1400 1440 Avitas Order Bubble

The Order Bubble and How Fuel Price Will Change It All

Adam M. Pilarski

AVITAS

October 18th, 2012

Atlanta, Georgia

Role of Forecaster

Short term

Long term

Example

Role of Forecaster

Causalities are very robust

Unpredictable events

(by definition)

cannot be predicted

Their consequence though can

Importance of scenarios

Typical Forecast (Long Term)

There will be a demand for

33,248 aircraft from 2011-2030

worth $4,128,645,811.78

Not Typical Forecast (Precise Date)

The world will end December 21, 2012

(in the afternoon)

(3:48pm) The Maya

I believe Boeing will re-engine this year

The Bet

Bet was for a bottle of wine

but

I prefer models

Not Even

Showing True Class

Jim Albaugh Private Correspondence December 16, 2011

“It was the best bet I ever lost”

Current Big Issues

Bubble in narrowbody aircraft

Oil Prices

Another Perfect Storm Possible

Iran flare-up

Oil prices go through the roof

European recession/China slowdown

Lack of financing

Bubble of orders

How is this cycle different?

Low interest rates

ExIm/ECA financing

High oil prices, need for newer aircraft

Manufacturers need money

Declining military expenditure

Airbus/Boeing want to slow new entrants

New aircraft types

Leahy not retiring yet

0

500

1,000

1,500

2,000

2,500

3,000

1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Orders and Delivery, Narrowbody and Widebody Jets

Narrowbody and Widebody Delivery

Narrowbody and Widebody Orders

0

400

800

1,200

1,600

2,000

1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Orders and Delivery, Narrowbody Jets

Narrowbody Delivery

Narrowbody Orders

0

200

400

600

800

1,000

1,200

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Orders and Delivery, Widebody Jets

Widebody Delivery

Widebody Orders

0%

10%

20%

30%

40%

50%

1971 1976 1981 1986 1991 1996 2001 2006 2011

Backlog as Percentage of Active Fleet, Narrowbody Jets

0%

10%

20%

30%

40%

50%

60%

70%

1976 1981 1986 1991 1996 2001 2006 2011

Backlog as Percentage of Active Fleet, Widebody Jets

0

2

4

6

8

1971 1976 1981 1986 1991 1996 2001 2006 2011

Backlog as Multiples of Annual Production, Narrowbody Jets

0

2

4

6

8

10

12

14

1976 1981 1986 1991 1996 2001 2006 2011

Backlog as Multiples of Annual Production, Widebody Jets

I believe we are in a bubble environment

with too many orders

Additional Reasons for Bubble

Double counting

ME/Rest of World

New/Legacy leasing companies

C-Series Factor

Historical production growing at 2.9% annually

Announced production rates of 42/month by

2012 (Airbus) and 2014 (Boeing)

Talk of rates of 60 aircraft/month

C Series, 919 and MS21 not included

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 2026 2030

Narrowbody Delivery, History and Forecast

30

40

50

60

70

80

90

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Forecast of Narrowbody Monthly Production Rate, By Duopolists

If past trend continues

to be compatible with Airbus/Boeingforecast

if other narrowbody types deliver as EdGreenslet predicts

Announced rates not compatible with

Airbus/Boeing forecasts

Possibility of much higher retirements, shorter

economic life – depends on oil prices

Widebody production needs to grow from 1% to

5.9% annually to satisfy Airbus/Boeing forecasts

0

100

200

300

400

500

600

1970 1980 1990 2000 2010 2020 2030

Widebody Delivery, History and Forecast

Issues

Retirements

Economic life of aircraft

How will the bubble burst?

Sweet home Alabama

Oil prices

Fearless Forecast - Oil

My bold forecast

By October 16th, 2018 oil prices will be $40

Are we running out of oil?

NO

Years of reserves left

20

30

40

50

60

1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Years

Years of Crude Oil Reserves Left

Source: U.S. Department of Energy, Energy Information Administration

Are price increases result of demand push?

