The latest commentary and analysis from Ascend by Cirium.
ISSUE 70, 1ST QUARTER 2021
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March 22, 2021
Max Kingsley-Jones, senior consultant, Ascend by Cirium, reviews the development of the intermediate regional jet sector and impact of the SpaceJet pause
The decision by Mitsubishi Aircraft to “pause” development of the SpaceJet has unsurprisingly led to speculation about the future of the much-delayed regional jet family. But if the status of the programme does move from limbo to defunct, this could have a long-term impact on the supply-side dynamics in the intermediate regional jet (70-90-seat) space and the wider sector below the mainline market.
The market in which Mitsubishi pitched the SpaceJet (called MRJ at launch in 2007), has been through many iterations and players over the last few decades. As things now stand, Embraer is well-placed to have the market to itself should the SpaceJet not be revived.
Until Canadair (later Bombardier) heralded the advent of the 50-seat jet in 1992 with the original CRJ100, regional jets were effectively the lower end of the jet sector. The market had been fought out during the 1980s and early 1990s between British Aerospace (BAe) and Fokker with their 146/RJ and 70/100 families, respectively.
The aircraft landscape that exists today was shaped three decades ago as various OEMs – both existing and new entrants – jostled to position themselves for the replacement market and growth. During 1996-1999, the European regional OEM scene was in turmoil as Fokker folded while BAe tried to forge a partnership with ATR to create the clumsily named “Aero International (Regional)” or AI(R).
The Airjet family of a 70-seater with a 58-seater to follow failed to launch, and the ensuing demise of AI(R), left the way open for the recently created Fairchild Dornier and its new family of 50-110-seat jets, baselined on the 70-85-seat “728JET” (later “728”). With solid backing by Lufthansa and Swiss regional Crossair, this cleansheet design with five-abreast cabin configuration and GE Aviation CF34-8 power was launched in 1998.
While this was playing out, Bombardier moved to capitalise on the runaway success of the CRJ100/200 with a 70-seat major derivative. Launched as the CRJ700 in 1997, this was in fact the first of the new 70-seaters making its first flight in 1999.
Watching in the wings was Embraer whose initial 70-seater plans emerged in 1997 based around a stretched EMB-145. However it quickly became apparent it needed a more holistic approach. Its plans crystallised around a 70-110-seat four-abreast family dubbed “ERJ-170” and “ERJ-190” using versions of the same CF34-8 engines on the 728. This little powerplant would become the cornerstone of the first generation of large regional jets.
The green light shone at the 1999 Paris air show, with Embraer flipping original 728 customer Crossair to place the launch order for 60 and 100 options. The family subsequently became known as E-Jets.
Fairchild Dornier’s early move was not enough to guarantee success, and shortly after the 728’s glitzy roll-out event in March 2002, the cash-strapped company filed for insolvency. Launch customer Lufthansa eventually signed for E-Jets.
With Bombardier having expanded its offering with the 90-seat CRJ900 (and 100-seat CRJ1000 launched in 2007) and Embraer’s all-new family well established, the size and shape of the intermediate regional jet market was set fair. Since the first CRJ700 was introduced in 2002, Bombardier and Embraer have between them delivered almost 1,700 aircraft into the sector – with shipments averaging over 70 aircraft annually during the last 10 years.
When Mitsubishi decided to challenge this duopoly in March 2008 with the launch of its 70-90-seat MRJ concept backed by launch customer ANA, service-entry was envisaged for 2013. The all-new design, powered by advanced Pratt & Whitney geared turbofans (the PW1200G GTF), looked impressive from a technical perspective. Its powerplant was set to create major disruption in both the regional jet and single-aisle sectors in the years that followed.
There were of course the usual question marks over a new entrant’s ability to deliver the required level of global support and despatch reliability, but this did not prevent the MRJ racking up key US orders from SkyWest and Trans States.
Spurred on by the success of Airbus and Boeing with their re-engined single-aisles, Embraer decided to follow the derivative approach, launching its updated E-Jet E2 family in 2013 powered by the GTF. Deliveries of these new variants began with the 97-seat E190-E2 in April 2018, followed by the 120-seat E195-E2 in September 2019.
