perspectives 27
th April 2020
Global Equity Research
AirLinks – Value Chain Debates
Aircraft deliveries – weighing
Research Analysts:
Neil Glynn
@
Olivier Brochet
@
Robert Spingarn
@
Chris Leonard
@credit-
Jose Caiado De Sousa
@
Onur Muminoglu
@credit-
Alejandro Zamacona
@credit-
Louis Chua
@
Lokesh Garg
@
Lok Kan Chan
@
Danny Chan
@
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mailto:@
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Paul Butler @
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DISCLOSURE AND
THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
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Assessing the impact of COVID-19 on
aircraft deliveries from an airline vs
OEM perspective
We aggregate our global views on how decision making on aircraft deliveries will impact
the global market. This first derivative analysis focuses on airlines, commercial OEMs
and the aftermarket.
We recognise this is a developing theme as airlines/OEMs update their plans, with scope
for multiple different interpretations from corporates, the sell side and the buy side. We will
continue to weigh up developments and viewpoints from the industry to provide maximum
insight on airline net capex and OEM/aftermarket revenue prospects.
We also utilise Credit Suisse HOLT® to frame how the market is pricing prospects for each
individual stock focused on in this presentation.
Airlines need to cut net
capex to preserve cash; via
delivery deferrals or
SLSBKs
OEMs have pre delivery
payments and new
technology improves
airline efficiency levels
Key related global research:
Safran – Aftermarket reboot: downgrade to
Neutral Airbus – Rate cuts: a step towards
the other side
Boeing – Framing Risks, Reducing Estimates, Reducing Target Price
European Airlines – Liquidity the key short-term focus – but long-term liquidity
thinking also
likely to change
Global Airlines – Charting global airline liquidity
AirLinks – Value Chain Insights: Structural effects of COVID-19 may fall unevenly
across the value chain
Global Airlines
Air France-KLM (Underperform, TP €)
Analysts: Neil Glynn, Arthur Truslove, Hannah Burrows
Key risk: Heavy capex burden contributes to the need
for a government bailout (just agreed). Leverage
escalation in 2020, and potentially 2021, threatens to
absorb most of the equity value in the company.
Relevant details: 2020 capex originally planned at
€ – now cut to €. We model € in 2020,
before € in 2021. Despite this 2020E net debt
escalates to 2019A EBITDA (pre-gov’t debt) given
negative FCF of €.
Analyst view: We expect AF-KL to re-assess the size of
its fleet, while looking to accelerate planned retirements
(A380s, A340s, A330s). Mgt’s priority needs to be
generating FCF to de-lever post-crisis and our analysis
suggests the potential for airlines to require significant
liquidity buffers beyond the crisis, which could drive a
significant re-set of long term capex plans.
CS HOLT view – stock pricing in dramatic
returns recovery: HOLT suggests the market is
pricing in a CFROI of %. This is the highest
level of market implied CFROI yet recorded by
HOLT and is driven by an increase in the
discount rate as the model penalises the
company for credit risk and higher
leverage versus peers.
Ma rket ca p (€m,
RHS)
Planned capex (€m,
LHS)
2020E 2021E 2022E
00
10001000
20002000
30003000
40004000
50005000
AF-KL annual capex plans 50-100% > mkt cap
HOLT pricing in long term CFROI of 8% (green dot)
easyJet (Outperform, TP 945p)
Analysts: Neil Glynn, Arthur Truslove, Hannah Burrows
Key risk: Management reducing capex quickly.
However will still spend almost £1bn over the next 18
months while earnings recovery question marks remain
large.
Relevant details: EZJ has announced the deferral of
24 aircraft deliveries due over FY20-FY22, with the
result that it will see only six gross deliveries in 2H20
(nil on a net basis) and nil in FY21. This drives capex
down £1bn over 2H20- FY22. We model net
debt/2019A EBITDA rising to in FY20E.
Analyst view: EZJ’s fleet plan suggests capacity could
be as much as 10% lower in FY21 vs FY19, and we
expect management to focus on recovering PBT per
seat to reduce leverage. With capex of only £600m in
FY21, PBT per seat
>£2 (2016A-2019A £4-£6) could generate positive FCF.
CS HOLT view – stock pricing in returns
consistent with GFC levels: HOLT suggests the
market is pricing in a long-term CFROI of 5%
implying that the market expects
returns to remain below prior lows
(2009) on a five year view.
3000 3000
2000 2000
1000 1000
0 0
2020E 2021E 2022E
Planned capex (£m, LHS) Market cap (£m, RHS)
EZJ annual capex plans now <40% of mkt cap
HOLT pricing in a long-term CFROI of 5% (green dot)
IAG (Outperform, TP 463p)
Analysts: Neil Glynn, Arthur Truslove, Hannah Burrows
Key risk: IAG has confirmed its liquidity position of
€ at 27 March but the market keenly awaits
decisions on capex management given concerns over
corporate travel prospects in particular.
Relevant details: IAG’s latest plans for 2020-2021 capex
are
€ and € at the gross level with 54 and 42 aircraft
deliveries planned, albeit with the potential for aircraft sale
and leasebacks (SLSBKs) to finance half of aircraft
deliveries, limiting net capex to €2bn-€3bn. We model net
capex of € in 2020E and € in 2021E, and
acknowledge 38 lease expiries in 2020 and 46 in 2021.
