Manufacturers tend to highlight trends such as the burgeoning middle class in emerging markets as key drivers for rising commercial aircraft demand. But the single most important factor is something less strategic: fleet replacement.
According to's latest global market forecast (GMF), more than 10,000 aircraft will be replaced over the next 20 years. Airbus predicts a total output of 27,000 new single-aisle and larger airliners by 2032. Those will be built by Airbus, , and , of course—and soon also by Comac and the . (UAC).
If Airbus's forecast is on target, 38% of total production will be needed to replace the existing fleet. But if airline growth is lower than the 4.7% average Airbus predicts, then the share of replacement aircraft will rise even further. David Stewart, of the ICF SH&E consultancy, estimates that 45% of deliveries this year are for replacement rather than fleet growth.
According to the GMF, 500 aircraft must be built annually to compensate for retirements. And this year, that figure is likely to be exceeded, says TeamSAI President David Marcontell. His consultancy forecasts that 503 aircraft will be permanently parked in 2012.
That figure is higher than it has been in the past few years, when retirements rarely exceeded 400. The increase is a function of the fact that total aircraft numbers are rising, thus even at a stable retirement rate, the absolute numbers will go up.
But that is only part of the truth. Some analysts are noting what they think could be the beginning of a trend: Airlines globally are slowly beginning to retire their aircraft at younger ages. And they believe that trend will accelerate with the arrival of new aircraft such as the Airbusand MAX in the next few years. “The fleet is getting younger, faster,” says Marcontell.
The average fleet age has already declined slightly since 2009, just after the global financial crisis took hold. The average age is now 11.9 years, compared to 12.2 years three years ago.
Several factors are contributing to what could be early signs of a changing behavioral pattern. The main factor is fuel, which has risen in price fourfold in the past 10 years and now comprises 30-50% of an airline's total costs, depending on the business model. Only small advantages in fuel burn will trickle down to the bottom line, with all other expenses being roughly equal. The incentive to replace older, less fuel-efficient aircraft has sharpened. And with the advent of the A320NEO, 737 MAX and, and the production ramp-up of the recently introduced , the fuel-burn advantage is widening, too.
“Almost all surviving airlines today are low-fare and low-cost,” says Richard Aboulafia, Teal Group vice president. “In a world of impressive industry-wide operational and structural improvements, it comes down to technology.” He says this is due to the fact that “nobody has huge lease obligations on 30-seat jets anymore and nobody has absurdly heterogeneous fleet plans anymore . . . . Nobody has equipment sitting around at hubs for 2 hr. or more.” Thus, Aboulafia points out, “equipment fuel-burn is the only major cost area left that carriers can change.”
Because the cost-savings associated with acquiring new aircraft surpasses airline profit margins, there is a huge cost disadvantage to being left behind in the fleet renewal game, Aboulafia argues. “If your competitor refleets with these new planes and you don't, you are toast,” he says.
In this environment, aircraft financing will become even more crucial. Having access to financing will no longer determine whether an airline operates an older or newer fleet—it will determine whether that airline is going to survive. “We just cannot afford not to fly new aircraft,” says Alex Cruz, CEO of Spanish low-fare airline Vueling.
Provided financing is available, all the new aircraft programs coming to market in the next few years are likely to see greater demand than in previous regular replacement cycles, with all other parameters remaining unchanged. Aboulafia predicts that once the NEO and MAX become available, there will be a massive run-up in single-aisle demand.
This could be very good news for Bombardier and itsnarrow-body, which would otherwise be in jeopardy. It appears to be finally garnering significant interest with the addition of a 160-seat version that appeals to mainline and low-fare carriers. , and Vueling are among the airlines seriously considering an order. The CSeries will replace Boeing 737 Classics at Air Baltic in the medium term.
But will carriers begin retiring aircraft at younger and younger ages? Ed Greenslet, who analyses fleet development worldwide for The Airline Monitor, says “there is some, but no overwhelming evidence” in the numbers indicating that airlines are beginning to replace their aircraft earlier. “We have not yet reached the turning point,” he says. Greenslet agrees, though, that there is a growing expectation that aircraft retirement will come earlier and move closer to 20 years, as opposed to the 25 years that seems to be the current industry standard. He models his forecasts on the assumption that aircraft are retired when they pass 25 years of age.
