Travelers hate them – fees for everything. Change your mind? That will be $50 please. Got bags? A fee. Spirit even charges for carry on bags. Is there no end to the nickle and diming? The short answer is no. Continue reading
[UPDATE - The table and blog updated]
Besides seeing its neo sales continue to grow – perhaps not as fast this year as last – Airbus created a race for the two engine firms. The stakes are huge. Both CFM and P&W need to build and maintain momentum. Continue reading
This show follows the usual pattern – orders get announced for maximum media coverage. And the orders are big. Boeing started with a massive order – it’s biggest ever – Lion Air of Indonesia finalized a firm order for 201 737 MAXs and 29 Next-Generation 737-900ERs. The agreement, first announced last November, includes options for an additional 150 airplanes. Lion is launch customer for the MAX-9. With orders for 230 airplanes valued at $22.4 billion (list prices), the deal is the largest commercial airplane order ever in Boeing’s history by both dollar value and total number of airplanes.
Not to be outdone, Airbus also made an order announcement. ALAFCO Aviation Lease And Finance Company, a Kuwait-based international aircraft leasing company, finalized a purchase order for 35 A320neo Family aircraft bringing its total backlog for the type to 85. The firm contract is an increase from the previous agreement signed at the 2011 Dubai Airshow for 50 A320neo aircraft.The 2011 neo order included P&W GTF engines so we assume the same applies to the new order as well.
Then another unexpected order popped up. BOC Aviation said it has ordered 20 C919s. There has been little news from COMAC and the C9191 for a while. And keeping the order game going, Bombardier announced and order for five Q400s. This follows news last week of an order for up to 24 CRJ1000s. Interestingly the customers have not been announced though the assumption is that the CRJs are going to Garuda.
EU economic news is playing out with devastating effect among the region’s airlines. Five EU airlines have collapse in the last few months. Air Alps, Czech Connect, Cirrus, Spanair and Malév.
More are at risk – Aer Lingus, TAP and LOT. State airline support within the EU is waning. Many of these airlines are old names in the business – Malév was in business for 66 years. Malév said that as its suppliers lost confidence they demanded to be paid in cash. The nature of the airline business is that they run like supermarkets. They charge for supplies but can never pay cash. Once suppliers demand cash, no airline can survive for long.
The collapse of these EU airlines offers an opportunity for the arriviste of the industry. Specifically this would be cash-rich airlines in the Gulf clamoring for more EU slot access. If they were to own an EU airline the slot problem would diminish considerably. Hence the clever move by Etihad buying into airBerlin. Airlines in China might also consider this, but aviation relations between the EU and China are frosty at this writing.
State owned airlines are an anachronism. Airlines are too risky and no longer offer “jobs for pals” within the EU; and this is the case in most countries these days. Airlines cannot survive if they have too many employees. To qualify this, take the example of a successful airline – in 2010 Southwest handled 2,513 passengers per employee. By comparison Delta handled 1,369 and American 1,315. The following chart provides another measure of how airlines continually try to squeeze more out their people.
Both US and EU airlines have been aiming at increased efficiency. The dotted green line (using right axis) shows by how much the US airlines have been able to get their labor force to work harder than the EU airline labor force. The delta between US and EU airlines is quite remarkable. A number of US airlines recently started to show profits. The chart, obviously, does not show the pain suffered by staff who lost their jobs.
The EU airlines still on brink face trying times – weaker demand; poor capitalization and robust and aggressive LCCs. Within the US we have seen Chapter 11 help the legacy airlines cut their costs to become competitive with the likes of Southwest.
US and EU airlines provide great lessons – the race to lower costs never ends. State support only delays the inevitable; it is a band aid that offers no cure to the fundamental illness of too much cost. We will see additional failures in the EU this year, as several other carriers continue to struggle, and LCCs swoop in to take the most profitable routes when they fail.
India’s Kingfisher Airlines had another challenge when it ran into IATA’s clearing house rules. The airline has about a third of its fleet out of action. One would think that these challengers are making the future of the airline ever more tenuous. Apparently not according to analysts at Bangalore Aviation. We did a podcast with them last night.
