Leeham News and Analysis
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Leeham News and Analysis
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- Boeing-IAM contract talks fail, no new negotiations scheduled, no end in sight October 9, 2024
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Indigo order raises questions of demand in India, elsewhere
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Introduction
The Indigo order announced this week for 250 Airbus A320neos raises once again questions of whether Indian airlines in particular and the greater Asian region in general are over-ordering airplanes.
We’ve written in the past that we believe Asia and India are dicey markets for which a shakeout is yet to come.
The USA entered deregulation in 1979/80. There was a proliferation of new airlines that started service–by some counts, more than 200. Nearly all failed through a combination of poor business plans, under-capitalization, mergers, economic and travel collapses due to Middle Eastern wars, fuel price hikes and other factors.
Even legacy airlines collapsed. Eastern Airlines, Pan Am, TWA and Braniff–all storied names in US commercial aviation–are gone. (The new Eastern Airlines hopes to start service this year, 23 years after the original one ceased operations.) Northwest Airlines and Western Airlines merged out of existence.
The US airline industry is down to American, Delta and United as the holdovers from a by-gone era. Southwest Airlines now carries more domestic passengers than any of these legacies. Alaska Airlines remains. jetBlue, Spirit Airlines and Frontier Airlines are a new breed of Ultra Low Cost Carriers (ULCC).
In Europe, a shakeout of airlines has occurred but arguably it has hardly gone far enough. During our trip last week to Brazil to visit Embraer, officials pointed out that there are 40 airlines in Europe serving a market similar in size to the USA, where essentially there are 10 carriers.
In Asia and India, the shakeout is only beginning.
Summary
- Shakeout of airlines in US has occurred.
- Shakeout in Europe has occurred, but it hasn’t gone far enough.
- Shakeout in Asia is only just beginning.
- “LCC Evolution” is shrinking.
- ASEAN region is over-ordered.
Discussion
Last spring we counted some 70 low cost carriers in Asia. Many of these are subsidiaries of what we call a “mother ship.” AirAsia, for example, created AirAsia-branded LCCs in a number of countries, a requirement of local regulations that demanded a locally owned and based airline. Among the subsidiaries is one in India.
LionAir is following a similar pattern and so are some of the other airlines, such as one in Vietnam.
The rationale, according to Tony Fernandes, CEO of the AirAsia Group, is that Southeast Asia alone has a population of more than 600m–larger than the US and Europe combined. Transportation, because of geography and topography, has to go mostly by airplane or ship, he told us in an interview two years ago. Thus, AirAsia ordered more than 300 A320s. LionAir did one better–more than 500 Boeing 737s and A320s. Garuda Indonesia Airlines announced an order this week for 50 737s, but our market intelligence tells us the carrier was considering an order for 200-300 to compete with LionAir and AirAsia. Common sense prevailed.
AirAsia and a LionAir subsidiary have already deferred airplanes. So has AirAsiaX, the LCC long-haul company which had Airbus A350-900s on order before becoming a launch customer in July for the A330neo. Tigerair and JetStar (Hong Kong) deferred deliveries.
India is a graveyard of airlines. While the country is one of the most populated in the world, residents don’t have a lot of discretionary income to travel. Fares have to be extremely low and profits at Indian carriers are notoriously elusive. Government aviation policies don’t help, nor does government ownership. Air India is a perennial basket case. The LCCs in India have struggled.
Indigo is one exception. But whether it can truly support the kind of orders it has is doubtful. We’ve had a number of airlines in Asia (of which India may be considered by some to be a part) on what we call our Storm Warning Flag list. Indigo, LionAir and AirAsia all are on our list.
Our visit to Embraer last week was before the latest Indigo order. EMB does its own market assessment of the so-called “mainline” carriers (the A320/321 and 737-800/900 operators) and specifically called out these three airlines, plus Norwegian Air, as having well over-ordered. (Norwegian is also on our Storm Warning Flag list.) Embraer also identified the the ASEAN region (Southeast Asia) as over-ordered, the only such region in the world in its analysis. Only 16% of its E-Jet customers are from this region.
Embraer has developed a formula of what it calls the LCC Evolution, in which “sustainable” LCC expansion is diminishing.
In Europe, there were 9.5 times new LCC markets vs canceled markets, with about 1,200 LCC markets. This reflect the beginning of the growth era of LCCs.As markets grew to last year to about 2,700, the ratio of growth to canceled markets shrunk to 1.5.
“Mid-density markets are not presenting demand stimulation to sustain high capacity narrow-body operation,” EMB told us.
In Asia, the LCC Evolution went from 13 in 2004 to two last year. There were just over 100 LCC markets in 2004 and just over 500 today. The data demonstrates, at least to us, the point we made earlier: the population is there, the potential is there but the money is not–yet.
