This is the second of two Parts looking at the wide-body market
April 25, 2017, © Leeham Co.: When lessors face re-leasing wide-body airplanes as lease terms expire, they face a far narrower market than for single-aisle airplanes.
While there may be a thousand operators which can be targets for Airbus A320s and Boeing 737s, there may be only a hundred operators interested in the most popular wide-body aircraft. When you get to the Very Large Aircraft sector, the potential market declines to the figurative, and perhaps literal, handful.
There is more of a secondary market for Airbus A330s than Boeing 777s. This is because the 777 is larger, used on longer flights, and the A330 is often used in regional services, such as intra-Asia. Indeed, Airbus says the average flight of the A330 is only around 2,000 miles—less than the distance from New York to Los Angeles.
“The 777-300ER is a much larger aircraft, dealing with a smaller, more defined market,” says Ray Sisson, the chairman and CEO of the lessor AVi8 Air Capital. “The A330 is more of a commodity-sized wide-body from a lessor’s perspective. The A330/767/787-ranged aircraft will always have a more broad market appeal.
“You see the A330, to a certain extent, serves as a large regional jet for a lot of the Asian and Middle Eastern carriers.”
While Sisson sees a slump in wide-body sales for the next five years, he remains optimistic about the long-term demand for the smaller wide-bodies: the Boeing 787/A330 through the Airbus A350-1000/Boeing 777X.
The 777X, like all wide-bodies these days, is a slow-seller. Few have been sold since the program launch in 2013 and most of those in the launch are from the Big Three Middle Eastern carriers. About two thirds of the orders for the X are from these Big Three.
Sisson believes it’s just a matter of time until sales pick up, and the demand will be strong.
“I think there will be strong demand for that aircraft [777X] amongst the carriers that couldn’t quite get there on the A380,” he says. “The 777X gives them large but not supersized capacity. If you think about large Asian and Middle Eastern carriers, it’s the perfect aircraft for them.”
The A350-1000 is an “excellent” aircraft, Sisson says. “Airbus did a great job answering what was previously Boeing’s monopoly with their 777-300ER.
“Airbus came out with the A350-1000 to be a 777-300ER killer. Even Boeing behind the scenes said, yes, Airbus produced a great aircraft; we have to produce something better again. And it appears they’ve done it with the 777X.
“I think the 777X will sell extraordinarily well. Everyone who is a current 777 operator, I think you can anticipate them picking it up across the product range.”
The A350-1000 hasn’t sold better because customers anticipated Boeing would produce the 777X, and there was a wait-and-see attitude.
“If you chose to become an operator of the A350-1000, you were probably already a 777 operator,” Sisson says. “If you’re a 777 operator and have not made a fleet modernization decision yet, you might want to wait and see what Boeing’s answer to the A350-1000 is before making that choice.”
Sisson also said there were probably some questions about the differences between the Rolls-Royce engines on the A350-900 and -1000.
“I like the 787 a lot. I like the 330neo. The 330neo is slightly disadvantaged because Airbus introduced it slightly later than the market would have liked it.
“It’s a really strong market in terms of steady passenger growth,” he says. “They’re going to do just fine. The market just has some indigestion right now with a near-term widebody oversupply, due to older equipment staying in fleets longer due to low fuel costs. The market will sort through that over the next few years and rebalance itself.”
“Another driver in the 777X market is what happens to the A380,” says AVi8 president Ed Wegel.
With leases expiring soon on the first A380s at Singapore Airlines and then Emirates Airline, the question of what happens to these airplanes is upon the industry, Airbus and the lessors.
Singapore already said it will return the first five A380s to lessors at the end of the leases. (SQ is replacing these with new A380s.)
At one point, Emirates President Tim Clark said he’d simply park his owned 12-year old A380s and scrap them. This caused consternation among the lessors of EK’s A380s. Clark backed off his declarative statement, but never really said what will happen with the aircraft when EK is done with them.
A secondary market for the A380 is problematic at best.
Wegel said start-up, low-cost and second or third tier airlines are typically the targets for used wide-bodies.
The idea of an A380 going to a start-up probably defies belief, but at least one Asian LCC has looked at the idea.
“Given a narrow operator base and high reconfiguration costs, I see a challenging market right now for the A380s as they come off lease,” Wegel said. “Also, given they are limited to certain high volume airports and slot controlled, this makes it near impossible for a new entrant, start-up carrier to fly the A380.”
