RichardAboulafia.com 

:: May 2020 Letter ::

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Dear Fellow Dark Cloud Dwellers,

Great news! My April note had a long list of good news about our industry’s outlook in these very difficult times, and – again, great news – this month’s note, with the inevitable follow-on list of bad news is much shorter! In fact, this list has just one item:

1. We have way too many jetliners.

Okay, that may be a very big item. We have a lot of jets. In any bad year in history (1991, 2001, 2009 etc.), traffic fell by 2-3% year/year. IATA’s latest 2020 projection calls for a 55% drop. That new number optimistically assumes a fourth quarter recovery that really isn’t likely to happen. And today, around 14,000 jets – about 60% of the world’s jetliner fleet – are parked. There won’t be a COVID-19 vaccine for at least 18 months, so we don’t see traffic returning to the 2019 peak until late 2023 at the earliest. Even Qatar is deferring deliveries. That’s right – the airline that always wants to order 50 of everything now wants fewer planes. In fact, it plans to cut 20% of its fleet. Nobody wants or needs jets.

Meanwhile, all jetliner production lines are actively building unwanted jets at high rates. This month, the 737MAX re-started too. Even the A380 line, bizarrely, is still open, converting useful labor, parts and materials into something completely useless.

This will be a long, unpleasant bust cycle. It’s too early to determine winners and losers at this stage of the downturn, but I can offer three guidelines, as an educated guess of what’s coming:

1. Biggest Equals Worst. The only clear and obvious forecast so far. That horrible gnashing sound you hear in the background is 200+ young but ungainly monsters being turned into something more useful, which, of course, is anything other than an A380. Reportedly, there’s a debate within Boeing about the 747-8’s future. In times like these, when there’s a debate about a jet’s future, it has no future. The 777X and A350-1000 order books aren’t in great shape at all. And who will want the last 777-300ERs when Delta is retiring ten relatively young ones? The only strong twin aisle programs are the 787 and A350-900. But it will be some time before any aircraft program can be termed “strong.”

2. If airlines can get similar range and seat mile costs, they’ll downsize. New, efficient smaller single aisles (100/130-seats) can get close to the range and economics of what a bigger one (150/160-seats) does but with fewer seats. That will benefit the A220. It should benefit Embraer’s E190/195E-2, but the end of the Boeing JV means they’re stuck with higher costs.

Similarly, if an airline can replace a twin aisle with a large single aisle, it will. The shift away from twin aisles, a clear trend over the past few years, has accelerated greatly. It had been a single aisle buying preference; it’s now a twin aisle retirement/replacement preference too. It will also be driven by consumer behavior – for years after the pandemic, expect frequent fliers to prioritize point-to-point over changing planes in crowded hubs. All of this greatly benefits the A321neo, particularly the XLR, the most capable single aisle on the market.

3. Regionals are useful. Some headline news has been negative, with Trans States, Compass, and other operators now bankrupt. I understand why there’s a debate about this, but I still view regional aircraft and airlines as increasingly useful to maintain networks and service in a time of greatly reduced demand. Low fuel prices also help make RJ’s higher costs more manageable.

These guidelines may be useful ways to think about fleets in the next few years. But then again, they may be useless, because so far OEMs aren’t necessarily acting in rational ways. Consider this longer list of inexplicabilities:

1. With the above trends, Boeing could use Embraer, for its E-2 series to counter the A220, and for engineering help to create an A321neo competitor. For whatever reason, they walked away.

2. With the collapse of the Boeing/Embraer JV, Mitsubishi would seem to have a great opportunity to attack the regional jet market on equal terms with Embraer, the incumbent. Instead, they’re slashing the MRJ development budget, shelving the smaller SpaceJet and freezing test flights, casting doubt on the entire program’s viability. And strangely, Mitsubishi just went ahead with its CRJ acquisition, giving them the support structure they urgently need for a plane that might stay on the shelf.

3. Again, Boeing desperately needs an A321neo competitor. It can put the new plane’s launch off for a year or two, but the idea of slashing R&D by 25% right now (as it did with its first quarter results) seems highly ill-advised. As with the Embraer walk-away, Boeing seems willing to accept single aisle marginalization, reducing itself to just one product (the 737MAX8).

4. Since Airbus has the middle market to itself, it made sense that they’d solve their A321 production constraint problems by converting the A380 line into an A321neo line. Instead, they’ve shelved that idea.

All four of these things may be explained by companies wishing to preserve cash in the midst of an unprecedented crisis. But the fifth inexplicability contradicts that:

5. With fuel as cheap as it is, and cash as scarce as it is, airlines should be slashing new jet intake and hanging on to middle aged jets. Instead, at least anecdotally, many airlines plan to keep taking new jets and will park the middle aged ones instead. Everyone is playing up retirements, not deferrals (even though one-third of the January order book has since been deferred).

The bottom line: COVID-19 is accelerating all of the trends that were impacting the industry before this pandemic happened: Boeing’s self-inflicted marginalization, a secular shift away from twin aisles, a preference for small, nimble fleets over big jets, and route fragmentation. Aside from the huge oversupply problem, nothing new is happening. It’s just happening faster.

Yours, ‘Til The Bad News List Shrinks By One Item,
Richard Aboulafia
 

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  ~  Last updated on January 08, 2006