Dr. Stuart Hatcher
Chief Economist & ISTAT Certified Senior Appraiser
I have talked a lot about the large orders that have been 'announced' recently and are set to spice up the Paris Air Show for sure. But it got me thinking about the potential lead times, especially when I see that the Ryanair order has a 2027 date attached to it.
It’s long been a factor in this industry that whilst lead times are expected to be of a certain length, there remains a number of situations, where for some, lead times are less of a problem. Or, where there are sudden deferrals, aircraft swiftly become available, so the odd immediate order/delivery event can occur too.
We have seen this in most narrowbody programs, for poor demand years like 2002 or 2009. For Boeing, large orders from Ryanair or any of the top four US carriers, will normally trigger some shorter lead times. When looking back at deliveries for the last 18 months, it is interesting to see, that out of the 527 Boeing 737-family aircraft delivered, 43% were ordered within 2 years of delivery, whilst the remainder had been on order for ~8 years. Naturally, the extent of this has been affected by the delays to the MAX 7 certification and bringing forward the deliveries for the MAX 8s, but I’m generally not surprised by 20% levels of sub-two-year lead times, as seen over many years.
For Airbus, historically this would have been the case too, but certainly not for the past four years, whereby only 1% of the 709 deliveries that occurred over the past 18 months had been ordered within two years.
Prior to 2019, both OEMs were at a point where the average lead time for each family was five years. Airbus had shifted from a long-term rate of four years in 2017, as the huge orders from 2011 were surpassing their delivery capacity. Meanwhile, Boeing had been steadily building from four to five years over a much longer period. However, that’s where the similarity appears to end. Whilst the lead times for A320 family aircraft have simply grown year over year, such that current year deliveries have been on order for an average of eight years, the large number of movements has kept the 737 family lead time closer to just five years. This sounds incredible given the issues with the program and the industry as a whole since 2019. Certainly, Boeing have remained more conservative on their delivery forecasts compared to Airbus, and I expect ramp-ups will be slow and cautious, whereby it could be another three years before we get close to where the original NG delivery rate was.
However, considering that there are over four thousand 737s on backlog today, with an average lead time to date of 5.7 years already, and coupled with the high interest being generated for the MAX 10, overall program lead times could rise sharply up to where the neo is today. Especially once the MAX 7s eventually reach Southwest, as those were ordered 12 years ago.
For Airbus, the neo backlog already exceeds 6,000 units, with an average lead time today of 5.2 years, so there is plenty of room for the total lead time to grow by another four years and reach twelve years by 2027. Breaking down the various sub-models within each family, it is highly probable that as Airbus continue to pump out A321neos at a higher rate than A320neos and based on the large orders for the MAX 10 already from prominent customers, Boeing must take a more aggressive stance once certification is achieved, to counter the expansion of the A321neo. Already, a lot of ground has been lost in that market, due to the absence of any competitive threat, but the gap must be narrowed.
Manager - Airline Analysis
With Ryanair and easyJet having reported Q1 (calendar year) results, this and last week respectively, we are getting an impression of the European LCC sector. On nearly all metrics Ryanair dominates.
It is of course not fair to compare the two in terms of scale of revenue or profit, with easyJet’s fleet of 329 approximately 2/3 the size of Ryanair’s 541 aircraft.However, it is meaningful to compare Ryanair’s Q1 operating margin of -12.1% to the -35.2% of easyJet. Both recording a loss will be no surprise, with Europe the most seasonal market, especially felt among LCCs who primarily serve the leisure market. Michael O’Leary predicted their loss in advance, despite their record nine months prior, with Easter falling in Q2.
For both carriers, there is a similar capacity variance, between the summer peak and winter trough,of around 50-60%. Therefore, it cannot be argued that one targets the winter season more than the other and is thus explained by the profitability of operations. Interestingly, easyJet grew their revenue in the period year-on-year (+77%) by a greater amount than Ryanair (+55%). However, their operating loss remained essentially the same magnitude as the previous year. Whilst this translates as an improvement in operating margin, it also shows those increases in operations had negligible profitability.