Reuters is reporting that Kingfisher’s CEO has kept up with his demand that Indian airlines be allowed to import their own jet fuel. Since some Indian states charge as much as 28% sales tax on fuel, being allowed to bring in their own fuel could bring huge savings. Indian airlines will be allowed to import jet fuel directly under a proposal from a ministerial panel Aviation Minister Ajit Singh is reported to have said.
The NEO and MAX have taken the market by storm. Customers seem to be willing to stand in line – even though the 787 and A380 programs taught that sometimes one can order too early. Yet the desire for fuel efficient workhorses appears inelastic. Continue reading
Cathay announced it was adding to its existing A350XWB order by committing for six additional -900s. The airline now has 36 A350s on order plus two more committed via pre-arranged 12 years leases. These six aircraft are scheduled for delivery in 2016-17.
The selection of this airplane is important because Cathay Pacific is also a significant 777-300ER customer. The A350-900 falls between the 777-200 and 777-300 in size, with 314 seats, falling between the 301 and 365 capacities of the competing 777 models. The forthcoming A350XWB-1000, at 350 seats, will be closer to the 777-300ER, and could represent a potential replacement for that aircraft in the future.
This is certainly an interesting development, given that Boeing will be introducing its revised 777-8 and 777-9 shortly after that timeframe, although it is not expected that the re-engined version of the 777 will fully match the economics of the much lighter, heavily composite A350XWB.
Airlines that operate the 777 are typically very pleased with the airplane, which has been among Boeing’s best products. Cathay has been a particularly happy customer of the 777-300ER. Boeing’s revised 777-8 and -9 models will no doubt continue to build on the success of their -300ER, and we expect the 777-9 to be larger than the existing 777-300ER to improve seat-mile economics.
Cathay has ordered 71 777s so there is no doubting its current commitment to the airplane. But ordering the new technology A350XWB could mean a key conquest for Airbus in the large wide-body twin segment. It appears Cathay is planning on standardizing on the A350-900, and possibly the A350-1000 in the future, for the 300-350 seat segment.
An airport at the Thames Estuary has moved a step closer with confirmation the UK government would hold a consultation into the proposals. Having ruled out expansion at the existing airports in the south of England, the government is seeking ways to ensure the UK maintains its position as an aviation hub. London’s airports have been forbidden to grow by adding runways. Anyone who has flown through Heathrow knows how crowded it is.
The estuary idea, first championed by London mayor Boris Johnson, faces many hurdles. The fact the idea is being given any consideration after being dismissed at first is good news. UK deputy prime minister Nick Clegg is thought to be opposed to the idea and environmental campaigners have attacked the plan, claiming local birdlife would be endangered. Chancellor of the exchequer George Osborne did not rule out the plan in 2011 during his Autumn Statement.
There is more information on the estuary proposal here.
Reuters reports EU airlines are buying up carbon credits on the cheap. Recently carbon credit prices have dropped to about half what they were trading at a year ago. This move is quite different from other non-EU airlines; whose reaction has either to join the lawsuits or, in the case of China, to refuse to pay them. The most extreme case has been AirAsia X which simply withdrew from the market because the ETS, fuel prices and other costs were too much.
Interestingly Ryanair announced it would charging customers €0.25 per leg to offset the ETS fee. The airline thinks its 2012 ETS bill will be around €20 million – equivalent to just under 80 million passengers for 2012. Meanwhile Lufthansa said it would need to pass on €130 million in ETS costs to its customers. In 2011 Lufthansa carried 90.2 million passengers (group figure). This means the airline needs an ETS offset of approximately €1.44 per passenger assuming they carry the same numbers in 2012.
As EU airlines move on the slump in carbon credit prices, hedging much as they do on fuel, prices are likely to firm. In the meantime we are now able to define with more clarity what the impact will be for travelers. Certainly, given some of the onerous taxes and levies (the UK APD being the worst), the ETS offset fee is not going to be high enough to hurt air travel. At the moment at least.