Embraer argues that this slowing in LCC Evolution begs for right-sizing aircraft from today’s mainline jets to the E-Jet, a principal outlined is what it calls the CASM Paradigm. We’ll discuss this in a future column.
Conclusion
The Indigo order for Airbus brings the OEM up to parity, or nearly so, in the YTD battle with Boeing for bragging rights on overall annual orders. But we remain concerned about the quality of the Top 10 narrow-body customers of Airbus vs Boeing. Airbus has historically been willing to take more risks than Boeing in some of these campaigns, and the risk-reward has proved successful. That there have been more than 200 A320 cancellations this year illustrates the risk. But many orders for Airbus and Boeing are so far out, and the two companies so overbook their orders, that cancellations as often as not relieve pressure on the order book and ultimately the production line.
For me, the most important part of the Indigo formula is that they’re retiring airplanes at 6 years old, so their eventual fleet size is extremely dependent on the delivery schedule of their order. I don’t believe the schedule has been announced, but if they’re over a decade, then their fleet size wouldn’t be growing particularly crazily.
Reminds me of Ryanair a decade or so ago.
Aircraft like an A320 are customized not more than 12 month ahead of delivery date, many items are actually defined later. Hence, any cancellation that happens more than 12 month before delivery remains without any negative impact. Getting a new home for new A320neos will probably be one of the easier tasks in the next couple of years.
Don’t forget VX as a domestic.
I believe Boeing and Airbus Global Market Forecast predictions for India, which are strikingly high, are heavily influenced by GDP growth predictions. Likely, some of the new carriers are going to fold operations within a number of years, but I believe that some are probably also going to make it. And carriers who are successful in Asia can probably operate fleets of many hundreds of aircraft with relative ease. Of course, if the predicted GDP growth won’t materialize, then the outlook will shift quite drastically.
I feel that it’s almost hard to fathom that, in Asia, the country of China is more populous than the continents of Europe and North America combined.
The indigo order is to replace the existing fleet, not to expand (like Lion Air) the folks at Indigo are very smart, and have no interest to grow exponentially for decades. The last order of A320 was justified with a 3-4 year churn rate (not 6 as mentioned above), so this makes relative sense.
A question will come up: where will Indigo get rid or retiring aircraft? Well, that’s where the leagcies come in. Currently SAS is retiring their MD80/90/95 fleet and replacing it with leased former Indigo A320 aircraft. 🙂
So everyone (including Lion and Air Asia is copying what Ryan does and dumps the planes when the warranty runs out (usually around 5 years).
Saturate the used market and the value drops, the return falls and your airline goes down into the dumps as its using that as a revenue source money saving model.
I have seen the same thing in economic (prim mortgage anyone?) first guy gets away with it the copy cats get caught with their pants down.
You may look smart for a while but……… US Airlines operate in a securitized environment with SEC, shareholders etc keeping an eye on them. Not guaranteed obviously but you do not get away with shenanigan long term. Ergo, where you see this cropping up is Asia (Ryan air I will leave to Scott to comment on if he has insight).
So yes they are on my watch list.
@TransWorld
Why do you continue with your knee-jerk reactions to anything related to Indigo’s fleet expansion strategy instead of providing thoughtful responses and analyses?
It’s all good to be critical when that’s warranted. However, in this case you’re all wrong — among other things — about “the 5 years”. You know, it doesn’t really take too much of an effort to check one’s “facts” before posting a comment. 😉
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http://theflyingengineer.com/2014/07/12/indigo-may-lease-airplanes-on-short-term-from-tiger-airways/
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http://online.wsj.com/articles/tiger-airways-to-sublease-12-airbus-aircraft-to-indigo-1412946643
Scott, it may look is if the font for the blockquote is not right.
Ya think?
Working on it.
Are there really 40 airlines in Europa or 40 brands with far less motherships?
Lufthansa owns 100 % of German Wings, Austrain, Swiss, Eurowings, Air Dolomiti and parts of several more airlines. Air France and KLM are together like British Airways and Iberia with IAG.
http://en.wikipedia.org/wiki/Association_of_European_Airlines
What is Air Malta with a fleet of just 10 A320?
I think 40 is a tad overstated, don’t let yourself be fooled by the large number of brands. Lufthansa group alone operates 9(!) brands. Airline mergers in europe often don’t result in elliminating the brands as in USA.
I can count 25 larger airlines. (There are more, but most are pretty small):
Norwegian airlines
Ryanair
Easyjet
Monarch
Virgin Airlines
Flybe
Jet2
TuiFLy (incl Arkefly, Jetairfly and Thomson Airways)
Thomas Cook (incl Condor)
Germania
Wizz Air
Star Alliance (5): Lufthansa(including Swiss, Edelweiss, Austrian, Brussel Airlines, Germanwings, Eurowings, Air Dolomity, SunExpress), Adria Airways, Aegan Airlines, LOT, SAS
Sky Team (4): Air France/KLM, Alitalia, TAROM, Air Europe
Oneworld (3): IAG(including British Airlines, Iberia, Vueling), Air Berlin(incl Belair, Flyniki), Finair
Ethihad Partners (3): Air Serbia, Darwin Airlines, Air Berlin(incl Belair, Flyniki)
I’d agree though with Scott, that many european airlines are weak and clear candidates for mergers. That’s valid most prominently for most of the smaller Star alliance members and those airlines Ethihad has bought stakes into.
