June 22, 2020, © Leeham News: Although more passengers are flowing through airports and airlines are adding back service, airplane order deferrals continue.
Airline bankruptcies do, too.
LEVEL’s short haul operation went into bankruptcy last week. LATAM Argentina ceased operations. Lufthansa said it may seek administration if shareholders don’t agree to the government bailout negotiated by the airline.
New orders dried up. And, so far, there is no telling when there might be some placed.
Boeing announced just a handful of new orders last month. Airbus didn’t announce any orders in May.
It’s still too early to predict when any new orders of consequence may be placed. At least that’s the current thinking at Boeing.
“Airlines are primarily focused on the liquidity and managing their liquidity and managing their employment. Their heads are not in orders right now,” a Boeing official said in an interview with LNA. “Their heads are in survival, up to the point of recovery and then putting plans in place for when you recover, how are you going to go forward? Once you recover, what contingency plans do you have to put in place? What if there’s a relapse before a vaccine hits the street? That’s what people are most focused on. You do have a handful of folks still thinking orders.”
But there are opportunists. Michael O’Leary, chairman of Ryanair, spoke of the possibility of new orders during the prolonged 737 MAX grounding. Whether he’d step up and place an order during the COVID crisis remains to be seen. But it would be in character.
“You do have a number of folks who would come out of the woodwork trying to be opportunistic and buy at the bottom of the cycle because it makes more sense from a buyer standpoint,” the Boeing official said. “Yes, O’Leary is talking to us. There are a number of others talking to us. There were a number of campaigns that had to be put on hold on the Max, where folks are trying to see when that return to service happens before they go forward.”
There are deferrals related to the MAX grounding and from COVID. For those companies that made public announcements, deliveries are deferred to 2024 to 2027.
Is there enough information yet for Boeing to project when there will be a new bow wave of deliveries? Previously, deliveries of the MAX fell sharply from 2024.
“There are a couple of things we’re dealing with,” the Boeing official said. “One of them is COVID. It’s taken a toll on everybody’s plans and we have to manage to that.
“Another one is the MAX return to service and the uncertainty around that.” (The best estimate now is that the Federal Aviation Administration may recertify MAX in August or September. However, Europe’s EASA timing may be sequential.)
Every month of uncertainty has a knock-on effect for a customer. A large fleet of 737 NGs may have 10 to 20 airplanes per month that are affected.
“They have to make a decision on whether they’re going to return them from lease or they’re going to do their forward sale or they have to do a big maintenance check on them because the fleet plans are timed with those things,” the Boeing official said. “Once you tell them, I can’t deliver it, say in August, I’m going to deliver it in September or October, the two months could be worth a year or two because now he’s going to have to do his maintenance and keep flying them. They can’t defer maintenance anymore.”
Once maintenance is performed, an airline needs to amortize it.
“Now he’s sitting on the asset longer. That’s the kind of stuff that we’re working with every airline. It’s not just demand, it’s also the maintenance events, it’s the forward sales,” the official says.
“We’re not as excited about a bow wave because of the storage that we have,” the official says. Boeing has about 450 MAXes built but stored. “What you’re going to do is just plan a prudent production rate and then rely on your inventory to deal with surge or keep storing them a little longer, whatever is needed to do so that you can match where the demand is. I’m not too excited over the next two years on the single-aisle.”