2019 is not shaping up to be a good year on the order front which is not particularly surprising given the headwinds. Already year to date, we have an unprecedented number of aircraft returning from failed operators as traffic growth slows, yields continue to soften from an historical low point, fuel costs increase across the medium term and forex is far from ideal. Aside from these economic points, 737 MAX grounding and the China-US Trade problems add to the woes. Despite this doom and gloom, we must stress that the industry remains resilient as the numbers of consumers that can afford to travel continues to grow, and all the facets required to support that (such as leasing) will grow and evolve with it. Potential risks are high, and with that comes a greater need to be diligent.
Both Airbus and Boeing published order summaries for 2019 are looking bleak with minus -125 and -84 respectively (without taking AC606 into account) but once we factor in Jet Airways and a few others the position is much worse. As at 31st May, the total we record in IBA.iQ is closer to 391 cancellations this year, over three times the number recorded at the same point last year, and ten times for the same periods in 2014, 2015, 2016 and 2017.
As we are all well aware, backlogs have been reaching stratospheric proportions over the past decade but 2019 is the first year in which we actually start to see the total recede, even considering the fact that 737 MAX deliveries stopped several months ago. With such substantial backlogs, some element of cancellation activity was expected and it shouldn’t be surprising to see much of them come from struggling or failed operators. We cannot lose sight of the fact that the total backlog for the two largest OEMs still sits at 12,865 units (IBA.iQ, 12th June 2019), whilst ATR, Bombardier, Comac, Embraer, Irkut, Mitsubishi and Sukhoi hold onto 1,878 orders in the pipeline.
Looking over previous Air Show performances, we have generally seen a close relationship with oil price and the overall order tally (once MoUs, LOIs, and Options are considered), but clearly the number of firm orders has been tailing off as backlogs have been so high and it’s been several years since a new aircraft model (rather than a variant) has been launched.
So far this year, oil has undergone several price forecasts varying from USDPB 60-75 (Brent), so not wildly different to the same view a year ago, which means a sudden new push to buy more fuel efficient designs is not on the cards. That being said, plenty of rumours surround the launch of the infamous A321XLR which should attract at least some action on Airbus’ home turf.
Taking a brief look at the leasing sector, previous Air Shows have witnessed a flurry of activity from a wider group of lessors (not just the top 5) as an alternative/addition to their normal sale leaseback approach to grow. Competition amongst the ever-growing list of lessors has driven pricing up and yields down, such that direct orders have appeared more attractive to those who have strong marketing capabilities.
In previous years, the lessor share has remained above 20%, with some years even nudging over the 50% mark as lessors fight off yield pressure. Looking at just the fuel-efficient designs from Airbus and Boeing, lessors currently hold on to 21.5% of the overall backlog (2,291), which over time will swing >40% through sale leaseback activity as operators take delivery. A top ten list by backlog shows strong commitment from many of the top 20 lessors and indicates to us that relatively few orders are expected during the show this year, with the possible exception for the A321XLR. Equally we don’t expect to see many orders from lessors that have a relatively small number on backlog such as DAE Capital, who currently hold only nine ATRs on backlog, and therefore appear outside of this list despite having a substantial portfolio.
The vast majority of the backlog with the top 20 lessors is naturally weighted heavily by the narrowbodies (84%) followed by widebodies (8%), regional jets (6%) and finally turboprops (1%), which will re- adjust upon delivery to increase the widebody exposure closer to the 14% as covered by the overall backlog. The top 20 lessors currently have 2,230 A320neo and 737 MAX on backlog, which will likely only increase the overall relative coverage of the fleet by just a few percent unless airline owners fall into difficulty and divest a larger portion of their portfolios into the operating lease market.
Whilst the industry has enjoyed unprecedented profit levels in recent years, this has tended to come from a relatively small group whilst others feel content with low single digit margins.
Due to the large size of the lessor backlog, it is also difficult to pinpoint medium-sized operators and below that may place orders, as this is the natural stomping ground for the lessor to place their direct orders. There are a number of carriers that have yet to place any fleet renewal orders, in particular Air France and KLM who have very few on backlog and fleets with an average age of 14 and 12 years respectively. Others include operators such as Icelandair, ElAl, Aer Lingus, UPS, Finnair, Thai, Korean, Saudi Arabian, Rossiya, and a number of Chinese operators that have ageing fleets yet with very few (or none) on announced backlog. For the top 20 airlines, most have a backlog v In service fleet percentage between 20-30% as part of their ordered fleet replacement strategy. At the other end of the spectrum, operators such as VietJet, flydubai, AirAsia, Lion Air, Wizz, GoAir, and Frontier, have backlogs that exceed 200% of the size of their current fleets, with IndiGo at around 160%.
Both 2017 and 2018 Air Shows displayed a staggering number of MoUs and LOIs which somewhat over-shadow the dwindling firm orders, which again is reaction to current backlog levels.
Over the past 3 years we have witnessed MoUs reach parity with firm orders in 2016 to 2.5 times in 2018 which is unsustainable in our view. Much of the announcements last year were from undisclosed operators, VietJet, Moxy (David Neeleman’s new venture) and a handful of others that the OEMs have already confirmed within this year’s order stats. We certainly expect to see a large number of orders at this year’s show to fall into this category for confirmation or quiet cancellation at a later date.
Looking at the specific sectors individually, the narrowbody market gathers the most interest and the one most likely to have a muted performance this year compared to previous Air Shows. Clearly the 737 MAX grounding is going to impact sales, but we wouldn’t be surprised to witness a top-up order, in addition to further details being announced on the re-entry into service for the type. Airbus are expected to launch an even longer range version of the hugely successful A321neo, designed to go beyond the 4,000nm range (206 pax). Naturally, this will appeal to US operators traditionally bound to the 757 by getting more range all-year- round, in addition to European carriers trying to serve leaner longer- range city pairs that smaller widebodies have been serving.