The third variant, the E175-E2, is a couple of seat rows longer than the 76-seat E175 from which it evolved and flew in December 2019. But that increase in capacity has so far blunted sales due to current scope clause restrictions in the key US market.
These clauses currently cap the regional airlines serving American Airlines, Delta Air Lines and United Airlines at 76 seats and a maximum take-off weight of 86,000lb (39t). Neither the E175-E2 nor MRJ90 met the MTOW limit and hoped for relaxations have failed to materialise.
Meanwhile the MRJ had experienced a series of delays and redesigns, pushing back first flight until November 2015, by which time deliveries were back to 2018 amid further development troubles. Further slippages meant that by the 2019 Paris air show certification was not expected until 2020. Firm orders stood at 213 aircraft, but hopes that US customers would switch to a smaller 70-seater MRJ70 version proved elusive.
During the show, Mitsubishi Aircraft revealed a programme reboot under the “SpaceJet” branding, and the larger M90 was joined by a revamped smaller variant, the scope-clause friendly M100 at 76 seats for delivery from 2024.
But the SpaceJet programme soon suffered a major blow when Trans States cancelled its order for 50 M90s (plus 50 options) citing that the 88-seat variant did not meet US market requirements. The orderbook for the M90 included 15 for launch operator ANA, 32 for JAL and 100 for SkyWest, albeit deferred, with Aerolease recently cancelling its 10.
Mitsubishi’s decision in 2019 to acquire the CRJ programme from Bombardier amid its “sunset” phase was mainly about securing a turnkey global support network for the SpaceJet. But in May 2020, it suspended SpaceJet M100 development, followed in October by the decision to “pause” the baseline M90 variant.
“We will work to review where we stand, make improvements, and assess a possible programme restart,” said Mitsubishi.
The latest Cirium Fleet Forecast projects almost 2,200 deliveries worth over $57 billion in the intermediate RJ category globally over the next 20 years. The forecast assumes US scope clauses will be addressed and expects 62% of deliveries will be to North American operators.
As it stands the only firm programme, the E175-E2 is stalled with an empty orderbook while the SpaceJet at best faces an uncertain future. History does not paint a happy picture for airliner programmes that have been stopped and then restarted. But if the SpaceJet is not revived and demand in the 70-90-seat regional jet sector reaches the forecast level, then it will surely prompt a reaction or risk the market being left entirely to Embraer.
Changes to US scope clauses are therefore crucial to “uncork” demand in the key US market for larger intermediate regional jets like the M90 and E175-E2, which are effectively in limbo awaiting a relaxation – the E175-E2 is delayed to at least 2023. This means the scope-compliant E175-E1 continues in production (132 were on order at 1 January 2021), and deliveries are projected for at least another five years.
However, the current crisis may well prompt renegotiations around the scope clauses and open the market to the E175-E2 and possibly enable a restart for the M90.
March 22, 2021
Generation H….160
Sara Dhariwal, valuations manager, Ascend by Cirium, looks at the medium twin helicopter market as the new H160 is introduced.
As the Leonardo AW139 is marking 20 years since its maiden flight in 2001, its newest rival – the Airbus Helicopters H160 – will start deliveries this year. It is the first new-generation helicopter to be introduced to the medium twin category since the launch of the AW139.
The H160, which made its maiden flight in 2015 and was certificated in July 2020, is the first-ever fully-composite civil helicopter and has the new Safran Arrano engine. The 12-seater has the largest and canted Fenestron® ever made as well as new Biplane Stabilizers™ and Blue Edge® main rotor blades concept.
While deliveries generally in the helicopter sector have reduced year-on-year since 2018, the diversity of types and roles, and introduction of improved and new models like the H160 will help to stimulate demand for both replacement and growth moving forward. Among early customers are Heli Union, Milestone and All Nippon Helicopters, with expectations of military orders being placed in 2021.
The medium twin category in which the H160 competes, is defined by a typical seating of 12-15, with MTOWs in the range of 5-8t. The types in this category include the Sikorsky S-76, Bell 412EP and the AW139, with the latter being the most successful type in recent times and will form the primary competition to the H160.