Like Greenslet, Airbus does not yet see a trend toward earlier retirement. The manufacturer's analyses examine what share of the worldwide commercial airline fleet is still operating after a defined number of years in service. In 1990, 55% of 25-year-old aircraft were still flying; in 2012 that share reached around 62% and more than 80% of 20 year-old aircraft were still flying (see graph). The numbers fluctuate from year to year, but they remain in a similar range in the forecast.
David Trevor, head of market research and forecasts for Airbus, points out that in past cycles, airlines have not accelerated retirements “because there is a trade-off.” The new and particularly fuel-efficient aircraft are competing with less-efficient ones that have been written off already and no longer contribute to expenses through capital costs.
He argues that airlines cannot retire aircraft more quickly because neither Airbus nor Boeing are prepared to ramp up production beyond what they consider to be sustainable for the long term. Delays in the 787 and A350 programs have also led carriers to keep flying their current long-haul fleets and add aircraft of existing types. Even theand have benefited to a limited extent. For example, has received more 767s to compensate for a capacity shortfall due to 787 delays, and the A330 has been selling well since the 787 was launched.
Bert van Leeuwen, managing director of aviation research at DVB Bank, notes that while the retirement age of aircraft may not yet be changing markedly, “there is a process going on.” He sees “clear evidence” that first- and second-tier airlines are disposing of their aircraft much sooner than in the past. These aircraft continue to fly, but not with the leading carriers. Van Leeuwen argues that the high price of fuel and availability of new aircraft enable that earlier-than-usual transition.
And even the weak financial state of the airline industry is not interfering with these disposals because interest rates are relatively low and carriers can “rather easily afford to buy a new aircraft,” van Leeuwen says. Moreover, leasing companies and financiers own 35% of the world aircraft fleet—and more than 50% of A320s and 40-50% of A330s. In other words, airlines have more flexibility than they have previously to replace or negotiate favorable rates on leased aircraft, which make up a greater part of their fleets. According to van Leeuwen, “it is already very difficult to place a seven-year-old A320 or 737-800 at decent lease rates” because airlines can just as well take new aircraft and finance them through sale-and-lease-back deals.
Greenslet believes theis “the most vulnerable” to early retirement. The fleet is relatively small and as soon as real alternatives are available, the four-engine Airbus will be on its way out, he argues. It will be accompanied by the , as its “days are coming to an end,” Greenslet says, noting that “you want to replace those aircraft with something truly superior.” So the two types are likely to be replaced only when the 787, and A350 become available in large numbers.
Van Leeuwen says the A340-500 and -600 in particular “are almost impossible” to sell, and DVB Bank has bought 15 747-400s to be broken up for spares. Their engines can be used on 767s. But he also sees high-gross-weight versions of the A330-300 replacing older 777-200ERs over time, because they can perform most of the 777 missions..
Of course, many very old aircraft have already been retired. There are hardly any 747-200s, A300s and MD-11s in passenger service now. And what are being retired next are “perfectly good airplanes whose fuel consumption is not so good,” says Greenslet. According to Airbus data, 70% of the fleet operating in the year 2000 was old-generation, but today that share has dropped to 30%.
The rollover will not happen overnight, however. Greenslet predicts that the world fleet will grow 15% over the next four years. During the same time, the number of 747-400s operated by 76 of the world's largest airlines will decrease to 388 units from 428. And of the 300 A340s flying today, 288 will still be in service in 2016. The 737 Classics will be replaced most rapidly, with the number of -400s and -500s cut back to a third and the amount of -300s more than halved.
From the perspective of financiers and leasing companies, the replacement game is more difficult on the single-aisle side, Greenslet says. “The shelf-life of the A320NEO and the 737 MAX are relatively short,” he says. He expects Airbus and Boeing to offer all-new aircraft in the second half of the next decade, since the NEO and MAX “have 10 years of life.”
While the huge tallies of NEO and MAX orders are testament to the fact that airlines still like what Greenslet calls a “half-step,” aircraft lessors and financiers will have to keep in mind that the two types may well lose residual value earlier than their predecessors.
Greenslet believes Boeing and Airbus will stop building current versions of the 737 and A320, respectively, soon after the NEO and MAX become available—and that same fate will loom once other newly developed aircraft are on the market.