In the case of Ryanair, their net margin of -8.2% was also superior to their operating margin. This was due to negligible finance expenses (from all but no leasing), a tax asset and foreign exchange gains. easyJet do not report net margins in interim results, however, the expense of their 42% leased fleet will likely exceed any tax asset or FX gain.
Looking forward, pent-up demand is expected to endure and bring a strong Q3 for both airlines. It is interesting to note that Ryanair are already fuel hedged 85% of FY24. By contrast easyJet are only hedged 56% (on average) of the same period, and for approximately 28% higher price ($114bblvs $89bbl). It is important to note, however, that fuel hedging is not always a good thing. If Russia reconciles with the West, more kerosene may enter Western markets and lower the spot price. Ryanair locking in their advantage may become locking in unprofitability.
Talking of Russia, yet another country opened up operations to the pariah state this week. Georgia’s national flag carrier, Georgian Airways,started operations between the two, whilst the government also allowed Russian airlines into the country. Interestingly the President and her supporters, who opposed the government’s decision, suggested boycotting the airline. Airline CEO, Tamaz Gaiashvili, is quoted as replying for them to “keep their dirty hands-off Georgian Airways”.
The CEO did do well topointout that already Turkish, Israeli and lots of Arab airlines continued operations to the country. It was one of the big tailwinds of Turkish Airlines’ strong 2022 results. It is an interesting decision for Georgia, as they have typically had a strained relationship with Russia, around the independence movements of South Ossetia and Abkhazia.
This is perhaps again showing that financial concerns are taking greater priority over any political stances, especially with real worries of high-interest rates triggering a global recession.
Finally, revisiting the theme of consolidation from previous weeks, the US DoJ reminded us,twice this week,that mergers cannot go ahead without scrutiny. These were decisions to break up the 4-year-old Northeast Alliance (NEA) between American Airlines and JetBlue Airways and a rumoured decision to block the KoreanAir-Asiana merger.
The NEA allowed the two US carriers’ schedules to complement one another as well as establishing codeshare agreements. However, the DoJ has decided that, since its inception, it has only put upward pressure on fares. In 2022 US carriers had higher fare hikes than any other market. American Airlines isa good example of this, with revenue increasing by 67% compared to an RPK increase of only 33%. All the while, passenger numbersonly increased by 20%. The DoJ is perhaps correct to be sceptical, although they should be aware that the trend is almost universal among US airlines.
Both Airlines are believed to be contesting the decision, although JetBlue will need to save legal resources to fight off the concurrent challenge to their Spirit merger.
The second decision of the US DoJ was, curiously, about airlines across the Pacific. With a view of city pairs between South Korea and the USA, the DoJ is rumoured to rule that a merger between Korea’s two large full-service carriers is uncompetitive.
This decision is surprising as the South Korean market is arguably one of the most competitive in the world. As well as having the busiest route in the world (Jeju-Seoul), they currently have eight low-cost carriers and two full-service carriers.
