16-02-2024

Date: 16/02/2024 (Edition 3) Download PDF

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Neil Fraser

Manager - Airline Analysis

Chartered Financial Analyst

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GTF hit worse than first thought

From talking a lot about Boeing woes recently, one cannot forget that Airbus aircraft are also affected by production issues, albeit not of their own doing. The Geared Turbofan (GTF) powder coat issue on Pratt and Whitney’s PW1100G engines resulted in advice to promptly inspect all affected A320neo and A220 aircraft from September 2023. At the time, the FAA estimate for inspection turnaround was 100 days. If Spirit Airline’s latest statement is true, this has now trebled to 300 days as RTX (P&W’s parent company) struggles to cope with the backlog. With a spares shortage in the market, airlines may be without lots of these aircraft for almost a year.

The OEM first became aware of the powder metal issue on a V2500-A5 on an A320ceo. However it was subsequently found to affect the Geared Turbofan (GTF) more broadly in December 2022. Fortunately, IBA research indicates that only aircraft built before 2022 are likely affected by the issue, so new deliveries will not add to the problem. Nonetheless, at the time of writing, there are 385 GTF powered A320neo family aircraft parked or stored. Of these, 287 aircraft have been parked for greater than 60 days and are therefore highly likely to be suspect to the problem. This proportion could possibly be higher.

Fortunately for the airlines, RTX has budgeted $2.9bn for the issue, as of their Q3 2023 report. Using the FAA estimated costing (although we suspect this to be understating since it won’t consider things such as transportation and work scope creep), the cost per aircraft could be approximately $720k, summing to circa $220m (assuming 300 aircraft). Airlines will therefore be glad to hear that the allocated fund allows for significant compensation. This will of course be resolved on a case-by-case basis but split evenly could be around $8.9m per aircraft.

For an airline such as Spirit, who now estimate 26 aircraft on the ground on average in 2024, this could represent $231m. This may sound sizable, but with the new estimates on how long aircraft will be on the ground, using IBA Airlines’ 2024 Forecast we are able to see that this could represent closer to $750m for them in lost revenue. This gap is perhaps showing that the RTX budget was initially reasonable. It should also be noted that MTU were also part of this Joint venture so may be expected to contribute as well. Nonetheless, with increasing turnaround times, RTX now need to budget more, or else face further wrath from customers.

India’s Go First were placing blame almost exclusively at P&W’s door for their failure, and it will be interesting to see whether the potential acquirers of that business will see any of that compensation. The deadline for a bidder, before they are liquidated, was extended by a further two months this week. Interestingly, Go First’s competitor IndiGo, is the second most affected airline by this issue and still managed a net profit margin of 14.9% for Q4. Fortunately, RTX are in a very healthy position with over $5.5bn in cash reserves and a $72bn book value, so will be able to support the issue (although some might argue, why not faster?). With these engine issues affecting circa 300 aircraft and Boeing’s continued headaches, 2024 has headwinds straight off the runway.

Tee Orianzi

Analyst - ESG Consulting

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Aircraft lessors express scepticism on green fuel as a definitive solution

At the recently concluded, Airline Economics conference in Dublin, industry stakeholders observed a shift in investor priorities, with environmental, social, and governance (ESG) concerns receding due to pressing issues such as the scarcity of fuel-efficient aircraft. Notably, leading aircraft lessors emphasised the need for substantial government investments to facilitate a transition to greener fuels, specifically sustainable aviation fuel (SAF).

Aengus Kelly, CEO at AerCap, one of the industry's biggest lessors, asserted that governments must allocate significant taxpayer funds to achieve widespread adoption of SAF, estimating a capital requirement between $1.45 trillion and $3.2 trillion to attain the industry's 65% SAF goal by 2050. Despite airlines' commitments to using SAF, challenges such as limited supply and high costs hinder progress. Industry leaders, including Avolon CEO Andy Cronin, underscored the necessity for policy intervention to ensure infrastructure development, innovation, and cost control for SAF.

However, Ireland's Environment Minister, Eamon Ryan, countered that SAF production should predominantly rely on private sector funding, emphasising the industry's obligation to meet emission targets. Overall, the discourse on ESG issues among lessors came with some scepticism. IBA acknowledges these concerns from a lessor perspective, however from an industry-wide level, there is ongoing research and developments on various feedstock, production costs and efficiency, developing government regulations and interest from financial institutions to provide essential capital.

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William McClintock

Manager - Market Analysis & Forecasting

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UK Airport Slot Reform - What does it mean for airlines?

The UK's Department for Transport (DfT) aims to overhaul the slot allocation system to foster a fairer and more competitive airline market, ultimately maximising passenger value.

Key issues include outdated criteria for allocating slots, insufficient support for new entrants, opaque decision-making processes, and limited transparency in slot trading. Incumbents holding onto slots and lack of flexibility in regulations exacerbate the problem. With a projected 52% increase in terminal passengers by 2050, reform is urgently needed to optimize limited slot capacity and ensure fair market practices.

In this short analysis, William McClintock, has distilled the DfT's 99-page proposal into the key points airlines need to be aware of to understand how slot reforms may affect you and your business.