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lightsaber
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Udvar-Hazy interview, CAPA on airlines

Wed Jun 02, 2021 10:38 pm

I found this interview... enlightening and scary:
https://centreforaviation.com/analysis/ ... azy-561543

- "Many airlines have mortgaged everything, their planes, their slots, their airport terminals, their ground facilities, their frequent flyer programmes....I believe that a significant part of airline loans will either have to be forgiven by government agencies or converted to some kind of equity.

err... isn't that what bankruptcy is for? Delete equity, lenders own (part) of the business and a restart.

.I think we would limit the size of our exposure to startups to maybe 5%, 6% of our total portfolio.


I think placing aircraft might boost that up to 10% to 12% of the portfolio, see the first part on airline debt, those airlines will not be nimble.


I think what has changed is that none of us in the airline industry anticipated back in March, April of last year, when this whole pandemic began to take on its course, none of us anticipated that here we are 14, 15 months later, and we still don't have a totally clear path of recovery.


Nor myself and I was more bearish than most on what level of recovery we would rebound to. The industry had expenses and little income, as with many industries.

When will business travel return? I'm sure there will be a quick recovery to 60% or a little more of prior, but conventions are a long way away and many will zoom.

Basically a good read on the fiscal chaos in the industry. I think I need to extend out my recovery timeline. :cry2:

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Jetport
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 1:25 am

Thanks for the link, interesting interview.

Very interesting quote from article that leasing is now over 50% of the market:

"At the end of last year, we crossed that threshold where more than 50% of the aircraft are leased, either on an operating lease or a finance lease or on a sale-leaseback. That is a huge change from where we were even five years ago."

I am likely going to my first convention in September, I believe business travel will recover faster than most people think. I do think the percentage of air travel that is business will likely be permanently reduced, but likely only by 5 percentage points or so. I am very thankful I don't have that many years left to work. If I was younger the prospect of decades of awful Zoom/Teams meetings would really be depressing.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 1:31 am

Jetport wrote:
If I was younger the prospect of decades of awful Zoom/Teams meetings would really be depressing.

Sure, but that's old-people mentality.

Me, I'm beyond thrilled that I don't have to be around a bunch of colleagues/salespersons/marketers/etc whom I don't even want to see in the first place...
....much less go somewhere to be around them.

Soon as we're done-- *click.*

The thought of ever having to go back full-time into an office, or worse: travel to conventions/trainings; is beyond nightmarish.
I myself, suspect a more prosaic motive... ~Thranduil
 
Jetport
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 1:38 am

LAX772LR wrote:
Jetport wrote:
If I was younger the prospect of decades of awful Zoom/Teams meetings would really be depressing.

Sure, but that's old-people mentality.

Me, I'm beyond thrilled that I don't have to be around a bunch of colleagues/salespersons/marketers/etc whom I don't even want to see in the first place...
....much less go somewhere to be around them.

Soon as we're done-- *click.*

The thought of ever having to go back full-time into an office, or worse: travel to conventions/trainings; is beyond nightmarish.


We better hope for the health of the airline industry we all love there are lots of people like me. I think Zoom/Teams is more an extrovert/introvert thing than generational, most extroverts hate Zoom/Teams, introverts love it.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 2:32 am

Jetport wrote:
We better hope for the health of the airline industry we all love there are lots of people like me. I think Zoom/Teams is more an extrovert/introvert thing than generational, most extroverts hate Zoom/Teams, introverts love it.

I wouldn't disagree with you on the latter; however I will say that something recent generations have been far more willing to accept (or even consider the possibility thereof in the first place)... is that (1) things change, and (2) the old ways may not necessarily have been the best, most efficient, nor most sustainable ways.

In essence: if those old travel patterns don't return, then airlines will simply have to adapt or die.
And if that means everyone has to become clones of Spirit in their domestic service/layouts in order to survive, or if we have to see modifications in the current H/S vs P2P models, then so be it.
I myself, suspect a more prosaic motive... ~Thranduil
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 5:39 am

What I think is most surprising is how airlines have retired entire fleets during the crisis on short notice. Including young airplanes like many A380s or 777s and so on. How did they manage to cut short their leases so easy this time? I had the impression you cannot just cancel a lease and walk away. Somehow the system must have changed so that leased fleets could be dropped and airlines sometimes try to only keep their owned inventory.

From a passenger perspective all this ongoing outsourcing and cost reduction makes flying like bus driving but with extra payments for everything. Baggage, reservation, free seat next to you, lounge, food and drinks, WLAN, checkin at the airport and so on. There is not much perceived extra or luxury atmosphere left. If they continue to go this route it will be a race to the lowest price only and finally be a flying subway it seems. Not sure if all this will generate more income for the airlines on the long run?
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 5:54 am

Noshow wrote:
What I think is most surprising is how airlines have retired entire fleets during the crisis on short notice. Including young airplanes like many A380s or 777s and so on. How did they manage to cut short their leases so easy this time? I had the impression you cannot just cancel a lease and walk away. Somehow the system must have changed so that leased fleets could be dropped and airlines sometimes try to only keep their owned inventory.