Medium twins are expected to account for the highest delivery value for civil turbine helicopters – $11 billion or 26% of the total delivery value – in the next 10 years, according to the 2020 Cirium Helicopter Forecast.
| S-76C++ | Bell 412EP | AW139 | H160 | |
| MTOW (tn) | 5.2 | 5.4 | 6.4 | 6.05 |
| Seats | 12 | 13 | 12-15 | 12 |
| Range (km) | 761 | 660 | 1,061 | 880 |
| Engines | Safran Arriel 2S2 | P&WC PT6T-3DF | P&WC PT6C-67C | Safran Arrano |
Production for the S-76C series ended in 2012 and its successor, the S-76D, has failed to amass any significant demand in the market with only 76 helicopters in service after 10 years since launch.
We have observed the deterioration of the market and values for the S-76 in the past five years and while the fleet grew quickly, it was always at the mercy of fluctuations in the offshore sector since over 50% of the fleet operates in this capacity. Since the downturn in the oil & gas industry, the type has struggled to find another sizeable market and as a consequence, we have seen values plummet.
As the closest match to the S-76C series in terms of size and capability, the H160 is in a good position for replacement opportunities among the sizable fleet of just over 340 helicopters.
Likewise, deliveries for the Bell 412EP have tailed off in the past 10 years, with the type not managing to spur growth despite upgrades available. The Bell 412 is, like the AW139, also a versatile machine which is finding a good second home in utility roles, where it has always had a good presence. Therefore, while values have declined, they have stayed more stable than the S-76 as its share in other operating segments help underpin values.
The versatile AW139 saw its delivery numbers peak in 2013 with 103 deliveries and has a current fleet of some 910 in offshore, law enforcement, corporate/VIP, EMS as well as SAR roles. It has become the market leader and has the best value performance in the segment.
Like the AW139, the H160 can also expect to compete for some market share with the slightly smaller intermediate category which includes the AW169, as well as from the larger capacity category of super mediums which include the H175 and the AW189.
Market opportunity
There is a forecast replacement requirement of almost 500 medium twins over the next decade. Replacement of the smaller Airbus AS365 and H155 models is also a target for the H160, which could create over 100 further opportunities.
Taking this into consideration, it seems logical to conclude that to provide effective competition for the AW139, the H160 will have to try to establish itself across a similar number of segments in order to get the leverage required to grow the fleet and underpin values.
This offshore operating segment may provide the biggest difference in market environment between the introduction of the AW139 and the H160. At the time of the launch of the AW139, there was significant and rapid growth in the oil & gas segment. Not surprisingly, a large proportion – 36% – of the early AW139 deliveries went to the offshore segment and it has a current share of 37% operating in this role.
It is unlikely that the H160 will find such traction upon its introduction as the oil & gas market is still in a downturn and excess capacity remains a challenge. Over the medium to long term, the H160 has a good opportunity to replace types like the S-76 and AS365.
There is also now a small subset of the offshore fleet used for support of windfarms, primarily in Europe, notably off Germany, the UK and Netherlands. Although a relatively small fleet (<20) is used today, mainly light twins and AW169s, this is expected to grow. Environmental pressures are leading to more focus on sustainable energy, with Europe and Asia-Pacific projects in the pipeline. This will lead to a growth in helicopter usage and whether the H160, as a slightly larger machine than those serving the sector today, will find a sizeable opportunity in this field remain to be seen.
The EMS market accounted for 18% of deliveries, led by the AW139, as the large cabin has proved popular for carrying multiple stretchers and more equipment, especially with government and parapublic operators.
The medium twins have seen an 11% delivery share in law enforcement roles in the past 10 years, with modest fleet growth often in emerging markets by government parapublic arms. The Bell 412 is a popular type in this segment and it is reasonable to expect that the H160 will take some of the replacement share in the next 10 years.
The large cabin of the AW139 has made it popular for corporate/VIP usage with governments and large corporations. The market downturn has seen a slow increase in the past five years, and this is expected to continue in the near-term future as the Covid-19 pandemic has put pressure on the global economy. Increased used availability has particularly affected deliveries of larger new corporate-equipped helicopters.
