Market Sentiment Analysis from Dublin 2024

Key takeaways, findings, and market sentiments from recent Airline Economics, Growth Frontiers Dublin 2024.

Written by our ISTAT Certified Appraiser, Gary Crichlow. Data analysis and provision by Data Analyst, Paul Saupe.

A consistent theme during 2024 Growth Frontiers Dublin was the supply side limits on manufacturers’ ability to ramp up deliveries; new technology engine durability issues; as well as access to spare parts and maintenance slots, meaning operators have increasingly limited choice when it comes to available, quality aircraft.

A key challenge in deliveries is the supply of new technology engines, particularly in the narrowbody sector. The durability issues (primarily experienced by Pratt & Whitney’s Geared Turbofan (GTF) family) are resulting in increased demand for spares, which has a knock on effect on the availability of engines for newly built aircraft; as well as ongoing maintenance. Post pandemic maintenance capacity itself is also constrained, further compounding the issue of quality, new technology aircraft available for lift.

This has meant a strongly renewed interest in classic technology aircraft. The chart below illustrates this effect: before the pandemic, there was a clear gap between classic technology aircraft activity, measured as flights per day averaged over each month, and new technology aircraft activity. That gap persisted in the immediate aftermath and initial recovery as new technology aircraft were preferred. However, since the beginning of 2023, the gap has narrowed strongly, reaching parity in the second half of 2023. This has now actually flipped: classic technology aircraft are, on average, now working harder than the new generation aircraft that are supposed to replace them.

The constraints on the supply of available aircraft outlined above, and continued recovery in demand, have resulted in strong upward pressure on Market Values and Lease Rates. This has been evident over the past 12 months, practically across the board. Gains are particularly strong for older technology aircraft types that had struggled in the immediate aftermath of the pandemic. Notably, values and lease rates in the widebody sector have picked up. The table below illustrates a selection.

A useful analytic that our Automated Valuation Model enables is a historical spread of Market Values, plotted as a fan chart that shows the statistical range of values observed for each age.

The charts below show a representative classic technology aircraft type, the A320ceo, as compared to its new generation counterpart the A320neo. This allows investors to see exactly where we are in the cycle.

The A320ceo chart illustrates that Market Values are currently very close to their all time historical highs across the age spectrum, almost mirroring the A320neo Market Value spread. Clearly, operators are demanding quality lift, and are prioritising that need over age or technology generation.

Looking ahead, the supply constraints do not appear to have a short term solution. We also see the potential for a glut of new technology spare engines once the current durability issues are addressed.

On the demand side, indications are generally positive, although consumers’ behaviour will evolve as they continue to adjust to the inflationary environment and geopolitics remains a wild card.

Our conversations with the market indicate a preference from lessees for fixed rather than floating lease rentals, indicating that lessees are also concerned with hedging their bets even as they search for any available aircraft that will do the job.

Given the potential for volatility amidst what appears to be a very strong current market, AviationValues’ daily updated data and analytics is a critical tool for investors to get the first wind of any market movements.

Rumours abounded regarding the expectation of more aircraft trading activity, particularly in terms of sales of aircraft with leases attached amongst lessors.

We monitor aircraft trades across the aircraft market and have presented a snapshot of aircraft we’ve identified that have changed hands between lessors between 2020 and 2023.

We’ve attempted to focus as far as possible on ‘normal’ lessor trading activity, and disregarded ownership changes as a result of lessor consolidation, which has featured significantly in the past three years. These include AerCap’s acquisition of GECAS; Carlyle’s absorption of AMCK and Fly Leasing; Avilease’s purchase of Standard Chartered Bank’s finance lease portfolio; the integration of Falko Regional Aircraft into Chorus Aviation Inc; Aergo Capital’s takeover of Seraph Aviation; the merger of Elix Aviation and ADARE Aviation Capital into Abelo; ALAFCO’s portfolio purchase by Macquarie AirFinance; and the acquisition by Azorra of substantially all of Voyager Aviation’s assets.

The resulting trading picture is illustrated below.

With those transactions stripped out, the chart does not appear to illustrate a discernible upward trend in normal trading activity … yet. Signs from the most recent quarter are encouraging, but it remains to be seen whether it continues.

In our conversations with lessors, we detected a growing consensus that while both buyers and sellers were increasingly willing to come to an agreement over the bid/ask spread, each side still expected the other party to move first. It is evident from the chart above that lessors are not afraid to move on opportunistic purchases, such as Azorra’s activity with Nordic Aviation Capital in the second quarter of 2022; but time will tell how quickly inter lessor trading will return as part of the normal course of business.

Sustainability was a key theme of the week, with discussions and panels regarding aviation’s decarbonisation and net zero strategy, and financiers’ responsibility in incentivising progress.

The heart of the decarbonisation problem is that an energy source that can replicate the energy density of kerosene, at the scale, cost, safety and reliability that global aviation needs, does not yet exist.

The major underpinning of aviation’s sustainability strategy is increased use of Sustainable Aviation Fuel (SAF). However, SAF is still fuel: it results in the same direct carbon emissions as kerosene when burnt, the key being whether the environmental impact of its production results in a net reduction. How that net reduction is measured and reported is crucial: it must be holistic, transparent and stand up to scrutiny, otherwise the perception of greenwashing will be impossible to avoid.

