Insight: Monday 4 May 2020: Early Visitors to the Airline Graveyard

News:
In the wake of the current global pandemic, airlines are sending aircraft into storage in record numbers as demand for travel drops due to quarantine orders and international travel bans. But at the start of the year, the desert was relatively empty. At the end of April, 59% of the commercial aircraft fleet worldwide had moved into storage. In prior crises, aircraft in storage topped out at about 11% of the fleet. This crisis certainly is different.

Airlines are already taking actions to decide which planes are likely to re-emerge from the desert, and while most will remain in storage and likely parted out and scrapped. This morning, American Airlines announced that it will permanently retire five aircraft types, the E190, 767-300ER, 757-200, A330-300, and CRJ-200. All of these aircraft are older models whose missions might be replaced with other aircraft that will be more suitable to a post-crisis environment. Earlier, Air Canada stated that it will accelerate the retirement of 79 aircraft in its fleet, including Boeing 767, Airbus A319s, and Embraer E190s.

Analysis:

What will we see as a post-crisis environment? Lower traffic is the first element, as traffic is not expected to rebound to 2019 levels before 2023 in domestic markets, and not until 2024 for international markets. There is no doubt that many aircraft will be stored for some time. The question will be which types re-emerge from the desert and which will never fly again.

Lufthansa presents an interesting role here, as they fly nearly every type of aircraft possible, and are one of only two carriers flying both the A380 and the 747-8i. They also own 168 of their 181 wide-body aircraft, leasing only 13. That provides flexibility in determining which aircraft will return, whether A340-600s, 747-400s, A340-300s, A330-200, Boeing 767-300ERs, and Boeing 777-200s. They may be a bellwether to watch in terms of which aircraft types are likely to remain in the desert permanently.

The decision to retire an older aircraft hinges on multiple factors – size, and market demand being the first two. If you can’t profitability fill an aircraft, it isn’t of much use. Next are operating and maintenance costs. Older aircraft tend to have higher fuel burn, higher emissions, and higher maintenance costs than newer models. Depending on fuel price and other factors, those aircraft may not be as competitive with newer aircraft, even when capital costs are considered.

The aircraft’s age, the position of the aircraft in the maintenance cycle, and whether a retrofit will be needed to maintain the current premium seating and branding of the airline is another consideration, as new interiors and aircraft and engine overhauls can be expensive. Delta, for example, operates several older MD-88 and MD-90 models that were scheduled for retirement by 2021 but are unlikely to re-emerge from the desert.

Insight:

The depth and scope of the current pandemic will tax aircraft markets and likely result in older and less efficient models staying in the desert permanently, culling the fleet to match demand as traffic slowly returns.

We expect the following aircraft types that enter storage during the crisis will have a slim chance of returning to service.

• Regional Jets: CRJ200, CRJ700, ERJ135, ERJ140, ERJ145.
• Narrow-Bodies: A318, A319ceo, B737-600, B757-200, B757-300, MD-80, MD-90;
• Wide-Bodies: A330-200, A340-300, A340-600, A380, B767-300ER, B777-200, B747-400. Each of these aircraft may be phased out by several airlines as the current pandemic runs its course and the industry slowly recovers.

We expect that some of the newer aircraft that have been temporarily grounded will re-enter service once traffic picks up again. Our analysis sees these aircraft as the winners in the market:
• Regional Jets: CRJ900, CRJ1000, E175
•Narrow-bodies: A220, A320ceo and A320neo, A321ceo and A321neo, B737-700, 737-800 and 737-900ER, 737MAX when re-certified, E190, E195, E190-E2, E195-E2.
• Wide-bodies: A330-300, A330neo, A350, B787, B777-300ER

Airbus and Boeing will continue to produce aircraft, albeit at lower production levels after customer deferrals, to replace some of the less-efficient older aircraft. While airline fleet plans will change with reconfigured schedules amidst lower demand and delivery schedules altered at Boeing and Airbus, new aircraft will continue to be needed to replace older aircraft that are retiring, just not at the record-setting production rates we’ve seen over the last few years.

The shakeout will favor the newest and more efficient and environmentally friendly aircraft, an important factor in some government bailouts that come with “carbon-neutral” strings attached. This crisis has resulted in the deepest downturn globally that the aviation industry has experienced during the jet age, and it will re-shape airline fleets through the early retirement of older aircraft types.

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