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The final episode of our IBA Insight webinar series. Over the past four months, IBA’s award-winning Valuations team have been sharing their latest intelligence on aviation values across all major asset types, engines, eVTOLs and helicopters. How do macroeconomic factors influence the narrowbody and widebody freighter markets? IBA’s intelligence discloses weakening cargo load factors and air freight yields. It summarises the active freighter fleet and market supply and demand, highlighting the 737-800’s enduring domination of narrowbody conversions with a potential risk of oversupply. The 767-300ER’s lead will continue for at least 3 years until the A330 takes over. Finally, IBA shares the relative performance of different conversion programmes and anticipated values and lease rate trends for popular freighter types. Watch on Demand
IBA, the leading aviation market data and intelligence company, has today announced the acquisition of the Fleetwatch application from Aeromanage. Fleetwatch provides the aviation leasing and finance community with mobile device alerts, linked to aircraft flight events and status changes, using ADS-B data. The application provides enhanced visibility to key stakeholders around how aircraft are being operated, enabling proactive and reactive portfolio management, forming an integral part of their risk mitigation toolkit. Alongside IBA’s recently launched Data and News Alerting from its IBA Insight aviation intelligence platform, the Fleetwatch acquisition, and integration, further demonstrates IBA’s commitment to delivering its clients enhanced insights that can be leveraged to manage risk and drive value creation. IBA's President, Phil Seymour, says: “We are excited to be enhancing our aviation intelligence capabilities with this acquisition of Fleetwatch. It will now form an integral part of our suite of News and Alerting solutions, providing key industry stakeholders such as lessors, banks, investors and insurers with top class insights and live updates about their fleets.” Fleetwatch will provide subscribers to the IBA Insight platform with a range of information, via daily notifications, that can highlight a variety of significant aircraft use scenarios. Fleet/Aircraft Discrimination Users will be able to see if their aircraft are being over or under-utilised compared to the average. Users will also be able to track the aircraft’s flight lengths and distances and compare the average for that model at the same operator. This will enable users to assess evolving operational patterns and whether maintenance implications, such as reserve and compensation rates need to be adjusted for this, to forecast revenue scenarios in PBH (power by the hour) agreements, and to be alerted to return condition scenarios where under or overutilisation is a factor. Grounding Fleetwatch enables users such as lessors, banks and investors to see if their aircraft have been on the ground for prolonged periods, allowing them to contact the operator to enquire about any issues. Fleetwatch will alert users if their aircraft has been grounded for any more than two days, allowing aircraft owners to keep track of their leased fleets and identify any problems early. Prohibited Destinations Lessors, banks, investors and insurers can receive alerts from Fleetwatch which flag if their aircraft have entered prohibited destinations, enabling them to monitor operators’ compliance with contractual terms and any sanction restrictions. Ivan Borysenko, Senior Manager - Director at Aeromanage, said: “The insights that Fleetwatch provides will provide a significant addition to IBA’s aviation intelligence capabilities. It will give the IBA Insight platform users access to timely updates on aircraft status, allowing issues to be identified as early as possible and solutions developed.” -ENDS- About IBA IBA delivers the best of all worlds - deep aviation consultancy expertise, and cutting-edge and actionable data insights, all delivered by a proven, expert team with a strong customer focus. An independent, innovative and forward-thinking business, IBA has over 35 years of heritage and experience in aviation. Having won the Sustainable Technology award for its IBA NetZero platform in 2023 and for its Carbon Emissions Calculator in 2022, and being named 'Appraiser of the Year' by their clients for five years, IBA prides itself on its integrity, fierce independence, and continual innovation. The key to IBA’s success is its people – some of the best in the industry, based in multiple locations across the globe – real experts who are passionate about aviation and go the extra mile for their clients. For more information, visit www.iba.aero IBA media contacts Charlie Hampton / Faye Clarke Email: [email protected] / [email protected] Mobile: +44 (0)7884 187297
Welcome to IBA Sustainability Watch: August 2023 Environmental, Social, and Governance (ESG) issues are now seen as a key risk to investments in aviation, and authorities across the world are demanding more transparency and stricter reporting standards. It’s never been more important to understand the pathways to net zero emissions, and their real-term impacts on all key players across the industry. Each month, IBA’s ESG Consulting team will be sharing key insights and the latest news from the growing world of sustainable aviation.
