IBA Insights

Key Economic Indicators – The Influence On Orders For New Technology, June 2018

As Farnborough Airshow approaches, using our iQ Trends module, we take a quick look at key economic indicators to see how these may influence demand and orders for new technology.

GDP continues to grow as is evident in the uplift of specific countries’ GDP forecasts during 1Q18. This growth helps to support passenger
demand which in turn drives capacity requirements upwards. Global RPKs rose by 9.5% in March while capacity and load factor grew 6.4%
and 2.3% respectively.

Latin America leads in regional passenger growth, posting an 11.8% growth, closely followed by Asia-Pacific with 11.6% growth. Demand
in the Middle East hit 10.7% from 4.1% in the previous year following the stabilisation of disruption caused by a ban on large portable
electronic devices and potential flight restrictions.

GDP performance

Interest rates and inflation.

Overall slow rises in interest rates are anticipated provided economic recovery continues as expected. Inflation has
remained low and the IMF has indicated market correction as pricing continues to grow and inflation remains muted.

In the narrow body market, historically there has been a strong correlation between the A320ceo and 737-800 market lease rates, and 5Y swap rates. There is potential for an upswing in lease rates for these aircraft in the short-to-medium term if interest rates rise. Typically higher interest rates should deter new investors which in turn will help to strengthen the lease rates as competition diminishes.

Oil prices

Oil volatility continues, world pricing is expected to settle ~$63 – up $1 on short term expectations – Supply levels continue to shift. Long-term
expectation is $85 by 2025 – $105 by 2050. In the current environment where fuel prices are relatively low, airlines are reluctant to pay a premium
for new aircraft driving demand for existing variants.

Using the narrow body market as an example once more. As fuel prices rise, there will be an increase in orders for the neo and MAX aircraft. A rise in new generation aircraft entering service will compress lease rates for all ages. In the short-term, ageing aircraft will continue to operate as demand is high but will be among the first to be impacted by neo and MAX deliveries along with new A320ceo and 737-800 aircraft. Younger
examples in their first lease, around five years old, will be less affected by the increase in fuel price until the older examples have exited from service.

As it stands, both Airbus and Boeing are still accepting orders for older technology. Both typically exhibit a rise in orders during air shows.

If you have further questions contact: Marketing@iba.aero

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