This is a continuation of our recent story on the demise of the 747. There have a spate of stories recently about the 747s future. Most of these stories talk about the lower costs of the Super Twins and how they can replace the 747.  Of course that is a big factor, but what are these costs?  Let’s take a look at the 747-400 data .

There are 193 747s operating in the United States and of these, 62 are -400s.  Let’s look at data from three US airlines flying the 747-400; UPS, Delta and United.

UPS is a relatively recent acquirer of the -400, which replaced older -100 and -200 models in its fleet. Notice that from 2009 when its flight hours started to operate at a typical 25,000 hours per quarter, repair costs kept rising.  Freighters tend to be retired passenger aircraft and this means they are old to start with. The UPS fleet consists of 12 -400Fs and one -400M.  The -400M is over 20 years old at this writing; six of the -400Fs are over 15 years old, and the remainder are between five and six years old.   It is notable that maintenance costs for both airframe and engines have continued to rise, despite similar utilization in recent years.

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Delta picked up its 747 fleet from Northwest. Northwest was the launch customer for the 747-400.  The average age of Delta’s fleet of 16 aircraft at this writing is 19 years. After Delta took over Northwest one can see the Delta MRO was effective in reducing engine repair costs even as hours grew.  Delta’s MRO capabilities are well regarded, and need to be, because the airline, like Northwest that it acquired, likes to keep older aircraft in service rather than replace them with new aircraft.  But it is notable that even as engine repair costs are lower than they used to be, airframe repair costs continue to rise.  After all, old aircraft are like old people, and require more care.

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United has a fleet of 24 747-400s and they average 18 years of age; the oldest is 24 years old and youngest 14 years.  As the chart illustrates, repair costs continue to slowly rise.  We also note that for the fleet air hours are declining.  These airplanes are aging rapidly, and simply don’t perform as well as they used to.  Anecdotal evidence shows that United has had trouble with this fleet can be found here and here.  Indeed in 2010 Jeff Smisek, United’s CEO, described the 747 being an “unacceptable product” for the Australian market.

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To get more color on the United 747-400 fleet we analyzed data from FAA’s SDR (Service Difficulty Reports)  reports.  The results are detailed below. Between 2008 and the first half of 2013, United reported 1,500 SDRs on the 747 fleet.  The number reported each year is on the left bar chart. The pie chart on the right breaks down the SDR code types.  Over two-thirds of the SDRs are lighting related and the next largest category is fuselage related at 7%.

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What will happen next for the US airlines operating the 747-400?  Delta does not appear in a rush to replace its aircraft and this was confirmed by the airline: “We have not announced any plans about our 747s. We do not have any current plans to take delivery of additional 747 aircraft“.

United plans for the A350-1000 to replace its 747s.  For United the A350 can’t come quickly enough.  The A350-1000 could achieve EIS by 2017 according to Airbus.  Projecting 747-400 airframe repair costs from now to the end of 2017, United could be spending 33% more than it is now.

Can United use its 777s in the meanwhile?  The following chart shows that these aircraft are working hard.  United has 74 777s and they average just under 14 years old.  We can also see United is working this fleet harder each quarter, which means this fleet is likely picking up work from the 747s.  But here also United is seeing a rise in repair costs, though on a per aircraft basis it is much lower than on the 747s. Interestingly the 777 engine repair costs are rising faster than airframe repair costs. We estimate that in 2012 United spent on average $4m annually per 747 on airframe repairs.  By 2017 this could rise to $5.5m annually per aircraft.

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So what does United do? It turns out that the airline is squarely in the sights of Airbus.  Airbus’ COO Customers, John Leahy, has spoken about United being a prime target for the A380.  Airbus needs to sell more of these aircraft, and fast.  EADS CEO Tom Enders is unhappy with A380 sales, and Tom Williams EVP at Airbus is wary of how the potential for slowing A380 production would impact the program.

Now visualize the situation John Leahy faces. Between the need to sell more A380s and ensure a stable production level should provide John Leahy with extraordinary leverage.  French politicians will panic if Airbus has to slow A380 production. Things are bad enough in France, economically, as it is.

Rather than see this as bad news, John Leahy is likely empowered to offer United an extraordinary deal.  Apart from potentially juicy terms, United needs a solution to its aging 747 conundrum.  United is one of the few airlines with traffic volumes and markets that could deploy a VLA successfully. A founder member of the Star Alliance, United could readily deploy a VLA in markets across the Pacific and Europe. We suspect that Jeff Smisek and John Leahy have been having some interesting discussions.

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