Leases always have an out - it just often is expensive. Furthermore, the threat of bankruptcy of airlines is an incentive for lessors to make a deal since that deal is probably better than the outright lease cancellation by the court. But your last sentence seems off, its not like airlines just returned aircraft with no cost.

Noshow wrote:
From a passenger perspective all this ongoing outsourcing and cost reduction makes flying like bus driving but with extra payments for everything. Baggage, reservation, free seat next to you, lounge, food and drinks, WLAN, checkin at the airport and so on. There is not much perceived extra or luxury atmosphere left. If they continue to go this route it will be a race to the lowest price only and finally be a flying subway it seems. Not sure if all this will generate more income for the airlines on the long run?


What ongoing outsourcing? There hasn't been any real change in airlines. The LCCs/ULCCs are still doing their thing and the legacies are, too. The legacies are clearly going for revenue premiums generally (although competing with basic fares), so that alone disproves your "race to the lowest price."
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 6:03 am

Take Lufthansa as an example, they have sold their european catering, it got just changed to buy on board In economy class. And they move their own business partly to Eurowings aircraft on short haul. Staffed by cheaper Eurowings crews. A long range Eurowings is planned next but this is another thread. I agree that US airlines might handle this differently.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 11:23 am

I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.

Airlines, generally speaking, are not viable businesses. Deregulation has been a disaster.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 11:48 am

Jetport wrote:
Thanks for the link, interesting interview.

Very interesting quote from article that leasing is now over 50% of the market:

"At the end of last year, we crossed that threshold where more than 50% of the aircraft are leased, either on an operating lease or a finance lease or on a sale-leaseback. That is a huge change from where we were even five years ago."

I am likely going to my first convention in September, I believe business travel will recover faster than most people think. I do think the percentage of air travel that is business will likely be permanently reduced, but likely only by 5 percentage points or so. I am very thankful I don't have that many years left to work. If I was younger the prospect of decades of awful Zoom/Teams meetings would really be depressing.

With the current health of the airline market, it wouldn't surprise me if 2/3rds of aircraft are leased going forward.

I agree long term the reduction will be smallish, but not zero. I can only base on my employer and we have found about a quarter of prior business travel just wasn't worth it. We also found half our prior business travel was *really* needed and we lost some business not sending out enough people. Then the last quarter we think has long term social network building benefits that will benefit the business in years to come. So I expect, due to natural growth, business travel to be back to normal by 2025, but at a reduced fraction of the market. So I can see where your would get 5%, I think it will be a 25% reduction in business travel. Partially as this allows companies to avoid building or renting larger facilities.

It will be interesting to see how travel grows. Comparing Memorial day (5/31/2021 vs. 5/27/2019) 1.900 million vs. 2.485 million. Friday before 1.959 million vs. 2.512 (2019). People want to travel, but it is a reduction. It will take years to fully recover, the debate is how many years.
https://www.tsa.gov/coronavirus/passenger-throughput

Noshow wrote:
What I think is most surprising is how airlines have retired entire fleets during the crisis on short notice. Including young airplanes like many A380s or 777s and so on. How did they manage to cut short their leases so easy this time? I had the impression you cannot just cancel a lease and walk away. Somehow the system must have changed so that leased fleets could be dropped and airlines sometimes try to only keep their owned inventory.


Noshow wrote:
What I think is most surprising is how airlines have retired entire fleets during the crisis on short notice. Including young airplanes like many A380s or 777s and so on. How did they manage to cut short their leases so easy this time? I had the impression you cannot just cancel a lease and walk away. Somehow the system must have changed so that leased fleets could be dropped and airlines sometimes try to only keep their owned inventory.

I find the Delta example more appropriate. It would have cost more to keep the MD-80s and MD-90s flying than anything. When demand returns, those airlines saved enough cash to easily buy (or lease) new. Or will buy up low cost discount aircraft. Widebodies are different, international travel is still very supressed. The A380 was marginal before Covid19. ANA and JAL are retiring very old 777-200ERs. Much was normal lease returns. In the long run, that will help leasing. As already noted, leasing companies do nothing for free, payments were expected.

SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.

Airlines, generally speaking, are not viable businesses. Deregulation has been a disaster.

Yield management works, it just requires high demand. It is back. Airlines that do great yield management will make a few percent more which makes all the difference in the long run.

I do think more will be ULCC. The SouthWest strategy is, in my opinion, fairly saturated. That doesn't mean they won't grow, I think more and more aircraft will go to the ULCCs. At first I dismissed Allegiant, then I noticed "hey, that is really convenient..." But we can go to the Breeze thread to discuss that. I see the discounted used aircraft finding their way into less than weekly service (say parked on Tuesday and Wednesday most weeks).

In my opinion, oil prices will rise and that will push to new aircraft. Part of the issue with aircraft is that improvements cost more (CFRP wing, GTF, CMCs, variable cycle engines such as the LEAP turbine cooling). Due to cheap financing and a surplus of production, new can be bought. Or buy surplus used... Or only fly older aircraft when yields are high (not on the low yield Tuesday or Wednesday).