Looking more specifically at the higher capacity routes, operators should continue to put their faith in the widebody sector, especially those with strong dual/tri/quad class brands. In this class, operators are faced with choosing from the A330neo, A350, 787 and 777X families which cover ten distinct models, albeit there are only seven models that attract any reasonable attention. Generally, new orders for passenger configured widebody aircraft has been lacklustre since 2013/14 when the A330neo, 777X and 787-10 variants were launched and only managed to achieve around 15% of the orders captured by the narrowbody market, That is until this year, where widebody gross orders have actually exceeded by 2:1, albeit with some large cancellations for Airbus too. BA and Lufthansa have already ordered the 777X and 787 this year respectively, whilst Lufthansa have also ordered the A350 too in equal number. There has been plenty of speculation that Boeing could launch the NMA this year, however, we feel that given Boeing’s preoccupation with sorting the 737 MAX issue, this may be pushed back to at least a point when the re-entry is well underway. On the other hand, exciting new developments from Seattle would be potentially good for Boeing’s stock price which has seen a steady decline since early March. With the current (and expected) product line, one would expect Airbus to use the A330neo and A321XLR to surround the NMA in a pincer movement whilst Boeing develop the concept.
For the regional aircraft sector, there has been much change that could spark some activity this year. Scope clause restrictions have seen demand for some types fade away such that no backlog exists now for the E175-E2. For the other members of the E2 family, orders remain low at a mere 40 orders for the E190-E2 variant, and 122 for the E195-E2. For the E1s, only the E175-E1 holds any weight with 180 on order and just seven across the E190-E1 and E195-E2. For the CRJ family, there are only 43 CRJ-900s on order, whilst the MRJ90 leads the lot with 223. The current in service fleet stands at around 5,010 aircraft across all variants above 30 seats, 4,291 if we just include the ERJ, E-Jet, and CRJ. Age-wise, the ERJs and CRJs are getting close to retirement now at 15.45 and 13.72 years respectively. 20 years is about the limit before the high-cyclic utilisation puts pressure on their use. There is therefore the inevitable re-fleet process ahead and only 613 on backlog. 2,520 of the regional fleet is currently in use within North America and an integral part of the feeder network. At an average age of 13 years (held down by 701 E-Jets), now is the time that a replacement is sought, although one eye must remain fixed on the archaic and immovable scope clause restrictions that prevent aircraft design to move in the most efficient way. Thre are rumours surrounding a potential sale of the CRJ program to Mitsubishi (after already divesting the Q400 program and 50% of the CSeries), and the redesign of the MRJ70 to deliver a 76-seat Scope compliant alternative. As effectively the E190-E2 and MRJ90 will always fail the weight limitation, we would expect sales of E175-E1 and “MRJ76s” to potentially pick up orders at Paris, whilst acquisition of the CRJ program would provide a boost to the support network.
Finally onto the turboprop sector, which is fair to say, has not had a good few years with >12% of the fleet of ATR42/72-500/600 and Q400 aircraft currently parked. Over time, this segment has typically performed well and is no stranger to long periods of poor and strong performance depending on the position of oil, and this is unlikely to change. So far this year, 20 units have been ordered across both the ATR and Q400 families, which is half of the number recorded at the same point last year for the first half of 2018, and one third for the same point in 2017.
Realistically, it would be difficult for orders to be any lower than seen last year at Farnborough, but we don’t expect them to be strong. ATR will however, be on home soil, and given the fact that Longview’s acquisition of the Q400 closed last week, there may be time to show off some new orders at Le Bourget.
So, to summarise the general activity for this year:
- Airbus to potentially launch the A321XLR
- Boeing to not launch the NMA quite yet
- Boeing to set out the re-entry of the 737 MAX in more detail
- Mitsubishi to launch the MRJ70 to optimise for scope clause compliance
- DHC to make some noise on the purchase of the Q400 program
- Sukhoi need to quash safety concerns and aftermarket support problems
- Airbus: New orders from the US majors for the A321XLR; a new order by Saudi Arabian Airlines for both A350s (to replace the 777-200ERs) and A320neos/A321neos; a potential large order from IndiGo for the XLR to take advantage of the vacuum left by Jet Airways; Air France surely must make an order for new narrowbody aircraft soon (along with a replacement for the ageing 777-200ERs and A330s)and Korean and Thai could be in the mix for some A330neos and A350s, as they need to look at ways to curtail operating costs.
- Boeing: Strong focus on military orders, service contract wins, potentially a number of top-up 787 orders and some new 787 and 777X orders from legacy carriers in the Far East and Europe (like Air France, Thai & Korean). A potential 737 MAX order (Ryanair?) to top-up a previous order wouldn’t be a surprise either. Freighters were the big winner last year, and there is still some way to go before the backlog gets anywhere near replacement level, so we expect more orders here.
- Mitsubishi: Conversion of some MRJ90 orders to the new “MRJ76, and some new wins from the US market looking to replace older technology.
- ATR & DHC: We expect a very small number of new orders <20 for each program.
- Embraer: Additional E175-E1 orders and some E195-E2 orders.
- Comac, Irkut, Sukhoi: Nothing of note is expected.
- Lessors: We expect to see no more than 20% of the firm Airbus A320 orderbook as yields remain challenging. ALC are the usual suspects to jump in early and get a launch order in.
And finally, the numbers…
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