Pontifications: Five-year slump in wide-body demand seen, says lessor

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.

By Scott Hamilton

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.

Low Oil Prices Suppress Sales

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.

Rescheduling, not cancelling

Ray Sisson

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.”

Secondary markets

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.

Impact of new narrow-bodies

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.

37 Comments on “Pontifications: Five-year slump in wide-body demand seen, says lessor

  1. 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.

    Being dumb I do not understand this, does it mean that minimal deliveries are needed for the next 5 years or does it mean based on the backlog of orders we will have no orders for the next 5 years, deliveries or orders?

    • He probably didn’t mean anything specific, he just wanted to create a headline and work on the the market perception for his own purposes (he is starting a company which needs to acquire assets so he needs them to be cheap). Don’t read too much into the numbers, read into the intentions.

  2. I think the key words in this article are that they are waiting for the 777X. I add the 787, A350 and A330neo because none are available in the near term. If there are a few slots available over the next five years then they will be sold.

    The airlines are just doing the right thing by picking up second hand widebodies at cheap prices. There will be some modest deferrals provided the second hand market remainers a buyers market, but airlines won’t want to loose their slots.

    The 7M7 could be a game changer if it allows long haul with hub and spoke economics. No more hundred mile journeys to and from the airport. No more 2-3 hour queues to check-in. No more packing and stacking. I would certainly pay a little extra to miss all of that fun!

    • I thought the 787 was supposed to change all of that!?
      Nudge, nudge, wink, wink!

    • That’s the second time this month I’ve done that. I guess I just want this year to be over already…

      Hamilton

      • Well stop it. Spring just got here, let us enjoy it and the summer whatever nature brings.

        Start the fast forward in October!

        • Spring hasn’t arrived in SEA. We continue to set records for rainfall…..day after day after day after day….

          • Scott: Spring to an Alaskan is when the snow melts! We then take whatever gets thrown at us with gratitude. It much better than dark, cold and icy.

            I think you should move up to BHam (I am visiting). A bit of rain, a lot of partly cloudy but nice, some fully clear days .

  3. Ray Sisson: “Low oil prices continue to suppress new orders. It’s simply the low fuel [price] environment, which I think people are coming to see as a meaningful longer term state of affairs.”

    Most people have come to view the current price as the “natural price” of oil, and will likely remain there for a long time.

    Ray Sisson: “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.”

    The over-supply is a five-year phenomenon? I am not sure I understand the meaning of that statement. If Sisson meant that we are into this for at least five years I would tend to agree. But I wouldn’t call this a phenomenon. For me it is a condition. And if airlines and lessors drive that condition they certainly don’t control what brings it: Oil prices, interest rates, economic growth, the new President, Brexit, Isis, North Korea, China, etc. Just to name a few.

    Ray Sisson: “The difference is the start of production for the 777X. Quite frankly, everybody is waiting for the 777X.”

    Yes, of course. I think this is pretty obvious. 🙂

    “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.”

    I don’t believe that. If you have enough people to fill a widebody aircraft you will not substitute two narrowbody aircraft just to increase frequency. The A321neo, and to a lesser extent the 737-8, might complement the existing widebody offer, but I don’t think this will affect the overall demand.

    • I think the narrow body vs wide is situational specific.

      Ak Airlines does exactly that and it works (ANC -SEA) but the rest of their routes are narrow body.

      Norwegian is going to use the 737-8 for that Trans Atlantic flight. Lighter, cheaper, more flexible.

    • @Normand Hamel:

      “I don’t believe that. If you have enough people to fill a widebody aircraft you will not substitute two narrowbody aircraft just to increase frequency. ”

      That would be incorrect in many cases. A number of flights (at least here in the USofA) are completely frequency-based using either (or predominantly) single-isle planes. ORD-LGA, SFO-LAX are two such examples.

      • What you say is true, but what I had in mind is the Trans-Atlantic market, which is expensive to operate because crews don’t come back the same day. In that particular market the yield will be higher with a single widebody than two narrowbody aircraft.

        Anyway, the number of flights is already very high over the North Atlantic and what people are looking for are bargains, and that can more easily be obtained with widebody aircraft.

        If someone can demonstrate to me that the 757 has taken away an appreciable portion of the widebody market, instead of just being a complement to it, then I might change my mind about Sisson’s comment.

        In any case the narrowbody aircraft that can now cross the Atlantic will only replace those 757 and will have little impact on the present widebody market. The 757 did not create a revolution and I don’t think the A321neo will either.

        The only aircraft that has some potential to make a dent in the widebody market is the MoM, but it it’s not going to be a narrowbody aircraft anyway. And like the 757 before it it is not part of a well-thought-out strategy and will likely encounter the same fate.

        • I think you are looking at the situation from a position similar how the oil companies viewed electric cars until recently.
          “no one will ever use electric cars as more than vanity toys for short range travel”

          when a new product appears that either fills an unserved niche or creates a new category then business models change, and the companies that recognize it early and act profit.

          an example of this is Emirates and the A380 & 777 (probably the only really successful A380 use case) where the sheer size and range of the A380/777 and the convenient geography of the Persian gulf allowed Emirates to build a hub and spoke model like no other, aggregating _all_ Australasian traffic out a given mid sized European city onto one A380 a day, hubbing them in the UAE out to similar A380s which aggregate all the European sourced traffic for a particular Australasian city.

          both of these planes defined new categories in terms of size & running cost.

          a 4500-5000 nm range small twin aisle with sharp economics could be another niche buster which could similarly shake up the conventional air travel market.