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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 1:24 pm

The interview, what jumped out at me, airlines have lost ALL of the profits they have ever made since WWII. Borrowed against every tangible asset, and also against virtual and intangible assets. Government loans will have to be forgiven, converted to some sort of ownership, or paid back (he seems to imply this may not happen much). Lessors are owning most of the planes, and are gaining more power as airlines lose the power to make all/most of the decisions on operations. The old Boeing versus Airbus: P2P versus hub - Airbus winning with the 321s with extended ranges. A final all-over impression I came away with: a real crap shoot is going on, and who knows just who is winning. Mostly lessors.

So a question - who is the real aviation - naively we think aviation is about planes and pilots, more sophisticated the airlines, thinking out of the box - financiers and lessors with a big hunk of government thrown in?
Buffet: the airline business...has eaten up capital...like..no other (business)
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 1:56 pm

lightsaber wrote:
I found this interview... enlightening and scary:
https://centreforaviation.com/analysis/ ... azy-561543

- "Many airlines have mortgaged everything, their planes, their slots, their airport terminals, their ground facilities, their frequent flyer programmes....I believe that a significant part of airline loans will either have to be forgiven by government agencies or converted to some kind of equity.

err... isn't that what bankruptcy is for? Delete equity, lenders own (part) of the business and a restart.

.I think we would limit the size of our exposure to startups to maybe 5%, 6% of our total portfolio.


I think placing aircraft might boost that up to 10% to 12% of the portfolio, see the first part on airline debt, those airlines will not be nimble.


I think what has changed is that none of us in the airline industry anticipated back in March, April of last year, when this whole pandemic began to take on its course, none of us anticipated that here we are 14, 15 months later, and we still don't have a totally clear path of recovery.


Nor myself and I was more bearish than most on what level of recovery we would rebound to. The industry had expenses and little income, as with many industries.

When will business travel return? I'm sure there will be a quick recovery to 60% or a little more of prior, but conventions are a long way away and many will zoom.

Basically a good read on the fiscal chaos in the industry. I think I need to extend out my recovery timeline. :cry2:

Lightsaber


Good questions.

(1) yes, that is exactly what bankruptcy is for. And it works perfectly well for airlines (speaking from personal experience). But you know what’s even better, leveraging political capital to just get free money. In business school, they now teach that any business leader should leverage government relationships first to get a capital payment (sometimes euphemistically called a “forgivable investment or loan”). That is half of what they do in “government affairs” offices in Washington (the other half would be lobbying on regulations). The US/Europe used to be different from Africa or Russia in this respect, but we now follow the “global norms” on it. This is part of what makes Washington area real estate so valuable

The recovery will be interesting. INTL is so hosed for at least another year. US and EU “domestic” will recover strongly. Global travel had been growing in 2019. This growth curve will retard by several years. I bet 2023 we will be back to global 2019 traffic. But this represents a different future than we had before, modified by the effect of Covid.

A final all-over impression I came away with: a real crap shoot is going on, and who knows just who is winning. Mostly lessors.

So a question - who is the real aviation - naively we think aviation is about planes and pilots, more sophisticated the airlines, thinking out of the box - financiers and lessors with a big hunk of government thrown in?


Airlines have always historically lost money BECAUSE there are guys out there willing to throw money at it and watch money burn. Usually it is government guys burning the people’s money (small countries propping up a flagship airline for example). The US does it in more subtle ways… until Covid when we just do that very thing.

Financiers, the one thing to understand is they take intelligent gambles on the residual values of those airplanes. They are not just throwing money in. They are there to make a profit, even *if* they know that airlines as corporations will lose money overall. The finance guys don’t care. They have their own business model.

At times, equipment manufacturers bastardize the finance process in order to get their *equipment* out there and make money on that. I believe overall that GE and Rolls have made good money. Boeing and Airbus, overall, appear to make good money long term. So not everybody is crazy. But the airlines are crazy. And it will never change. This is all just my thoughts; YMMV
 
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Re: Udvar-Hazy interview, CAPA on airlines

Thu Jun 03, 2021 10:22 pm

This is about the third iteration of "have lost every dime they have ever collectively made." Soon, they will be raking in record profits again, making more than they ever have. But before, long before, they gather enough assets to repay all these extant liabilities and also create the seed money for new airplane projects, the next cycle will take them down again. Airlines are not viable businesses.

Also, when record profitability returns, consumer groups and certain government officials will say they are gouging the public. Fine, keep buying re-engined 1980s airplanes forever.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Fri Jun 04, 2021 1:29 pm

LCD.. - interesting comments. And then oddly there are people and companies who love (and I think that is literal thing) making planes, flying and working on them, and even bankers and financiers who love making it all possible. I tend to explain everything from evolutionary development and morality understanding. Us social primates are fascinating.
Buffet: the airline business...has eaten up capital...like..no other (business)
 
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Re: Udvar-Hazy interview, CAPA on airlines

Fri Jun 04, 2021 3:53 pm

SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. .............
Airlines, generally speaking, are not viable businesses. Deregulation has been a disaster.

Im guessing you are referring to the US aviation industry. Because Globally the sector has been growing in capacity for the last 30 years.
And most other nations have a deregulated sector
 
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Re: Udvar-Hazy interview, CAPA on airlines

Fri Jun 04, 2021 7:40 pm

The US, Indian, and quite a few other airlines have not been a great investment. That just means the leasing companies need options to loan funds.

