Premium – A Fleet Review of British Airways

British Airways is the flag carrier of the United Kingdom, and it is the largest British airline by fleet size and second by traffic after easyJet. The British Airways brand emerged in 1972 when the UK government merged state-owned BOAC and BEA. In 1987 the company was privatized. BA, as the company is more commonly known, is a founder member of the oneworld Alliance. BA has been a long time key Boeing customer Since 2000, there have been significant fleet shifts BA only has 9% of its fleet in medium-haul BA is a highly influential airline. Many airlines around the world follow it's fleet decisions. While this may once have been empire influence, today this influence is driven by BA's reputation as one of the world's premier airlines. What does the BA fleet look like since 2000? BA saw its fleet was impacted from various mergers, the most recent being British Midland in 2012. Note BA has kept its parked at a minimum. The following chart shows a fundamental shift that has taken place at BA over the period. In 2000 Airbus only had 11% of the BA fleet, but at the end of 2016, it was well over half. This switch is really important in terms the future for the aircraft OEMs. Next, let's look at the BA fleet by operational performance in three charts. As we go through these charts, consider what the impact from Brexit might have. It's an open question, but Brexit could impact how BA's fleet evolves. First the short haul fleet, where Boeing's demise in the fleet is apparent. BA did not move from the 737 Classic to the NG, switching to Airbus. There were 43 A319s at year end with an average age of 14.4 years - and these will likely be replaced by 2020. An RFP for this is likely within the next two years. Next, the medium-haul segment. This market is in the MOM segment. BA has been running down this fleet segment. It appears that BA will likely standardize on A321. There are only seven 767-300ERs left, and 10 A321neo on order. BA appears to be unprepared for competition from LCCs like Norwegian which will operate in this segment. BA's 767-300ERs have the range to serve markets as far away as California, which constitutes long-haul. It seems clear the airline needs to revisit to this segment. It is not able to compete with this fleet size. This segment offers the potential for opening new markets - as Norwegian intends. It might be appropriate to add A321LRs to this fleet. If JetBlue deploys its A321LR fleet across the Atlantic, as expected, BA will face a premium level competitor, not only the LCC Norwegian. Consequently, we think BA has to review this fleet to remain credible and effective. It seems clear the airline needs to revisit to this segment. It is not able to compete with this current fleet size. This segment offers the potential for opening new markets - as Norwegian intends. It might be appropriate to add A321LRs to this fleet. If JetBlue deploys its A321LR fleet across the Atlantic, as expected, BA will face premium level competitors, not only the LCC Norwegian. (In an earlier post we explained our reservations about LEVEL) Consequently, we think BA has to review this fleet to remain credible and effective. Besides a single-aisle ~225 seater with 4,000NM range offers disruptive potential to markets south and east of Heathrow. Moreover, such aircraft can serve other UK centers like Manchester with effective medium haul international service. Aircraft in this segment are workhorses at other airlines. At the US mega-carriers, this segment typically is one-third of the fleet. By that measure, BA has a weakness. The following chart perhaps illustrates this better than words. Finally, the long-haul segment. Like the short haul segment, the long-haul segment has been growing. The current fleet started evolving in 2010, with the deployment of 777-300ERs and a handful of A318s. As the 747s started retiring from 2013, the first 787-8s arrived along with more 777-300ERs, The first A380s also arrived in 2013. Boeing's monopoly among the long-haul fleet at BA ended in 2009 when the A318s started service between LCY and JFK. In 2013, with the A380's arrival, Boeing lost its flagship status at BA. This is not a current concern for Boeing as it holds a substantial lead over Airbus in long-haul fleet size at BA. But that appears to be changing. The following table lays out how the fleet looked at year end and also lists orders to date. The areas to note are BA's 747 fleet which is the backbone of its long-haul service. It does not appear the 777-300ER or even 777X will be the 747's replacement. It does appear the A350-1000 could be the 747 replacement even though many more need to be ordered to ensure that. BA stated at the time of the A350-1000 order this model would replace"some" of its 747s. BA has also stated it is in the market for well-priced second-hand A380s. The most obvious targets are those being retired by Singapore Airlines, which are also Rolls-Royce powered. BA will also need to review replacing the 777-200ERs as these reach 20 years in service. Will BA entertain A350-900s or 777-8? Almost certainly a vigorous campaign will ensure when that RFP is issued. Boeing could also offer more 787-9 and -10s. Whereas Boeing had no competition at the top end of the market at BA a few years ago, Airbus now offers compelling alternatives. Airbus has been successful at BA in the two smaller segments. Boeing will have a tough race on its hands even though it has long been a BA favorite. Of the 73 orders in place, Boeing only has 20 spread over three models to Airbus' 18 with one model. Finally, we look at engines. BA is a foundation stone Rolls-Royce customer. The International Aero Engines listed are on the A319/320 fleet and the engine was a Rolls-Royce/P&W joint venture. The 39 GE90s on the 777s were a one-off because when BA ordered a second batch of 777-200ERs they came with Rolls-Royce. The 777-300ERs have GE as standard. While Rolls-Royce does not have a guaranteed monopoly at BA, it is clear the airline prefers to buy from this vendor when it can. BA's commitment to the 777-300ER is not strong - it leases most of the fleet. If the A350-1000 performs as Airbus has advertised, we expect BA to order more of that model and, possibly, the -900 as well. Boeing might get more 787 orders as the 777-200ers retire. But it looks like Airbus has a strong chance or growing its fleet share at BA. Although Boeing has an advantage with the 787-9 on the forthcoming Heathrow-Perth route, Airbus already has a response in the A350-900ULR. BA is facing more choices across it entire fleet range.

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