from Emirates

Etihad’s investment in Jet Airways:

– January 2019: Etihad made a conditional offer to increase its current hold

– Etihad’s equity injection is subject to the approval of the Bank-led Resolution Plan,

which is piloted by the State Bank of India and constitutes equity infusion, debt

restructuring and asset monetization to close Jet Airways’ current funding gap of c.

Rs 8,500 crore

Airline Date Update % Owned

May ‘17 Restructure 49%

Oct ‘17 Bankruptcy 29%

Feb ’18 Restructure 49%

Oct ‘18 Restructure 24%

Qatar has aggressively pursued partnerships by taking minority stakes in regional

partners

– January 2015: Qatar acquired minority stakes of IAG, bringing up to 20%

– September 2017: Qatar acquired 49% Meridiana (Rebranded as Air Italy)

– November 2017: Qatar acquired 9.6% Cathay Pacific

– January 2019: Qatar acquired 5% in China Southern

– Qatar Indian full-service venture sidelined due to restrictive foreign investment rules

Source: CAPA, BITRE, Credit Suisse research, Company press releases




Strategic PartnerLCC


3. Evaluating the Most Popular Forms of Liquidity

Each financing source is susceptible to both credit market and regulatory shocks which can reduce the supply

and increase the cost of financing

It is therefore prudent to pursue a diverse funding strategy

The Cornerstones of Aircraft Financing

Bank

Debt

Leasing

Companies

Export

Credit

Capital

Markets

25 Evaluating the Most Popular Forms of Liquidity

Healthy Aircraft Financing Environment

Positive Outlook for Aircraft FinanceThe aircraft finance environment for 2018 and 2019 is still positive. The industry is expected to have continued developing

new markets and structures, enabling broader financier and investor participation in aviation and greater efficiency for

airlines and lessors.

Growing delivery finance requirementsUS$ Billion

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E

Leasing

Companies

Capital

Markets

Commercial

Banks

Export Credit

Agencies

Private Equity

& Hedge

Funds

Tax Equity

Insurance

Airframe and

Engine

Manufacturers

Major ConcernCautionarySatisfactory

4%8%

44%38%

24%

26%

26%

25%1%

2%1…

1%

$122B

$139B

$153B

$172B

$185B $189B

2017 2018 2019 2020 2021 2022

Export Credit Bank Debt Capital Markets

Cash Insurance Manufacturer

Source: Boeing Capital London Roundtable, May 2018.


Source of Funding

Source of Financing for Boeing Deliveries 2009–2017

Source: Boeing Capital London Roundtable, May 2018; Airbus Marketing & Financing Updates, Sep 2018

Source of Financing for Airbus Deliveries 2003-2017

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2005 2007 2009 2011 2013 2015 2017

Airline:

Cash and Commercial Debt

Lessor:

Cash and Commercial Debt

Lessor:

SLB

Airline:

ECA

Lessor:

ECA

Manufacturer:

ECA & SLB

39%

2%

26%

32%

1%

Capital Market

$10B

$12B

$13B

$55B

$66B

$68B

$76B

$117B

Africa

Central Asia

LatAm

Middle East

China

Europe

Asia excl. China

North America

Sale-leaseback Export Credit Bank Debt Capital Markets

Cash Insurance Manufacturer


Share of Global Fleet on Operating Lease Stable at ~43%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000Jan

-90

Dec-9

0

Nov-9

1

Oct-

92

Se

p-9

3

Au

g-9

4

Jul-9

5

Jun

-96

Ma

y-9

7

Ap

r-98

Ma

r-99

Fe

b-0

0

Jan

-01

Dec-0

1

Nov-0

2

Oct-

03

Se

p-0

4

Au

g-0

5

Jul-0

6

Jun

-07

Ma

y-0

8

Ap

r-09

Ma

r-10

Fe

b-1

1

Jan

-12

Dec-1

2

Nov-1

3

Oct-

14

Se

p-1

5

Au

g-1

6

Jul-1

7

Share

of G

lobal F

leet in

Serv

iceO

pera

tin

g L

ease F

leet

Operating Lease Fleet Share of Total Global Fleet

Source: FlightAscend Consultancy, Commercial Market Update Webinar, 13 December 2017


Rank Leasing CompanyTotal

Portfolio

1 AerCap 34,680

2 GECAS 24,652

3 BBAM 20,916

4 Avolon 19,426

5 SMBC Aviation Capital 16,200

6 ICBC Leasing 16,148

7 Air Lease 14,796

8 BOC Aviation 14,620

9 DAE Capital 10,610

10 Aviation Capital Group 9,206

11 BoComm Leasing 7,900

12CDB Aviation Lease

Finance7,390

13 ORIX Aviation 7,308

14 Nordic Aviation Capital 6,467

15 Goshawk 6,467

16 Jackson Square Aviation 6,412

17 Aircastle 5,782

18 Amedeo 5,003

19China Aircraft Leasing

Company4,642

20 Macquarie AirFinance 4,635

Chinese Share of Global Lease Portfolio to Increase Further

Source: FlightAscend Consultancy, Commercial Market Update Webinar, 13 December 2017; Flight Ascend Consultancy; Flight Fleets Analyzer and Ascend Values data, end-2018

Note: Based on the Top 50 companies with a substantial operating lease business ranked by the value of their owned and/or managed fleets at 31/12/2018.

8,500 9,600

13,000

15,600

18,000

23,300

32,900

41,600

57,300

71,800

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Share

of G

lobal L

ease P

ortfo

lio

Valu

e o

f C

hin

ese B

acked P

ort

folio

(U

S$m

)

Portfolio Value ($mm) Share of Global Portfolio

(1)

Share of Chinese Backed Portfolio Top 20 Leasing Companies


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