Post-coronacrisis aviation: Middle Market Aircraft golden age?

The past few weeks, which have felt like months, were filled with anxiety and uncertainty within the aviation industry. It seemed like changes were coming at an unprecedented rate, as governments around the world started imposing travel limits to prevent the spread of COVID-19, with changes to the limits occurring on a daily basis. While the situation has normalized as much as it can under such circumstances, with airlines operating only crucial flights, including cargo and repatriation flights, the outlook is as foggy as the opening scenes from the video game Silent Hill.

Many do agree that the industry will not stay on the same growth path that it experienced prior to the outbreak, as demand and confidence in air travel has taken a huge hit. While predictions range from mild to absolutely devastating effects, it is clear that the aviation industry will not be the same after the crisis. After all, each of the previous shocks have left their mark; – whether it would be the consolidation in North America following 9/11 or the dominance that low-cost carriers established in Europe after the 2008 financial crisis, some will fall and some will rise after the coronacrisis.

However, in the medium-term, one type could rise like no other: Middle Market Aircraft.

Wide-body unpopularity

As the coronavirus spread globally and it became clear that passenger demand would not recover in the short-term and airlines needed to cut costs significantly as cash flow is reduced, companies began shipping their older and less fuel-efficient aircraft to retirement. Even the young guns, which were recently built, are left unwanted: Airbus indicated that it was forced to cut production rates, as airlines defer deliveries of newly built aircraft. Boeing closed down shop for two weeks starting March 25, 2020. An update in early-April announced that the manufacturer is set to suspend its main factories in the Seattle, Washington area indefinitely, while Boeing 787 Dreamliner production in North Charleston, South Carolina, was also suspended indefinitely. As of April 17, 2020, the Chicago-based planemaker indicated that it planned to gradually resume aircraft manufacturing processes starting April 20, 2020.

The problems for both Original Equipment Manufacturers (OEM) do not end there. On the horizon, both have new and upcoming products on the table. While Airbus had its fair share of issues selling the A330-800neo before the coronacrisis, Boeing bet a lot on the 777X: the folding wingtip aircraft was supposed to become another cash cow for the company, joining the 737 MAX and the 787, both flagship products, which are also suffering their fair share of issues. The 777X, intended to replace the aging 747 and the aging technology of the 777, had an okay start. Boeing had amassed 309 orders for the now-longest commercial aircraft from eight customers, with 10 orders associated with unidentified customer(s).

The Airbus A380, for example, a behemoth in its own right, is seeing its future put in jeopardy right before its eyes. Airlines are already retiring the double-decker because of its tight profit margins – with an uncertain future about the number of demand airlines are going to face from passengers, the aircraft was left unwanted. Lufthansa (LHAB) (LHA) , for example, was very snappy with its decision, as the German airline group announced that it would retire six A380s on April 8, 2020.

For the 777X, Boeing predicted a fairly narrow market. Back in 2013, its commercial market outlook indicated that large wide-body aircraft, able to seat more than 400 passengers, would have a market size of 760 deliveries until 2032. In total, the company predicted that 8,590 new wide-body aircraft would be needed.

Changing market outlooks and dynamics

At the Paris Air Show 2013, Randy Tinseth, the Vice President of Marketing at Boeing Commercial Airplanes, said this forecast gave the company “confidence as we increase our production rates and invest in new products like the 777X and 787-10X.” The manufacturer launched the 777X the same year with 259 orders and commitments. A revised forecast in 2019, predicted the wide-body delivery count to stand at 8,340 until 2038. Six years later at the same event, Tinseth remarked that the aviation market was “broader, deeper and more balanced” than seen in the past.

The market changed swiftly a few months later, as the coronavirus outbreak broke the seams of the industry apart. The 777X, can potentially become another product that airlines do not currently, or in the short-term, desire to have. The wide-body jet, already late, is expected to enter service in 2021. However, the enthusiasm to welcome the aircraft is dwindling.

One of the eight customers, Cathay Pacific signed up for 21 Boeing 777X-9 aircraft. Now, the Hong Kong-based carrier is sending indirect signals that it would rather stick with the older version of the Triple Seven, the 777-300ER, according to one executive of an aircraft leasing company. Cathay Pacific extended its leases on 10 of the aircraft type with BOC Aviation, reported the Seattle Times. Furthermore, the airline has held talks with another aircraft leasing company to extend leases on another 10 Boeing 777s, indicated the report.

Currently, Cathay Pacific operates 68 Boeing 777 aircraft.

Neither narrow-body nor wide-body aircraft are currently attractive to airlines. With cash reserves draining and the options to refill the reservoir far and few between, paying for aircraft deliveries is the last thing that executives want to do.

