Mike Levine died on 06-Feb-2017. He is survived by his wife Carol and two daughters. He was an intellectual giant who greatly influenced the fundamental direction of the airline industry.
Airlines are set to add more new aircraft than ever before in 2017. After years of record ordering and building backlogs, aircraft manufacturers are making good on their promises to ramp up production. The industry is enjoying record levels of growth and profitability; with solid passenger market fundamentals, and both airlines and leasing companies having access to ready liquidity, cheap debt and plentiful equity capital, making financing fleet orders easier than at any time before the global financial crisis.
In the era of digital transformation, management at different airlines are working at different levels of renovation based on their own actual and perceived situations as well as the visions of their airlines and the resources available. However, most transformational initiatives thus far have focused on enhancing the value of physical existing products.
Aviation leasing continues to see a favourable outlook, growing rapidly in both size and importance. The sector is enjoying a combination of easily available funding at low interest rates and strong lease yields, while it’s airline customers benefit from record profits, lower fuel costs and strong air travel demand.
Oriel reviewed its piece written in Jan-2016 and many of its thoughts panned out during 2016. In particular, the growing gap between the values of aircraft sold naked and those transacted with a lease in place. In Oriel’s opinion, this gap has reached unprecedented levels as new lessors and investors seeking yield have fuelled a value bubble for aircraft with leases attached.
The CAPA world airline industry operating margin model forecasts that margins will fall from 2016 to 2018, suggesting that the estimate of 8.3% in 2016 may have been a cyclical peak. The Jan-2017 update of CAPA’s six monthly world airline profit outlook, which adds 2018 to the model for the first time, attributes the expected declining margin trend to increases in oil prices and the rate of fleet growth.
During 2016, more than 50 new carriers commenced air service operations worldwide. The bulk of start-up activity centred in Europe, followed by South America, Asia Pacific, the Middle East, North America and Africa. Interestingly, the majority of the new airlines which launched in Europe were subsidiary start-ups such as Norwegian Air UK, TAP Express, AZALJET, Eurowings Europe and French Blue.
Southeast Asia, along with the Middle East, are the only two regions with as nearly as many aircraft on order as in the active fleet. Southeast Asian airlines currently have nearly 1700 aircraft on order compared to an active fleet of approximately 1800 aircraft.
It is rare in the South Pacific to have such a momentous year for fleet, but 2017 promises airline, network and hub changes as Qantas receives its first of 11 Boeing787s. After a half century of acquiring successively larger flagship aircraft – variants of the 747 and then the A380 – the 787 reflects the new Qantas transformed, post-Emirates partnership, under CEO Alan Joyce.
Northeast Asia in 2017 gains added risk as fleets become shaped by politics: short term government matters impacting airlines for the long term. This potential impact appeared very suddenly with the election of Donald Trump as US President who, along with appointees and advisors, has heightened tensions with China, the largest buyer of Boeing aircraft. There is an ever-present risk of a form of non-political retaliation that excludes Boeing from order books.
The Middle East region has the highest ratio of in service to on order aircraft (1.0 to 0.94). For every one aircraft in service in Feb-2017 (1459) there is nearly one on order (1368). The Middle East has the fourth largest regional backlog, much lower than the 4600 aircraft on order in Asia Pacific and lower than the 2200 aircraft on order in each of North America and Europe. Unlike North America and Europe, most new aircraft in the Middle East are for growth, not replacement.
African airlines currently have less than 150 aircraft on order compared to an active fleet of approximately 1,600. In the neighbouring region of the Middle East, there is a similar sized fleet but 1,400 orders. Fast expansion from Middle East airlines have made it extremely difficult for African airlines to compete. But this is hardly an excuse for African airlines falling short; over many decades they have demonstrated their capability to do that without any help from outsiders. Given the diverging order books of the two regions the outlook for the African airline sector remains relatively bleak.
Europe Fleet Outlook: Long haul strategies account for much narrowbody and widebody newgen fleet orders.
North American airlines have roughly 2132 aircraft on order, of which nearly 61% are narrowbody jets pegged for replacement and aircraft upgauge as the region’s large global network airlines continue their strategy of shedding 50 seat jets.