Analyst view: We expect IAG to focus on phasing out
older/less efficient aircraft including B747s (32 at
December) and A380s (12), A340s (15) and possibly B777-
200s (46) and A330-200s (24), and anticipate that 2021
deliveries in particular will see significant deferrals.
CS HOLT view – stock pricing in long-term
returns of only 1%: HOLT suggests the
market is pricing in a CFROI of % on a five
year view versus a 10 year average of % and
a market implied CFROI of
% in December 2019.
The probability of IAG
achieving above a % t+5
CFROI is 86%.
2020E 2021E 2022E
Planned capex (€m, LHS) Market cap (€m, RHS)
00
10001000
20002000
30003000
40004000
50005000
60006000
IAG annual capex plans close to mkt cap
HOLT pricing in a long-term CFROI of 1% (green dot)
Lufthansa (Neutral, TP €)
Analysts: Neil Glynn, Arthur Truslove, Hannah Burrows
Key risk: LHA’s liquidity position is fragile with “on-
balance-sheet” liquidity sufficient for one month’s cash burn
were forward bookings refunded. €10bn of unencumbered
aircraft may need monetising and LHA has confirmed it
urgently needs state aid.
Relevant details: LHA had planned to spend over €3bn on
capex in 2020 and nearer €4bn in 2021. Management is
focused on reducing capex to considerably lower levels based
expectations that it will emerge from the crisis smaller; we
model € capex in 2020E and € in 2021E. LHA has
also announced aircraft disposals which should reduce its
capacity by % once the crisis passes.
Analyst view: We expect significant aircraft deferrals at
LHA; likely as part of a state aid package agreement. Our
analysis suggests the potential for airlines to require
significant liquidity buffers beyond the crisis, which could
drive a significant re-set of LHA’s long term capex plans.
CS HOLT view – stock pricing in long-term returns of
%, consistent with performance through the past cycle:
HOLT suggests the market is pricing in a CFROI of %. This
is notably higher than what HOLT suggests was priced in pre-
crisis, which is a result of a higher
discount rate as the model penalises
Lufthansa for higher leverage and credit
risk levels than peers.
Market cap (€m,
RHS)
Planned capex (€m,
LHS)
2020E 2021E 2022E
00
10001000
20002000
30003000
40004000
50005000
LHA annual capex plans close to mkt cap
HOLT pricing in a long-term CFROI of % (green dot)
Ryanair (Outperform, TP €)
Analysts: Neil Glynn, Arthur Truslove, Hannah Burrows
Key risk: With gross cash at % of annual revenue
pre- COVID-19, and capex plans stalled by the global
B737 MAX grounding, RYA is the best positioned
European airline under our coverage.
Relevant details: We model capex of € for RYA’s
FY21E to March 2021, and also € for FY22E.
However, our capex forecasts rely on MAX aircraft
deliveries, which have yet to re-start and the COVID-
19 crisis makes it increasingly challenging to predict
when this will occur. As such, RYA capex plans may
reduce drastically without RYA’s own intervention.
Analyst view: We see RYA as a clear structural
winner, well-positioned to benefit from industry
consolidation post- crisis.
CS HOLT view – stock pricing in long-term
returns of 6%, not seen since GFC: HOLT
suggests the market is pricing in a CFROI of
% for Ryanair. This is the lowest level ever
recorded by HOLT (data available from 2005)
with the spread between the market implied
CFROI and the forecast CFROI close to trough
2008 levels.
Market cap (€m,
RHS)
Planned capex (€m,
LHS)
2021E 2022E 2023E
00
20002000
40004000
60006000
80008000
1000010000
1200012000
RYA annual capex plans only % of mkt cap
HOLT pricing in a long-term CFROI of 6% (green dot)
Turkish Airlines (Neutral, TP )
Analysts: Onur Muminoglu, Neil Glynn
Key risk: THY has been caught in lockdown in the
growth mode. It had barely comfortable 20% gross
cash ratio and a high adj ND/EBITDAR of
(YE19). Almost all capacity grounded and ~US$250m
monthly cash burn (CSe) might require easier terms
from creditors/state if lockdown is prolonged beyond
the high-season summer.
Relevant details: THY is looking into 28 new aircraft
deliveries this year (net 13), another 187 in 2021-24
depending on MAX/Neo availability. It estimate it has
~US2bn unused rollover credit facility (= 2020E
EBITDAR, <1yr )
Analyst view: Despite tight cash balance, THY has good
access to local banks’ financing, including the EXIM
Bank, in our view. It is a strategic asset for the Turkish
Govt (50% equity holder), which stated it would “provide
necessary support if needed” (NTV, 18/3/20).
CS HOLT view – stock pricing in long-term
returns of %: HOLT suggests the market is
pricing in a CFROI of %, close to 2015
peaks, and implying a
significant pick-up from %
in 2019. HOLT model
penalises the company for
credit risk and higher
leverage versus peers.
THYAO annual capex plans now above mkt cap
HOLT pricing in a long-term CFROI of 3% (green dot)
American Airlines (Underperform, TP US$)
Analysts: Jose Caiado De Sousa
Key risk: We originally modelled 2020E capex at
$, falling to $2bn in 2021E, which compares to
an average of
$ annually over 2014-2019 and medium term
guidance of $. AAL and BOC Aviation have
reached a sale and leaseback agreement for 22 new
Boeing 787-8 aircraft, with the aircraft scheduled for
delivery in 2020 and 2021. .