Although the smallest of the sub-sectors, search and rescue is important for the medium and larger sizes, with 10% of medium deliveries being for SAR since 2010. We expect further fleet replacement as well as more commercial replacement and movements away from military service, with an opportunity for around 100 mediums in the next decade.
Summary
Similar to the super mediums, the H160 will be facing an initially difficult market environment with limited demand from the offshore sector, an uncertain economic climate initially following the recession brought on by the Covid-19 pandemic, and perhaps limited financing opportunities as investors are still able to recall getting their fingers burnt from the collapse of the offshore market.
However, the H160 is not a new size category like the super mediums were and is therefore likely to fit into operator’s fleet mix more seamlessly. In addition, as the newest generation helicopter in the market, the H160 will be well placed to take advantage of the relatively sizeable replacement opportunity that exists across operating segments.
Will the H160 also suffer from market gloom or is it in fact exactly what the market needs and will prove to be in the right place, at the right time? The team at Ascend by Cirium will continue to monitor developments closely.
March 15, 2021
Widebody aircraft values under pressure
David Griffin, valuations consultant, Ascend by Cirium, considers widebody values, and in particular, what we can expect to see in 2021.
Values for widebody aircraft were already under pressure before the pandemic, when 50% of the widebody fleet had Market Values (MV) at 95% of Base Value (BV) or higher. The first chart shows the ratio between Market Value, which is the spot trading price in prevailing market conditions at a given point in time, and Base Value – the long-term underlying value of the asset in a balanced market where supply and demand are in equilibrium. The chart shows the movement of the curve to the left between December 2018 and 2019, and their decline was accelerated through 2020.
Today, half the fleet is below 83% of Base Value, although interestingly, across this two-year span, about a fifth of the fleet has always remained above Base. Through 2020, this was due to robust demand for maindeck widebody freighters to replace lost belly-hold capacity on widebody passenger aircraft.
On a fleet-weighted average basis, Market Values on liquid older technology types (A330, 777-300ER) fell by 20-30% while new technology types (787 & A350 family) declined by 3-17% over the course of 2020.
Also included in the chart is the peak and the trough of the previous cycle. Two things are immediately obvious, despite a decade-long growth cycle, widebody values did not get anywhere close to the levels seen before the global financial crisis. Secondly, the current MV/BV curve shows that more than half the fleet already has MV/BV ratios worse than the trough of the prior cycle (July 2010) – and that is in spite of impairments made to BV curves since the financial crisis.
Deliveries through the growth cycle were significantly higher than the long-run average when normalised for fleet size. Consequently, the fleet is quite young, with 60% of all widebodies being under 12 years old.
If we look ahead through 2021 and the fundamental drivers of supply and demand, it appears that supply of passenger widebodies will increase further, while demand remains anaemic, pointing to further pressure on values and lease rates.
There is expected to be a large surplus of aircraft through to the mid-2020s, despite a 45% reduction in deliveries from Airbus and Boeing in 2020. Without sufficient demand to absorb them, we expect to see an increase in retirements and passenger-to-freighter conversions. Notwithstanding this, 2020 saw the lowest number of retirements since 2009, suggesting that a low demand for used serviceable material has kept some aircraft in storage for the time being, with a potential part-out wave beginning soon.
The number of stored aircraft peaked at around 14,400 or 65% of the global fleet, but has since reduced and diverged, with 28% of single-aisle aircraft being parked while widebodies are at 37%. The widebody in-service fleet continues to see some aircraft kept in service, even if in low numbers, due to cargo demand. The number of twin-aisle passenger aircraft being used on all-freight flights remains substantial (mostly belly cargo, albeit over 100 aircraft carry light freight in the cabin).
Lease returns are scheduled to remain at historically high levels. Lessors will attempt to push out these scheduled returns and avoid unscheduled returns through lease-term extensions and rental renegotiations where possible. This carries the additional benefit for lessors of receiving the aircraft back as the market is recovering, with a greater chance of crystallising return conditions.
