Six months ago, last October, the headlines spoke of Airbus resisting pressure from lessors and engine manufacturers that would have it cut planned production rates.   Airbus currently plans to increase A320neo family production to 64 per month in the second quarter of 2023, 70 per month in early 2024, and 75 per month by 2025.  An article in the Financial Times stated “the chief executives of Avalon and AerCap wrote to Guillaume Faury, Airbus chief executive, in recent weeks to express their concerns that the aircraft market would not support the most aggressive increases in output rates.”

The lessors felt a surge in production rates might be disruptive to an industry recovering from the global pandemic and negatively impact the values of older aircraft. Engine makers also warned Airbus that the increase might be difficult given the fragile supply chain during the recovery from the pandemic.

Fortunately, Mr. Faury stuck to his guns and is moving ahead with his plans, citing the resilience of the industry from prior downturns, such as 9/11, the two Gulf Wars, and SARs.  In each of those cases, lessors also warned about potential overcapacity, only to see the industry recover quickly from those downturns.  Of course, the lessors don’t want the value of their fleet diminished until their sale, typically through an asset-based securitization, can provide the appropriate return.

With supply chain problems making virtually every current aircraft delivery from Airbus and Boeing about a month late, Steve Udvar-Hazy from Air Lease Corporation remains concerned about the supply chain and the ability to achieve those planned rates at the ISTAT Americans conference earlier this week. 

Oil Prices Spike

Then came Putin pushing into Ukraine, and upsetting world energy markets.  High energy prices have just changed the economic equation to be even more in favor of new narrow-body airplanes, as they burn 15%-18% less fuel than the prior generation.  The rise in fuel prices has created a new mandate for a more rapid changeout of the last generation, albeit earlier than planned, because of the inherent economic disadvantage.  Lessors, of course, will want their share, which lately has been about 60% of the market.

But with a massive order book at Airbus, without the planned production increases, there would be no available slots in the skyline for new customers or additional lessor orders.  Mr. Faury understands that despite periodic shocks, the aviation business has an inexorable upward trajectory.  One would think that the lessors would also have a long-term horizon for their business plans rather than to second-guess the OEMs, whose business it is to build aircraft based on 20 year plus program time frames.

The lessors are now jumping on board the bandwagon, as their customers will soon be looking at new aircraft and re-thinking their fleet plans in light of high fuel costs.  But to get their share of the business, production rates will need to increase.  Today, the major lessors now appear to be in favor of increasing production rates, a 180-degree reversal from six months ago.  

Boeing, back in 2015 at the JPMorgan Aviation, Transportation and Industrials Conference, their CFO Gregg Smith stated “there is really no correlation between oil and demand for airplanes.  Customer should really look much more long-term and look at the overall operating expense of the airplane.”  Those of us who analyze the industry observed the opposite – high fuel prices fuel demand for replacing older generation aircraft with new aircraft.  The reason is simply that the overall operating economics change dramatically.  The overall operating expense of an airplane is driven disproportionately by its thirstiness for fuel.

Boeing is struggling to deliver 737 MAX aircraft, producing at a relatively low rate as it still needs to deliver about 350 already product aircraft.  The FAA pulled Boeing’s production certificate for the MAX after discovering a significant number of quality issues with completed aircraft and has still not restored it.  Until Boeing can convince the FAA that it can deliver airplanes with an acceptable level of quality, each individual aircraft needs to be inspected and approved by the FAA.  This may impact Boeing’s ability to meet its production ramp-up in 2022.

If Airbus is successful in increasing rates and Boeing cannot match them, the market share impact will continue to be as dramatic as today’s 65%-35% differential in backlog, a sharp divergence from the 50%-50% levels we’ve seen over the last couple of decades.  Airbus’ move to increase rates appears to be well-timed, with higher fuel prices fueling demand, and additional aircraft availability combining to meet customer needs.  Advantage Airbus, and disadvantage to those lessors who haven’t yet fully utilized asset-based securitization to de-risk their fleets from the risk of earlier than planned retirements for last generation aircraft. 

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Ernest Arvai
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President AirInsight Group LLC

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