June 10, 2013
Credit: Japan Airlines
Airlines have been in survival mode since the outbreak of the global financial crisis in 2008. But with signs that the world economy is entering a slow, sustained upswing, the industry is making bold moves that could lead to another order boom for widebody aircraft.
Airline leaders gathered last week at the International Air Transport Association (IATA) annual general meeting to exchange views and discuss trends. A major theme was that while increased profitability is still not leading to significant margin improvement, the financial climate is beginning to change. Willie Walsh, chief executive of International Airlines Group (IAG), told the assembly, “I genuinely believe we're an industry that for the first time will start exceeding our cost of capital.” He argues that “the industry will be very, very different.”
Cost-cutting, capacity discipline and mergers in some markets have been the major drivers of financial improvements. But as demand growth kicks in, airlines in many parts of the world are becoming confident enough to look at replacing their existing long-haul fleets and plan for expansion. Airline leaders also expect oil prices to come down over time and settle back into the range of $80-100 per barrel, which would allow airlines to regain profitability even further.
There are also cautionary notes, such as the one voiced by Ethiopian Airlines CEO Tewolde Gebremariam, who points out that the industry could soon face overcapacity again, given the massive number of anticipated aircraft orders.
The new widebody models—such as the Boeing 787-10X and 777-8X/9X as well as the Airbus A350 family—are likely to benefit the most from the upcoming wave of orders for new long-haul capacity. Airbus remains bullish about the outlook for the A380, although it does not seem as though many airlines are prepared yet to take on the risk of having to fill such a large aircraft.
Emirates, of course, is the exception. The airline would like to order more than the 90 A380s it had committed to, 33 of which have been delivered. But until it can find more space for them at its Dubai hub, it will have to hold off on new bookings. Emirates planners are reportedly looking at an A380 fleet of 120-130 aircraft.
Moreover, Emirates President Tim Clark says he would “dearly like the stretch” version of the A380, though he realizes that Airbus has its hands full with other projects now and needs sales of the current A380 to pick up first. Emirates has been looking at putting another 120 seats into a stretched A380, increasing capacity to 640 seats in three classes.