Identifying the pricks which will burst the bubble in aircraft orders

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1 Identifying the pricks which will burst the bubble in aircraft orders Adam Pilarski, Senior Vice President, AVITAS, Inc. September 14 th, 2017 Panama

2 World Developments Using economics to understand them Implication on our life Page 2

3 To help us understand reality we can use 4 economic concepts Trade offs Game Theory Principal/Agent dilemma Analytical thinking Page 3

4 Page 4 Analytical Thinking

5 For every simple problem there is an answer that is murky, complex and wrong. Paul Krugman For every complex problem there is an answer that is clear, simple and wrong. H. L. Mencken ( ) Trade-offs Page 5

6 Brexit Trade off Benefit economies of scale, lower costs ( ) Cost bureaucrats far away tell you what to do Page 6

7 Principal Agent Problem Can we find better implementers? Page 7

8 Movement from central authority Business people? Military? Page 8

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10 Trump is CEO of the country Nikki Haley May 14 th, 2017 Page 10

11 Judging by results (concentrate on efficiency) Plethora of billionaires in cabinet Use/acceptance of business principles to guide our life Education Charter Schools Can military run better government (plethora of generals in cabinet) Page 11

12 Make America Great Again not the same as America World Leader Page 12

13 Page 13 If not the U.S

14 The New World Leader? Page 14

15 Page 15 Implications for business

16 U.S. Share of World Traffic 80% 70% 67.6% 60% 50% 40% 30% 42.2% 31.8% 25.1% 21.4% 20% 10% 0% Page 16

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18 Future role of dollar? Demise has been predicted many times Adam s theory of tallest midget Possible huge implication for our industry Pricing of aircraft Financing Oil prices Page 18

19 Adam Smith Page 19

20 Possible bubble Why bubble? How can bubble burst? Middle East developments Page 20

21 Disclaimer Aviation is like a box of puppies Good for us all Long term sunny future Page 21

22 Short term Possible hiccup Possible over ordering / over supply Page 22

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30 No more cycle I think we re a little bit more sophisticated in orderbook management. This is no longer a cyclical industry, it really isn t. John Leahy ISTAT Meeting, March 2016 I think it s highly unlikely you ll ever see losses in this industry again. We are in a whole new world. Doug Parker April 2016 Page 30

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32 Page 32 Possible explanations for mother of all cycles

33 World Economy fine / box of puppies Page 33

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35 Period of low oil prices Replacements Insurance New aircraft/engine developments Page 35

36 Monetary factors Historically low interest rates Plenty of funding available seeking returns New funding available (Middle East, China) Page 36

37 Result More aircraft available, some financed by new players (possible pressure on lease rates) More airlines, LCCs being supplied aircraft More traffic in part because lower oil prices and more competition (possible pressure on yields) Page 37

38 Also More government supported entities? China, Middle East Less emphasis on markets Page 38

39 How can hypothetical bubble burst? Traditional way Interest rate rise China Middle East Page 39

40 Old fashioned economic recession Old fashioned policy mistakes (aka trade war) Page 40

41 Interest rate rise Unknown timing Could affect lessors, LCCs, others who financed short term at low rates Page 41

42 Page 42 China

43 Important elections in October Page 43

44 Page 44 Middle East

45 Gulf 3 Carriers in 2016 Percent of World s Widebody Fleet 10.5% Percent of World s Widebody Backlog 23.6% Dubai Airport Number 3 in the World Top Airlines: Emirates #4, Qatar #14, Etihad #19 Page 45

46 Middle East Aviation Percent of World s Widebody Backlog 0.7% 31.2% Widebody Fleet 0.0% 17.9% Page 46

47 Good things about Middle East Carriers Well run New type of service connecting new destinations Page 47

48 Oil prices related to Middle East airlines Oil prices related to traffic levels (both inbound and outbound) Hub traffic greatly affected Political factors in U.S. and Europe Page 48

49 Correlation Coefficient 83% Page 49

50 Summary More evidence we are facing a bubble Possible ways of slowdown identifiable Slowdown in Middle East not a temporary phenomenon Still believe in rosy future of aviation Page 50

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Industry Overview Presentation to ASA June 8th, 2015 Phoenix, Arizona

Industry Overview Presentation to ASA June 8th, 2015 Phoenix, Arizona Adam Pilarski Senior Vice President, AVITAS, Inc. High Correlation - Traffic vs. Economy Ln RPK = - 13.1 + 1.96 Ln GDP -. R 2 =.9963