Relevant details: AAL confirmed $ in liquidity as
at 9 March, and an additional $10bn in unencumbered
assets. It has not yet confirmed its latest liquidity
position however plans to accept a total of $ in
payroll assistance, including
$ in direct grants plus a low-interest loan of
$. AAL also plans to seek an additional $ in
a separate loan from the US Treasury.
Analyst view: American reports 1Q20 results on 30
April when we expect a further update. AAL’s work
with BOCA highlights it is focused on maximising
liquidity, but we also highlight its focus on increased
fleet efficiency.
CS HOLT view – marketing
pricing in long term CFROI of
9%, above mid-single digit history:
HOLT suggests the market is pricing in a
CFROI of % compared with a 10
year median of %.
Annual capex unwinding from 6Y avg of $
HOLT pricing in a long-term CFROI of 9% (green dot)
Delta Air Lines (Outperform, TP US$)
Analysts: Jose Caiado De Sousa
Key risk: DAL has reduced 2020 planned capex by
>$3B, including working with OEMs to optimize the
timing of future aircraft deliveries.
Relevant details: Since early March, DAL has raised
$ of new financing at an average rate of just under
4%, encumbering approximately $ of collateral. At
the end of Q1 DAL had $6B in liquidity, and expects to end
Q2 with $10bn in liquidity however daily cash burn at the
end of March was $100m. DAL aims to cut the daily cash
burn in half by May. The carrier also retains c.$13bn of
unencumbered assets that could be used to further bolster
liquidity.
Analyst view: DAL is strongly focused on using its market
power to manage cash flows including capex and opex.
CEO Ed Bastian highlighted at 1Q “we do not need any
more aircraft to be putting on the ground” and the
company does not plan to extend any more cash this year
on aircraft (however it does not rule out taking planes fully
financed).
CS HOLT view – market pricing in long-term
CFROI of 6%, below 5Y
experience: HOLT suggests the
market is pricing in a long term
CFROI of % versus a 10
year median of %.
Delta managing capex to limit cash out
HOLT pricing in a long-term CFROI of 6% (green dot)
Southwest Airlines (Neutral, TP US$)
Analysts: Jose Caiado De Sousa
Southwest annual capex low-teen % of mkt cap
Key risk: We had originally modelled capex of c$2bn
over 2020E-22E, however Southwest capex is highly
dependent on the return to service of the B737 MAX
aircraft, which accounts for its full orderbook.
Relevant details: Southwest has not yet provided
updated guidance around its liquidity position
however the carrier plans to accept $ in payroll
support, including $ in direct grants and a ~$1B
low-interest, 10-year unsecured term loan. It will also
provide the Treasury with stock warrants.
Analyst view: Southwest reports 1Q20 results on 28
April when we expect a further update. On 24 April,
CEO Gary Kelly highlighted “we’ll have to prepare
ourselves for a drastically smaller airline” with clear
potential ramifications for fleet size (as fellow MAX
customers announce cancellations).
CS HOLT view – market pricing in long-term CFROI
of 4% versus mid-high single digit history: HOLT
suggests the market is pricing in a long term CFROI of %
compared with a 10 year median of %.
HOLT pricing in a long-term CFROI of 4% (green dot)
United Airlines (Outperform, TP US$)
Analysts: Jose Caiado De Sousa
Key risk: We originally modelled capex of $
in 2020E falling to $4bn in company has
entered an agreement with BOC aviation to
finance 16 737s and 6 787s due for delivery in
2020 through sale and leasebacks.
Relevant details: United confirmed its liquidity
position of $ as of 16 April. The carrier also
expects to access $ under government loan
and $5bn under the government support act. It
then announced a 39m share stock offering on 21
April to raise c.$1bn in equity.
Analyst view: United reports 1Q20 results on 1
May when we expect a further update. UAL’s work
with BOCA highlights it is focused on maximising
liquidity, and we highlight that its 2021 deliveries
are all B737 MAX aircraft per Cirium.
CS HOLT view – marketing pricing long-
term CFROI of 8%, above recent history:
HOLT suggests the market is pricing in a CFROI of
% compared with a 10 year median of
%.
United 2020 capex plans near to mkt cap – but SLSBKs to
minimise net capex spend
HOLT pricing in a long-term CFROI of 8% (green dot)
Copa Holdings (Outperform, TP US$)
Analysts: Alejandro Zamacona, Felipe Vinagre
Key risk: Copa maintains a strong liquidity position.
in cash and more than USD200m of undrawn
credit facilities, over USD1bn of unencumbered assets and
USD400m of PDP’s with Boeing. CSe monthly cash burn of
~USD73m under a zero-flights scenario. Fleet
densification plan could be delayed as per Covid- 19
leading to long term travel restrictions on social
distancing; fading cost savings initiatives (Sub-6 plan).
Relevant details: Fleet flexibility on lease expirations until
2024; CPA could convey capex reductions from MAX
deliveries; leading to a potential deferring of all-Boeing
narrow body fleet.
Analyst view: We don't forecast any liquidity needs during
2020. However, the short term benefit or low oil prices
could be offset in the long term as the markets served by
CPA, benefits from higher oil prices. Overall, we see CPA
as a well-positioned player to overcome Covid-19 crisis.
