Podcast: Flying and Buying, How COVID-19 is Changing Airline Strategies

With aircraft production poised to accelerate in 2021, an Aviation Week analysis of proprietary aircraft operational data shows the precipitous fall in utilization for many aircraft workhorses. Listen in as our editors break it all down.

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Below is a rush transcript of Aviation Week’s November 6, 2020, Check 6 podcast.

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Joe Anselmo:              Welcome to the Check 6 Podcast. I'm Joe Anselmo, Aviation Week's editorial director and editor in chief of Aviation Week and Space Technology magazine. The steep drop off in airline traffic has forced carriers to rethink how they utilize their fleets, but quantifying that change beyond anecdotal stories is harder than it sounds. A group of Aviation Week editors spent weeks working with data analysts from Aviation Week's fleet discovery to get a better picture of how aircraft utilization has changed since COVID-19 descended on the U.S. and Europe eight months ago. Out of that, they've also gleaned some clues about how demand for new airplanes will be different as the industry climbs out of the crisis in 2021.

                                   Joining us from Frankfurt to make sense of all this is Jens Flottau, our executive editor for commercial aviation. And here with me in Washington, D.C. is Sean Broderick, Aviation Week's air transport and safety editor. Sean, you know I'm going to put you on the spot first. This was a big, big project of a moving target. Tell us what you did with the data team and share with us the big takeaways.

Sean Broderick:          Sure. Yeah, it's interesting because as everybody out there knows, we are somewhere ... I guess in the middle innings, let's hope, from a baseball standpoint, of the pandemic and its effects on fleet utilization. What we try to do, is look at where airlines were just before the pandemic hit, let's call it end of 2019 and where they are now. What has changed and what is likely to change going forward? And yeah. A couple of big picture takeaways are clear. The peak of the aircraft inactivity was back in the March-April timeframe, when the demand had gone lowest in the biggest portions of the world. The pandemic started to have an impact on airlines in the Far East, particularly China in January, of course but the general global peak probably sometime in March or April.

                                   Airplane activity -- the number of airplanes being flown -- that's an interesting distinction that we'll talk about here in a minute, has begun to pick up but we still see a significant number of airplanes that are parked. And we've had a lot of airlines identify airplanes that are not going to come back. In general, there are some trends that you can link together, even though regions are different, airlines are different, business strategies are different but in general, it appears as though at least for now, the retirements that we've seen announced are more of an acceleration of planes that were already in the works.

                                   Couple of general takeaways that apply across the globe. The retirements that we've seen announced so far are more accelerating fleet changes that were in the works, as opposed to new announcements driven by the pandemic. And we've seen the most inefficient aircraft pushed out, including a lot of larger, hard to fill airplanes, notably A-380s, A-340s, four-engine airplanes that were giving airlines challenges even before the pandemic. Wide bodies have been more affected. The narrowbodies, that's a function of the demand challenges when you're closing down borders and having uncertain travel restrictions, but the widebody market was already facing some challenges, particularly on the new order side before the pandemic. A little bit of an acceleration there.

                                   The narrowbody market was challenged in 2019 because of the MAX situation. You had artificial capacity constraints created by the fact that the MAX's weren't there. They have gone from tremendous high utilization to more of a wait and see mode now. Not a lot of retirements outside of older models, like some MD-80s and some 757s, but midlife A320, 737s and of course the newer ... The NEOs and the MAX's, when they return. No threat from the pandemic but utilization has gone down. The most interesting thing that we've seen I think, is that you can look at ... We like to track the number of airplanes that are in service but when you look at utilization, the utilization of the fleets that are back in service, there's been a significant change in how busy aircraft are. We took a look using the fleet data at the airplanes that were in service.

                                   We picked January because it was again, just before the pandemic really started to heat up. And then we looked at September because that's where we were. And a couple of data points illustrate the differences in utilization that we're seeing, the 737-800 utilization, hours per day we're talking of only the airplanes that were in service. We take the storage ones, the parked ones out. Only airplanes that were flying at least some of the time, 30% decline in the daily flight hours on the 737-800s, A330s, A321 NEOs up closer to 40%. Actually, A330-300 almost 50% decline in the number of hours they're flying per day. While the number of airplanes are coming back, we’re still seeing a tremendous dip in utilization. Some of that's because of ... In the U.S., we have the CARES Act, so there may be still an artificial level of service that's being supported but fundamentally, it's because airlines are in this in between mode and they don't want to have airplanes just mothballed while waiting for demand to come back.

