This is Part 1 of a series looking at wide-body aircraft demand.
April 24, 2017, © Leeham Co.: We’re in a five-year slump for wide-body aircraft orders, say veteran executives of a new leasing company.
This means airlines will hold onto Airbus A330s and Boeing 767s/777s longer than planned, deferring—but not canceling—orders for Airbus A350s and Boeing 787s.
Orders for Boeing 777Xs and even Airbus A380s will resume eventually—but not any time soon.
Ray Sisson, the chairman and CEO of the new lessor AVi8 Air Capital, and Ed Wegel, president of the company, told LNC in an interview last week that there is a solid market for the proposed Boeing 7M7 (the Middle of the Market airplane).
Sisson, who was CEO of the lessor AWAS until a large portion of its portfolio was sold, also sees a robust market eventually for the 777X.
A much more modest market is seen for the A380.
Sisson said low oil prices continue to suppress new orders.
“I’m seeing some fairly broad medium term weakness given what’s objectively an oversupply situation,” Sisson said. “This is not driven by any fault with the aircraft. It’s simply the low fuel [price] environment, which I think people are coming to see as a meaningful longer term state of affairs.
“This is making older wide bodies very economical–767s, older A330s. Additionally, the aircraft that were anticipated being retired because of age or lack of economic operating conditions had expected to reach the end of their useful lives at around $100 fuel…the situation has completely changed.”
Because aircraft are not being retired, an over-supply developed, Sisson said.
Sisson said he sees fuel prices today “comfortably” in the mid-$50s, declining to the mid-$40s. With fracking now profitable at $48, vs $70/bbl previously, reserves are increasing.
Sisson disputed a Goldman Sachs (Hong Kong) research note that cited spot fuel pricing in Asia at $65/bbl.
Sisson sees a rescheduling of wide-body orders, but not cancellations.
“The current technology aircraft, the 330s, the 330neos, the 787s and the 350s, are good aircraft and airlines are going to need them,” Sisson says. “It’s just that we’re in this interim period where aircraft that had anticipated being scrapped or parked simply haven’t been.”
Sisson said the over-supply is a “five-year phenomenon” before capacity gets soaked up, which assumes Airbus and Boeing continue the currently announced production runs.
“Airlines and lessors will dictate that by how they place orders and how they defer and potentially cancel,” he said. “This is a timing issue.”
Boeing already reduced production of the 747-8 to 6/yr. Production of the 777 Classic will drop to 5/mo next year, with actual deliveries declining to 3.5/mo; the difference is the start of production for the 777X.
However, Sisson would not be surprised if Boeing further reduces the Classic production.
“Boeing can price those aircraft to keep production going,” he added, but there is a lot of wide-body availability in the market. Quite frankly, everybody is waiting for the 777X.”
To Sisson’s point, a few large airlines indicate they are interested in cheap wide-bodies. Delta Air Lines last year bought one run-out 777-200ER for under $10m. Delta, which has its own MRO shop, must invest millions in overhauling the airframe and engines, plus reconfiguring the airplane to Delta specifications.
United Airlines last week said it is shopping for used wide-bodies.
Despite the transition costs and, for lessors, the downtime associated with re-leasing the airplane to another airline, Sisson sees a secondary market for the 777 Classic and the A330.
“There certainly is a secondary market. People are still flying long-haul” with other aircraft, he said.
Lessors have maintenance reserves collected from airlines that can pay for the MRO costs.
“The issue really is that it is going to be tougher on the yield on the younger wide-bodies,” he said, referring to the lease rates.
Another factor affecting the demand of wide-bodies is the growing capability of the new narrow-bodies, said Wegel, AVi8’s president.
The introduction of the A321neo and 737-8, each capable of select trans-Atlantic flying and equivalent operations over land, reduces the demand of wide-body aircraft, he said.
The next part of this series will delve into this and other views by AVi8 on wide-body demand.