It is a very high fixed cost industry without the sure revenue of utilities.


I missed the A220 bit:
And now you've got the 220 family, which is gaining momentum. We've ordered 50 of those, and we have 25 options that we're discussing with Airbus to exercise.

That implies their original batch of A220 is being placed at an acceptable rate! :hyper:

I'd love to know how well each family is being placed. Re-reading the article, MAX placement seems to be a challenge.

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Re: Udvar-Hazy interview, CAPA on airlines

Fri Jun 04, 2021 8:05 pm

Eagleboy wrote:
SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. .............
Airlines, generally speaking, are not viable businesses. Deregulation has been a disaster.

Im guessing you are referring to the US aviation industry. Because Globally the sector has been growing in capacity for the last 30 years.
And most other nations have a deregulated sector


The U.S. sector grew significantly since dereg, too, but growth doesn't mean profitable growth. Go ahead and look at 30-yr ROIC for any U.S. carriers other than AS or WN. It's ugly. Europe has seen profits in the ULCC sector but size-weight it against the capital destruction across the entire sector including the failures at Sabena, Olympic, AF, etc. and it doesn't look promising.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Fri Jun 04, 2021 10:27 pm

SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.


it is simply untrue that airlines as a whole have reduced capacity over the past 30 years. Passenger counts for U.S. carriers were up over 40% from 2003 to 2018. Domestic passengers increased by a third while international nearly doubled in that timeframe. And this is with average length of haul continuing to gradually increase. The legacy carriers taken together may have reduced capacity, but then the LCCs and ULCCs have taken up that slack and more.

The reason for "stalled" airplane development is essentially just tied to slowing improvement in technology. There are fewer big gains to be had in terms of aerodynamics or reducing weight of aircraft, and the success of the A320/1neo demonstrates that hanging improved engines on existing designs is a more cost-effective solution than clean-sheet airliner designs. Established programs like the A32X and 737 have mature supply chains and huge economies of scale, so it's really tough for a new entrant to come up with something which can be manufactured in a cost-competitive way -- and that ignores the fact that the incumbent designs have hundreds of millions of hours of operation to work out any issues in their designs. The incumbents are also loath to disrupt the cash flow from their successful programs, nor are they terribly interested in plowing tens of billions of dollars/euros into a new program which may not produce better margins than what they currently have on offer.

Furthermore, for customers, a new type must offer compelling economics when compared against existing types in their fleet; to wit, Southwest's decision to go with the 737 MAX-7 instead of the A220. Training, scheduling, maintenance, etc. are important to airline customers and decades of experience have demonstrated that simplified fleets offer meaningful cost savings. We're even seeing Delta, which two years ago operated close to a dozen types, moving to maybe six or seven mid-decade.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 3:49 am

ScottB wrote:
SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.


it is simply untrue that airlines as a whole have reduced capacity over the past 30 years. Passenger counts for U.S. carriers were up over 40% from 2003 to 2018. Domestic passengers increased by a third while international nearly doubled in that timeframe. And this is with average length of haul continuing to gradually increase. The legacy carriers taken together may have reduced capacity, but then the LCCs and ULCCs have taken up that slack and more.

The reason for "stalled" airplane development is essentially just tied to slowing improvement in technology. There are fewer big gains to be had in terms of aerodynamics or reducing weight of aircraft, and the success of the A320/1neo demonstrates that hanging improved engines on existing designs is a more cost-effective solution than clean-sheet airliner designs. Established programs like the A32X and 737 have mature supply chains and huge economies of scale, so it's really tough for a new entrant to come up with something which can be manufactured in a cost-competitive way -- and that ignores the fact that the incumbent designs have hundreds of millions of hours of operation to work out any issues in their designs. The incumbents are also loath to disrupt the cash flow from their successful programs, nor are they terribly interested in plowing tens of billions of dollars/euros into a new program which may not produce better margins than what they currently have on offer.

Furthermore, for customers, a new type must offer compelling economics when compared against existing types in their fleet; to wit, Southwest's decision to go with the 737 MAX-7 instead of the A220. Training, scheduling, maintenance, etc. are important to airline customers and decades of experience have demonstrated that simplified fleets offer meaningful cost savings. We're even seeing Delta, which two years ago operated close to a dozen types, moving to maybe six or seven mid-decade.


My comment was poorly worded. I intended to say that they have moved to smaller and smaller airplanes. There's tons more overall capacity, much, much more frequency on smaller and smaller airplanes.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 4:26 am

SteelChair wrote:
ScottB wrote:
SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.


it is simply untrue that airlines as a whole have reduced capacity over the past 30 years. Passenger counts for U.S. carriers were up over 40% from 2003 to 2018. Domestic passengers increased by a third while international nearly doubled in that timeframe. And this is with average length of haul continuing to gradually increase. The legacy carriers taken together may have reduced capacity, but then the LCCs and ULCCs have taken up that slack and more.

