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Falling Retirements, Rising Production Rates Set To Clash

How much must retirement rates climb to keep projected OEM deliveries coming?

A steady run of low fuel prices combined with strong global passenger demand have slowed the flow of older aircraft out of the global fleet, setting up a showdown between retirement rates and planned new-aircraft production increases.

Brent Crude oil prices, which hovered at $100-120 per barrel from early 2011 through late 2014, have been below $50 per barrel for most of the last 18 months. Lower fuel prices have triggered lower airfares, stimulating passenger demand.

International Air Transport Association (IATA) figures pegged 2015’s global demand uptick, measured in revenue passenger kilometers (RPK) at 6.5%—the biggest annual jump since 2010. Global capacity, measured in available seat kilometers, was up 5.6%, and was outpaced by RPK growth in every region except the Middle East, where expansion by carriers Emirates Airline, Etihad Airways and Qatar Airways helped push capacity up 12.6%.

The demand jump and cheaper fuel have been a boon for older, less efficient aircraft. Aviation Week’s Commercial Fleet & MRO Forecast shows that retirements in 2015 totaled 510, or 1.7% of the active commercial jet and turboprop fleet of about 30,000 aircraft. Both figures declined for the third straight year, hitting lows not seen since 2007, just before the Great Recession was in full swing.

[CHARTBEAT:3]

Higher planned production rates at Airbus and Boeing and the introduction of new models, such as Bombardier’s C Series, mean these numbers must climb—and fast. Aviation Week’s figures indicate retirements steadily rising to 3.0% of the active fleet, or nearly 1,300 aircraft per year, in 2025. The annual average during the decade is 991, a 55% jump over the 639 per-year average from 2006-15.

Much of the increase will take place in the next few years. The forecast has retirements totaling 940 in 2020, or 2.5% of the projected year-end fleet of 37,600.

Absent a boost in already strong traffic demand, this will not be enough to absorb planned new delivery rates.

“Overall, our analysis indicates a market roughly in balance currently but on its way to oversupply given planned production rate increases,” states a UBS analysis. “While supply is already running well above normal at 8% of the installed base per year (on seats), demand has so far kept pace, as above-trend traffic growth has offset falling retirements. However, supply is set to increase by a further ~40% over the next several years, growing to ~9% of the installed base per year.”

UBS’s five-year look ahead projects annual deliveries of aircraft certified for 30 or more seats totaling 1,724 this year and rising to 1,915 in 2020.

The company’s assumptions include lower production rates than those announced by the major OEMs; their projections put delivery totals at 1,740 this year and 2,351 in 2020.

UBS sees Boeing ramping up to 47 737s per month in 2018 and staying there through 2020, while the manufacturer plans to be at 47 per month next year, on its way to 57 per month by 2020, for example. UBS sees Airbus A320-family production topping out at 48 per month in 2018; the Toulouse-based airplane-maker plans to be at 60 per month by mid-2019. UBS’s forecast uses a 2-3% compound annual growth rate of total seats, compared to 6-7% “implied by Boeing/Airbus guidance.”

Despite discrepant forecasts of narrowbody demand, UBS says that these aircraft are “slightly” undersupplied now and would remain so with A320 and 737 production rates at or below 100 per month combined. Model-specific retirement data support the theory that the recent dip in retirement rates is largely attributable to a rebound in used narrowbody demand, especially for in-production aircraft.

UBS estimates that the number of parked narrowbodies—120 seats and up—fell 7% in the 12 months ended March 31, compared to 3% for the global fleet. The company calculates that 350 aircraft left the fleet in that time—437 were parked, but 87 aircraft were taken out of storage. The figure is 1.3% of what UBS considers the active fleet, considerably below the 2-4% average attained for most of the last four years. The rolling 12-month average for narrowbody types is 1.5% that are being parked and 0.5% returning to service, for a net active fleet reduction of 1.0%.

The parked A320 fleet at the end of March totaled 175 aircraft, down 20%, or 45 aircraft year over year. Its counterpart, the 737NG, had 115 aircraft parked at the end of March, a 9% drop—12 aircraft—from March 2015.

While reliable, middle-age A320s and 737s are becoming harder to find, the ramp-up in A320neo deliveries and next year’s introduction of the 737 MAX should change this quickly.

“[A]ssuming Airbus and Boeing are able to proceed with the announced rate increases on the narrowbody aircraft, . . . there will be plenty of feedstock in terms of retirements over the next five years,” Canaccord Genuity says, adding that it sees both OEMs hitting “the low 50s” per month on their narrowbody lines.

Out-of-production narrowbodies continue to find their way to the desert and, eventually, tear-down facilities. There were 215 Boeing 757s parked at the end of March—a jump of 38 aircraft, or 21% year over year—representing nearly 25% of the remaining fleet. The parked 737 Classic fleet stood at 318, 6% higher than March 2015’s total of 299 and also about 25% of the remaining fleet.

While narrowbody types are close to supply-demand equilibrium, the widebody market is more volatile. Airbus and Boeing have reduced rates on the A330, A380, 747 and 777 lines in the last year, while A350, 787 and even 767 production is increasing—moves that highlight the twin-aisle market’s oddities.

The parked widebody fleet rose 3% in the 12 months ended March 31, UBS figures show. “The increase in parked widebodies is driven by A330/777/767-300/-40s0, which mainly average 10-15 years old, which we believe is indicative of widebody overcapacity,” the company states.

While 97 of the parked 767 fleet are a graying 23.1 years old, 68 parked A330s averaged 10.1 years, and 53 777s averaged 14.1. A 2014 study from lessor Avolon pegged age as one of the biggest factors in whether a parked aircraft returns to service, with 15 years marking the dividing line between aircraft likely to fly again and those that are not.

If fuel costs remain low, retirement rates may lag. UBS sees retirement rates climbing to 3% of the fleet “over the next several years”—still 2% lower than where it needs to be to balance supply and demand, assuming traffic growth of 5%.

“However, we believe the total number of scrapped aircraft is limited by the number of less-than-15-year-old aircraft in the fleet, which have historically accounted for more than 95% of total” retirements, UBS says. About 20% of the active passenger fleet is 15 years old or younger. “We estimate the older portion of the fleet will continue to decline,” UBS says, “and see this restraining scrap rates.”

Aengus Kelly, CEO of lessor AerCap, suggests a mainline aircraft’s market appeal is as much about age as size. He puts the global fleet on three tiers: new-technology, current-technology and “less-fuel-efficient” older-technology assets. Also, the top tier—the 787, A350 and next-generation narrowbody types—and the next level down, which includes 777s, 737NGs and newer A320s and A330s, “are in high demand.”

Most of the retirement variations and used-parts activity, driven by both traffic demand and lower fuel prices, is happening on the third tier, notably among first-generation A320s, A330s and older 767s.

“What is happening with those older assets is that airlines are operating them for longer than either [we] or they had envisaged,” Kelly says. But their renaissance will not last long.

“Airlines are coming back to us and saying, ‘We would like to extend those assets for a period of time,’” he says. “However, the extension period is capped out at the engine overhaul date or the cabin reconfiguration date.”

Once these models go out of production, they become more expensive to operate. Green-time engines become harder to find, making costly overhauls the only option to keep aircraft flying—a trend that has emerged in the CFM56-3 market as operators squeeze a few more cheap cycles out of their 737 Classics. 

 

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