22 February 2016
And the winner goes to…
While trade attendance at the recently concluded Singapore Airshow (16-21 February) saw a 7% increase compared to 2014, with 30% of the visitors from overseas, there was a sharp fall in aircraft deals during the six-day event.
Two years ago, the Airshow generated USD32 billion worth of sales. Last week just USD12.7 billion, or just over a third the value of 2014’s, worth of deals were inked. Organisers were quick to point to the 40 deals with undisclosed values – up from 24 in 2014 – but then even if these deals were added up, they are unlikely to surpass the sales posted two years ago.
Apart from commercial aircraft, defence products were also among the highlights of the Airshow. Unmanned aerial vehicles (UAVs) that were on display included Israeli-built Hermes 450 and Heron 1. UAV support systems were on display, too, including those made by China’s CATIC and Northrop Grumman.
Airbus managed to secure an order from Philippine Airlines for six of its A350-900s; and the European aircraft maker also said an undisclosed client ordered 14 A330-900neos. That brings to 186 firm orders for the re-engined A330 – an incredible achievement for an aircraft that was first launched in the early 1990s.
Not to be outdone, Boeing received firm orders for 12 B737 MAX from Chinese carrier Okay Airways as well as another four orders of B737-8 MAX from Papua New Guinea’s flag carrier Air Niugini, valued at around USD440 million at catalogue prices.
In the highly competitive regional jet segment, Japan’s Mitsubishi scored a deal for 10 of its MRJ aircraft to Aerolease Aviation, a lessor based in Miami. The deal also included options for 10 MRJs.
Canadian plane maker Bombardier made the headlines during the Airshow, too, but for very different reasons – it released quarterly figures that were cause for concern, and announced the slashing of 7,000 jobs. Additionally, the company said it hoped to secure a bailout from the Canadian government, similar to the one it received from Quebec province. Not to be outdone, Bombardier said it signed a Letter of Intent (LoI) with Air Canada for 45 CS300 planes, with options for 30 more. All told, this was worth some USD6.4 billion, but whether it will be enough to salvage the CSeries programme remains to be seen.
The mood at Brazil’s Embraer was generally upbeat, given the imminent rollout of its E190-E2 on 25 February. The Brazilian firm is spending a mere USD1.7 billion on its E2 programme compared to Bombardier’s costly CSeries. Embraer has notched 167 firm orders for the E2s, on top of 373 options and purchase rights with 70 customers in 50 countries.
Unfortunately for Embraer, not many airlines in Southeast Asia are convinced yet of what the E2 jets could do in terms of generating higher yields and therefore, more profits. The E2 next generation aircraft sports new aerodynamically advanced wings and will be powered by Pratt & Whitney geared turbofan engines.
While it’s evidently clear that Asian airlines and more Asian passengers (particularly from China) will dominate and dictate global aviation markets and trends, doubts remain if Asian carriers can exploit this phenomenal growth by making more money. Indeed, the International Air Transport Association (IATA) said Asian airlines are “finding profitability quite thin” due to intense competition and over-capacity.
Asian airlines, especially discount carriers (which account for 54% of capacity in Southeast Asia), are facing an incredibly harsh operating environment. In our view, many of these airlines have over-ordered aircraft during the period of over-exuberance, notably from 2012 to 2014, when interest rates were low and money was cheap.
To make things more complicated, we think some of these no-frills airlines may have also purchased the wrong type of aircraft, which will result in further over-capacity in the near future. Southeast Asian airlines have placed massive orders and will take deliveries of hundreds of A320s and B737s by 2020.
These aircraft are typically configured by LCCs with between 160 and 180 seats. More seats don’t necessarily mean more profits, even if load factors are say, 80%-85% on average, given that the breakeven points are almost always higher on these aircraft. Hence, yields are severely eroded.
Asian airlines will need to continuously assess the ever-changing airline landscape and operate more efficiently. This begins with having the right equipment (aircraft) that will provide maximum benefit (profit). A smaller, single-aisle plane than an A320 or B737 could mean lower costs but with higher returns. More importantly, it rights the imbalance of over-capacity, the bane of the industry.
There are several relatively simple ways for airlines to make more money than they are now, more so under the current climate of low jet fuel prices… but that requires a change in mindset and the courage to take calculated risks. The payouts could well be worth the gamble.