Premium #229 – The Slowly Evolving Fleet

With discussion about a bubble in the single aisle markets and the realization today that even widebody orders are slowing, what conclusions can we draw from fleet data? Clearly it is difficult to see a pattern when looking year by year because fleet decisions are long term plans. We decided to take a longer-term approach and examine how the passenger fleets are evolving in five year increments, starting in 2000. The chart illustrates that fleet growth has been robust. This is despite 9/11, oil shocks, SARS, ISIS terrorism and other nasty factors that typically have negative impacts. Over the fifteen-year period the passenger fleet grew by just over 88%. These fifteen years represent the equivalent of half the career for a typical aircraft. Is it any wonder why the industry leaders are so confident? The industry has withstood tremendous shocks and kept right on growing. The confidence is easy to understand. It also explains why the industry is now sitting on a record backlog, despite the slowing aircraft orders across the board. It would seem, reasonably, that the industry growth pattern is well established and robust enough to withstand anything. Even as we put forward this view, the comments from GE’s Aviation President David Joyce resonates. As we mentioned previously, Mr. Joyce remarked at Farnborough that we cannot expect the past order levels to sustain. After all, he noted, the OEMs have to deliver the equivalent of thirty years of production over the next ten years. So we can expect to see the fleet to continue to grow, as the chart suggests. But we should also expect to see slowing orders, which if continued after the backlog is trimmed would eventually impact fleet growth. The question is whether the rush for new aircraft is over, and airlines will return to ordering aircraft closer in to their deliveries? Airbus, in the most recent Global Market Outlook forecasts the fleet doubles between 2016 and 2035. Boeing is even more optimistic. A comparison of the big two OEM forecasts is shown below. The differences between the two are substantial and the cause of much discussion. Each company has a slightly different definition of the market. Airbus has three categories and ignores anything under 100 seats. We selected the Boeing data that matched to the Airbus forecast in creating the comparison. It is interesting to see how confident Boeing is in the single aisle category where it is being outsold by Airbus. Could it be that Boeing’s confidence is based on something it has planned for the segment that has not yet been announced? Or is that confidence based on the expectation that low cost carrier growth in emerging markets will demand a substantial increase in narrow-body aircraft? If we take a look at the fleets over the last 15 years and express the size of the fleet by seat capacity, as percentages, the data show the following. This chart compares the percentage of fleet in four categories from 2000-2015. It is notable that the fastest growing segment in absolute terms is from 50-85 seats. The biggest winner here has been Embraer and its E-170/175. Much of this growth was in the US, where regional airlines needed to update their fleets as the pressure from majors forced them to consolidate operations away from 50 seater RJs to the larger models. As we can see the impact has been substantial. The growth in the small segment up to 100 seats pits the smaller firms against each other, and the competition has been brutal. Yet this is where we see newcomers like Superjet and Mitsubishi which are only going to add to the competitive pressures. From 101-200 seats we see the heart of the market, with approximately 60% of the overall share. This is also a brutal segment, where incumbents Airbus and Boeing have to fend off the encroachment of Bombardier and Embraer at the low end. Of these two, Bombardier represents the more significant threat as it will almost certainly stretch the CSeries beyond current capacity, enabling it to compete directly with the heart of the narrow-body market. The overall single aisle market has typically ranged from 79% to 84%. Compare these numbers with what Airbus and Boeing have in their 2035 forecasts. It would seem we might expect the single aisle market to shrink in market share, albeit gaining volume in the number of aircraft in absolute terms. From 200-300 seats we see the twin aisle market emerge, and the success of the 787 and A330 dominate this segment. As the early 777s and A340s retire, operators will select from the 787 and A330neo or A350. This segment is duopoly territory and no less competitive. It appears this segment will stay between 8-10% of the fleet. Finally, the biggest aircraft with over 300 seats have stayed around 7% of the market. Within this segment, the number of aircraft with 300-350 seats appear to hover around 3% share. The 351-400 seat segment has grown from about 2% to 3%. The >400 seat segment has declined in share from 3% to about 2%. This decline is in part because with 747s retiring, operators have not replaced the 747s with A380s and not grown their fleet capacity. Rather, the focus has been on moving towards the 777-300ER and the “right-sizing” argument has worked. What is intriguing here is that Boeing has been successfully deploying “right-sizing” at the high end but using the “up-sizing” argument at the lower end (162-seat 737 MAX8) segment. It appears that operators of passenger aircraft are cautious at the high end because of both capital and aircraft-mile costs resulting in a distinct move towards focus on 350-400 seats. This means focusing on the 777X and the A350. Operators do not seem convinced of the mega-city argument made by Airbus to justify the A380. This may be myopic since airport congestion is real and getting worse as traffic keeps growing. The question is when congestion begins to result in turning away new frequencies at key airports, as that will be the impetus for a rebirth of very large aircraft orders. Are we five, ten, or fifteen years away? At the smaller end of the market there is a lot of activity from new aircraft from several OEMs. Arguably the most disruptive element in the smaller segment is the Pratt & Whitney GTF engine, which is powering a number of these aircraft. Boeing appears to be much more confident than Airbus in its forecast, particularly for narrow-body aircraft. There is a substantial difference between Airbus and Boeing forecasts. But given that the forecasts are for 20 years, it may be a while before we know whose forecast was closest to reality.

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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