Random Thoughts on US President’s Day

Random Thoughts on US President’s Day

It is a quasi-holiday in the US, with government and financial markets closed, but many businesses open. With not much news generated on a holiday, here are several random thoughts in brief.

Boeing

and Airbus narrow-bodies not in Singapore

Neither Airbus nor Boeing are exhibiting their A320neo and 737MAX aircraft in Singapore this year. Boeing has no commercial aircraft, while Airbus has the A350-1000 on site. While the focus of this year’s Singapore Air Show appears focused around defense and business aviation, the airshow in what is rapidly becoming the largest market for growth in aviation, Asia, appears to be losing ground. Paris and Farnborough remain the largest attraction, but it now appears Dubai has eclipsed Singapore for third place. After many years of success, the Singapore show appears to be moving backwards with the duopoly players. With strong backlogs, the delivery skylines for the big two appear quite full.

COMAC does display C919 at Singapore

Meanwhile, China’s COMAC is displaying the C919 competitor to the A320neo and 737MAX at Singapore, its first international appearance. COMAC needs additional international customers, and this is a good opportunity to display its wares for the Asian aviation community. Singapore seems an ideal place for China to expand its wings, and is a positive for the credibility of the air show.

Airbus pushes back development of new model?

The Airbus road show continues, with CEO Guillaume Faury and CFO Thomas Toepfer in London. With record orders in 2023 and delivery slots effectively now into 2031 for narrow-bodies and limited slots in 2028 for the A350, their backlog is solid and the upward trend should continue unabated, Airbus is unlikely to launch an all-new aircraft before 2030, which many expected in 2028 or 2029. That translates to a 2037-2038 EIS for the A320 replacement. With a current 60-40 market share advantage over Boeing, the cumulative effect will be substantial in terms of aircraft in service and long-term aftermarket revenues for Airbus.

Airline Outlooks Vary Substantially by Region

The airline industry is coming off of a mixed bag of earnings, depending on where in the world they are located, the pandemic recovery, and regional economic outlook.

North America – Airlines are facing healthier economic trends as the US economy leads the world out of the pandemic. First quarter performance was stronger, particularly for ULCCs that were lagging in 2023. While equity prices are down, the outlook, particularly for the big 3, is quite compelling. We see strong performance continuing in 2024.

Europe – Weaker economic growth in Europe could impact airlines, and long-haul capacity increases are significant enough to threaten international yields, particularly on transatlantic operations. The European network carriers may face a more difficult 2024, and among the LCCs, issues with the MAX and GTF impact the major players. Profitability pressure for European-based airlines is likely for 2024.

China- Domestic flight activity in China is outpacing pre-pandemic 2019 levels, but international flights lag, at about 67% of pre-pandemic levels. Routes between US-China are at only 20% of pre-pandemic levels, and while opportunities for growth exist, geopolitical decisions may impact the restoration of flights to pre-pandemic levels until 2025. International traffic in China will return to 80% of pre-pandemic levels according to CAAC, and a tightening supply-demand balance should favor higher yields.

Asia-Japanese airlines, including JAL, appear to be in a cost-containment mode. Reaching earnings targets may be a stretch in 2024, but returns and dividends are increasing. Singapore Airlines has seen a supply-demand imbalance resulting in elevated air fares, and Cathay Pacific had strong earnings from both cargo and passenger recovery in Hong Kong. We are bullish on Southeast Asia as a growth market for 2024, with North Asia less robust.

Australia- Qantas remains a question mark, given investigations and Senate inquires into airfares, slot allocation at Sydney, and labor as issues. Nonetheless, the fundamentals for Qantas remain strong and the carrier should bounce back, despite the issues, as both international and domestic travel are recovering with supply continuing to be constrained, resulting in higher yields. We are positive on Qantas outlook, despite the regulatory difficulties.

Latin America – This region led the recovery in growth last year, and strong performance in the airline sector was able to absorb capacity increases and maintain strong yields. Jet Fuel prices are a potential headwind in Latin America, but Copa, Azul, LATAM, and Volaris all appear to be performing well. The question for Volaris is what the GTF impact will be on the airline’s performance moving forward. All in all, Latin American airlines, sans GOL, appear well positioned for growth.

India
The supply-demand outlook in India is in the airline’s favor during the next two years, as a health yield environment, industry consolidation, and capacity constraints have led to 87-88% load factors, which should remain through 2025. RPM growth at 17% should outpace capacity growth at 14%, further enhancing yields. The outlook in India is positive.

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