Analysis: Widebody demand faces bumpy recovery | Analysis | Airfinance Journal

Analysis: Widebody demand faces bumpy recovery

In 2019 the major aircraft OEMs were as bullish as ever about the long-term prospects for global passenger and aircraft demand, with their respective market outlook forecasts predicting a buoyant outlook for narrowbody and widebody orders.

In its June 2019 Commercial Market Outlook (CMO) , Boeing predicted a need for more than 44,000 new aircraft deliveries, valued at over $6 trillion, by 2038, as a result of growing passenger volumes and increasing retirements.

Of these, more than 32,000 would be narrowbody aircraft and more than 8,300 would be widebodies.

Together, the new jets would support an industry where passenger traffic would grow at an average of 4.6% annually and cargo traffic would grow at an average 4.2%.

Airbus’s Global Market Forecast, published in September 2019, anticipated that air traffic would grow at 4.3% annually, requiring some 39,200 new passenger and freighter aircraft over the next 20 years.

Of this total 25,000 were predicted to be for growth, 14,210 for replacement and 8,470 aircraft would remain from the existing fleet.

The European OEM predicted the need for 29,720 small aircraft, 5,370 medium-sized aircraft and 4,120 large aircraft. 

The small segment includes the A220 family and all variants of the A320 family. The medium segment includes the A330 and A330neo family, and can also include the A321LR and XLR versions used on long-haul missions. 

The largest segment also includes the A330neo family together with the larger A350 family, which also includes the ultra-long range (ULR) version.

Neither report includes the words 'pandemic’ or ‘epidemic’, although reference is made to the recovery after the 2003 SARS outbreak. 

Yet it is the global Covid-19 crisis that is defining an entirely new demand curve for widebody aircraft in today’s global market.

The International Air Transport Association (IATA) has forecast that long-haul and international travel will be the most severely impacted segment of travel. 

The association believes long-haul markets measured by RPKs will not return to 2019 levels until 2023. The recovery will begin in domestic and then regional markets, it believes.

The challenges facing long-haul operations are particularly stark, with a mosaic of national quarantine rules and border restrictions complicating a market which is already a complex operation. 

In the great fleet cull that airlines around the world have enacted following the collapse in air travel since March, it is older widebody models such as the Boeing 747 and A340 and A380 that have borne the brunt of the retirements.

So what does the crisis mean for widebody demand?

A Boeing spokesperson says that the US OEM is currently working on an updated CMO which will provide more colour on the level of aircraft demand, while noting that “the fundamentals that have driven and expanded this market segment are still very much in place and we continue to expect a healthy mix of growth and airplane replacement driving overall demand”.

“Since long-haul traffic is likely to take longer to fully recover from the impact of the virus, we’ll see widebody aircraft demand follow a similar path, though the dynamics of the market will accelerate some strategic planning. This crisis has underscored the value of versatility, especially in the widebody segment, and airlines have focused their restructuring efforts around this theme,” the person says.

Ascend by Cirium’s outlook for the long-haul market mirrors the assessment of IATA, with the appraiser expecting demand to return to 2019 levels only in 2023.

But Ascend has a scenario that estimates that twin-aisle fleet levels will be static or could even fall over the period.

“Bearing in mind that the passenger twin-aisle fleet in service at the end of last year was around 4,600 aircraft, this scenario estimates the equivalent fleet at the end of 2023 to be around 4,500. So an overall decline in twin-aisle aircraft of around 100 aircraft,” says Rob Morris, global head of consultancy, Ascend by Cirium.

“But bearing in mind that we also expect around 900 new twin-aisle deliveries in the same period, we are effectively estimating the net removal from service of 1,000 twin-aisles over the next four years (including 2020). The numbers also clearly indicate that we see no growth so all new deliveries will effectively be for replacement, where we are effectively predicting some 250 annual retirements of twin-aisle aircraft,” he adds.

Morris says that older aircraft types are likely to be phased out, such as older 777-200ERs, A330s (especially -200s and low gross weight -300s) and 777-300ERs. The appraiser also expects the retirement of any remaining passenger 747s and also 767s that are too old to convert to freighters (1980s or early to mid-1990s vintages).

Morris thinks it is “potentially” possible airlines could turn to long-range narrowbodies as an alternative to widebodies given the current depressed demand forecast. 

“Cargo may be a wildcard though because we have already seen in the early months how the loss of the long-haul network has negatively impacted cargo capacity (50% of which was historically in passenger aircraft bellies). So airlines may seek to continue with twin-aisles on those routes where cargo is lucrative,” he says.

In a recent webinar, IBA presented one scenario that forecasts an oversupply of up to 2,500 narrow- and widebody aircraft in the market, calculating that global demand, once the current restrictions are lifted, will have declined by 20% by the end of 2021.

IBA also calculates that 1,850 widebody aircraft could be withdrawn from service – a net reduction of almost 30% of the total widebody fleet. The factors determining the most at risk aircraft include cost of operation as well as age. This leads IBA to forecast the possibility of an almost universal withdrawal of the A380 from service over the next two years if demand forecasts bear out, along with older twin- and four-engine aircraft including the A300, A310, A340, 747 and 767. IBA also forecasts that A330 and 777 aircraft over 13 years old could be surplus to requirements.

Long-term prospects

The Boeing spokesperson believes that the long-term demand picture for long-haul aircraft will remain “relatively consistent with previous trends”. 

The growth in long-haul traffic and the need for replacement aircraft will continue to fuel demand for widebody aircraft from a diverse set of customers, the person notes.

This would appear to be borne out from prior experience of global crises. 

Following events such as the first Gulf War, the Asian financial crisis of the mid 1990s, 9/11 and the global financial crisis, passenger numbers have plateaued or fallen before recovering and growing at an even greater rate.

In terms of market recovery, there seems to be some justification for expecting Asia to lead the way. 

The continent will remain the largest widebody market, driven by a combination of growth and replacement requirements, Boeing believes. 

In North America and Europe, the demand balance leans more toward replacement, while the Middle East, a “key growth market” for the US OEM, will enter an important replacement phase. 

“We expect these trends to continue. If anything, the current crisis will accelerate the retirement of less efficient aircraft as operators look to optimise their long-haul fleet for the future,” says the spokesperson.

In its 2019 forecast, Airbus estimated that Asia-Pacific would account for 42% of deliveries, with airlines in North America and Europe together representing 36% of passenger and freighter aircraft deliveries.

Airbus declined to comment on updated estimates when contacted by Airfinance Journal

Morris says that once open borders and quarantine restrictions are removed, under normal circumstances he would expect Asia to lead recovery, as it has always been the region where most long-haul aircraft are concentrated, but he also notes that “China is holding that back by limiting flights into its borders”. 

“It is not difficult to envision other regions in Asia such as Japan and Korea resuming long haul flying sooner, as well as regions which by nature are more geographically isolated such as Australia and New Zealand, and regions like the Middle East and Turkey which will be eager to capitalise on the recovery and gain more market share through fifth freedom traffic.

“After all, with lower traffic numbers, it is easier to fill twin-aisle aircraft when you have a hub model,” he adds.

Finally, he expects transatlantic services to resume once both the USA and EU bring their number of Covid-19 cases down significantly, but the speed of recovery is highly dependent on a coordinated approach to easing border restrictions by the entire Schengen area plus the UK.

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