                                   They don't want to cut pilots and ramp down to a level that they know is going to be a temporary bottom but because of the uncertainty and we've seen cases rising here, certainly in the U.S. and other places, lock down in England. Some lockdowns around Europe. There's so much uncertainty that they're playing this wait and see mode. And where we are now, is not where we're going to be in three months. And certainly not where we're going to be in a year, where retirements are going to be much more I think, solid. The retirement numbers are going to go up. It was interesting trying to wrap your head around all of it and come up with some definitive conclusions that you know are going to be ... They're going to be out of date in a month or so.

Joe Anselmo:             Okay. They might be out of date, Sean, but when you looked at all that, was there anything that jumped out and surprised you? Something that wasn't how you thought it would be?

Sean Broderick:          It was more about how -- Instead of the big picture, the bottom line takeaways and the numbers -- it was more about the different approaches that airlines are taking with the fleets they have, the different strategies. For example, easyJet at the very beginning of the pandemic, they kept all of their airplanes in a ready to go mode. Within a few weeks, England had its first lockdown and it was clear that this was going to get a lot more serious before it got better. They ultimately parked all of their ... They grounded their entire fleet, pulled maintenance forward and now they're ready to go if and when demand starts to come back. We've seen some of that but then we've seen other carriers that are more reliant on crossing borders, like let's say, Cathay Pacific. They've had to be a lot less active and they have a lot more uncertainty.

                                   The most interesting thing I think, is the different strategies the airlines have taken. Retirements is another great example. In the U.S., American Airlines, very aggressive in parking fleets and trying to streamline. They're parking a lot of their 737-800s. They have parked a lot of their older narrowbodies and widebodies. They're going to keep their 787s. They're trying to streamline their fleet, regional jets out. They've made these decisions. United Airlines, outside of a handful of Pratt powered 757s... They are not announcing anything as being parked yet, even though they have a bunch of other 757, 767, some older 777s.

                                   There's a different approach that underscores in some cases, the value of the assets. American's got a lot of new airplanes, very expensive for them to be not flying them. And in the United's case, it's recognizing that there's complete uncertainty. And if they park some airplanes that they have now and demand comes back, they're going to find themselves on the wrong end of the demand curve.

Jens Flottau:               Yeah. I had a couple of observations that surprised me too. First of all, I was surprised to see how weak the A-330 picture is. A relatively large part of the fleet is parked, stored. They're flying less than the 787 and the A-350s. That in itself is no surprise, but the degree of the reduction in the flight program was a surprise to me, given that it is a relatively efficient aircraft. The other observation beyond the obvious, which is the A-380 year and the 747-8 and so on, is that Sean talked about this accelerating existing trends. And one of these trends is the acceleration of 777 retirements or phase outs. We've observed this when we did the research for the story but we also saw this in other developments quite recently. Delta just flew its last 777 flight this week. [inaudible] Airways and Japan Airlines are cutting their fleets in half. Cathay is deferring a massive 777X order, reducing capacity of its existing fleet.

                                   It is painful for the 777 fleet. And it must raise concerns with Boeing as far as future demand for the 777Xs. Interestingly, in some markets, more wide bodies are flown than you might have expected. And the reason is cargo because the narrow bodies just don't have the capacity for cargo that you need. And cargo is really the only thing that sells these days in some of these international markets. They are using more wide bodies than you would expect. And then when you look into narrow body fleets and specific types, one of the observations that I've had, is that airlines are trying to use ... It's obvious but I guess, worth mentioning anyway, that the most efficient aircraft are the most popular.

                                   Over here in Europe, Lufthansa is trying to use the A320 NEOs but to park the [inaudible] to the extent possible. I think at Delta, the A-220 is the most heavily used aircraft right now because it's small and efficient.

Joe Anselmo:             Okay. Jens, you guys also wrote a story about aircraft production and you had something encouraging. You said that Airbus and Boeing are going to get back to 2019 levels next year, which sounds great until you realize the caveat was that production was down in 2019 because of the MAX crisis.

Jens Flottau:              Yeah. And I'm not sure I would say it's encouraging. It's somehow more worrying. You have to put it into perspective. In 2018, combined deliveries were around 1,500 aircraft. Then 2019, we had the MAX crisis, so we went down to 1,100. This year, we were going to be well below 1,000, given the COVID situation, the deferrals, all the factors we know about. Well, well below 1,000. And then next year, we'll be back up at 1,100 and I'm asking myself why? Who's going to take all these aircraft? And don't forget, this does not include the close to 400 MAXs that have already been delivered, that did not operate last year, that did not operate this year but will be available for the in-service fleet next year, provided the grounding is lifted.

                                   We have this huge capacity coming in next year of new aircraft. And I'm really curious to see what that means. Will that accelerate retirements even more? What are OEMs going to do? Airbus is talking about raising narrow body production further beyond the 40 NEOs per month from the third [inaudible]. It could actually be more than these 1,100. And when we look at the airline side of the industry, we're seeing the recovery trend reversing. IATA just announced this week, September traffic data and its recovery is slowing. In Europe in particular, traffic is going down compared to August. We may well run into an overcapacity situation very, very soon. We're already in over capacity but this is over capacity in terms of newly delivered aircraft.