As of January 2021, we are aware of 61 airlines which entered bankruptcy restructuring or completed liquidation in 2020, representing over 1,400 aircraft, a third of which are aircraft on order. This pool of aircraft at bankrupt airlines includes 340 widebodies, 18 of which are on order.
The overall number of failures in 2020 is relatively small despite the distressed climate. This is due to the unprecedented levels of financial support from governments to prevent carriers from failing. It will only be when these pillars of support are removed that the true health of each airline becomes clear and we will see increased failures and with that, increased supply of aircraft.
While airline financing is more challenging, there remains sufficient liquidity for lessors in this low interest rate environment. For example, Air Lease Corp priced $750 million of senior unsecured medium-term notes at 0.7%. There is also a significant amount of private equity awaiting a chance to invest in commercial aviation – some have already invested in distressed situations. Meanwhile, some institutional investors have already returned to a degree, with further investment imminent.
The widebody market is unsurprisingly a lot less liquid than the narrowbody market, as illustrated in the second chart comparing fleet concentration with the Boeing 737-800. While the curves are broadly similar up to the 50% cumulative share mark, there is a significant divergence afterwards, highlighting the level of fleet concentration and lack of secondary market for the larger widebodies.
Even before the onset of Covid-19, there was a developing trend of operating narrowbodies on medium-haul routes instead of widebodies. This trend may further increase as airlines look to optimise the assets they deploy, both to maximise load factors and lower operating costs.
Considering the current surplus of Airbus A330s and Boeing 777s, it is difficult to envision a scenario where all of these aircraft are reabsorbed back into the passenger market. This leaves investors with two choices to reduce excess supply: part-out or conversion to freighters. The part-out market itself is challenged, with less capital to deploy and a lack of demand for used serviceable material (USM) while spare engine demand on the widebody side is solely coming from freighter aircraft.
The other alternative – freighter conversion – has its own pitfalls. If the decision to convert is based on financial metrics alone and not a thorough analysis of demand scenarios, then there could be an excess supply of widebody freighters several years down the line as the industry recovers.
Oversupply in the market is coming from aircraft exiting their first lease (or defaulting before the first lease is even over), and many have their book values too high to allow a sale for freight conversion, in some cases necessitating an impairment prior to conversion. The number of widebody impairments made by lessors is expected to increase in 2021. Through 2020 there were relatively few, considering the environment, but this year we expect the underlying drivers to trigger further impairments.
The most interesting factor to pay attention to in 2021 is the uptick in availability of new technology aircraft, particularly the Boeing 787. While there was some availability of these types in early 2020, the overall number was quite low. The restructuring at Norwegian has led to the inevitable demise of their troubled long-haul network and subsequently their 35 787s are now seeking new homes. This is on top of another 110 787s and A350s at airlines who are restructuring, meaning we could see further declines in Market Values and Lease Rates, given the weak nature of demand. This could further challenge A330 and 777-300ER Market Values, which have their own threats of additional supply from struggling airlines.
Airlines will continue the 2020 trend of choosing to operate the 787 and A350 with their superior economics over their predecessors, especially in light of higher fuel prices compared to a year ago. Comparing the number of flights tracked between mid-February 2020 and the end of January 2021, we see that 787-9 activity is down only 17% while the A330-300 and 777-300ER are both down 57%. The recovery in A350-900 flying activity has not been as strong and remains down 40% compared to a year ago. This may be due to the concentration of A350s in Asia and the current strict restrictions on cross border travel in the region.
While there are many ways of predicting in what year passenger traffic returns to 2019 levels (in our view no earlier than 2024) we believe that twin-aisle passenger aircraft recovery will occur some 12-18 months after the global single-aisle fleet. So, while there may be light at the end of the tunnel for the commercial aviation industry, for the widebody segment it is merely a flicker, and we can expect further hardship in the year ahead.
March 3, 2021
Five members of the Ascend by Cirium team assess the industry outlook across a few key metrics for the year ahead.