CS HOLT view - the market is pricing in a
long-term CFROI of %: This
compares to a volatile
track record but a range of
3-8% over 2015-2019
CPA annual capex plans at around 30% of mkt cap
HOLT pricing in a long-term CFROI of 7% (green dot)
AirAsia Group (Neutral, TP )
Analysts: Danny Chan
Key risk: As at end FY19, AirAsia had in
cash, RM430mn in borrowings and in
advance sales.
With the grounding of its fleet, there is risk that the
airline will
face liquidity issues within the next 3 months.
Relevant details: AirAsia’s founder, Tony Fernandes,
is now pleading with his passengers to accept credits
as refunds.
AirAsia is also negotiating with its lessors for
payment deferrals. They also managed to
abandon/defer the delivery of some aircrafts for this
year and are reducing overheads by implementing
salary cuts.
Analyst view: There is scope for consolidation in
Malaysia’s aviation sector (AirAsia and MAS), which
bodes well for the industry post-crisis.
CS HOLT view – market pricing in long-
term CFROI of 8%: HOLT suggests the
market is pricing in a CFROI of
8% which compares to a high-
single digit average through the last
cycle.
Market cap (RMm,
RHS)
Planned capex (RMm,
LHS)
2020E 2021E 2022E
22002200
23002300
24002400
25002500
26002600
27002700
AirAsia capex plans modest vs mkt cap
HOLT pricing in a long-term CFROI of 8% (green dot)
Air China (A shares) (Underperform, TP Rmb )
Analysts: Lok Kan Chan, Kenneth Fong, Rebecca Law
Key risk: With weakened demand, Air China should
continue to focus on cost cutting and capex reduction.
Relevant details: Aircraft commitments at RMB 30bn in
FY20 and RMB 29bn in FY21. The company has planned
to introduce 34 units from Airbus and 3 from COMAC.
Analyst view: Due to the weakened demand, Air China
has continue to negotiate with suppliers to delay fleet
delivery. Given Air China is a SOE, its unutilised banking
facilities is high at RMB 110bn so fleet delivery is unlikely
to be impacted by liquidity. That said, fleet delivery plan
should mostly rely on demand.
Air China 3-year committed capex on aircraft
HOLT pricing in a long-term CFROI of 6% (green dot)
CS HOLT view – market pricing in long term
CFRO of 6%, above the experience of the
past cycle: HOLT suggests the market is
pricing in a long-term CFROI of around 6%
which compares to a consistent 0-4% annual
range over the past cycle.
2020E 2021E 2022E
Planned capex (RMBm, LHS) Market cap (RMBm,
RHS)
00
2000020000
4000040000
6000060000
8000080000
100000100000
120000 120000
Cathay Pacific (Neutral, TP HKD )
Analysts: Lok Kan Chan, Kenneth Fong, Rebecca Law
Key risk: Global outbreak has continue to hurt CX on
top of the heavy oil hedging loss (40% of original
consumption hedge at
~USD64 Brent oil). CX has continue to seek room
for cost reduction including capex.
Relevant details: CX has planned 13 aircraft deliveries
for FY20 and has been under ongoing negotiation with
suppliers for deferrals in order to help preserve cash.
Analyst view: CX has already asked employees to take 3
weeks no pay leave. We believe CX would further
continue and enhance its cost cutting measure including
CAPEX reduction especially as demand remains
depressed.
CS HOLT view – market pricing in long term
CFRO of 3%, broadly in line with the
experience of the past cycle: HOLT suggests the
market is pricing in a long-term CFROI of around
3%. CX’s experience has been volatile over recent
years but it has seen a low-
mid- single digit percentage
CFROI in most of the early
stage of the last cycle in
particular.
CX capex plans low in 2020 but ramping in 2021
HOLT pricing in a long-term CFROI of 3% (green dot)
Market cap (HKDm,
RHS)
Planned capex (HKDm,
LHS)
50000 50000
45000 45000
40000 40000
35000 35000
30000 30000
25000 25000
20000 20000
15000 15000
10000 10000
5000 5000
0 0
2020E 2021E
China Eastern (A shares) (Underperform, TP Rmb )
Analysts: Lok Kan Chan, Kenneth Fong, Rebecca Law
Key risk: With weakened demand, CEA needs to
continue cost cutting and capex reduction.
Relevant details: Aircraft commitments at RMB 18bn
in FY20 and RMB 12bn in FY21. The company has
planned to introduce 38 aircraft from Airbus, 5 from
Boeing, and 3 from COMAC in FY20. No order has
been made for this year.
Analyst view: Due to the weakened demand, CEA
has continue to negotiate with suppliers to delay
fleet delivery.
Given CEA is a SOE, its unutilised banking facilities is
high at RMB 50bn so fleet delivery is unlikely to be
impacted by liquidity. That said, fleet delivery plan
should mostly rely on demand.
CS HOLT view – market pricing in long term
CFRO of 8%, above the experience of the
past cycle: HOLT suggests the market is
pricing in a long-term CFROI of around 8%
which compares to low-mid-single digit
percentage CFROIs over the past cycle.