IBA Weekly Date: 23/06/2023 (issue 32) Whilst Paris Air Show is known to be quiet on the last two weekdays, no one quite expected the absence of significant business that would continue until late on Monday. This quiet was broken by a blockbuster 500 aircraft order from IndiGo. Air India then followed up by firming their 470 aircraft order the next day. The week had been flush with rumours of large orders, leading IBA to forecast a total greater than 2,000 aircraft. We did not hit that estimate. However, if Turkish Airlines had committed to their rumoured 600 aircraft order, we would’ve been very close! At the time of writing, on Friday lunchtime, the total orders including Firm, MOUs, LOIs and Options reached 1,303 aircraft, worth $72.4bn based on IBA’s 2023 Current Market Values. This is an impressive total, with only 2013 accruing a larger tally. A more interesting detail is that 1,160 (89%) were firm orders, the highest ever. Having firm orders is good news for the programmes in terms of long-term confidence in them as well as securing Pre-Delivery-Payments (PDP). Large orders will allow the operator to demand a superior price, however, the OEM may also be able to benefit from demanding higher PDP in the higher risk transactions. Operators appear to be firming up orders to secure delivery slots in an environment of supply delays. However, with orders of such scale, questions arise as to whether the local markets can accommodate the growth. This is especially the case when the two airlines making the largest orders are in the same country. Source: IBA Insight & Intelligence Indian carriers dominated orders as expected The Airbus press conference on Monday got the tally off the ground, announcing 500 new A320 family aircraft for IndiGo. In numerical terms, this eclipsed the 470 Air India order that was firmed on Tuesday, with the Boeing and Airbus announcements happening almost simultaneously, as to avoid one getting more headlines. It is also worth noting that IndiGo already had a backlog of 485 aircraft, putting their new total just shy of the 1,000 mark. IBA values this new order at $28.0bn. Despite the numerical inferiority, IBA value Air India’s order at $33.1bn. This difference can be attributed to Air India also ordering widebodies. Their order in full was 220 aircraft, with Boeing (190x 737 MAXs, 20x 787s and 10x 777Xs) plus 250 aircraft with Airbus (140x A320neos, 70x A321neos and 40x A350s). There is also an option with Boeing for a further 50x 737 MAXs and 20x 787s), which would take their order total to 540. Unlike IndiGo’s Airbus loyalty, the order is split between the two large OEMs, reflecting the very mixed fleet of the Indian flag carrier and its present and future subsidiaries. Including widebodies in the order will likely solidify the airline’s dominant international market share (27.8% share compared to IndiGo’s 10.7% in 2023). The airline severely lags IndiGo in the domestic market share however (26.6% compared with 57.5% of IndiGo). Both are expecting to gain share from each other but will also be reliant on the market’s growth. Recent estimates have the Indian aviation market growing at 9% annually and the country has pledged $12bn to Indian infrastructure. Whether that can accommodate these 970 aircraft before their first flights, is another thing. Avolon led the lessors With the scale of the orders, one could be forgiven for thinking there were lots of participants. Among operators, Western Europeans were conspicuously absent, albeit Ryanair had placed a large 150 aircraft order (plus 150 option) pre-show. It was also the case with lessors. Avolon’s 40x 737s and 20x A330 order, as well as an 80 LEAP engine deal the only large business among them. Interestingly, Avolon’s ratio of orders to current fleet is getting closer to parity, similar to the likes of well-known speculative lessors like Air Lease Corporation (ALC). In an aircraft supply bottleneck, the lessor has more control over lease rental pricing. This is compared to an operator receiving multiple lessor offers for Sale and Leaseback. This relationship of course reverses in oversupply. Their A330s are expected to be delivered through 2026-2029, with the narrowbodies likely in the 2030s. We don’t know what the market will look like then, so these orders are therefore purely speculative. Source: IBA Insight & Intelligence Airbus beat Boeing comprehensively The week had success for many OEMs with De-Havilland’s 49 aircraft orders and Embraer’s 28 up among pre-Covid levels. However, the gulf between Airbus and Boeing was quite sizeable. As discussed earlier, IndiGo operate solely A320 family aircraft which pulled the OEM far ahead in the narrowbody stakes. Airbus already led pre-show in total backlog with 8,546 aircraft to Boeing’s 7,069. When looking at the A320neo and 737 MAX alone, the Airbus advantage was 1,300. This is now wider. In the show, Airbus totalled 846 orders. This is over double Boeing’s 356 orders. What is particularly interesting is that Airbus also won on the widebody stakes this year, with 72 firm orders to Boeing’s 40 (excluding 20 on option). Boeing had exceeded Airbus in widebody orders in eight of the last ten years. Boeing will be hoping that production delays to the 777X don’t cause a turning point. Source: IBA Insight & Intelligence This IBA Weekly was written by: Neil FraserHead of Consulting Neil FraserManager - Airline Analysis
IBA’s award-winning Valuations team will be sharing their latest insights on engine values in our new webinar series. In our second edition, Phil Seymour and Jamie Davey will reveal key trends to watch for in 2023, the impact of supply chains and inflation on engines values, values and lease rates update for popular engine types and parts and aftermarket updates. Click here to watch the recording
In the third edition of our IBA Insight series, Mike Yeomans, Denesz Thiyagarajan and Rami Abdel Aziz provided an overview of the eVTOL market, their top due diligence advice and the latest insight on residual values. Watch on Demand It’s estimated that 200 companies are currently working to manufacture electric vertical take-off and landing vehicles (eVTOLs). So, what is the market demand for these new technologies, and what will the assets be worth? Topics covered will include: Market overview Development update and entry-into-service timelines Valuation drivers and dynamics Valuation case studies for selected eVTOL types Watch on Demand If you have any further questions, please get in touch with [email protected].