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The aviation industry outlook for 2021
Peter Morris, Chief Economist at Ascend by Cirium
Max Kingsley-Jones, Senior Consultant at Ascend by Cirium
Richard Evans, Senior Consultant at Ascend by Cirium
Chris Seymour, Head of Market Analysis at Ascend by Cirium
Rob Morris, Global Head of Consultancy at Ascend by Cirium
The industry faces many uncertainties in the coming year amid the global vaccine roll-out, the hoped-for relaxation of travel restrictions and a solid recovery trajectory. The many variables playing out during 2021 will determine the level of success the industry can achieve, but the crucial ones are beyond its direct control. With that in mind, five members of the Ascend by Cirium team assess the industry outlook across a few key metrics for the year ahead.
Demand recovery
Forecasting aviation demand is always a challenge, but there are certain fundamentals such as GDP, disposable income, airline fares and services, which underpin global passenger demand. The wildcard in this was always “special events” such as war, terrorism and health scares, which interrupted the pattern of growth.
The difference this time is the sheer scale of the collapse in demand for global aviation. It is estimated that through 2020/2021, the airline industry will face revenues reduced by over a trillion dollars, compared with expectations in 2019. Global GDP has been hit, but now travel plans involve the weekly public health decisions of more than 180 sovereign nations, all retaining the right to decide who can visit, and why, and enforce this on airlines and airports. Added to this, millions of individual passengers are now constantly reassessing the health risks and convenience of air travel, with views that might fluctuate with each newscast or vaccine shot update.
And yet the fundamental concepts underpinning industry growth remain the same. Travel growth needs a GDP recovery, as well as for confidence to return. So as the impact of the crisis on GDP and incomes reduces, travel will start to return, although major questions remain as to how many airlines can remain viable faced with massively reduced revenues.
Evidence from multiple previous crises suggests that air travel will eventually return to match the levels of 2019, although it will take time – probably no earlier than 2024. Globally, our “Scenario 4” envisages passenger traffic reaching 47% of 2019 levels by the end of this year. The performance varies from 80% of 2019 levels for China-domiciled carriers to around 30% for African and Middle Eastern airlines, with Asia-Pacific at 45%, Europe 35% and North America 49%.
There is consensus that recovery will start with domestic traffic, as individual countries feel they have gained a degree of control over the virus. Next to recover will be regional movements where passengers from a limited number of close countries are generally involved, and business connections are more frequent. The last category to recover is likely to be intercontinental travel, where the wide variety of traveller origin/ destinations makes it so much harder to define and exert public health controls.
Airline outlook
Despite the battering the industry has endured since early last year, there are still some 670 airlines globally with passenger jets in service. This compares with almost 720 just as the crisis began and less than 500 in Spring 2020 after over 250 airlines temporarily stopped flying. Although the volume of operators remains solid, their equipment utilisation has been pared back and most are operating at a fraction of their break-even load factor.
IATA estimated that airlines were burning cash at a rate of $300,000 every minute in the second half of 2020 and the slow recovery means this will likely continue at an average of $5-6 billion per month. The diagnosis last September was bleak: many airlines could run out of cash within six months without some form of lifeline.
That outlook hasn’t changed, meaning 2021 will play a crucial role in forming the industry’s long-term landscape. More airline failures are a certainty – and there are already some obvious casualties – but the absolute number will depend on the pace and effectiveness of vaccine rollouts and the resultant lifting of travel restrictions.
While there will be more consolidation, this will be tempered by market dynamics favouring collapse over rescue. And of course, there is the age-old issue around sovereign status which has traditionally ensured survival of so-called “zombie airlines”.
But as weaker players fall by the wayside, expect new entrants to launch with clean slates and sporty lease deals. The outlook for solid demand in the air-cargo sector, combined with the glut of passenger airliners creating attractive conversion candidates, may also sprout some opportune moves in that sector.
Fleet evolution
The commercial jet fleet stood at 25,450 aircraft in service at the start of 2020. This included 23,550 passenger aircraft and 1,900 freighters. A year on, the passenger jet fleet has fallen by 5,500 in-service aircraft. Within this, the twin-aisle fleet has declined 32%, with slightly smaller falls for regional jets and single-aisles. Given traffic declines of more than 50%, the fleet numbers reflect large falls in aircraft utilisation and load factors.
The in-service freighter fleet has actually grown by 10% over the last year, a trend reflective of the relatively robust recovery in cargo traffic, as well as the lack of long-haul passenger aircraft bellyhold capacity.