Which makes the current non-EU airline position seem more about fighting EU laws than anything else. Given the EU’s determination to enforce the new rule, airlines may have to simply swallow their pride and buy credits to offset ETS charges. Of course ETS costs per passenger are low now. As soon as the airlines start to get on board, we suspect the EU will increase the ETS to test how much revenue they can squeeze out of travelers. No government can resist seeing how hard it can squeeze any gold egg laying goose. And in doing so, the EU risks getting the airline industry even more irritated. But the EU has demonstrated its deaf ear before.
It is the time of year for prognostication. In that tradition, AirInsight will boldly go where all pundits have gone before – but with better accuracy. With our psychic powers in full swing, here are our fearless predictions for 2012:
1. The world will not end – the Mayan calendar was carved on a stone of a certain size, and they ran out of space. Period.
2. Yes, we will see increasing amplitude in climate, natural disasters, and even the location of limited wars and revolutions, with Syria and Iran currently the most likely candidates. But political change will limit the impact of the powers that be today.
3. We will see interim solutions to the Eurozone crisis, as well as the US dollar, as governments and central banks join forces to salvage the financial system and limit future derivatives and risky behavior. We may go back to investing in whole aircraft again, rather than A,B, and C tranches of bundled EETCs and derivatives, if regulators have the intestinal fortitude to increasingly limit derivative instruments. We believe they will, especially with housing assets.
4. Aircraft manufacturers will increasingly become financiers of last resort – constraining capital for important R&D initiatives and new product development.
5. The business aviation recovery will begin, albeit quite slowly, but business jets and turboprops will increase sales in 2012.
6. The new generation of fuel efficient aircraft engines and high fuel prices fueled by political instability will force Boeing, Airbus, Bombardier and Embraer to increase production capacity to meet new demand. New NB aircraft will be sold out thru 2022 by YE 2012.
7. Just as when jets replaced turboprops, some relatively young narrow bodies with older engines will become economically obsolete at a young age, causing some residual value issues for leasing companies and financial institutions. One can’t assume a 25 year economic life any longer for a new A320 or 737NG delivered in 2012.
8. With American in Chapter 11 bankruptcy, expect the America West management team of USAirways to make a run at American, further consolidating the US legacy carriers.
9. The EU emissions trading scheme will continue to be controversial for the foreseeable future, and will likely impact some Airbus orders for China in retaliation, as well as provoke retaliatory actions by the US Congress in the US — which could negatively impact the Eurozone recovery. Brussels hasn’t awakened to reality yet, and likely won’t until the Euro collapses, and the British celebration haunts the continent.
OVERVIEW
2011 was a boffo year, with record orders at Airbus and outstanding orders for Boeing’s 777-300ER. Had Boeing’s 737 MAX commitments become orders by year end, Boeing would have had a boffo year, too. With the expectation that these commitments will become converted to orders this year, Boeing should easily become more even with Airbus. Having been bolstered by some 1,500 neo orders last year, sales can be expected to slow this year because delivery positions are now well out to the end of the decade.
With cargo statistics beginning to soften dramatically toward the end of last year, this usually is a leading indicator of softening passenger traffic. Might this also depress orders? We’ll see.
But in the USA, the New United Airlines is expected to place an order for 150-200 single-aisle aircraft. Proposals from Airbus and Boeing were due in December. The Old United has a large aging fleet of A319s/A320s and Boeing 757s and a smaller fleet of launch-customer 767-200s. This is going to be a big catch, and it will be interesting to see if Airbus can convince United’s new Boeing-centric Continental Airlines management that it should win at least some of the order. Now that Boeing has the MAX to compete with the neo, the competition is much more even than had it been neo vs 737NG.
This will be an important year to watch for Airbus and the A350 development and for Bombardier and the scheduled first flight of the CSeries. This will be an important year for Boeing and whether it can efficiently ramp up production of the 787 and if it can complete on a timely basis all the rework on those nearly three dozen 787s sitting around Paine Field in Everett.
Here is a company-by-company rundown.