          • I would amend the A380 and Emirates as fully Stay tuned) successful large scale.

            It seems to have worked for BA, Luft, AF, etc, but not on a more than around 10 scale.

            Unless it worked for all of those on a larger 20-30 scale, then its where its at with the malaise.

          • Normand: Who says you don’t come back the next day.

            You could turn around that night and do it.

            Its only 3000 miles, its not like its a big ocean.

          • @TransWorld

            Because the crew needs a rest. It’s part of the regulations.

  4. Normand…I live in Vienna. Austrian flies to New York and DC but not Boston. With A321LR they could just about reach Boston. Now you fly with a widbody via FRA, MUC, ZRH, CDG, LHR…but if Viennese start flying nonstop, and more and more other mid sized cities in Europe have nonstop flights to Boston then who is going to fill the widebodies? Widebody demand could shrink due to more nonstop flights on A321LR flights.

      • geographically, Boston is well suited to be a single point hub for an airline that serves all of Europe (as far as Moscow and Turkey), all of the Americas north of Argentina and north west Africa in 1 stop using a ~4500 NM range MoM…..

          • Stick that red dot on Hawaii and notice the link between a big chunk of South America and North East Asia. As Hawaiian still mulls over the A380. North American routes are already as matured and established as they’re likely to be for now, although that will change when the A321 NEO LR gets more take up and potential future MOM planes.

      • I would. As a transit point on my way to Wachuset Mountain. Or do I have to wait for next winter?

    • I see long range narrow bodies being in the mix with wide bodys . Peak season fly wide body, low season fly narrow. Shoulder season fly a mix of both over the week.

    • At 3522nm GC distance (plus winds and European routings the A321LR is not going to be able VIE-BOS with an economical payload.

  5. I think what is being missed is to created demand you need to created shortage.

    777 does that by default.

    787 needs to cut back production and dramatically .

    A350 needs to watch the ramp up

  6. “Boeing already reduced production of the 747-8 to 6/yr”

    Even at that rate, its not currently sustainable as the stories say its Boeing who is buying its own planes ( as freighters) and then leasing them out at market rates.
    Will they do the same for the 777 classic as its numbers fall between now and final end of production date.

    • Not exactly true.

      Boeing has 14 FIRM orders from UPS, they are “bridging the gap” as it were for now.

      Obviously a short term remedy.

      They also have 14 UPS options which I would not think UPS would have taken (money down) if they did not expect to use them.

      So two to 5 years more production with a possibility of other orders coming in.

      So at least a step back and watch program

  7. Delta bought the 777 to part out. Also bought a few 744’s 16-20 months ago for parts.

  8. I suspect airlines are using the current low fuel price environment and overall reduced demand to re-balance the aircraft asset valuation and economic life equation. With many airlines operating wide body fleets with average ages less than seven years, there is a real opportunity for airlines to turn excess asset valuations into cash (ideally average ages should be in the 8-11 years range).

    For many airlines this could equate to additional cash generation (reduced CAPEX) as high as $2b per year.

    On the flip side, airlines still have to compete. If Airline ABC can fly a new 787 at a cost 7% lower than a competitor flying A330’s, this can be leveraged to gain market share. No use generating cash if there is a corresponding reduction in market share (which would directly reduce the airlines valuation).

    ….and this is where reality kicks in.

    For airlines like QANTAS the 787-10 has the operational capability to replace the A330-200, A330-300 and 747-400 currently serving the Asian network. Not only would the 787-10 be cheaper to operate it would come with the added economic advantage of having more seats to sell.

    If we consider this mishmash of aircraft and subsequent customer product probably cannot be sustained against competitors like Cathay Pacific and Singapore Airlines, there would be limited advantage for QANTAS to defer the introduction of the 787-10 for the sake of saving (deferring) a couple of years of CAPEX .

    As such QANTAS should be in the market for 20-30 787’s for delivery in the 2020-2024 time period, which would still be in line with a typical replacement schedule for A330 and 747 aircraft.

    Airlines like LH, United, American (Delta is an enigma), Virgin Atlantic, Air France, KLM, British Airways, Thai are all in a similar position.

    They can trad water, but not for long!

    • Qantas 789s will be configured for 236 pass, their 3 class 747s have 364 seats.
      No way can 787-10 will be able to do 3 class 350+ seats, they need a plane in 777X class for that or A3510

      • Yea I was thinking the same thing.

        Qantas seems to be a substitute much less capable aircraft not replace e the 747-400s.

        The -10 is a ways out to start with and I don’t think their reserve of slots for 787 aircraft covers that model.

        Qantas is an odd one, they never got 777s I have not clue, its the natural aircraft for them.

        NZ has them for crying out loud.

  9. The QF 787-9’s are in a three class configuration catering for long haul, not medium haul routes.

    A better comparison could be made with the QATAR 2-class 787-9’s, which have a total of 299 seats.

    This suggests a QF 787-10 in the 320-340 seat segment range.

    QF’s A330-200’s have 271 seats and the 300’s 297 seats, both in a 2-class configuration. As such the use of 787-10’s would equate to an increase in capacity of ~10-20%.

    The 747-400’s are used infrequently, so in net terms there would still be an increase of seats if the aircraft were replaced on a one for one basis.

    • How do you use an aircraft “infrequently ” ?

      Somedays I feel like a 747? Somedays I don’t?

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