Pihero From France, joined Jan 2005, 5174 posts, RR: 78 Posted (7 years 12 months 2 days 16 hours ago) and read 2649 times:
These are some thoughts I had through reading AF and BA financial results, along with some of the more interesting threads on this forum.
Please bear with me as it is my first foray into economics .
Booming air traffic. Diminishing fleets.
After three consecutive years of fast growth - 7% or more - there is no sign of an air transport recession, in spite of the soaring oil price and the slow-down of the western world economies. The prevision for the next three years for IATA carriers is around 3 to 4 %. At the same time, the progression of the world fleet is not following that growth, most of which comes from fast climbing load factors. ( In this respect, the order books are hiding that situation as the retiring aircraft are just barely being replaced by new equipment).
Oil is biting.
...and cause a faster retirement of older tech airplanes : This is no time for gas guzzlers any more : BA, AF, AA are the first airlines showing what in my opinion is going to be a general solution, but they are only the most visible ones ( a trip to one of the boneyards like Chateauroux is quite an eye-opener ). That these airplanes cost an extra 30 to 35 % extra fuel to operate is no longer acceptable at a time when people calmly forecast a 200$/bl oil price.
The end of mass air travel ?
Airlines are now operating very tight schedules and tight fleet management. For instance, the loss of the 777 caused BA to revised their whole summer schedule. We are also beginning to see frequency / capacity drops on some of the *secondary* routes.
But... What is astonishing is that, contrarily to what expected to happen,i.e a downturn in the airline business, yields have never been so high :
- High priced tickets, due to a reduced offer to a growing -albeit slower - demand
- Taxing passengers on generally accepted gratuities : number of luggage, oversized cases, weight above allowances...
- Contraction of fare ranges toward the most expensive ones : for instance three years ago in 2005 a Y class Paris-Sydney was 1,000 € ; it's now 4,400...Even more telling, a CDG-NRT Y ticket went from 620 to 6,500, while the J ticket went from 3,300 to 7,500.
- Soring load factors : I still remember that a ball park figure for a smooth ops was about 70~75%. Beyond that figure, it was accepted as an industry wisdom that one would start losing customers...Guess what : 80~82% load factor seem to be the norm now, meaning that the majority of flights would be full or even over-booked and that with no appreciable loss of customers.
- What happened to these lovely bonus air-miles ?
Is it all rosy then ?
No. Some airlines are in trouble.
-Those with older fleets because of reduced fuel-efficiency. One estimation says that AF.KL saved some € 600M this year just because of their fleet renewal. I would then suspect that all these MD80s, 73Classics, 767s, 757s,306s,310s, 744s, MD11s are beginning to see the end of their days.
-Those already in financial squeeze because of their inability to manage some meaningful fuel and currency hedges,.let alone invest in new equipment.
But the main problem seems to be coming from the scarcity of available new airliners and the situation of these airlines is not going to improve any soon : Manufacturers' order books are full, delivery delays get longer and longer : A 330 ordered now will not fly until 2011 ; a 777 not before 2012~2013 (my lack of data on Boeing delivery slots doesn't help here ) ; a 350 or a 787 not before 2013 or even 2017... The situation seems somewhat better on the single-aisle category where also the arrival of new types from Embraer...is to be carefully assessed.
More on the fleet renewals.
Unless my estimation on delivery dates is very wrong - and it could well be as we do not know whether each manufacturer has reserved FAL slots for new customers, we will see soon an enormous boom in the 330/340 order book as for the moment Airbus Industrie is alone in being capable of selling wide-body slots as early as 2011 and IMHO it won't at all be surprising to see some of the US legacy carriers operating them sooner than we'd expect.
That puts the 777 future into perspective : Between the moment the last of the already-ordered airframes comes out of the final assembly line - 2013 - and the 359 EIS - say 2017 -, the T7 will have the field all to itself. After that, who knows ? and let's not forget that this order bonanza bars the entry/offer/delivery of an advanced model for the foreseeable future.
The problem is that the longer an airline board delays their decision, the more difficult it will be to get new, efficient airplanes.
That remark illustrates the choice for the likes of AF.KL : 787 or 350 , whatever the engine choice ?
Time is fast running out and the phenomenal success of the Dreamliner is - at the moment - playing into Airbus' hand.
So my final question is : "When is Boeing going to open a second 787 assembly line ?".
Just my two € cents.
Kaitak From Ireland, joined Aug 1999, 13265 posts, RR: 34
Reply 2, posted (7 years 12 months 2 days 9 hours ago) and read 2483 times:
Thank you for sharing these views with us, Pihaero; obviously you've put a great deal of thought into them. I think you make a lot of very valid points. I would like to think that there will be a boom, but really, my personal feeling is that we've just not seen the full effects of an economic slowdown hitting aviation yet. It's worth noting that many airlines buy (or hedge) their fuel well in advance, so the current fuel prices might not begin to bite painfully for some time to come, possibly early next year. I would expect that a combination of slow winter demand and rising oil prices could make the 2008/9 Winter season very unpleasant for some carriers, maybe fatal for a few too.
Personally, until fuel prices come down very considerably, we will not see an upswing in the airlines' fortunes. Don't forget that rising oil prices hit the consumers' pockets in very many different ways, from petrol for the car, to home heating oil and many other products which come from oil or oil by-products.
I really hate being pessimistic; I'm not naturally a pessimist (I'm not an economist either!), but I think the airline industry is in for a lot more pain before things get better.
Pihero From France, joined Jan 2005, 5174 posts, RR: 78
Reply 3, posted (7 years 12 months 2 days 8 hours ago) and read 2434 times:
Quoting Kaitak (Reply 2): Personally, until fuel prices come down very considerably, we will not see an upswing in the airlines' fortunes.
That's what I thought - been thinking, actually. But see that the fuel surcharge is not hurting passenger traffic at all and airlines, the like of AF.KL are hedging their fuel costs a lot well in advance than I thought. The AF.KL document on their financial result reveals a period af 12 to 16 quarters. That's three to four years.
Quoting Kaitak (Reply 2): I would expect that a combination of slow winter demand and rising oil prices could make the 2008/9 Winter season very unpleasant for some carriers, maybe fatal for a few too.
It could happen. That's why I am making a careful difference between the financial health of airlines : Those who can afford new investments and those who can't. In the second category we will find the potentially disappearing companies.
Another aspect of this situation is that, apparently, passengers are quite prepared to travel in less comfortable conditions, provided they can lower their travel costs. I would have thought a year ago that the 10-abreast seating would be suicidal for an airline to offer...it's certainly not the case. Of course, we see the pampering of high yield passengers : they get about everything bar the FA and they're paying a fortune. but as a whole, cattle class is developing... I hope we won't be seeing the re-birth of third class of yesterdays liners...and in this respect, a 650 seat-380 is not very far off.
There is where my pessimism is at the moment.
As for the 744 early retirement, now I can see that it was in the cards at AF.KL : the orders and options taken on the 7777 point only to that direction. If you just take a look at their financial result,page 79, you see that the delivery schedules of the T7 are 5, 5, 5, 4 +8, 1 + 8 for 2008, 09, 10, 11 and 2012 respectively, so I can already assume that these options on 2011 and 12 are bound to be lifted.