The challenge is that SAF is still significantly more expensive, is not widely available, and producing it at scale will need to be managed so that it actually achieves demonstrable emissions reduction, and does not cause result in unintended impacts effects caused by, for example, changes in land use. 

The hydrogen concepts being studied by manufacturers centre around small, short haul aircraft as the initial forays. It’s important to keep in mind that while hydrogen is technically zero emissions from a carbon point of view at the point of using it, from an overall planetary point of view the environmental impact of its production matters. As with SAF, holistic, robust and transparent measuring and reporting is key. Most hydrogen produced today is from fossil fuels: low emission hydrogen production represented less than 1% of total hydrogen production in 2022; while it’s growing, estimates are that fossil fuels will still account for about half of the total hydrogen produced globally in 2030.

Furthermore, the infrastructure to store and deliver hydrogen to where it’s needed by hydrogen powered aircraft is still yet to be constructed and operated, both of which also carry environmental price tags. And that’s before commercially viable aircraft that can actually use hydrogen have been designed, built and certificated.

The overall takeaway is that the aviation industry cannot afford to greenwash the scale of the challenges it faces. Technology, in terms of new fuels,  engine and airframe concepts, while crucial, is only one piece of the puzzle. Infrastructure, safety and regulatory hurdles, as well as the political and financial will to invest in and navigate them,  are equally important.

Given the well publicised issues with the 737 MAX 9 and Boeing’s efforts to turn things around, it was inevitable that Boeing would be in the spotlight. Interesting questions were asked regarding whether Boeing was on its way out, whether a window of opportunity is opening for a new entrant into the narrowbody space currently dominated by the A320 and 737 families, or both.

Clearly, the barriers to entry are extremely high, demanding billions of dollars of up front investment, access to specialist talent and technology, a global supply chain and a comprehensive aftermarket support network, with no guarantee of commercial success.

Equally clear, one manufacturer cannot realistically supply all the demand, particularly given the production capacity constraints that bedevil the entire aviation supply chain. As an illustration, we modelled the firm order backlog in a (very) hypothetical scenario where Airbus or COMAC, as the manufacturers with the most comparable airframes, each stepped into Boeing’s 737 MAX orderbook, and looked at the resulting delivery timeframe based on the most recent announced delivery plans. The analysis does not take into account future incoming orders or firming of options; so in essence, the analysis is the most optimistic scenario possible from the point of view of a 737 MAX customer who switched.

* Firm order backlog, net of aircraft currently in inventory or in pre delivery, and no Letters of Intent or options. Analysis assumes no future additional orders (including firmed options). Production run based on publicly available manufacturer production rate targets.

Our tally of the number of Boeing 737 MAX waiting to be produced is 4,194 aircraft (defined as the order backlog net of aircraft currently in inventory or in pre delivery, Letters of Intent or options). At the current maximum monthly production rate of 38 aircraft allowed by the FAA, that represents 8 years’ worth of production even if no new orders are placed or no additional options are firmed. Assuming Boeing is able to achieve its aim of producing 50 aircraft per month by 2025, we calculate its production run would last just over 6 years.

Airbus’ tally of A320neo family aircraft yet to be produced currently stands at 6,877 aircraft, and the plan is to gradually ramp up monthly production to 75 aircraft by 2026. That represents approximately 8 years’ worth of production based on our analysis. Adding Boeing’s backlog in a one to one swap for Airbus aircraft, at Airbus’ planned production rate, would swell the backlog by more than 60% and would mean anyone who was last in the queue today would not receive their narrowbodies for another 12 years.

The situation becomes even starker if we model the same scenario with a recent market entrant, COMAC. The Chinese manufacturer is not yet at a stage where they can challenge the global Airbus/Boeing duopoly, but they are certainly the most likely in the foreseeable future. They have stated plans to achieve 150 aircraft production per year within the next few years. If they are able to achieve this, then a complete switch from the 737 MAX to the C919 would still entail current customers waiting for their aircraft well into the 2050s.

Of course, by then COMAC’s production capabilities may have matured to the point where they can match Airbus. Airbus itself would be heavily incentivised to raise production rates further to accommodate an en masse switchover from Boeing, although the logistical challenge of doing so would be significant. The intent of the analysis is to simply underscore the scale of the task anyone looking to replace Boeing would face, whether they are a seasoned competitor or a new entrant.

Boeing clearly has significant challenges; but to borrow a well known quote, the reports of their death are greatly exaggerated. The reality is that there is, at present, no realistic alternative for Boeing customers to get their hands on a comparable product in a reasonable delivery timeframe.

That said, the needle is evidently moving, ever so slowly, away from satisfaction with the current de facto duopoly status quo. It remains to be seen whether a player like COMAC, or a completely new entity, decides to act; or when one of the incumbents decides to finally bite the bullet with an all new design. Watch this space, and keep abreast of development with AviationValues’ daily updated data, values and analytics.

Disclaimer: The purpose of this blog is to provide general information and not to provide advice or guidance in relation to particular circumstances. Readers should not make decisions in reliance on any statement or opinion contained in this blog.

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