CEA 3-year committed capex on aircraft HOLT pricing in a long-term CFROI of 8% (green dot)
Market cap (RMBm,
RHS)
Planned capex (RMBm,
LHS)
80000 80000
70000 70000
60000 60000
50000 50000
40000 40000
30000 30000
20000 20000
10000 10000
0 0
2020E 2021E 2022E
9000090000
China Southern (A shares) (Underperform, TP Rmb )
Analysts: Lok Kan Chan, Kenneth Fong, Rebecca Law
Key risk: With weakened demand, CSA needs to
continue cost cutting and capex reduction. We
highlight capex plans ramp down from 2020 into
2021 then 2022.
Relevant details: Aircraft commitments at RMB 41bn in
FY20 and RMB 21bn in FY21. In FY20, CSA planned to
introduce 36 fleets from Airbus and 42 (including 737-8)
from Boeing fleets.
The company has already delayed 16 aircrafts
delivery in 1Q20.
Analyst view: Due to the weakened demand, CSA
has continue to negotiate with suppliers to delay
fleet delivery.
Given CSA is a SOE, its unutilised banking facilities is
high at RMB 250bn so fleet delivery is unlikely to be
impacted by liquidity. That said, fleet delivery plan
should mostly rely on demand.
CS HOLT view – market pricing in long term
CFRO of 7%, above the experience of the
past cycle: HOLT suggests the
market is pricing in a long-term
CFROI of around 7% which
compares to low-mid-single
digit percentage CFROIs over the
past cycle.
CSA 3-year committed capex on aircrafts
HOLT pricing in a long-term CFROI of 7% (green dot)
Market cap (RMBm,
RHS)
Planned capex (RMBm,
LHS)
2020E 2021E 2022E
00
1000010000
2000020000
3000030000
4000040000
5000050000
6000060000
7000070000
8000080000
Interglobe Aviation (Outperform, TP Rs 1,500)
Analysts: Lokesh Garg, Gaurav Birmiwal
Key risk: While capex risk is limited given Indigo
finances its fleet via operating lease, its fleet growth (a
plane a week) limited only by manufacturers ability, has
to slow down. Indigo has been having hefty MTM gains
(aircraft value) on SLBKs and those gains may go too.
Indigo only gives capacity guidance.
Relevant details: Half of this incremental capacity was
planned to be deployed on short-haul international
routes, which may be difficult now. Indigo has a large
order book with Airbus and it may want to renegotiate
pricing in changed circumstances.
Analyst view: Indigo was strong (~US$ bn free
cash), however 4Q20-2QFY21 losses can be
overwhelming. Indian govt. unlikely to help much.
Indigo can manage capacity addition by accelerating
the phase out of >6-7 years old A320CEO leases as
maintenance on these is quite heavy.
CS HOLT view – market pricing in long
term CFROI of 9%: The market is pricing in
a long term CFROI of % vs % in
January 2020.
Limited capex risk given op lease financing
HOLT pricing in a long-term CFROI of 9% (green dot)
Market cap (INRm,
RHS)
Planned capex (INRm,
LHS)
2020E 2021E 2022E
00
5000050000
100000100000
150000150000
200000200000
300000 300000
250000 250000
350000350000
400000400000
Singapore Airlines (Neutral, TP S$)
Analyst: Louis Chua
Key risk: SIA has heavy planned capex, peaking in
FY21E at S$6bn with FY20-24E cumulative capex at
S$, while earnings recovery remains uncertain.
The value of SIA’s investments in associates & JVs
could also see further write- downs due to the COVID-
19 outbreak.
Relevant details: With net gearing rising to as at 3Q
FY20 due to its fleet expansion plans coupled with the
significant decline in passenger revenue owing to Covid-
19, we estimate SIA could require S$ of liquidity by
Jun-20. SIA has since announced that it is raising S$
in new equity and up to a further S$ via 10-year
Mandatory Convertible Bonds (MCBs) via rights issues.
Carrying value of SIA’s associates & JVs is ~S$ as
of Dec-19.
Analyst view: We take comfort that Temasek Holdings
(% shareholding) has committed to subscribe for its
pro-rata entitlement and backstop the balance of the
proposed capital raising. While significantly dilutive to
shareholders, we believe the capital raising exercise and
access to credit facilities should provide sufficient
liquidity for SIA to continue operating as a
going concern amidst COVID-19 uncertainties.
CS HOLT View – market pricing in long-term
CFROI of 2%: HOLT suggests the market is pricing
in a CFROI of % for Singapore Airlines, implying
that the market is expecting returns to remain below
historical averages on a five year view.
SIA annual capex plans at ~74% of mkt cap
HOLT pricing in a long-term CFROI of 2% (green dot)
Qantas (Neutral, TP A$)
Analysts: Paul Butler, William Park
Key risk: Qantas has confirmed its liquidity position of
A$ on 25 March. The key risk is around
challenges, timing and costs associated with ramping
up operations post- COVID-19.
Relevant details: FY20 capex guidance at A$ per
annum before travel restrictions. Cancellation of the off-
market buyback to preserve A$150m in cash. Deferred
payment of dividends until September. Available liquidity
stands at A$ with a further A$ in
unencumbered assets.
Analyst view: We estimate Qantas’ sustainable
maintenance capex at ~US$ per annum. In FY21
and FY22, we expect management to lower this to
~A$600m to conserve cash. In FY23-26, we think capex
for fleet renewal will need to step up (. Project
Sunrise) to ~A$ per annum.
CS HOLT view – stock pricing in long-term
returns of 4%: HOLT suggests the market is
pricing in a CFROI of % for Qantas, below pre-
crisis level but above historical average through
the cycle.