Joe Anselmo:              Okay. You talked about Airbus ... You guys have also written for Boeing's part, it's going to cut wide body production in half next year by 50% and gradually restore MAX production to reach 31 per month by the end of the year, correct?

Jens Flottau:               Correct, yes.

Joe Anselmo:              Sean, do you agree with Jens? Are the OEMs in danger of over-producing, based on the fleet utilization you're looking at?

Sean Broderick:          It's interesting question. Boeing is going ... They're continuing to reduce except for on the MAX program, of course, which is at very low production rates now. It'll be interesting to see how quickly they will ramp up to that 31 number because they have 470 stored airplanes that they can begin delivering as soon as the grounding is lifted, that are counted as undelivered. They're counted in delivery numbers that Jens talked about. They have this surge and it'll be interesting to see how quickly they can get back. I think that there is a risk, especially if we don't have a steady recovery that includes more than some big domestic markets from the pandemic. Nobody's going to take a new widebody airplane and use it at levels where it makes sense. And on the narrowbody side, the industry did okay in 2019, without those nearly 400 MAXs that Jens talked about. It seems crazy to think that they can't get through the next three or four or five years at production rates that are much lower than they were in 2019 because the demand's simply not going to be there.

                                   Much of it hinges on not just how quickly but how smoothly we get out of this demand struggle. And the news that came out of IATA today, certainly not encouraging but not surprising either. Yeah, I think there's absolute risk. And the other thing too, we don't have clarity on a lot of what the retirement picture is going to be. The retirements have not jumped the way that they certainly will jump in a year or two or three. When we looked at the study that we did ... We've recorded about 500, let's call it, commercial aircraft retirements this year, so far. That's through nine months, on pace to about match last year. That's going to be way under where things are going to be in 2021, 2022, 2023, when airlines really begin to wrap their heads around their demand situation, maybe begin to take some of the new airplanes.

                                   The peak of retirements, at least in our database the way we calculate it, was about 880 airplanes back in 2012. We should get above that in the next couple years but we're not there now. And that's part of the log jam when you're trying to understand how these fleets are going to shake out. Delta has parked those 777s for example but they're not necessarily retired. They may be but there are some young airplanes there. And somebody that wants to take a flyer on a cheap, efficient, long haul aircraft, there's some there. Having the retirement picture crystallized is going to be key to creating the flow of new airplanes coming in. And we're not quite there yet because the demand curve hasn't settled down or the demand wave, I guess.

Joe Anselmo              Okay. Look for Jens and Sean and the rest of the Aviation Week commercial team’s stories in the November 9th edition of Aviation Week & Space Technology ... And Sean, let's set it up by giving a shout out. Who did you work with on the data team that helped crunch all these numbers?

Sean Broderick:          Well, it'd be shorter to tell you who I didn't work with. Daniel Williams, tremendous analysis, especially on the utilization. This is all under Terra Deskins. Our data team, really unsung heroes at Aviation Week because every time I ask them a question, I have five more questions because of the level of detail and information that they have given. They had us down to specific routes and, "Do you want to know what the A220s were doing on this route in January?"

                                   And that's one of the reasons why this project took eight weeks because going through the granularity of data that our data team makes available is amazing but yeah, I'd be remiss if I started naming names but it's really ... It's everybody. Aviation Week ... Team Aviation Week fleet discovery, how's that?

Joe Anselmo:              It is. Thanks to the writers, thanks to the analyst. And Jens, thanks for your leadership of the team. That's a wrap for this week's Check 6 Podcast. A special thanks to our producer in Washington, Donna Thomas. Join us again next week for another Check 6, which is available for download on iTunes, Stitcher, Google Play and Spotify. And if you like what you've heard, please give us a positive review. We appreciate your feedback. Thanks for your time and stay safe.

 

Joe Anselmo

Joe Anselmo has been Editorial Director of the Aviation Week Network and Editor-in-Chief of Aviation Week & Space Technology since 2013. Based in Washington, D.C., he directs a team of more than two dozen aerospace journalists across the U.S., Europe and Asia-Pacific.

Sean Broderick

Senior Air Transport & Safety Editor Sean Broderick covers aviation safety, MRO, and the airline business from Aviation Week Network's Washington, D.C. office.

Jens Flottau

Based in Frankfurt, Germany, Jens leads Aviation Week’s global commercial coverage. He covers program updates and developments at Airbus, and as a frequent long-haul traveler, he often writes in-depth airline profiles worldwide.