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By Vincent Valery
July 22, 2019, © Leeham News: Development of single-aisle aircraft that now have ranges of plus-or-minus 4,000 nautical miles are fragmenting hub markets needed to fill large twin-aisle aircraft.
Just as twin-engine widebodies began fragmenting routes needed to fill the Boeing 747 and later the Airbus A380, the Boeing 737-8 and Airbus A321LR/XLR appear to be contributing to weak demand for the Boeing 777X and Airbus A350-1000.
With launch of the Airbus A321XLR last month and expected New Midsize Airplane once the MAX crisis is over, some markets might have structures dramatically altered in the second half of next decade. The prime candidate is the US East Coast–Europe market. We will investigate through historical examples how things might turn out.
The first long-haul fragmentation wave occurred in the 1980s with the launch of the Boeing 757, 767 and Airbus A310. Boeing delivered at least 200 more passenger 757s and 767s than 747s in the 1982-2005 period (968, 892 and 684 respectively).
The twin-engine aircraft allowed the launch of thinner trans-Atlantic routes. These were especially useful for US airlines that operate multiple hubs. Continental Airlines later pioneered 757 service from Newark to Western Europe.
A major impediment to further fragmentation with 767s was the lack of comprehensive open skies agreements across the Atlantic. The current open skies agreement between the United States and European Union came into effect in 2008.
Boeing boasts the ability of the Dreamliner to launch new point-to-point routes. However, its main interest lies in replacing larger aircraft, notably aging Boeing 747s and 777s. The Airbus A350 and Boeing 787 have benchmark-setting operating costs.
The two aircraft families are especially attractive for carriers that operate from multiple long-haul hubs. Airlines now have much greater operational flexibility to enter new thin trans-Pacific markets, add frequencies on the busiest routes and launch new flights to existing destinations from another hub.
The A350 and 787 are much easier to fill than the 777-300ER or A380 to acceptable load factors, especially during the low demand season. The numerous Oceania–USA routes launched in recent years are negatively impacting demand on flights between Los Angeles and Sydney airport, historically the two main gateways for connecting traffic in that market.
Operating long haul routes is a very expensive business. A daily flight costs dozens, if not hundreds of millions of USD on a yearly basis.
The smaller A350 and 787 materially lower the financial risks associated with operating such routes. An added bonus is more flexibility to move capacity around an airlines’ network throughout the year as demand pattern change.
During the first decade of the new millennium, the newer Airbus A330 progressively overtook the 767 as the default aircraft for smaller trans-Atlantic routes.
With US airlines in dire financial shape at the time most orders came from European carriers. American Airlines and Delta Air Lines inherited A330 fleets from US Airways and Northwest Airlines respectively.
As the years went on, Airbus significantly improved the A330, including increases in maximum takeoff weight that made it capable of flying direct to the US West Coast from Europe. It became a more efficient aircraft than the over capable and heavier 777-200ER for trans-Atlantic operations.
As mentioned in another article on LNA, the 787 was supposed to kill the A330. With the expected NMA launch Boeing intends to return the favor to Airbus and kill the A330 once and for all.
With the arrival of the Airbus A320neo and Boeing 737 MAX families a new wave of fragmentation in the trans-Atlantic market is in its infancy.
Norwegian Air Shuttle was flying the 737 MAX from Ireland and the Northern United Kingdom to secondary New England airports until the grounding. Air Canada was flying from St John’s and Halifax to London. The Canadian carrier intended to launch flights from Montreal to Bordeaux, Shannon and Dublin this summer with the Boeing bestseller single-aisle.
Aer Lingus was supposed to launch new routes to Montreal and Minneapolis from Dublin this summer until the plan was postponed due to A321LR delivery delays. TAP Air Portugal launched flights between Lisbon and Washington Dulles and increased frequencies on the Porto–Newark route with the A321LR.
In the 1970s and 1980s, widebody aircraft were the norm on US trans-continental flights.
This changed from the late 1990s once the Airbus A320 and Boeing 737 NG, capable of flying coast to coast non-stop, entered service. The Airbus A321 was also improved to fly US trans-continental missions. Nowadays, single-aisle are the norm and widebody aircraft the exception, the latter exclusively used for departures at slot constrained peak times.
This shift occurred because narrowbody operating costs are competitive compared with widebody, even at the congested LAX and JFK airports. More frequencies are critical to lure and keep high paying business class passengers. Unless there are substantial cargo revenues or a lack of slots at peak times, airlines are better off operating single-aisle aircraft on US trans-continental routes.
Once launched, the A321XLR will be able to fly plus or minus 4,000 nm in practice on trans-Atlantic flights. The Boeing NMA will have at least as much effective range in apples-to-apples cabin configurations.
As discussed earlier, the 787 and A350 are progressively taking over trans-Pacific routes traditionally operated by larger aircraft. The 737 MAX, A321LR/XLR and NMA have competitive enough operating costs compared with latest generation widebody aircraft such as the Boeing 777X, Airbus A330neo or 787 to trigger a fragmentation wave in the US East Coast–Europe market.
Airlines can recover the marginal increase in operating costs by increasing frequencies in business-oriented markets and that improve yields in the process. Adding a flight with a late afternoon–early evening departure from Europe is a prime candidate to entice business travelers who won’t need to stay overnight any more.
Most passengers are willing to pay a premium for a point-to-point service that bypasses the need to connect via a hub.
The 737 MAX, A321XLR and NMA significantly lower the financial risks associated with launching new routes. Those aircraft materially lower the minimum passenger demand needed to sustain a route compared to a current generation widebody.
It is a lot easier to achieve acceptable load factors on the smaller 737 MAX, A321LR/XLR or NMA. This is particularly enticing on the notoriously seasonal trans-Atlantic market. Airlines might even be able to make money (or at least lose a lot less) during the low demand winter months.
An NMA or A321XLR is also far more flexible than current generation widebody aircraft to operate shorter routes profitably across an airlines’ network.
These smaller aircraft might turn some airports on both sides of the Atlantic into more significant trans-Atlantic hubs. Thanks to geography, Boston, Dublin, Lisbon and Montreal have the biggest potential to significantly grow traffic.
As far as the larger hubs are concerned, people won’t stop flying between them overnight. They usually grew to that status because of higher origin-and-destination passenger demand in the first place. To prevent business passengers from switching to competitors, airlines will generally prefer down-gauging to smaller aircraft rather than canceling frequencies. The impact will be biggest on hubs that mostly rely on transit passengers.
When the A321XLR enters service in 2023-24 and NMA enters service in an estimated 2027, large 777 and A330 fleets delivered from the late 2000s until the early 2010s will be up for renewal.
Airlines are eagerly awaiting Boeing’s NMA decision to start in-depth analysis to replace those aging widebody aircraft. Along with the ongoing increased fragmentation in the trans-Pacific market, the prospect of a significant shake up across the Atlantic seem to be hurting the Boeing 777-9 and Airbus A350-1000 market prospects.
Large twin-aisle aircraft carry a hefty price tag. Most airlines’ raison d’etre is to maximize return on invested capital for shareholders while lowering risks in a notoriously cyclical industry. A larger number of 737MAXes, A321LR/XLRs and NMAs might be a preferable (and safer) investment of billions of capital expenditures rather than fewer A350-1000s and 777-9s from an airlines’ standpoint.