:: August 2004 Letter ::
TV ads change your life. We were recently cleaning house, and whenever I got sentimental about giving old stuff away, my wife reminded me of that Ikea lamp commercial. The images are from the lamp’s point of view, abandoned by its owner on a rainy sidewalk and replaced by a new lamp. Sad music is interrupted by a goofy man with a Swedish accent: “Many of you feel bad for this lamp. That is because you are crazy. It has no feelings. And the new one is much better.” That puts things in perspective. Off to the donation center we go.
The aircraft world doesn’t need this admonition. The ad promotes obsolescence and disposability, to stimulate demand for new products. But disposability is an extremely well established concept in our industry. Think about the jetliner marketplace over the last ten years. Some evil geniuses convinced everyone, except Northwest, that fully depreciated old planes were in fact not the correct fleet plan. Everyone bought new planes, even low-cost start-ups and Third World carriers with funny names.
How did the evil geniuses sell these new planes? They made them financially digestible. All jetliners are 25-35% off list price, even if you’re a marginal player. The new planes come with manufacturer financing (and an Ikea Allen wrench). Easy payments, coupled with a new, common fleet and a new plane maintenance holiday are a strong attraction for any carrier.
But selling new planes when there are many good used ones available takes more than manufacturer finance. Part of the attractiveness of new planes is due to a government distortion of the marketplace. Thanks to ATSB and EU subsidies and the other barriers to exit (lenient bankruptcy regulations), aircraft financiers give the airlines relatively generous terms, since they’re financing equipment for a customer who’s unlikely to go away.
Whatever the reason, you can see the result: hundreds of planes are stuck in a weird netherworld. They have too much potential economic value to be scrapped, yet nobody wants them because new jetliners are desirable, and now easy to afford. They might be in a de facto early grave.
I didn’t see this coming. Like the French academic exclaiming: “Sure, it works in reality, but does it work in theory?” I continued to believe that market theory would prevail, favoring the older planes and suppressing demand for new equipment. Until, that is, now, and Teal sees the error of its ways. This month’s new Commercial Jetliner Overview has higher short-term deliveries: 595 this year, 625 in 2005 and 674 in 2006. We’re not at the frenzied level announced by Airbus at Farnborough (“market, shmarket—we feel like building 450 jets”), but we can’t say their numbers definitely won’t happen, either.
Of course, my original thinking might have been right. If anyone big—United, USAirways, Air Canada, Delta, etc—finally starts dumping new equipment on the market, their newer used jets might prove irresistible. But until then, it looks like the old stuff is out in the rain like that lamp.
Aircraft disposability is even worse in the military market. To make way for the new multi-role Super Hornet, the Navy shed legacy platforms, no matter how useful. The latest accelerated retirement: the F-14 fleet, now scheduled to leave service around 2007. The F-14 was the best naval fighter ever built. If only in theory, Iran will soon have better fighters than the USN. Good thing the US didn’t sell the Shah A-6s, too. The Navy cynically disposed of its younger A-6s first, turning them into coral reefs.
The situation is just as bad in the Air Force. To save cash for the F/A-22, the Air Force will give up everything—the F-111, EF-111, one-third of the B-1 fleet, and upgrades for many other planes. I’m amazed the F-15 and F-16 fleets have received even the minimal improvements they’ve gotten, but in July the Air Force unveiled a plan to retire 400-600 F-16s—half the fleet—over the next ten years. Even force structure gets sacrificed on the new plane altar.
Similarly, the 767 tanker may have been a good idea, but the deal’s opponents had a point about the Air Force exaggerating KC-135 corrosion to justify the requirement. The Air Force has a habit of this. Whenever they want to justify something new, the old stuff quickly acquires wing box cracks, unsupportable avionics, or scurvy. “Better retire that C-5A now. After all, that landing gear looks kinda weak, and rabies is contagious….”
But look at the one aviation segment that really functions as a market, without excessive distortion by government cash or rules. Business jets don’t get left on the sidewalk. They stay around for a very long time. Some 25% of the world’s bizjets are over 20 years old, and only 7% of all bizjets ever built have been scrapped. Favorite bizjet fact: half the Jetstars built are still in service. Lockheed built the Jetstar as a quad-jet because they couldn’t find the right engine for an octo-jet. Yet in the bizjet market, even Jetstars still have economic use.
That’s what an undistorted market looks like—equipment doesn’t get thrown away lightly. But in other segments, planes get put to pasture far more frequently. And the image is tragic. Picture a graceful, lonely L-1011, parked for eternity, its wings plucked like the petals torn off a flower, weeping hydraulic fluid tears in the rain.
Many of you feel bad for this L-1011. That is because you are crazy. It has no feelings. And that new twinjet is much better.
In addition to the Jetliner overview, August reports include the A380, F-117, some Russian planes, the AB.139, and the SJ30. Welcome back, Farnborough survivors.
Yours, ‘til I Drink Beer Out Of The Last Melted-Down 727,
© Richard Aboulafia 1997-2006, All rights reserved.