Last year the first Airbus Market Survey in Latin America provided valuable insights on how airline executives in the region perceive market evolutions and fleet requirements. Airbus has just launched their 2014 Airbus Market Survey in Latin America.
In the 2013 results Airbus discovered that:
- Intra-regional connections was the top long term network development opportunity
- The market has a “very optimistic near-term outlook”
- Criteria for new aircraft is driven by fuel burn, revenue generation ability and fleet rationalization
- Airlines need to see savings of 15% to transition to same generation and 25% to transition to next generation
- Best age to replace aircraft is between 8-12 years or a 15-20% cost improvement
With that backdrop, let’s look at this market. The table shows the regional fleet earlier this year. Over 77% of the fleet is narrow body (single aisle). This is why the intra-regional market shows up as important. The problem is that, on average, the fleet is really aged.Of the 1,683 narrow body aircraft in the market, 1,539 or 91% are operated by airlines. Among the airlines the fleet’s average age is just over 15 years. Based on Airbus’ survey it would seem this market has rich pickings. The next table shows the fleet by type and average age. We are showing the top 80% of the fleet. The highlighted rows shows aircraft well into the aged sweet spot Airbus identifies.
From the table we can see the A320 is by far the most popular aircraft deployed in the market – giving Airbus an advantage in the rationalization argument. Notice the aged aircraft are Boeing and Douglas. Based on Airbus‘ research these aircraft fall into the “transition” category. For an airline to switch to a next generation solution now becomes a key driver. The hurdle rate is 25% better economics according to Airbus’ research.This is where things become very intriguing. Airbus and Boeing don’t have anything in the 25% improvement category. Moreover the aircraft highlighted are all between 100 and 150 seats. If airlines were to stay with Boeing that would mean going to the MAX7 – but that is far away in delivery terms. Switching to Airbus means the A319neo – also far away in terms of EIS.
The identified targets represent 272 aircraft and we estimate a market total of 523 meet the age criteria. But what about the airlines? Airlines looking at aircraft in the 100-150 seat segment are most likely to consider the Embraer E2 or Bombardier CSeries. Of these the CSeries will be ready first and Bombardier would be delighted to take orders with deliveries starting in 2015.
For the 737-200H the two key customers to visit are Avior and Aviacsa. For the 737-300 the key customer is VivaAerobus; which is a current Airbus customer, flying three A320s now and with 30 A320neo on order. For the 737-200 the key customer is Aerolineas Argentina – probably not worth the effort for now. But certainly they would be influenced by export credits from Brazil or Canada. For the DC-9-30 the key customer is Venezuela’s Ascera – probably also not an ideal candidate for a sales campaign. The MD-82 key customers are Ascera, Aeropostal (Argentina) and Laser (Venezuela). None look especially attractive because of national politics and weak economies. The Fokker 100 key customer is Avianca Brazil. The airline also flies Airbus, but being Brazilian, we would suggest the E2 has the advantage here.
So even as the Latin America market is vibrant in terms of regional traffic growth, the key area of opportunity seems to be in the 100-150 seats segment because of aged aircraft. We do not see Airbus and Boeing with any advantages here other than pricing. Their aircraft are too heavy for this segment and the operating economics will require steeper discounts – and given their backlogs, these are unlikely. This means Bombardier and Embraer are “in the game”. Bombardier has the advantage of being able to deliver sooner on next generation aircraft. Whereas Embraer has the advantage of being the “local” option. The extent of the market opportunity could be between $8-10bn in orders over the next decade and we expect to see a good fight for every campaign.