How to forecast in a cyclical industry? Presentation to ICAO Air Transport Symposium Montreal, 19 th April 2012 2012 Rolls-Royce plc The information in this document is the property of Rolls-Royce plc and may not be copied or communicated to a third party, or used for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce plc. This information is given in good faith based upon the latest information available to Rolls-Royce plc, no warranty or representation is given concerning such information, which must not be taken as establishing any contractual or other commitment binding upon Rolls-Royce plc or any of its subsidiary or associated companies.
Contents Historic overview General principals Ideas for monitoring short-termterm cycle position
Contents Historic overview General principals Ideas for monitoring short-termterm cycle position
What factors are cyclical? Economic growth? Demand? Capacity? Yields and costs? Airline results? Aircraft orders and deliveries? Retirements? t Airline start-ups and exits?
2011 is early in the recovery cycle 30% Traffic growth 25% World GDP growth 1960s = 15% p.a. RPK growth / 5.3% p.a. GDP growth 1970s = 9% / 3.8% 1980s = 5.7% / 3.1% 1990s = 4.8% / 2.8% 2000s = 4.1% / 2.6% 20% 15% 1991 and 2001 saw traffic decline, exacerbated by 'shock' events 10% Strong recovery post 2008/9 recession 5% 0% -5% 1982 had worst global l GDP since 1945, but still 2% traffic growth 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
US revenue and cost trends 2006-12 RASM & cost change et fuel price change 25% 100% 20% 15% 10% 5% 0% -5% -10% -15% Revenue/ASM et fuel price Cost ex.fuel/trans.related Cost ex.fuel 80% 60% 40% 20% 0% -20% -40% -60% -20% an-06 ul-06 an-07 ul-07 an-08 ul-08 an-09 ul-09 an-10 ul-10 an-11 ul-11 an-12-80% et fuel prices flattening vs.2011. RASM holding well indicating strong demand.
Airline net financial results $m 25000 20000 15000 * 2005/6 N Am excludes United Q4/Q1 exceptionals, but includes DL/NW charges. 2008/9 excludes goodwill adjustments 10000 5000 0-5000 -10000-15000 -20000-25000 S&C America ME/Africa Asia Europe NAmerica 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* 2006* 2007 2008 2009 2010 2011 updated 10/4/12 Source: ICAO/Airline Monitor/Airline Business/R-R R analysis
Orders & Cancellations 12-month moving average, 100 pax and above Aircraft units 3500 3000 2500 Orders Cancellations Net orders Deliveries 2000 1500 1000 500 0 1971_Q3 1972_Q2 1973_Q1 1973_Q4 1974_Q3 1975_Q2 1976_Q1 1976_Q4 1977_Q3 1978_Q2 1979_Q1 1979_Q4 1980_Q3 1981_Q2 1982_Q1 1982_Q4 1983_Q3 1984_Q2 1985_Q1 1985_Q4 1986_Q3 1987_Q2 1988_Q1 1988_Q4 1989_Q3 1990_Q2 1991_Q1 1991_Q4 1992_Q3 1993_Q2 1994_Q1 1994_Q4 1995_Q3 1996_Q2 1997_Q1 1997_Q4 1998_Q3 1999_Q2 2000_Q1 2000_Q4 2001_Q3 2002_Q2 2003_Q1 2003_Q4 2004_Q3 2005_Q2 2006_Q1 2006_Q4 2007 Q3 2008 Q2 2009 Q1 2009 Q4 2010 Q3 2011 Q2 updated 10/4/12 Source: Airclaims Orders and cancellations exclude type swaps
Record levels of aircraft retirals Aircraft units 700 600 500 400 300 200 100 Average age 35 30 25 20 15 10 5 Widebody Narrowbody Narrowbody ret age Widebody ret age 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0 High fuel and commodity prices providing a catalyst for scrapping, as well as overcapacity through the recession
Number of airlines No.of operators of in-service western-built jets Net additions 900 800 700 600 500 400 300 200 100 50 40 30 20 10 0-10 -20-30 Airlines Net additions 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010-40 Number of airlines continues to grow, but some evidence of cyclicality
Contents Historic overview General principals Ideas for monitoring short-termterm cycle position
Passenger traffic through the cycle RPK (Index 2007=100) 130 125 120 115 High forecast = 7% p.a. 2010-12 Low forecast = 5% p.a. 2010-12 2000-2005 110 2007-20122012 105 low 100 95 90 2007 2000 2008 2001 2009 2002 2010 2003 2011 2004 2012 2005 2007-2012 High 2007-2012 actual 2010 traffic forecast was forecast to be in range 5-7% growth, but actually came in at 8-9%. 2011, despite many events saw c6.5% RPK growth.
