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Low Fuel Costs Setting Up Several Fleet-Strategy Shift Scenarios, Analysts Say

Analysts eyeing long-term ramifications of low oil prices on airline-fleet strategies see several potentially significant scenarios lining up, but most don&r

Analysts eyeing long-term ramifications of low oil prices on airline-fleet strategies see several potentially significant scenarios lining up, but most don’t expect any trend-altering shifts for another 6-12 months.

Oil producers are giving few signals that crude prices—which have fallen to lows not seen since 2009—will bounce back anytime soon (Aviation DAILY, Jan. 8). If prices hold steady, the attractiveness of operating middle-aged aircraft may become stronger. This could affect two different parts of the older fleet: aircraft still being operated by carriers but earmarked for replacement by newer-generation models on order, and the sizable population of parked aircraft that still have useful life remaining. 

A recent UBS analysis notes that U.S. majors American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines operate some 730 narrowbodies that are 10-15 years old. Their order backlogs include nearly 400 new current-generation narrowbodies and 500 next-generation narrowbodies.

Carriers like these could alter either the used-aircraft landscape or manufacturer backlogs by shifting retirement strategies and, perhaps, deferring deliveries, UBS notes. United and Southwest have recently tapped the used-aircraft market for lift. The combination of lower fuel costs’ driving down of operating expenses, and the influence of Delta’s success with flying used aircraft—such as the former AirTran Boeing 717 fleet—to meet demand, could help spread the trend among the Atlanta-based carrier’s larger peers.

“We see [Delta’s] fleet management strategy emphasizing used aircraft procurement and capital cost minimization as a major driver behind its sustained outperformance relative to its airline peers, and believe other airlines are beginning to consider used aircraft,” UBS notes.

More favorable operating economics for older aircraft could lead to capacity increases or, at the very least, changes in fleet utilization. Legacy carriers in mature markets—notably North America—have used capacity discipline to capitalize on rising demand in recent years. None of the U.S.’s big four expect to boost capacity more than 3% in 2015, Moody’s notes in a recent report on U.S. airports, which seems to suggest little room for adding cheaper lift on the back of low fuel. But carriers looking for cost-effective growth opportunities could find them in ramping up usage of older models.

“We estimate that the average daily utilization for aircraft in the global fleet has increased from 7.2 hours/day in 2009 to nearly 8 hours recently,” UBS says. “However, we estimate nearly all of this increase has been driven by higher utilization of very young (0-5 year old) aircraft, while older aircraft utilization is roughly unchanged. We see room for utilization to move higher on older aircraft, which are flying two to three fewer hours per day compared to younger equipment.”

A separate UBS analysis suggests that low oil prices have not yet altered aircraft retirement or scrap patterns, but signs suggest this could change. The number of parked aircraft stood at 2,657 on Dec. 31, up 4% from the prior year, primarily due to an increase in regional-jet retirements. Initial tallies on scraps suggest a significant drop in 2014, with 453 confirmed tear downs, compared to the 712 recorded in 2013. UBS notes that scrapped-aircraft tallies tend to climb over time as tear downs are confirmed, so while that gap should narrow, it also suggests fewer part-outs.

One possible explanation is the prospect of new opportunities for mid-life aircraft that may deliver more to the bottom line in service than as part-out candidates. UBS estimates that 826 parked aircraft—31% of the idle fleet—are aged 15 or younger and “could come back into service, particularly given the drop in oil prices.” 

While this could shift near-term fleet and network strategies, most analysts are comfortable in maintaining bullish outlooks for the record backlogs at Airbus and Boeing. A Canaccord Genuity analysis showed that, historically, drops of 50% or more in oil prices coincided with “large increases in backlog. . .showing that the desire for airlines to upgrade remains high during this period.”

UBS notes that if Airbus and Boeing deliver on promises of 15-20% lower operating costs on A320neo and 737MAX, this will be enough to offset higher acquisition costs compared to current-generation and even mid-life models “across most practical lease yield and fuel price outcomes.”

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