By early August, Gulf Coast jet-fuel future markets were predicting prices would ease from $2.07 per gallon to $1.97 per gallon by 2021, still well above early 2018 prices. If fully passed through to fares, that might be expected to cut traffic growth by 1.5-2% annually for the next two years.
Nevertheless, both airline fleet growth and aircraft utilization are still looking strong for the next three years, according to Boris Wolstenholme, chief strategy officer at the AJW Group. At least among AJW customers, which tend to be LCCs or in emerging markets, growth looks better than previously expected, Wolstenholme says.
One reason: In Europe, cessation of operations at Monarch Airlines and Air Berlin have opened up room for added capacity by other carriers. In other regions, pressure on margins from fuel prices seem to be offset by continued increases in demand for travel, the AJW exec notes. He acknowledges that AJW chiefly sees projections from its own customers, but is also not getting any indications of a slowdown from the wider airline market.
AJW is keeping a “close eye” on BREXIT, Wolstenholme says. So far, he does not see the trade dispute yielding a slowdown in traffic, but it does create a lot of uncertainty, which can delay decisions and commitments. And BREXIT difficulties could change the trade environment, as well as customs and regulatory requirements. AJW has plans to mitigate these changes, once the actual shape of Britain’s separation from the EU is known. “We operate in a cross-border environment, and we are used to dealing with changes in this environment.”
Any traffic slowdown, due to BREXIT, fuel prices or other factors, would result in a sudden surplus of tear-down aircraft and depress part prices for these models. Wolstenholme says his firm would not be too much affected by a decline in prices as these would be mostly for pre-2005 aircraft, and AJW has been emphasizing newer models. “We are very stringent on legacy assets.” And, so far at least, used-part pricing has remained very strong, due to continued growth. “The biggest impact on part pricing would probably come if a major airline decides to release parts.” And that often happens randomly.
AJW’s provision of maintenance and parts under flight-hour programs takes some of the financial risks of a slowdown off airlines’ shoulders. That is one of the attraction of asset management for airlines and accounts for the increasing popularity of these terms with carriers.
But it shifts these risks to providers like AJW, and the company must work hard to control its vulnerability. AJW has thus diversified its business, adding Bombardier business aircraft to its Boeing and Airbus portfolio, 70% of which is narrowbodies. And the asset manager is considering adding another platform to its support offers, but Wolstenholme will not disclose it yet.
In any case, AJW continues to grow, increasing revenue above budgeted levels so far in 2018. The AJW executive believes there are still plenty of opportunities to add efficiencies to airline supply chains.