But the crisis will eventually blow over. Slowly, the aviation industry will recover and travelers will board aircraft and book their travels. However, the main issue stemming from the coronacrisis is the fact that not only that the global economy has taken a hit and millions of jobs were lost, but that passenger confidence was shaken. International Air Transport Association (IATA) Director General and CEO Alexandre de Juniac remarked on April 14, 2020, that passengers would not book their holidays “until they feel personally safe to do so,” as they had to be “confident that their travel will not be interrupted by the disease or by quarantine restrictions.”

Slow recovery on long-haul sectors

The recovery will not be a sudden one. For example, International Civil Aviation Organization (ICAO) data showcases that global demand for air travel, measured in Revenue Passenger Kilometers (RPK), took a dive after the September 11, 2001, terrorist attacks. The growth in RPKs went from almost 9% in 2000 to -3% in 2001, which recovered only in late-2003. Following the global recession of 2008, demand started to recover in 2010. Despite various shocks, including the SARS outbreak in 2003, ICAO highlighted that from 1995 to 2012, the average growth rate of RPKs was 5%.

Despite the fact that passenger demand went down the drain and uncertainty follows when it will come back up, airlines will have to make do and fly aircraft to make ends meet and pay the bills. Cutting costs is of utmost importance at the moment, as mentioned prior, cash flows are severely restricted due to passengers not booking forward travel. Domestic and short-haul travel might see faster recovery. For example, Ryanair’s chief executive Michael O’Leary expects rapid recovery of intra-European travel in the summer, as people will want to “go on holiday before the kids go back to school as long as they can do so in reasonable safety,” he told Reuters on April 15, 2020. The United States CARES act requires airlines to maintain certain connections. AirAsia announced that it is set to resume domestic flights in five countries in Asia, with the Malaysian domestic market being the first one to open – the low-cost carrier will start serving domestic flights from April 29, 2020.

“The resumption of services will initially be for key selected domestic routes, which will increase gradually to include international destinations around the network, once the situation improves and governments lift borders and travel restrictions,” stated AirAsia’s press release.

Long-haul travel, as also evident by AirAsia’s statement as an example and the number of wide-bodies being retired, might see a steeper hill to climb before its eyes. Passengers, affected by the economic uncertainty, would be less inclined to purchase more expensive long-haul tickets that are more expensive.

The role of middle-market aircraft

Prior to the coronacrisis, middle-market aircraft like the Boeing 757 or the Airbus A321LR, were facilitated on routes that connected city pairs that had enough demand to be economically viable for narrow-body aircraft, yet were too far apart. For example, American Airlines’ (A1G) (AAL) summer 2020 schedule included its first entry into Africa, with a flight from Philadelphia International Airport (PHI) to Casablanca Mohammed V International Airport (CMN), Morocco. United Airlines’ 757s ran flights between the United States and secondary European cities, as did Delta Air Lines. The latter’s expansion in Boston Logan International Airport (BOS) on the transatlantic sector was largely driven by the Flying Pencil. Out of the same East Coast airport, jetBlue planned to conduct its transatlantic venture with the A321LR.

While plans are up in the air due to the current circumstances, the role of such aircraft like the 757 or the A321LR was clear. Now that could change, considering the current situation and uncertainty floating above the industry. With passengers less confident in air travel and less inclined to splash the cash on a transatlantic trip, the operating costs of the wide-bodies do pose a question whether some routes remain viable in a post-coronacrisis world, especially if a financial crisis is set to follow.

Replacing the wide-body

The obvious candidates to replace twin-aisle jets on some thinner and lower profit margin routes are the Middle Market Aircraft. Currently, in the market, there are two: the Airbus A321LR and the Boeing 757. The latter, however, is now running at the end of its lifecycle, as Boeing rolled out the last 757 in 2004. The two aircraft offer an unprecedented combination of cheap operating costs in regards of their range and capacity, as their Operational Empty Weight (OEW) is much lower than those of a wide-body aircraft. Furthermore, their acquisition price is much lower, too. For example, the price for a new A330-800neo ($259.9 million) is almost twice as expensive as the A321neo ($129.5 million). While list prices are only indicative, they do provide an indication of an aircraft’s price.

The 757 or the A321LR could be perfect for flights between the United States and the United Kingdom, for example. The pair is the fifth biggest country pair in terms of offered capacity, according to data provided by OAG. But longer sectors, like transpacific travel or flights between Asia and Europe, would be nearly impossible to do without a stop to refuel. For airlines that do not operate either of the aircraft currently, introducing a new aircraft type is not a lucrative proposition. With cash reserves only draining, sparing additional resources to add either the 757, despite its cheap acquisition price due to the fact that only second-hand jets are available, or the A321LR, despite its commonality with the rest of the Airbus family, could be a challenge.

Nevertheless, it is an option: and an option that might become more and more discussed as the industry hopes to bounce back from a crisis like no other.


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