Will increasing fuel prices revitalize new aircraft sales?

Discussion
Buy new or continue using existing aircraft?

To answer the headline question, we will look at when operations costs favor a new aircraft over a continued use of an earlier generation of the same type.

We will compare Narrowbody aircraft in the first article with Widebody aircraft following in the next article. We will compare the difference in operating costs for the Boeing 737-800 versus the 737-8 for the Narrowbodies and the A330-300 versus the A330-900 for the Widebodies.

For the Narrowbodies the operating costs between the A320/A320neo and 737-800/737-8 are sufficiently close that we could have picked either family.

For the Widebodies, we want to pick aircraft from the most used segment, the 250 to 300 seat segment. On the Airbus side the choice is simple, A330 in its original form versus the neo version.

On the Boeing side, it’s not so straightforward. The 787 replaces the 767 but the types are not directly comparable. The 787 consumes less fuel than a 767. But it’s also larger, longer ranged and carries the standard LD3 container. So, there are more factors than fuel economy to change from a 767 fleet to the 787.

At the same time, the operating economics between the A330-900 and the 787-9 are sufficiently close, for the choice between the A330 and A330neo to also guide when the 787 comes into play.

Finally, if we have Airbus representing the Widebodies, we pick Boeing for the Narrowbodies.

Narrowbody cross-over fuel price

The primary factor between ordering a new Max 8 or keeping an existing 737-800 for a second lease term, is capital costs versus fuel costs. But a new aircraft also has lower maintenance costs.

The Direct Maintenance Costs (DMC) for the MAX 8 are slightly lower than the DMC for the 737-800, but a major difference is the new aircraft comes with a warranty. Therefore, there is a grace period before the maintenance costs kick in for the MAX 8.

The second lease term for a 737-800 also means the aircraft will pass the heavy structural check close to the transition. It depends on the lease arrangement how this is handled.

To handle the maintenance costs differences, we will assume the MAX 8 to have 20% lower maintenance costs by flown Flight Hour for the period we study. The rest of the difference will be capital costs versus fuel costs, as crew costs and fees for underway/landing charges should be close to equal.

We compare the costs including capital costs, the Direct Operating Costs (DOC), over an operating year. A typical Narrowbody flies 3,600 Flight Hours over the year, with an average sector length of 800nm.

The crossover point for the fuel price is then around $3 per US Gallon which corresponds to $125 per barrel. Right now, the fuel is at $2.15 or $90 per barrel.

The important point is not what the fuel price is today, but where it will be tomorrow. If the risk is high it will be around $125 per barrel or more, it’s time to order the new aircraft now.

Next week we check if the crossover point is the same or different for the Widebodies.

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