(aka all Chinese now driving cars)

NO

2005-2011

Oil Price Increase 77%

China Oil Consumption 54.3%

China GDP 86.2%

World GDP 14.7%

World Oil Consumption 0.5%

2000-2011

Oil Prices up 198.9%

Traffic up 53%

Jet Fuel Demand up 3%

Source: Airbus

Clearly the price mechanism works

Historically production disruptions caused by

supply rather than demand factors

Millions of barrels a day

Iran + Iraq

1976 1981 1989 1991 2011

8.3 2.4 5.7 3.6 6.7

Libya

2010 2011

1.7 0.4

Former USSR

1979 1992 1995 2011

11.4 8.3 6.7 11.7

Kuwait

1979 1991 2011

2.5 0.2 2.5

Millions of barrels a day

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1976 1981 1986 1991 1996 2001 2006 2011

Iran + Iraq

8.3 in 1976

2.4 in1981

5.7 in 1989

3.6 in 1991

6.7 in 2011

0.0

0.5

1.0

1.5

2.0

2007 2008 2009 2010 2011

Libya

1.7 in 1989

0.4 in 2011

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1979 1984 1989 1994 1999 2004 2009

Former USSR

11.4 in 1979

8.3 in 1992

6.7 in 1995

11.7 in 2011

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1979 1984 1989 1994 1999 2004 2009

Kuwait

2.5 in 1979

0.2 in 1991

2.5 in 2011

Historical Oil Prices

0

20

40

60

80

100

120

140

1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011

Historical Oil Prices

Source: BP Statistical Review of World Energy. 1861-1944 US Average; 1945-1983 Arabian Light posted at Ras Tanura;

1984-2011 Brent dated.

2011 Constant U.S. Dollars Per Barrel

0

15

30

45

60

75

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Million Barrels Per Day

OPEC

Non-OPEC


World Crude Oil Production, OPEC vs. Non-OPEC Countries, 1965 - 2011

Last time oil prices went sky-high – OPEC II

(1979-1986)

World Oil Production

The level of World oil production did not recover

to 1979 levels until 1996

During this time GDP at same time rose 60.8%

0

5

10

15

20

25

30

35

40

45

50

55

60

65

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995

Million Barrels Per Day


OPEC

Non-OPEC

World Crude Oil Production, OPEC vs. Non-OPEC Countries, 1965 - 1996

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1979 1980 1981 1982 1983 1984 1985

OPEC Production (1979 = 100%)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

1979 1980 1981 1982 1983 1984 1985

Saudi Production (1979 = 100%)

How is today’s situation different from OPEC II?

Are we in a competitive oil market?

Can you spell cartel?

Power of OPEC (% share)

1980 2000 2011

Production 42.6% 42.3% 42.9%

Reserves 66.5% 79.2% 72.4%

Recent Realities (2004-2011)

0

20

40

60

80

100

120

140

160

2-Jan-04 2-Jan-05 2-Jan-06 2-Jan-07 2-Jan-08 2-Jan-09 2-Jan-10 2-Jan-11

2004 - 2011 Crude Oil Price


Europe Brent Spot Price FOB (2011 Constant U.S. Dollars per Barrel)

Reasons

Political uncertainties

Middle East unrest

The dangerous troika

Saudis unwilling to act

Speculations

0

5

10

15

20

25

30

35

40

45

2-Jan-90 2-Jul-90 2-Jan-91 2-Jul-91 2-Jan-92 2-Jul-92

Historical Daily Oil Prices, 1990 - 1992


Europe Brent Spot Price FOB (1990 Jan Dollars per Barrel)

So Where Are We?

Possible Scenarios

Oil Prices stay high forever

Shorter economic life of aircraft

Advancements in technology

Less demand for aircraft

More replacement aircraft

So Where Are We?

Adam’s view correct

Bubble bursts, causes pain to some

Long term future favors more new aircraft

Slow down in fuel efficiency improvements

Different regional patterns of traffic

Timing of bubble bursting important

Summary

Future is predictable but has substantial random

elements

Bubble in narrowbody aircraft orders

Potential of much lower oil prices should be

considered in planning

1400 1440 Avitas Order Bubble

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Transcript of 1400 1440 Avitas Order Bubble