Daily Insight – Friday January 25, 2019 – Dublin Thoughts

News AirInsight attended the two aviation finance conferences in Dublin this week. The conversations we had and overheard were generally positive. Everyone is looking at growth. Traffic is strong. Load factors are high and airlines need more lift. The sooner the aircraft are delivered the better. Steven Udvar-Hazy and ALC are more sanguine and do not want to see further production rate increases at Airbus and Boeing. Analysis This ongoing bullish view does not solve the supply chain crisis. John Plueger, new boss at ALC, mentioned that oil and labor remain the airline industry’s big costs. The industry is seeing softening oil prices again. The recent spike caught Monarch, Primera and airBelin, and another spike will catch others. Norwegian perhaps? What we found amazing is that there was all the talk about cheap capital and cheap oil. Not a word mentioning labor – especially the pilot shortage. Widerøe has been suffering from a pilot shortage that may mean a reduction in state subsidies because the airline cannot fulfill its missions to small outlying communities. Where have you heard this before? Why in the US, where EAS services are not attracting airlines because they are short of pilots. Even mega-regional Republic has suffered from this. Insight It is our view that the aviation finance industry is perhaps too comfortable. The expansion that started over a decade ago shows no end in sight. This is leading to unbridled optimism. Money is flooding into the industry – much of it chasing yields. Because yields are low everywhere else, aviation is attracting hot money. But aviation is not a safe haven that some people might think it is. Sure Airbus and Boeing have near ten-year backlogs. The “happy days are still here” crowd will point to the fact that air travel doubles every 15 years, with an unbroken record. However during that 15-year period we experienced regular shocks – oil, terror, SARS, etc. Can “hot money” handle these shocks? Steve Udvar-Hazy noted that easy money does not necessarily come with industry insight. He’s right of course. Over time the safe bet is always to take the “flight to quality.” When the going gets tough, go with the industry veterans every time. Shocks are going to come - of that we are certain. The industry is currently seeing a flood of new lessors. They are chasing deals, driving down rates. There are a lot of airlines that have fewer than ten planes. They are the first ones that will go under when the next tsunami of bad news hits. They are the ones with the deals from new lessors. When this happens, can the remaining players pick up the slack? Maybe not – load factors are about 80%. There is a swing from smaller narrow bodies to larger ones. But this is still not enough capacity. Then, to top this off, there is a global shortage of pilots. Mesa in Arizona recently started hiring crews from Jordan. So the US pilot shortage among regionals now impacts Jordan too. The skilled labor pool is finite. Lots of pilots are reaching retirement age and there are not enough pilots in the funnel to replace them. This is a new shock coming. And we think nobody is ready for it. Our sense from Dublin is that there are tectonic shifts happening deep down in the industry that only the oldest of hands are sensing. Every upward swing has a correction. That is certain from economic history. So, while we all enjoy the ongoing optimism in Ireland, it is a good idea to check your emergency response kit. When the next shock comes it will be painful. The almost overnight absorbing of the Monarch, Primera and Air Berlin fleets was an aberration. It is foolhardy to think aberrations are normal. Normal for commercial aviation is long term growth interspersed with severe swings.

US Flight Planner - US DoT On-Time Data	Airbus vs Boeing - Official OEM Data
US Airline Schedule Performance - US DoT Data	Daily OEM Production & Deliveries -

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