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For an industry like civil aerospace, defined by multi-decade product cycles and economic cycles typically running 8-10 years, it still remains a surprise how conditions can change in less than three months.
In late February, the U.S.-Israeli strikes on Iran triggered a doubling of jet fuel prices, which peaked at more than $200 per barrel. Recent weeks have seen some retracement to about $160 per barrel, but this price still increases the average airline’s fuel bill by half, now accounting for around 30% of costs. Sustained, such prices make fuel price hedging prohibitively expensive and would all but eliminate many airlines’ operating profitability.
But fuel cost is not the only issue facing airlines. A concentration of jet fuel refining capacity inside the Gulf region has made airlines peculiarly vulnerable to the effective closure of the Strait of Hormuz. Few tankers of refined fuel have passed regularly through the strait since March, so airports in Asia, Africa and Europe may face jet fuel shortages in the coming months—the European Commission forecast this to start as early as June.
How airlines respond to this crisis is likely to define relative commercial performances of the airframe companies versus the engine producers and aftermarket companies at least through 2026 and likely into 2027.
Aircraft backlogs are now beyond eight years for the most popular models (especially the Airbus A321neo). Since a new jet typically delivers fuel efficiencies 15-20% better than the aircraft it replaces, we cannot see the current situation doing anything other than strengthening airlines’ need for new aircraft. If Boeing and Airbus can build them (and, up to early-2026, this had been the weak point for the industry), they will find airlines willing and able to take the aircraft.
But behind the still healthy new aircraft outlook, we recognize that airlines are working flat out to reduce fleet costs and minimize the impact of high fuel prices and variable physical availability. This continually forces planners to readjust schedules, aggressively winnow out the least profitable routes and frequencies and minimize use of their oldest aircraft and engines.
Capacity cuts are like the proverbial frog in a pot of water: Do them relatively slowly and quietly, and few passengers notice. An increasing number of carriers announced capacity reductions in April across Europe (Lufthansa cut 20,000 flights over the summer), the U.S. (Delta Air Lines cut second-quarter capacity 3.5%) and the Asia-Pacific (Cathay Pacific cut second-quarter capacity 2%; Qantas cut domestic capacity 5%). But fuel surcharges have a greater immediate impact, especially on the propensity to travel, and these are building up.
Past downcycles have shown that such a triaging tends disproportionately to affect the oldest engines, few of which remain in long-term service agreements and so are maintained on a cash basis. Such engines are typically the most profitable for the engine companies, and in recent years, many have had “full-scope” overhauls to offset shortfalls in new aircraft deliveries. Engines closest to consumption of their remaining “green time” are likely to be removed from service rather than sent for overhauls that can cost $10-15 million. We therefore see increasing risk that even relatively small falls in these elements of their aftermarkets could have a levered impact on the profitability of the engine OEMs and maintenance, repair and overhaul shops.
Two recent announcements have been particularly interesting in this regard. Lufthansa is grounding its entire MHIRJ CRJ fleet as well as some legacy (and iconic) large quads: Airbus A340-600s and Boeing 747s. Even more striking is WizzAir’s decision to retire early its fleet of A321ceos—the youngest of which is only nine years old!
Visibility through the second and third quarters is poor: Airlines started the year with good bookings, and many hope fuel prices and availability will revert to normal once some form of peace is agreed with Iran. Engine companies reported on their first-quarter calls that overhaul bookings were, similarly, full through the summer.
But hope is a poor strategic option, and Agency Partners’ notes from engine overhaul shop visits over recent decades show that few overhauls are really firmed up in either schedule or scope until the engine actually arrives in the shop. So companies’ full-year financial guidance for the mix between aftermarket and original equipment likely comes with a larger margin of error than usual, especially after the summer season. Fasten your seat belts for landing.
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