Several factors are contributing to what could be early signs of a changing behavioral pattern. The main factor is fuel, which has risen in price fourfold in the past 10 years and now comprises 30-50% of an airline's total costs, depending on the business model. Only small advantages in fuel burn will trickle down to the bottom line, with all other expenses being roughly equal. The incentive to replace older, less fuel-efficient aircraft has sharpened. And with the advent of the A320NEO, 737 MAX and A350, and the production ramp-up of the recently introduced Boeing 787, the fuel-burn advantage is widening, too.
“Almost all surviving airlines today are low-fare and low-cost,” says Richard Aboulafia, Teal Group vice president. “In a world of impressive industry-wide operational and structural improvements, it comes down to technology.” He says this is due to the fact that “nobody has huge lease obligations on 30-seat jets anymore and nobody has absurdly heterogeneous fleet plans anymore . . . . Nobody has equipment sitting around at hubs for 2 hr. or more.” Thus, Aboulafia points out, “equipment fuel-burn is the only major cost area left that carriers can change.”
Because the cost-savings associated with acquiring new aircraft surpasses airline profit margins, there is a huge cost disadvantage to being left behind in the fleet renewal game, Aboulafia argues. “If your competitor refleets with these new planes and you don't, you are toast,” he says.
In this environment, aircraft financing will become even more crucial. Having access to financing will no longer determine whether an airline operates an older or newer fleet—it will determine whether that airline is going to survive. “We just cannot afford not to fly new aircraft,” says Alex Cruz, CEO of Spanish low-fare airline Vueling.
Provided financing is available, all the new aircraft programs coming to market in the next few years are likely to see greater demand than in previous regular replacement cycles, with all other parameters remaining unchanged. Aboulafia predicts that once the NEO and MAX become available, there will be a massive run-up in single-aisle demand.
This could be very good news for Bombardier and its CSeries narrow-body, which would otherwise be in jeopardy. It appears to be finally garnering significant interest with the addition of a 160-seat version that appeals to mainline and low-fare carriers. EasyJet, AirAsia and Vueling are among the airlines seriously considering an order. The CSeries will replace Boeing 737 Classics at Air Baltic in the medium term.
But will carriers begin retiring aircraft at younger and younger ages? Ed Greenslet, who analyses fleet development worldwide for The Airline Monitor, says “there is some, but no overwhelming evidence” in the numbers indicating that airlines are beginning to replace their aircraft earlier. “We have not yet reached the turning point,” he says. Greenslet agrees, though, that there is a growing expectation that aircraft retirement will come earlier and move closer to 20 years, as opposed to the 25 years that seems to be the current industry standard. He models his forecasts on the assumption that aircraft are retired when they pass 25 years of age.
Like Greenslet, Airbus does not yet see a trend toward earlier retirement. The manufacturer's analyses examine what share of the worldwide commercial airline fleet is still operating after a defined number of years in service. In 1990, 55% of 25-year-old aircraft were still flying; in 2012 that share reached around 62% and more than 80% of 20 year-old aircraft were still flying (see graph). The numbers fluctuate from year to year, but they remain in a similar range in the forecast.
David Trevor, head of market research and forecasts for Airbus, points out that in past cycles, airlines have not accelerated retirements “because there is a trade-off.” The new and particularly fuel-efficient aircraft are competing with less-efficient ones that have been written off already and no longer contribute to expenses through capital costs.
He argues that airlines cannot retire aircraft more quickly because neither Airbus nor Boeing are prepared to ramp up production beyond what they consider to be sustainable for the long term. Delays in the 787 and A350 programs have also led carriers to keep flying their current long-haul fleets and add aircraft of existing types. Even the Boeing 767 and A330 have benefited to a limited extent. For example, Japan Airlines has received more 767s to compensate for a capacity shortfall due to 787 delays, and the A330 has been selling well since the 787 was launched.