QAN capex (CSe) down from ~30% to ~10% of market cap
HOLT pricing in a long-term CFROI of 4% (green dot)
Global Commercial Aerospace
- OEMs
24
Airbus (Outperform, TP EUR 82)
Analyst: Olivier Brochet
Key risk: Sustained deferrals of deliveries from airlines
suppressing build-rate rebound. Cash gets tested with
lower PDPs (pre-delivery payments) if deferrals take
hold, and a risk of inventory build if Airbus mismatches
production to demand.
Relevant details: Airbus has of liquidity at
end of March 2020. Cut A320 to 40/month on 8th April,
from at FY19. Each produced but undelivered
A320 = EUR30m cash on B/S. Orderbook split (37%
APAC, 26% Eur, 20% , 8% ). Airlines >3%
Orders = IndiGo 9%, AirAsia 5%, Wizz
4%.
Analyst view: Rate cut likely aligned with current PDP
collection pace. Narrowbody skew offers protection vs.
Boeing, and APAC traffic rebound could help protect
backlog. Strong liquidity in our view, and 2022e FCF
yield of % vs % L-T average.
CS HOLT view – market pricing in long-term
CFROI of 3%: HOLT suggests the market is
pricing in a CFROI of %, which suggests
% upside is warranted.
Although forecast CFROI (pink
bar) likely needs to adjust
down further following
production cuts. This compares
to 4-8% levels through the last
cycle
Group EBIT and FCF per delivery
HOLT pricing in a long-term CFROI of 3% (green dot)
Boeing (Neutral, TP $187)
Analysts: Robert Spingarn
Key risk: Sustained deferrals of deliveries and order
cancellations while the MAX remains grounded
accompanied with ~$40bn of gross debt could pose
liquidity problems.
Relevant details: At the end of FY’19, BA reported net
debt of
$ and drew $ on its term loan in the
beginning of Q1’20. However, the cash value of the
~400 built but undelivered MAX aircraft is
approximately $20bn.
Analyst view: While BA is now arguably cheap against
our latest ’22 FCF/share est. of $ (bolstered
by lingering deliveries of inventoried MAXs), concerns
regarding near- term liquidity and supply/demand
shock coupled with a net-
900
800
700
600
500
400
300
200
100
0
Source: Cirium
BA Deliveries 1990 - 2019
773
debt burden ($36bn 12/31/20E) that could hamper SH
returns for several years leave us at our Neutral
rating.
CS HOLT view – market
pricing in long- term
CFROI of 7%: HOLT
suggests the market is pricing
in a CFROI of % vs
% in January 2020.
591 Peak to
Trough
-58%
590
Peak to
Trough
-54%
248
271
This also compares to a CFROI level of 8%-
16%.
HOLT pricing in a long-term CFROI of 7% (green dot)
Global Commercial Aerospace
- Suppliers
27
Hexcel (Outperform, TP $34)
Analysts: Robert Spingarn
Key risk: Further production rate cuts from BA and
Airbus, especially for widebody aircraft where HXL has
significant exposure and the likely delay of a clean
sheet aircraft utilizing composites from either BA or
Airbus.
Relevant details: Commercial aerospace accounts for
~65% of HXL’s total sales. HXL’s shipset values on the
A350 and 787 are $ and $, respectively giving
it a high degree of downside risk to widebody production
cuts.
Analyst view: Despite the near-term headwinds, we like
HXL as a long-term play given the likelihood of increased
composite penetration in commercial aviation, and see
less relative downside to Airbus rates. At 11% 2021 FCF
yield, we retain our outperform rating as HXL is unlikely
to be significantly impacted by the potential acceleration
of comm’l aircraft retirements
CS HOLT view – market pricing in a long-
term CFROI of 1%: HOLT suggests the
market is pricing in long term
CFROI of % vs a 10 year median
of %. Expectations are well
below all previous lows – market
implied CFROI troughed at %
during the GFC.
HXL Shipset Values (USD millions)
A220 737
A320ceo 737 MAX
A320neo 747
A330 767
A330neo 777
A350 777X
A380 787
Source: Company Data
HOLT pricing in a long-term CFROI of 1% (green dot)
Meggitt (Underperform, TP 270p)
Analyst: Chris Leonard
Key risk: Airline decisions to defer new aircraft
deliveries, and manage fleet by retiring older jets is a
key margin headwind to Meggitt. Regional jet operators
bankruptcies increasing is also a large risk to profits
pool on their wheels+brakes franchise.
Relevant details: Civil Aftermarket 31% of revenue
FY19. Holds % market share globally on
regional/biz jets for wheels+brakes. Capex broadly
fixed in 2020e, CSe , inventory build could
be inevitable as customers de-stock Meggitt spare
parts.
Analyst view: Slowdown in air traffic, retirements
of old lucrative jets, regional jet fleet reduction,
spare parts cannibalising sales – pose a quadruple
threat to margin.
Consensus is too optimistic with EBIT margin climb in 2021-
AM Split (inner ring) of 31% of Group rev from civil
aftermarket, shows regional + large jet skew
22e as air traffic returns. Our view – wait for mid-
2020s for margin recovery.
CS HOLT view – market pricing in long-term
CFROI of 6%: HOLT suggests the market is
pricing in a CFROI of % which is the
lowest since 2004 and may have risks to
the downside as the business model of
Meggitt is severely challenged by Covid-
19 implications in our view.