Cirium’s baseline scenario envisages a slow return to service of the newer stored aircraft, and a recovery in aircraft productivity. However, by the end of 2021 this scenario calls for just 1,000 single-aisles and 150 twin-aisles to be added to the in-service fleet. With over 1,000 new deliveries and 900 retirements forecast in 2021, there will clearly still be a large fleet surplus of around 6,000 passenger jets going into 2022.
Single-aisles and larger regional jets are expected to see fleet recovery first, as short-haul leisure markets recover from Q3 2021 onwards. Prospects for mid-life twin-aisles currently in storage are bleaker. Some may be freight-converted, and newer types should re-enter service eventually, but many will be permanently retired.
Orders and deliveries outlook
The OEMs continue to face challenging times. Jet deliveries in 2020 were down 40% over 2019, at just 785, almost 1,000 aircraft fewer than the recent peak in 2018.
This year should see some recovery, with a forecast of around 1,200 deliveries, driven largely by some 360 Boeing 737 Max shipments, as well as delivery of stocks of built but undelivered aircraft. Deliveries also represent sale/leaseback opportunities for airlines to generate cash. But this level is only the same as a decade ago and the only production rate increase planned is for the Airbus A320neo, from 40 to 45 per month.
Monitoring the firm backlog is a key factor for 2021. It fell during 2020 by just over 1,000 (7%) to 13,300, valued at $825 billion (2021 $). Further erosion is likely, as customers adjust their capacity needs.
Over 800 cancellations occurred last year, 525 of which were for the 737 Max. At least 10% of the jet backlog is dormant or counted as potential cancellations by accounting standards. Yet the efficiency of new aircraft may lead many to defer rather than cancel, to keep slots for when recovery occurs.
There will still be new orders as some customers take advantage of early slots and/or attractive pricing. In 2020, there were still some 300 new orders placed after the end of the first quarter, when lockdowns began.
Cargo conversions are one bright spot, with an increase expected from 70 to over 90, as available feedstock and lower passenger aircraft market values combine with increasing demand for e-commerce helping drive conversion activity.
Leasing landscape
The commercial passenger jet fleet managed by operating lessors increased by 1.8 percentage points during 2020 and ended the year at 49.7%, with almost 9,100 single-aisle and 1,900 twin-aisle aircraft in current leasing portfolios. That growth was driven by high numbers of acquisition through purchase and leaseback deals in 2020. Growth is expected to continue in 2021 as airlines opened the year with more than 10,700 unencumbered assets which they can use to raise liquidity and strengthen their balance sheets, of which 5,100 are less than 10 years old. That is in addition to more than 700 Airbus and Boeing aircraft which airlines are also expected to take delivery of from their own orderbooks. Thus, it seems inevitable that operating leasing will finally achieve 50% market penetration of the passenger single-aisle and twin-aisle space in 2021.
By contrast, lessors face a challenging year from a remarketing perspective. At the end of 2020, we estimate that lessors held 368 single-aisle and 90 twin-aisle aircraft in their idle inventory, aircraft for which we have no future lessee or other fate identified. This inventory grew considerably through 2020 and has already done so in early 2021 to stand at 389 and 99 respectively by the end of January. With more than 750 known lease returns scheduled this year and substantially more possible for defaults or scheduled work outs – think Norwegian, Hainan, etc – lessors will certainly face difficult remarketing times through 2021 at least.
The Fearless Forecast
Summarising this, our forecast is that:
- Passenger traffic will reach only 47% of 2019 levels by end-2021, led by domestic market recovery;
- More airlines will fail as globally they burn $5-6 billion aggregate cash monthly; well-funded majors and agile low-cost carriers will be among the survivors;
- OEMs will deliver 1,200 new jets in 2021 including 360 Maxes;
- P2F freighter conversions will increase by almost 30% to 90 units in 2021;
- There will still be a surplus of around 6,000 passenger jets entering 2022;
- Operating lessors will finally achieve 50% market penetration in 2021 but also will face a challenging year for remarketing.
Check back in 12 months’ time to see how 2021 played out.
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