The reason for "stalled" airplane development is essentially just tied to slowing improvement in technology. There are fewer big gains to be had in terms of aerodynamics or reducing weight of aircraft, and the success of the A320/1neo demonstrates that hanging improved engines on existing designs is a more cost-effective solution than clean-sheet airliner designs. Established programs like the A32X and 737 have mature supply chains and huge economies of scale, so it's really tough for a new entrant to come up with something which can be manufactured in a cost-competitive way -- and that ignores the fact that the incumbent designs have hundreds of millions of hours of operation to work out any issues in their designs. The incumbents are also loath to disrupt the cash flow from their successful programs, nor are they terribly interested in plowing tens of billions of dollars/euros into a new program which may not produce better margins than what they currently have on offer.

Furthermore, for customers, a new type must offer compelling economics when compared against existing types in their fleet; to wit, Southwest's decision to go with the 737 MAX-7 instead of the A220. Training, scheduling, maintenance, etc. are important to airline customers and decades of experience have demonstrated that simplified fleets offer meaningful cost savings. We're even seeing Delta, which two years ago operated close to a dozen types, moving to maybe six or seven mid-decade.


My comment was poorly worded. I intended to say that they have moved to smaller and smaller airplanes. There's tons more overall capacity, much, much more frequency on smaller and smaller airplanes.


That’s demonstrably false, too. The 737 and A320 series are substantially larger than the options 30 years ago. The 767/A310/A300 replaced by larger A330, 787, 777, etc. maybe the 744, but the A380, 77W, and soon 777X have large capacities. Lastly, the small props have been replaced by larger regional jets.
 
SteelChair
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 12:44 pm

jbs2886 wrote:
SteelChair wrote:
ScottB wrote:

it is simply untrue that airlines as a whole have reduced capacity over the past 30 years. Passenger counts for U.S. carriers were up over 40% from 2003 to 2018. Domestic passengers increased by a third while international nearly doubled in that timeframe. And this is with average length of haul continuing to gradually increase. The legacy carriers taken together may have reduced capacity, but then the LCCs and ULCCs have taken up that slack and more.

The reason for "stalled" airplane development is essentially just tied to slowing improvement in technology. There are fewer big gains to be had in terms of aerodynamics or reducing weight of aircraft, and the success of the A320/1neo demonstrates that hanging improved engines on existing designs is a more cost-effective solution than clean-sheet airliner designs. Established programs like the A32X and 737 have mature supply chains and huge economies of scale, so it's really tough for a new entrant to come up with something which can be manufactured in a cost-competitive way -- and that ignores the fact that the incumbent designs have hundreds of millions of hours of operation to work out any issues in their designs. The incumbents are also loath to disrupt the cash flow from their successful programs, nor are they terribly interested in plowing tens of billions of dollars/euros into a new program which may not produce better margins than what they currently have on offer.

Furthermore, for customers, a new type must offer compelling economics when compared against existing types in their fleet; to wit, Southwest's decision to go with the 737 MAX-7 instead of the A220. Training, scheduling, maintenance, etc. are important to airline customers and decades of experience have demonstrated that simplified fleets offer meaningful cost savings. We're even seeing Delta, which two years ago operated close to a dozen types, moving to maybe six or seven mid-decade.


My comment was poorly worded. I intended to say that they have moved to smaller and smaller airplanes. There's tons more overall capacity, much, much more frequency on smaller and smaller airplanes.


That’s demonstrably false, too. The 737 and A320 series are substantially larger than the options 30 years ago. The 767/A310/A300 replaced by larger A330, 787, 777, etc. maybe the 744, but the A380, 77W, and soon 777X have large capacities. Lastly, the small props have been replaced by larger regional jets.


Guess you guys are right, all those DC10s, L1011s, and 747s that used to operate in the domestic US were a figment of imagination.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 5:15 pm

SteelChair wrote:
jbs2886 wrote:
SteelChair wrote:

My comment was poorly worded. I intended to say that they have moved to smaller and smaller airplanes. There's tons more overall capacity, much, much more frequency on smaller and smaller airplanes.


That’s demonstrably false, too. The 737 and A320 series are substantially larger than the options 30 years ago. The 767/A310/A300 replaced by larger A330, 787, 777, etc. maybe the 744, but the A380, 77W, and soon 777X have large capacities. Lastly, the small props have been replaced by larger regional jets.


Guess you guys are right, all those DC10s, L1011s, and 747s that used to operate in the domestic US were a figment of imagination.

I loved the L1011s to ATL. However, I remember two things:
1. Even on holidays, I could grab an empty middle row and sleep (as a child).
2. I remember how high the fares were, more in nominal dollars than today.
3. That smoking section! LoL

Much easier to place a 738 or A32x than a widebody.

The leasing companies are going to lose money on widebodies. This will make financing them shifting the risk to airlines. Since airlines need to finance as much as possible, in my opinion, that means gravitating to aircraft the leasing company is willing to take more risk, the easy to place narrowbody aircraft. Since they have more range, that works.

Where I fly is (mostly) expanding: TPA, DEN, SLC. Only those metropolitan areas not willing to expand will face a crunch. Since the newest narrowbodies put to shame the prior generation narrowbody aircraft on range (4600nm on A321xLR, 3600nm for MAX, hopefully we see the hypothetical -9ER, vs. 3100nm for 738 and a little less for A321/A320).

The larger narrowbodies are very economical.
I already have tickets for LAX-TPA. Part of the reason fewer widebodies is hub bypass. In my opinion yhe A220 combined with less than daily frequency should allow more and more places I fly to bypass the hubs..

