Insight: Wednesday 8 April 2020: The Other Side – Part 4: Fleet Impacts

News:
Once the coronavirus crisis ends, air travel will resume, but at lower levels of activity for the first few months as the economy rebounds, employees return to their offices and plants, and airport open at different times throughout the world.

Airlines will be loathed to immediately institute a full schedule, as traffic will not warrant either the number of flights nor typical seating capacity for those routes. In past downturns, airlines have returned to service in a conservative manner, utilizing smaller and regional aircraft to restore flights to routes, increasing the size of aircraft as traffic returns.

This situation has shut the majority of airline operations down quickly and has had a severe effect on load factors, as evidenced by this chart of TSA passengers screened, where levels have dropped to 4.5% of last year’s level.

As traffic and passengers return, we expect that airlines will reintroduce flights on a market by market basis, not all at once, and begin many routes with the lowest risk aircraft they can fly in that market. That typically means an initial focus on smaller aircraft, including regional jets and small narrow-bodies for domestic operations, and large narrow-bodies or smaller wide-bodies for international operations in certain markets.

That may or may not match the actual fleet in place after the downturn, and airline fleet planners are currently analyzing their future orders, deciding which airplanes to keep on order and which to defer or cancel as they project alternative demand scenarios.

Analysis

Airlines are risk-averse. If a market can be restarted with a small regional jet, and the airline can fill the seats, that’s ideal. From there, they can substitute a larger aircraft and move the regional jet to open other markets, eventually returning to aircraft and frequencies that better match supply and demand.

As an airline brings its fleet out of the desert and back into service, we would expect the smaller aircraft to be the starting point, but perhaps running in larger markets than they normally would. For business travelers, frequency is an important element, and the use of smaller aircraft can satisfy that need.

Similarly, in opening transatlantic routes, an airline may wish to re-introduce service with a long-haul narrow-body such as an A321 rather than a larger wide-body aircraft. This entails less risk and would enable the airline to maintain frequencies even if traffic has not fully returned to prior levels.

But airline by airline, fleet planners will be looking at how to optimize their fleet as traffic returns, with several factors coming into play. One of those is fuel price, as older aircraft models tend to burn more fuel than newer models. With oil prices currently at low levels, this would favor keeping older aircraft in the fleet in the short-term, while deferring new deliveries. But should fuel prices rise with renewed economic activity, the equation changes.

Assumptions with respect to future conditions drive fleet planning, and today’s effective shutdown of the industry for a longer than expected period requires some new assumptions. Those drivers include when economic growth will return and how robust it will be, how business and leisure travel return with the economy, and whether traffic will lead or lag economic growth. It will require assumptions about fuel pricing, aircraft values, maintenance costs and other factors to help optimize decisions about which aircraft to keep, which to retire, and whether the aircraft on order should be accepted, deferred, or in some cases, accelerated.

Insight:

Fleet planning is a complex process for an airline. Today’s coronavirus crisis adds uncertainty on several levels, making decision-making difficult. As a result, we expect airlines to take a conservative path to recovery and focus on utilizing their most flexible and economical aircraft first in the flight restoration process.

Today, we believe Airbus has a slight advantage over Boeing in that Airbus can address both the small narrowbody market and the large narrowbody market with newer aircraft than Boeing. At the small end of the market, the A220 is outselling the E2 series from Embraer by a wide margin. Similarly, at the high end of the market, the “middle of the market” pioneered by the 757 and 767, Airbus has a modern offering in the A321neo, XL and XLR, while Boeing’s 737MAX9 and MAX 10, even if ungrounded, lack the runway performance to be competitive. Advantage Airbus.

Of course, that doesn’t mean that Boeing is out of the picture. The question is whether the coronavirus will remain virulent or abate before the 737 MAX re-enters service. With the MAX grounded, Boeing is depending on older models in the narrow-body segment.

The wide-body portion of the market may see a rebound for the revised 787-8. This smallest version of Boeing’s popular wide-body has been revised with a tail section now similar to the newer models 787-9 and -10, which utilized newer technology. Bringing the -8 up to the standard of its larger brethren will make the -8 a more versatile aircraft, and low risk for its airline customers. We might see some orders for the 777X downsized into more flexible 787-8 models as the crisis unwinds. While Airbus offers the A330neo and A350-900, each is larger than the 787-8, which might be a “right-sized” alternative for the wide-body market today. Advantage Boeing.

The Bottom Line:

The economic downturn came at just the right time for Boeing, as it can buy time before its customers demand new aircraft be delivered. The payments Boeing paid to airlines for late deliveries of the MAX might now be reversed as airlines now seek to defer new aircraft. What’s good for the goose is also good for the gander.

While there remain too many uncertainties to predict what individual airlines will do, it appears that the A220, A321neo family and 787-8 are well-positioned as the industry exits the coronavirus crisis and returns to normal activity levels.

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