“But we remain concerned about the quality of the Top 10 narrow-body customers of Airbus vs Boeing.”
On Boeing 2014 Gross Orders there are 401 x 737s for “Unidentified Customer(s)” Half the order total.
http://active.boeing.com/commercial/orders/index.cfm
Do we know for who they are and if they are on the watch list?
Rgds
We don’t “know” who they are but we think there is a large number for China, to be announced next month when Obama is in Beijing for a regional Asian summit or the concurrent Beijing Air Show. There could be some 777s under Unidentified at the same time.
There are an additional 18 777s and 15 787 “unindentified” on top of the 401 737s.
Tony is wrong. Europe on its own has a population of 750m.
Just an off-topic comment about the new web site: It would be easier to read if the text was black instead of grey.
Yeah, we’re working on that.
Looking the 737 backlog I see 802 on order for 2014. Of those 401 are unidentified and 140 for lessors/ US Navy and 80 737 got cancelled. Looking at some of the remaining 737 customers I doubt if we are looking at high margins / a high quality order book.
Leeham: “In Europe, there were 9.5 times new LCC markets vs canceled markets, with about 1,200 LCC markets. This reflect the beginning of the growth era of LCCs.As markets grew to last year to about 2,700, the ratio of growth to canceled markets shrunk to 1.5. “Mid-density markets are not presenting demand stimulation to sustain high capacity narrow-body operation,” EMB told us. In Asia, the LCC Evolution went from 13 in 2004 to two last year. There were just over 100 LCC markets in 2004 and just over 500 today. The data demonstrates, at least to us, the point we made earlier: the population is there, the potential is there but the money is not–yet.”
Both OEMs are obviously counting on the emerging middle class especially in China, India and Asia at large, and where a lot of the future global air travel demand growth will come from.
I would agree, though, that many current LCC operators in Asia will probably not survive and fold. However, the only profitable airline in India — IndiGo — is obviously running things differently** and are thus already quite well positioned to meet the demands for Indian air travel during the next two decades. According to the prediction from the World Bank (link below), India could be the world’s largest middle class consumer market by 2030, surpassing both China and the US. So, the “money should be there”, by then. 😉
http://siteresources.worldbank.org/EXTABCDE/Resources/7455676-1292528456380/7626791-1303141641402/7878676-1306699356046/Parallel-Sesssion-6-Homi-Kharas.pdf
Pages 18 (A Closer Look at India’s Middle Class)
and 19 (Dramatic Expansion of India’s Middle Class)
A Closer Look at India’s Middle Class
•
Small today (5% of population), but set to expand dramatically.
•
India could be the world’s largest middle class consumer market by 2030, surpassing both China and the US.
•
Between now and 2039, India could add over 1 billion people to the global middle class.
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India’s middle class awakes
http://timesofindia.indiatimes.com/edit-page/Indias-middle-class-awakes/articleshow/26221440.cms
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**
http://www.ainonline.com/aviation-news/singapore-air-show/2012-02-15/indigo-sends-more-support-work-sri-lanka-new-blow-indian-mro
Surely, those blockquote fonts are in need to be fixed. 😉
The glitch has been fixed; do a Refresh and it will look fine.
Great! BTW, the blockquote looks better than in the old website layout. 🙂
You can probably add Jetstar to your watch list, not sure what Jetstar/QF have left on order but due to a lot of mess-ups they are parking new a320s and have already cancelled 36 x 787s. Boeing seem to count options as probable orders but it doesn´t look like happening in this case. (50 x 789s) I´m not sure if QF can afford the remaining 8 x a380s either, although using them to crush UA on Aus-USA is about QF´s only success in the last 7 or 8 years. either Only part of the Jetstar business not in disorder is Jetstar Asia but it isn´t growing either.
One Asian LCC problem not mentioned here is the difference between the rich and the poor in the growing markets is increasing, meaning the new so called middle class (counted as people earning over 7 USD/day by some economists) don´t look like ever being a market unless this changes.
I would like to pint out that JetBlue is NO LONGER a low cost carrier. I fly a lot and about 50% of the time on Jet Blue because of non-stop route. More often than not JetBlue fares are significantly higher than the legacy carriers.
Go on orbitz for example, and price your flights. You will be shocked!
To be accurate, jetBlue is no longer a low fare carrier (nor is Southwest).