I do not see the leasing companies excited about widebodies going forward.

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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 5:59 pm

lightsaber wrote:

The leasing companies are going to lose money on widebodies. This will make financing them shifting the risk to airlines. Since airlines need to finance as much as possible, in my opinion, that means gravitating to aircraft the leasing company is willing to take more risk, the easy to place narrowbody aircraft. Since they have more range, that works.

Since the newest narrowbodies put to shame the prior generation narrowbody aircraft on range (4600nm on A321xLR, 3600nm for MAX, hopefully we see the hypothetical -9ER, vs. 3100nm for 738 and a little less for A321/A320).

The larger narrowbodies are very economical.
I already have tickets for LAX-TPA. Part of the reason fewer widebodies is hub bypass. In my opinion yhe A220 combined with less than daily frequency should allow more and more places I fly to bypass the hubs..

I do not see the leasing companies excited about widebodies going forward.

Lightsaber


The massive range jump with the NEO and MAX have really changed the market. It used to be the 737NG owned the US transcon market because the A320 range was too tight - bad winds caused a tech stop. In 2007, flights to Hawaii were either 757 or widebodies, now almost all NB from the west coast. This increased range has made hub bypass so easy.

It may not be hub bypass, but more cities becoming a hub for their own O&D traffic. A city like Spokane or Boise used to have just a handful of destinations, now many more. In all of those added routes, more are flying now direct instead of through a hub.

Strangely, this same effect is crimping the RJ market big time, the RJ's used to fly from these smaller cities to a hub. Even with the scope clauses it is becoming easier to just fly a CEO or NG rather than the RJ's, Mad Dogs, 717's, Q400's etc.

The NB market is clipping the bottom of the wide body market, at the same time Covid has caused Zoom and Team calls to replace a lot of business trips. Airlines with a lot of wide bodies will have poorer yields causing financial pain, while pricing pressure in the NB sphere will shift a lot of traffic to a ULCC that doesn't have the burden of paying for a lot of big planes.

New startups seem likely, selecting an under served city to be a new mini-hub, lease used frames that are low cost, no unions, no past debt. The chance for success is better than the existing competition that has all of its equity wiped out and a mountain of debt.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 6:51 pm

SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.

Airplane development is not stalled, the neo/max products are in their early days and showing double digit improvement (I've seen estimates from 12% to 21%) fuel burn improvement over their predecessors, much more on emissions. This is far better than things such as computer central processor unit per-thread performance, this has been stalled for many years now. Same for auto models, we aren't seeing 12-21% fuel burn improvements either.

WN's network may become the model going forward, but presumably not their high cost union labor model.
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 7:37 pm

Revelation wrote:
SteelChair wrote:
I have been saying for awhile that the industry was in awful shape. That's why airplane development is so stalled, airlines can't afford to subsidize such efforts. There has been a gradual capacity reduction over the last 30 years. You can't shrink to profitability. I don't know what the next stage is, other than perhaps Southwest being the new model for how an airline should be organized. But certain dumbasses cling to their yield management strategies and 9 different fares for what is essentially the same product, all the while virtue claiming on social issues.

Airplane development is not stalled, the neo/max products are in their early days and showing double digit improvement (I've seen estimates from 12% to 21%) fuel burn improvement over their predecessors, much more on emissions. This is far better than things such as computer central processor unit per-thread performance, this has been stalled for many years now. Same for auto models, we aren't seeing 12-21% fuel burn improvements either.

WN's network may become the model going forward, but presumably not their high cost union labor model.


The savings is all (almost all) from the engine. The age of the airframe and wing technology is well documented on this site and others
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 7:44 pm

lightsaber wrote:
SteelChair wrote:
jbs2886 wrote:

That’s demonstrably false, too. The 737 and A320 series are substantially larger than the options 30 years ago. The 767/A310/A300 replaced by larger A330, 787, 777, etc. maybe the 744, but the A380, 77W, and soon 777X have large capacities. Lastly, the small props have been replaced by larger regional jets.


Guess you guys are right, all those DC10s, L1011s, and 747s that used to operate in the domestic US were a figment of imagination.

I loved the L1011s to ATL. However, I remember two things:
1. Even on holidays, I could grab an empty middle row and sleep (as a child).
2. I remember how high the fares were, more in nominal dollars than today.
3. That smoking section! LoL

Much easier to place a 738 or A32x than a widebody.

The leasing companies are going to lose money on widebodies. This will make financing them shifting the risk to airlines. Since airlines need to finance as much as possible, in my opinion, that means gravitating to aircraft the leasing company is willing to take more risk, the easy to place narrowbody aircraft. Since they have more range, that works.

Where I fly is (mostly) expanding: TPA, DEN, SLC. Only those metropolitan areas not willing to expand will face a crunch. Since the newest narrowbodies put to shame the prior generation narrowbody aircraft on range (4600nm on A321xLR, 3600nm for MAX, hopefully we see the hypothetical -9ER, vs. 3100nm for 738 and a little less for A321/A320).

The larger narrowbodies are very economical.
I already have tickets for LAX-TPA. Part of the reason fewer widebodies is hub bypass. In my opinion yhe A220 combined with less than daily frequency should allow more and more places I fly to bypass the hubs..