Energy &
Other, 10% Civil
aftermarket,
31%
6%
Defence,
36% 18%
8%
Civil OE,
23%
Civil aftermarket Large jet Regional Jet Bizjet
HOLT pricing in a long-term CFROI of 6% (green dot)
Raytheon Technologies (Outperform, TP $81)
Analysts: Robert Spingarn
RTX Pro Form 2019 Sales Mix
Key risk: Reduced air travel demand from COVID-19
and the potential for permanent demand destruction is
the biggest risk facing RTX. Lower deliveries, aircraft
retirements and a surplus of used serviceable material
are the primary downstream risks.
Relevant details: RTX generates significantly more
profit dollars from aftermarket sales than on OE sales,
particularly at P&W where OE sales are made at a loss.
Merger with RTN adds significant liquidity and cash
stability.
Analyst view: We like the stability offered by the
defense businesses and see a path for the stock to
generate $ in FCF in 2022. This, combined with
strong NPV from the GTF program keep us at
Outperform.
CS HOLT view – market pricing in long-term
CFROI of 10%: HOLT suggests the market is
pricing in a long term CFROI of % compared
with % in January.
Raytheon’s 10 year median
CFROI is %.
PW
Collins ISAS IDMS
Source: Company Data
HOLT pricing in a long-term CFROI of 10% (green dot)
20
% 27
%
23
%
30
%
Rolls Royce (Outperform, TP 1,070p)
Analyst: Olivier Brochet
Key risk: A reduction in new widebody aircraft
deliveries on the Airbus A350 in particular, puts at
risk the FCF inflection story in the mid-2020s.
Prolonged storage of the global widebody fleet, with
retirement risks here, will impact near- term cash
recovery.
Relevant details: Mid-term guidance to reach £1 per
share of FCF in (2023-24), we believe A350 was
accountable for % of the cash target. Q1’20 flying
hours reduced 25%, with March showing a 50% decline.
Analyst view: With group liquidity of in
Q1’20,
provides a lifeline for Rolls to survive the crisis in our
view.
Although widebody traffic will take time to recover, this
remains a value play with 55% market share of the
widebody order book.
CS HOLT view – market pricing in long term
CFROI of 9%: HOLT suggests the market is
pricing in a CFROI of %, which shows
market factors in growth of the
installed fleet that can drive
Rolls-Royce’s aftermarket
recovery.
Trent XWB (A350 engine)., was the key cash driver for the story
in our view
HOLT pricing in a long-term CFROI of 9% (green dot)
In service In storage Storage as a % of fleet
Safran (Neutral, TP EUR 84)
Analyst: Olivier Brochet
Key risk: Cancellations of airlines orders on the 737
MAX could boost cash burn on the LEAP engine.
Aftermarket also hampered by air traffic strongly
declining in 2020, with a slow recovery (IATA -48%
RPK in 2020). Risk of lucrative CFM56 5B/7B engines
reducing as fleet sunsets (retirements).
Relevant details: Split of OE/AM revenue is
%/45% in 2019. Safran has a % market share
on the A320neo family (not a retirement risk). Net
debt at FY19 was , with an undrawn
liquidity line of set to expire in 2022.
Analyst view: Safran is skewed to narrowbodies which
likely
Safran’s Engine fleet: in number of engines
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
has a more sustainable aftermarket than widebody
players, when traffic rebounds. Investor will pay a
premium for this.
CS HOLT view – market pricing in a long-
term CFROI of 8%: HOLT suggests the
market is pricing in a CFROI of %.
We use HOLT to show this factors in a
sales growth of - 30%, +9%, +7%,
+7%, +7% and EBITDA
margins dropping from 18% in 2019 to
stay at 13% from 2020-24.
Narrowbodi
es
Widebodie
s
CF6-6
CF6-50
CF6-80E
CF6-80C
CF6-80A
CFM
56-
5C
G
Enx-2B
G
Enx-1B
G
P7000
G
E90-76/94
G
E90-
110/115
LEA
P-1B
LEA
P-1A
CFM
56-2
CFM
56-3
CFM
56-7B
CFM
56-5B
CFM
56-5A
HOLT pricing in a long-term CFROI of 8% (green dot)
Senior (Outperform, TP 198p)
Analyst: Chris Leonard
Key risk: Build rates reducing at Airbus and Boeing, as
SNR is geared for higher production rates at 57-
60/month. Delay on 737 MAX return to service or
cancellations. Industrial end- market weakness (%
rev) is a risk, aerospace other 75%.
Relevant details: Aerospace decline of % in
2020e results in Group EBIT margins troughing at
c3% in 2020e (peak of % 2012). 2021e 737 MAX
EBIT 13% of Group.
Liquidity of GBP305m at FY19 with 2024 average
maturity protects outlook.
Analyst view: Senior is exposed to weakening build
rates, but liquidity provides a healthy position that does
not warrant % discount to book value. Immaterial
civil aftermarket exposure makes for cleaner recovery
story in our view as OE production has risk to upside in
2022/23 following deferrals.
CS HOLT view – market pricing in long-term
CFROI of -1%: HOLT suggests the market is
pricing in a CFROI of % which
is unrealistic in our view given the
drawdown in capex we expect in
2020e. As OE production for
aerospace comes back, we
anticipate CFROI inflecting as capital
assets are already in place.
