The aircraft market, particularly for narrow-body airplanes, has been changing dramatically over the last two years.  Airlines are seeking better seat-mile economics, both by ordering larger aircraft and by increasing seat density on existing aircraft to accommodate traffic growth.  The implications are quite interesting for both aircraft manufacturers and aircraft lessors.

The Trend to Larger Narrow-Body Aircraft
The current trend in the narrow-bodied market can be shown in a comparison of narrow-body aircraft that have been delivered, and those yet to be delivered in backlog for current and forthcoming models from Boeing and Airbus.

Both manufacturers offers aircraft in three sizes.  The A319 and 737-700 have 124 and 126 seats in two class configurations, representing the smallest in size.  The A320 and 737-800, at 150 and 162 seats respectively, are the mid-size, and the A321 and 737-900, at 185 and 180 seats, represent the large size.   The Boeing 737Max models, -7,-8, and -9, correspond to the current NG models in size.

The following chart compares historic deliveries with backlogs at the end of the 1st quarter 2013.  It is quite clear that that the proportions of small, medium and large airplanes are changing, and quite dramatically, from historic levels.

The once strong market for the A319 and 737-700 has all but disappeared in favor of the larger sized aircraft.  While aircraft of this size have accounted for 26.6% of program deliveries to date, they only represent 5.7% of future volume. The medium and large size models are taking a higher proportion of future deliveries, while medium size aircraft moving from 63.0% of deliveries to 75.8% of backlog, and the large sized aircraft from 10.4% of deliveries to 18.4% of backlog.

At a recent conference in Phoenix, Airbus Americas’ CEO Barry Eccleston noted that of Airbus’ 394 single aisle aircraft orders from the first quarter 2013, 225, or 57%, were for the largest variant, the A321.  With slimline seats, Airbus has already raised the single-class capacity of this aircraft to 236, and is now looking at slimline lavatories to further increase capacity for airlines in effort to maximize the number of seats.  He remarked that in 2007, airlines were looking at the A319 as the right sized airplane for opening new markets, but today, the decision metrics all center on seat mile costs.

In six short years, the market has completely changed. We expect this trend to continue as airlines find it more cost-effective to fly fewer, but larger narrow-body aircraft. With a slow capacity for growth, particularly in the United States, load factors have increased to record levels, and using larger aircraft represents a “safer” growth strategy than adding additional frequencies and risking excess capacity.

The Squish Factor
Airlines are also introducing slimline seats and reducing seat pitch to add additional seats to narrow-body aircraft.  Lufthansa has increased the capacity of its A320s by 8% through the use of thin-line seats from Recaro.

Similarly, Southwest in the US is introducing new thin line seats that allow an additional row of seats in their 737-700 aircraft (137 to 143 seats) with a one-inch reduction in pitch, a 4.3% increase in capacity.  Others are certain to follow this trend.

These new technology seats are unique because of their contours, which enable the same amount of space between seats at tray table level, yet allow an increase in the number of rows on the airplane.  The manufacturers claim that passenger comfort is equivalent, and that the additional room from the smaller frames makes up any difference. We will have to wait and see whether our rear-ends agree with that assessment.

The Bottom Line
The trend towards larger narrow-bodies is now quite clear.   What it means is that the 737-7Max and A319neo might not be as sound an investment for an airline or aircraft leasing company, as demand is moving away from that sector, likely impacting residual values.  This is also impacted by the forthcoming entry into service of the similarly sized Bombardier CSeries that offers much better seat-mile economics.

But it also means that investing in the larger A321neo and 737-9Max will likely find increasing demand, higher residuals, and will be easier to re-market in the future than today’s large models.  If I was I a betting man, I’d wager the larger models will continue to increase their market share and hold residuals better than their smaller counterparts, and favor the larger aircraft in financing transactions.

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