I do not see the leasing companies excited about widebodies going forward.

Lightsaber


Thanks for providing so much additional detail to buttress my point. I am of course speaking of US domestic operations.

Richard Anderson said almost 10 years ago that there were far too many widebodies. Prescient, no?

Nowadays, airlines add capacity by adding another narrowbody flight to a city pair.

The subtle undertone missed by almost everyone is that the US3 seek to fill up available airport slots in high yield markets to stifle competition. A larger number of smaller airplanes facilitate that strategy. And who can blame them, given the history of the industry?
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 7:59 pm

JayinKitsap wrote:
lightsaber wrote:

The leasing companies are going to lose money on widebodies. This will make financing them shifting the risk to airlines. Since airlines need to finance as much as possible, in my opinion, that means gravitating to aircraft the leasing company is willing to take more risk, the easy to place narrowbody aircraft. Since they have more range, that works.

Since the newest narrowbodies put to shame the prior generation narrowbody aircraft on range (4600nm on A321xLR, 3600nm for MAX, hopefully we see the hypothetical -9ER, vs. 3100nm for 738 and a little less for A321/A320).

The larger narrowbodies are very economical.
I already have tickets for LAX-TPA. Part of the reason fewer widebodies is hub bypass. In my opinion yhe A220 combined with less than daily frequency should allow more and more places I fly to bypass the hubs..

I do not see the leasing companies excited about widebodies going forward.

Lightsaber


The massive range jump with the NEO and MAX have really changed the market. It used to be the 737NG owned the US transcon market because the A320 range was too tight - bad winds caused a tech stop. In 2007, flights to Hawaii were either 757 or widebodies, now almost all NB from the west coast. This increased range has made hub bypass so easy.

It may not be hub bypass, but more cities becoming a hub for their own O&D traffic. A city like Spokane or Boise used to have just a handful of destinations, now many more. In all of those added routes, more are flying now direct instead of through a hub.

Strangely, this same effect is crimping the RJ market big time, the RJ's used to fly from these smaller cities to a hub. Even with the scope clauses it is becoming easier to just fly a CEO or NG rather than the RJ's, Mad Dogs, 717's, Q400's etc.

The NB market is clipping the bottom of the wide body market, at the same time Covid has caused Zoom and Team calls to replace a lot of business trips. Airlines with a lot of wide bodies will have poorer yields causing financial pain, while pricing pressure in the NB sphere will shift a lot of traffic to a ULCC that doesn't have the burden of paying for a lot of big planes.

New startups seem likely, selecting an under served city to be a new mini-hub, lease used frames that are low cost, no unions, no past debt. The chance for success is better than the existing competition that has all of its equity wiped out and a mountain of debt.

I agree with your analysis. The far greater range of the NEO/MAX will clip away a chunk of widebody demand. The debt from all those widebodies will hurt airlines and leasing companies.

I don't expect small hubs, but I fo expect same aircraft continuation services to be offered by the ULCCs in liu of aircraft transfers.

Lightsaber
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Re: Udvar-Hazy interview, CAPA on airlines

Sat Jun 05, 2021 8:00 pm

lightsaber wrote:
Much easier to place a 738 or A32x than a widebody.

The leasing companies are going to lose money on widebodies. This will make financing them shifting the risk to airlines. Since airlines need to finance as much as possible, in my opinion, that means gravitating to aircraft the leasing company is willing to take more risk, the easy to place narrowbody aircraft. Since they have more range, that works.

I do not see the leasing companies excited about widebodies going forward.

The trend away from WB leasing started with the 787, deemed operationally too complex to lease 1-2 to smaller second tier airlines when the first operator returns (and too much Boeing involvement / fees too). Later 777 and A380 lessor appetite was boosted thanks to OEM back end support, including guaranteed residuals.

In the future, WB finance will increasingly be the preserve of the OEM's, who will package bundles of leases to the market, but instead of say in the past 2x WB and 4x NB, now 1x WB and 10 NB (probably 1x 777X and 20 NB).

New WB risk aversion is very high. Boeing is likely to be the largest owner of operational X's through to at least 2030.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Sun Jun 06, 2021 2:19 pm

SteelChair wrote:
The savings is all (almost all) from the engine. The age of the airframe and wing technology is well documented on this site and others

Primarily, yes, yet we have recent posts here about the three finger winglet for A330ceo that adds 5%. Meanwhile Airbus is spending a lot of money on their electric rudder for a320 and Boeing is spending to move 787 systems tech onto 777X which isn't being done for vanity.
Wake up to find out that you are the eyes of the world
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Wake now, discover that you are the song that the morning brings
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 12:30 am

Revelation wrote:
SteelChair wrote:
The savings is all (almost all) from the engine. The age of the airframe and wing technology is well documented on this site and others

Primarily, yes, yet we have recent posts here about the three finger winglet for A330ceo that adds 5%. Meanwhile Airbus is spending a lot of money on their electric rudder for a320 and Boeing is spending to move 787 systems tech onto 777X which isn't being done for vanity.

Predictive maintenance is amazing, in my opinion, in reducing unexpected delays and maintenance while passengers are waiting.