KEY
CHART
Split of 2019 revenue
HOLT pricing in a long-term CFROI of -1% (green dot)
25%, Industrial
end-markets
6%
3%
8%
4%
4% 75%, Aerospace
47%
6
%
2%
7% 13%
Large Aerospace
Space & Non-
Military Passenger
Vehicles Other
Military Aerospace
Other Aerospace
Oil and Gas
Regional & Business
Jets
Truck & Off-
Highway Power &
Energy
TransDigm (Outperform, TP $439)
Analysts: Robert Spingarn
Key risk: Lower ASKs, inventory destocking, and
TDG’s high degree of financial leverage threaten
TDG’s liquidity and ability take advantage of lower
group valuations through M&A.
Relevant details: After paying a $ special
dividend in January, TDG’s financial leverage was
~. In the last month TDG has issued $ of
new debt to increase liquidity as it braces for a
slowdown in commercial aftermarket sales.
Analyst view: Despite its high degree of financial
leverage, we note that approx. 37% of TDG’s sales
comes from the defense industry, which should remain
stable despite the impacts of COVID-19. Post special
dividend TDG had ~$ of cash, enough to cover two
years of interest payments. We expect the compounding
machine to return to trend as ASKs recover.
CS HOLT view – market pricing in long-term
CFROI of %: HOLT suggests the market is
pricing in a CFROI of % for Transdigm
versus a forecast CFROI of 32% and a historical rate
of 35%+. This makes Transdigm the
most undervalued stock in the sector
per the HOLT model.
KEY
CHART
%
%
%
%
%
%
%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
TDG Organic Revenue Growth Rate ASK Growth Rate
Long term revenue growth vs industry ASK growth rates
Source: Company Data, IATA
HOLT pricing in a long-term CFROI of % (green dot)
KEY
CHART
Woodward (Outperform, TP $77)
Analyst: Robert Spingarn
Key risk: Premature retirements of comm’l
aircraft, green time management, and customer
destocking of inventories may significant drop in
sales and FCF potential. Lower OE deliveries also
a negative for aftermarket initial provisioning.
Relevant details: WWD is currently entering a
capex holiday, which should help it to preserve cash
in the near- term. Maintenance capex for WWD is
~$65m on an annual run rate.
Analyst view: Defense OEM and AM sales should
help limit the downside risk for WWD. We also note,
WWD’s favourable narrowbody revenue exposure
should enable it to recover faster as domestic air
traffic recovery is likely to precede the recovery in
international air traffic.
CS HOLT view – market pricing in long term
CFROI of 7%: HOLT suggests the market is
pricing in a long term CFROI of % versus a 10
year median of %, driving 57% upside per the
HOLT FY'19 Aerospace Sales Mix
10%
Commercial OEM
Commercial AM 36%
Defense OEM 28
%
Defense AM
26
%Source: Company Data
HOLT pricing in a long-term CFROI of -7 (green dot)
Companies Mentioned (Price as of 24-Apr-
2020)
Air China (, HK$) Air
China (, ) Air
France-KLM (, €)
Airasia Group (, )
Airbus SE (, €)
American Airlines Group Inc. (, $)
Boeing (, $)
Copa Holdings (, $)
Delta Air Lines, Inc. (, $)
Deutsche Lufthansa (, €)
EasyJet (, )
Hexcel Corporation (, $) Interglobe
Aviation (, ) International
Airlines Group (, ) Meggitt
(, )
Qantas (, A$)
Raytheon Technologies (, $)
Rolls-Royce (, )
Ryanair (, €)
Safran (, €)
Senior (, )
Singapore Airlines Limited (, S$)
Southwest Airlines Co. (, $)
TransDigm (, $)
Turkish Airlines (, )
United Airlines Holdings, Inc. (, $)
Woodward Inc (, $)
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This research report is authored by:
Credit Suisse Securities (Europe) Limited ....................................................................................................................Onur Muminoglu
Credit Suisse (Hong Kong) Limited ..................................................................................................................................Lok Kan Chan
Credit Suisse AG, Singapore Branch ............................................................................................................................Louis Chua, CFA
Credit Suisse Equities (Australia) Limited ...........................................................................................................................Paul Butler
Credit Suisse Securities (India) Private Limited ...............................................................................................................Lokesh Garg
Credit Suisse International ....................................................................................Neil Glynn, CFA ; Olivier Brochet ; Christopher Leonard
Credit Suisse Securities (Malaysia) Sdn Bhd ......................................................................................................................Danny Chan
Credit Suisse Securities (USA) LLC .........................................................................................................Jose Caiado ; Robert Spingarn
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Credit Suisse Securities (Europe) Limited ....................................................................................................................Onur Muminoglu
Credit Suisse (Hong Kong) Limited ..................................................................................................................................Lok Kan Chan
Credit Suisse AG, Singapore Branch ............................................................................................................................Louis Chua, CFA
Credit Suisse Equities (Australia) Limited ...........................................................................................................................Paul Butler
Credit Suisse Securities (India) Private Limited ...............................................................................................................Lokesh Garg
Credit Suisse International ....................................................................................Neil Glynn, CFA ; Olivier Brochet ; Christopher Leonard
Credit Suisse Securities (Malaysia) Sdn Bhd ......................................................................................................................Danny Chan
Important Credit Suisse HOLT Disclosures
The HOLT methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of
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