Summary of cycle position Demand falls, Airlines revenues & yields start to decline We re around here now. Aircraft return to service Load factors down Utilisation up Aircraft productivity now stable Monitoring for signs of expected upturn Utilisation cut Load factors up Aircraft parked xxx Demand starts to recover
Contents Historic overview General principals Ideas for monitoring short-termterm cycle position
Purchasing Managers Indices (PMIs) Expanding 65 60 55 50 Contracting 45 40 35 30 US Mfg Composite Eurozone Composite China Mfg Composite World Composite Dec-08 F M A M A S O N Dec-09 F M A M A S O N Dec-10 F M A M A S O N Dec-11 F Sources Eurozone = Markit China = Markit/HSBC US = ISM Manufacturing Report on Business World = Markit/PMorgan Global l Mfg & Services PMI
2012 GDP forecasts 7% US W Europe 6% Asia Pac Lat America World 5% 4% 3% 2% 1% 0% -1% F M A M A S O N Dec-11 F M A M S O N Dec-12 2013F Source: Consensus Forecasts
Lease Rates for Popular Types Change in lease rate y-o-y 30% 20% 10% A320-200 200 1999 737-800 1999 A330-200 1999 767-300ER 1999 0% -10% -20% -30% an 06 Apr 06 ul 06 Nov 06 May 07 Aug 07 Nov 07 Feb 08 Apr-08 un-08 Aug-08 Oct-08 Dec-08 an-09 Mar-09 May-09 ul-09 Sep-09 Nov-09 Dec-09 an-10 Mar-10 May-10 ul-10 Sep-10 Nov-10 an-111 Mar-111 May-111 ul-111 Sep-111 Nov-111 Source: Ascend: change from 12 months ago
Load Factor Changes LF change y-o-y (% points) 10.0 8.0 6.0 40 4.0 2.0 0.0-2.0-4.0 ATA AEA AAPA -6.0 Source: Association monthly press releases.
Aircraft productivity (ASKs/aircraft) %Ch Change y-o-y (Smoothed 3MMA) 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% ATA AEA AAPA Source: Ascend & Association monthly press releases. Fleet in service usage pax/combi/qc.
Industry Health February 2012 Metric Current Status Recent Trend Commentary Macro Metrics GDP Forecasts PMIs above 50 Oil (Kerosene) Price decreases Passenger Load factor (PLF) Increases Productivity Increases Young PAX stored fleet decreases Lease Rates increases Net Orders increases Deferrals decreases Backlog-fleet ratio decreases Unplaced Lease orders decreases Cost & Revenue improvements Civil Aviation Outlook Capacity balance: +1 Macro data marginally positive on balance Macro prospects diverging between Europe and ROW. US showing positive results The capacity balance has reduced by 1 point as the productivity (utilisation) metric moves from positive to neutral. On balance the macro data suggests an upturn later in the year. We expect RPKs for 2012 to grow between 3.5%-4.5% but economic uncertainty means there is a high probability it could be outside this range
PMI-type example for aftermarket Index (>50 = growth) Gross issues per engine 75 70 65 60 55 50 45 40 35 Index RB211 GI per in-service engine ( ) 30 6 per. Mov. Avg. (RB211 GI per in-service engine ( )) 6 per. Mov. Avg. (Index) 25
Summary Most aspects of the air transport industry are cyclical l from economic demand d drivers through h to supply issues and costs. However, the cycle for OEMs plays out over the long term. Long-term forecasts should aim to avoid building in overly optimistic or pessimistic start points If this can be consciously taken into account, then external shocks or recessions should not alter the long-term view Short term monitors to aid understanding of the current business cycle are needed both to help with the long-term starting point, but also for management information and business health tracking