The 787 subsystems took time to debug, but now airlines love them.

Future commercial aircraft will, almost certainly, have electric subsystems and CFRP wings.

For the leasing companies, the new engine predictive maintenance is worth it. Now items like combustor liners need to become more durable, but eventually the savings from predictive maintenance will push out old aircraft from fleets.

Electric subsystems allow easier shortfield tuning, improved engine out (allows shorter runways, I speculate why Airbus wants the A320 electric rudder).

Lightsaber
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 7:31 am

lightsaber wrote:
I found this interview... enlightening and scary:
https://centreforaviation.com/analysis/ ... azy-561543

- "Many airlines have mortgaged everything, their planes, their slots, their airport terminals, their ground facilities, their frequent flyer programmes....I believe that a significant part of airline loans will either have to be forgiven by government agencies or converted to some kind of equity.

err... isn't that what bankruptcy is for? Delete equity, lenders own (part) of the business and a restart.

.I think we would limit the size of our exposure to startups to maybe 5%, 6% of our total portfolio.


I think placing aircraft might boost that up to 10% to 12% of the portfolio, see the first part on airline debt, those airlines will not be nimble.


I think what has changed is that none of us in the airline industry anticipated back in March, April of last year, when this whole pandemic began to take on its course, none of us anticipated that here we are 14, 15 months later, and we still don't have a totally clear path of recovery.


Nor myself and I was more bearish than most on what level of recovery we would rebound to. The industry had expenses and little income, as with many industries.

When will business travel return? I'm sure there will be a quick recovery to 60% or a little more of prior, but conventions are a long way away and many will zoom.

Basically a good read on the fiscal chaos in the industry. I think I need to extend out my recovery timeline. :cry2:

Lightsaber


In the USA there is chapter 11.

But bankruptcy in many other countries is shaped so that there is the best outcome for the creditors. One big difference is, that the management usually does not survive.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 10:35 am

mjoelnir wrote:
lightsaber wrote:
I found this interview... enlightening and scary:
https://centreforaviation.com/analysis/ ... azy-561543

- "Many airlines have mortgaged everything, their planes, their slots, their airport terminals, their ground facilities, their frequent flyer programmes....I believe that a significant part of airline loans will either have to be forgiven by government agencies or converted to some kind of equity.

err... isn't that what bankruptcy is for? Delete equity, lenders own (part) of the business and a restart.

.I think we would limit the size of our exposure to startups to maybe 5%, 6% of our total portfolio.


I think placing aircraft might boost that up to 10% to 12% of the portfolio, see the first part on airline debt, those airlines will not be nimble.


I think what has changed is that none of us in the airline industry anticipated back in March, April of last year, when this whole pandemic began to take on its course, none of us anticipated that here we are 14, 15 months later, and we still don't have a totally clear path of recovery.


Nor myself and I was more bearish than most on what level of recovery we would rebound to. The industry had expenses and little income, as with many industries.

When will business travel return? I'm sure there will be a quick recovery to 60% or a little more of prior, but conventions are a long way away and many will zoom.

Basically a good read on the fiscal chaos in the industry. I think I need to extend out my recovery timeline. :cry2:

Lightsaber


In the USA there is chapter 11.

But bankruptcy in many other countries is shaped so that there is the best outcome for the creditors.

That’s true with Chapter 11 bankruptcy protection too. The creditors are the ones who ultimately have all the power and approve the restructuring plan.
 
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 1:31 pm

Corrections invited, but in bankruptcy the federal judge has all the power, and he/she operates under a set of laws, regulations, precedents. Creditors mostly have the right to determine what will be done with assets, but the judge, operating more as an arbiter considers what other stakeholders claims are considered. At least in the US I do not remember any even taint of corruption in the process. Obviously it is not 'pretty'. If I remember correctly lessors in aviation have been told they cannot retrieve their planes immediately per contract as that would potentially endanger the all over assets of the airline. In the end they got them back or re-leased.
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 1:46 pm

frmrCapCadet wrote:
Corrections invited, but in bankruptcy the federal judge has all the power, and he/she operates under a set of laws, regulations, precedents. Creditors mostly have the right to determine what will be done with assets, but the judge, operating more as an arbiter considers what other stakeholders claims are considered. At least in the US I do not remember any even taint of corruption in the process. Obviously it is not 'pretty'. If I remember correctly lessors in aviation have been told they cannot retrieve their planes immediately per contract as that would potentially endanger the all over assets of the airline. In the end they got them back or re-leased.

In the end the company can try to force the judge to impose a reorganization plan against creditor’s wishes, but that is very rare and usually only done as a last resort if nobody can agree on anything. The preference is ultimately to get a plan that a majority of creditors agree too and the company exits bankruptcy via that route. That would be seen as “best possible outcome for creditors”. It’s not like Chapter 11 screws the creditors in preference for shareholders.

Now during the bankruptcy proceeding creditor’s hands are tied some, and the debtor has more options to get out of contracts. But that is also true worldwide where bankruptcy protection is available (or else there would be little point to it).
 
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Re: Udvar-Hazy interview, CAPA on airlines

Mon Jun 07, 2021 4:29 pm

I think defined benefit pension holders are also considered 'creditor' to some degree. I am uncertain on that.
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