“It’s certainly tough,” he says. “I think the expectation was that a lot of the people getting out of 747s would go into the A380. I think they are all going downward in size, to 777s, 787s, A350s and A330s. I think that’s going to be a tough putt for the equity in those aircraft.
“I think people will scramble to keep those airplanes in place just to avoid the reconfiguration costs,” he says.
Airbus, which since 2000 has stuck to its rolling 20-year forecast that there is a need for 1,200-1,700 Very Large Aircraft (depending on the year of the Airbus forecast), still clings to the lower end of this range.
But now officials say it will be the next decade before the market catches up to the airplane.
Sisson sees a future market, but it will be tough.
“The ability of the long-range twins to complete or match up city pairs with frequency limits the opportunity for the A380 to grow at this stage,” he says. “I’m not prepared to say Airbus is wrong in the long-term because I could see a future where there are mega-aircraft serving mega-hubs.
“But the fact is, the orders tell the tale. You are not seeing airlines look at their city pairs and saying, ‘we need bigger wide-bodies,’” Sisson says. “They’re going for more frequency with smaller aircraft. It’s across the whole spectrum of jets.”
Boeing and Airbus, he says, have long range twins that are “so efficient.”
Wegel adds that not only do you have the twin-aisle, twin-engine fragmentation but the evolution to the A321neo and 737-8 starting trans-Atlantic service—the latter via Norwegian—adds to this trend.
It was TWA that began serving secondary markets out of New York with the 757 that is being reversed today with Europe-to-US secondary markets, Wegel says.
There is also a US-to-China secondary and third tier growth with the efficient twin-aisle, twin-engine aircraft.
Parenthetically, Hawaiian Airlines will begin A321neo service soon from secondary Hawaiian cities to secondary US West Coast cities in lieu of twin-aisle aircraft.
“Over time, I think the A380 will prove itself, but not as much as or as many units as Airbus had hoped,” Wegel says.
Wegel notes that “we’re seeing a slow-down in traffic from the Middle East. Do they need all those A380s? Do they need all those wide-bodies? Are they going to slow down their deliveries?”
In fact, Emirates Airline already deferred six A380s and has pushed some 777Xs back one year. Etihad Airways rescheduled a handful of 787s from 2018 to 2019.
The oft-talked about Middle of the Market aircraft, the New Midrange Aircraft (NMA) that Boeing is considering, should have a strong demand, says Wegel. The 7M7, as LNC calls it, could see an Authority to Offer this year and program launch next year.
Wegel sees the 7M7 as a 2025 airplane at the earliest. Sisson concurs.
“There’s a lot of demand for that aircraft,” Sisson says. “Boeing has to do something about the A321neo-LR. It’s a capable aircraft. It does some of the trans-Atlantic missions. People have been clamoring for a 757 replacement for some time.
“If [Boeing] can make a carbon fiber version of the 757, that’s a pretty killer app, which would put the squeeze on the A321neo, which would not be a bad result for Boeing,” Sisson says. “The 737-9 doesn’t do that. It doesn’t do the mission. It’s not as capable.
“I think Boeing does it. I’d be surprised if they don’t. I don’t know if they will announce it at Farnborough or at Dubai, but I know there are people who want it. I know, for example, several operators who need the combination of seats and range who keep extending the leases on their 757s.
“My gut is the [NMA] will be a super-capable 757,” he says.
The emergence of longer-range A321s and 737s with the neo and MAX families is another reason pressure is on the wide-body sector right now.
“There are a couple of other things that are going on,” Wegel says. “Delta [Air Lines] said they are doing a complete review of their wide-body program. In the next paragraph, it states they increased their order for the 737-900ER. I think that’s a new trend in the market, narrow-body medium-haul like Norwegian coming across the Atlantic with the MAX.”
Wegel noted that Norwegian Air Shuttle will begin trans-Atlantic service with the 737-8 from points in Western Europe to US secondary cities in New York and New England.
“The narrow-bodies of today are able to make those trips that once only wide-bodies could serve and thus were the aircraft of choice,” he says. “I have heard that JetBlue is talking about the A321neo as its aircraft of choice to go trans-Atlantic, although they haven’t made any formal announcement yet.
“This new trend could meaningfully cut into the number of wide-bodies that airlines will need,” he says. “That should continue to cut into the number of wide-bodies that you’ll need,” he says.
Overhanging everything is the continued low price of oil.
The airlines are getting used to the new normal, Wegel says, with oil trading in the $40/bbl-$60/bbl range “for a period of time.
“They are looking at and adjusting their fleet composition and fleet orders based on that,” Sisson says.