Premium #325 – Fleet review of the ME3

The ME3 are highly influential But their growth phase has slowed This must be a concern for Airbus & Boeing The ME3, or Emirates, Etihad and Qatar Airlines, have had a significant impact on commercial aviation in their short lives. The next chart demonstrates this. In less than two decades these three airlines have accumulated a fleet of over 500 aircraft. But the fleet growth is not the only impressive measure. The world's premier long-distance aircraft are the A380 and the 777-300ER. In the next table, we list the world fleet of these two aircraft. Within the Middle east region, the ME3 dominate. In 2000 the ME3 accounted for under 12% of the region's fleet. By the end of 2016, they accounted for 36%. All the region's A380s belong to them and of the region's 777-300ERs, the ME3 account for 85%. The ME3 have used their geographical locations to create business models that have become the nemesis of the older, more established, airline brands. Not only did the ME3 build powerful fleets that can reach any market, they also invested heavily in cabin services. Without the legacy costs to hold them back, the ME3 were also able to price their products aggressively. This quickly led to them driving premium traffic away from the older airlines. The influence the ME3 acquired in the short time they have been in business is unprecedented in commercial aviation. Airbus and Boeing have become dependent on these three airlines because of their large orders. It is commonly known that Emirates, as the world's largest A380 operator is trying to push Airbus to keep improving the aircraft. As another example take a look at the Boeing 777 order book from 200 through March 2017. The ME3 have become increasingly influential. For Boeing, the ME3 are crucial to their 777X program. Over 76% of the 777X orders have come from the ME3. The consequence of this dependency at Airbus and Boeing is that if these three airlines see slowing growth, as is happening now, those big order books for the top of the line models start to look soft. For Boeing, we have seen what this means. For Airbus, it is not only the A380, it's also the A350. We are seeing three business models at the ME3 at work. Full independence at Emirates, alliance member at Qatar and hybrid at Etihad. All three are slowing down. In the US, we have seen the network airlines seek government protection. In the EU, we have seen Lufthansa first seek to throttle back growth and then start to develop a working relationship with Etihad. The disruption by the ME3 has reached every major air travel market. That, of course, is why we are now going to see a slowdown. The ME3 have disrupted every significant market they can. Their grabbing of market share is not complete but becomes every more difficult with each year. The market reacts and the ME3 now face competitors who no longer ignore them. Qantas changed its route to Europe and the UK to pass through Dubai rather than Hong Kong. Singapore Airlines has had to get used to real competition for being #1 in cabin comforts as the ME3 relentlessly seek to outdo each other. One of the most important market changes has been a bifurcation of long-haul travel into premium and LCC. For network airlines this is a big problem. For travelers seeking the best price, the move to LCCs means the current large aircraft now may fly empty seats. Airbus, with its A380 being the most likely to suffer this problem, has refined the cabin to handle 80 more seats and drive down its seat-mile costs to the lowest in the market. On the other hand, LCCs like Norwegian are offering an effectively priced premium seat compared to network business class. While Norwegian is a small player today, the industry has learned from the ME3 not to ignore any disruptive threats. The Bottom Line: What are the future implications? This is a tough question. The ME3 have moved from being a disruptive force to become part of what is now normal in air travel. They continue to seek new niches - like service to Brazil. But the disruption becomes harder. For instance, the ballyhooed A380 service to DFW by Emirates has been downgraded to a 777-300ER. Qatar's service with an A380 to Atlanta has also been downgraded to a 777-300ER. Traffic doubles every fifteen years. But the ME3 fleet grew faster than that, and now it needs to take a breather and allow the market to catch up. The concern should be how long this breather will be. For Airbus and Boeing, missing big orders from the ME3 will be a reality check - the rest of the market is mature and buys much more carefully. The slowdown in orders for the top end aircraft is already showing for the 777 and A380. Growth among long-haul LCCs will not be for these aircraft. We expect a strong slowdown in wide-body orders, with a book to bill well under one for the next three years.

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