Luisa Barnes, Aviation Analyst [email protected] The Intergovernmental Panel on Climate Change (IPCC) recently published a report stating that climate change is set to breach the warming limit, set under the 2015 Paris Agreement. By the year 2027, they warn of a global 1.5°C temperature rise for the first time and a 2 in 3 chance that within the next five years, we’ll exceed the crucial 1.5°C threshold during a one-year period. So overall, the IPCC expects the next five years to be the hottest ever on record. What’s more, on top of the global warming from anthropogenic activities, it is probable that the oscillating weather system ‘El Niño’ will force temperatures to record levels and profound emission mitigation is urgently needed if we are to avoid irreversible damage.
How can the aviation industry, and more specifically aviation finance, tackle the existential challenges of ESG regulations? What are the ESG regulations and elements that you should be focusing on as an airline and a lessor? Join IBA’s dedicated ESG Consulting team to explore this and more in our upcoming webinar on Wednesday 26th April at 15:00 BST. Throughout the session, we'll share case studies and examine how specific airlines and lessors have implemented regulations such as EU ETS and CORSIA. Register here
IBA is the leading aviation data, intelligence and advisory company, providing award-winning solutions, valuations and asset management. With unrivalled data intelligence through IBA NetZero and IBA Insight, they work with airlines, financiers, aircraft manufacturers and leasing companies. IBA’s powerful combination of in-house expertise backed up with cutting-edge carbon emissions data from their IBA NetZero platform means IBA is well-adapted to provide industry players with critical support and guidance. In this film, we learn about ESG scoring and assessments, how decarbonizing by 2050 will impact ticket prices and profit and understand how IBA supports companies to achieve their ESG objectives.
Welcome to the Aviation Conversation. In this edition, IBA's Phil Seymour, Peter Walter and Denis Brailsford take a deep dive into the challenges faced by both airlines and lessors when redelivering aircraft, and how both parties can prepare for lease ends.
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In this short report, our experts Dr Stuart Hatcher, Geoff van Klaveren and Mike Yeomans share their expectations for the year ahead, examining macroeconomic factors, supply and demand, and challenges to airlines and aircraft values.
IBA presents: Ask the Appraiser. Our series of regular short webinars, designed to deliver you vital updates on how values are performing across the different aviation asset classes. In the third session of the series, join Phil Seymour and Mike Yeomans for an overview of the narrowbody market. Watch the recording Topics include: The trajectory of values and lease rates The state of supply and demand Fleet evolution What’s happening in the macroeconomic environment, and the impacts on the sector If you have any further questions, comments or feedback please get in touch with Mike Yeomans. The data used in this webinar is from IBA Insight, our leading intelligence platform for aviation finance. IBA Insight combines speed, accuracy, visual analytics and intuitive navigation to deliver actionable insight from comprehensive, integrated fleet, values, flight, carbon and market aviation data. More information can be found here.
IBA presents: Ask the Appraiser. Our series of regular short webinars, designed to deliver you vital updates on how values are performing across the different aviation asset classes. In the final session of the series, join Phil Seymour and Rami Abdel Aziz for an overview of the helicopter market. Watch the recording
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Israel has announced the ban of four-engine aircraft in Israeli airspace, in an effort to reduce noise and air pollution. Whilst the ban is mandated to come into effect from March 2023, it is believed that operators may be discouraged from operating such aircraft even sooner.