'Boeing Has Some Very, Very Tough Decisions to Make,' Air Lease Corp. Says
The likelihood of very large passenger aircraft returning to prominence in airline fleets is low, as airlines retire their remaining Airbus A380s and Boeing 747s, Air Lease Corp. said in its fourth quarter and full-year 2020 earnings call. Freighter conversions of these large widebodies also are diminishing, despite the overall strength of the cargo sector.
Cargo has kept planes in the air during the pandemic, but the airlines that have most benefited are ones with more modern widebodies, like the Boeing 787 and 777-300ER or the Airbus A350, ALC Executive Chairman Steven Udvar-Hazy said. Those aircraft were more easily and more quickly adaptable to flying economically viable all-cargo routes when international passenger traffic essentially ground to a halt.
With so many large widebodies leaving airline fleets, the number of seats per departure on most routes will be much smaller even after the recovery begins, Udvar-Hazy said. As many as 35 percent of total widebody seats already have come out of the market, and airlines are in the process of retiring four-engine aircraft, including in the very large segment and Airbus A340s. Aircraft from the Airbus A330 to the Boeing 767 and larger are being converted to freighters. These two trends taken together are ways the market has matched supply with demand. “I really hope that by the middle of ’22, we’ll reach the point where things will be back to some level of normalcy in the widebody market,” Udvar-Hazy said.
On the other end of the aircraft spectrum, ALC is seeing strong demand for the Airbus A220 as airlines retire A319s and Boeing 737-700s. The A220 is also replacing the Embraer E190 and E195 for some airlines, and filling the gap left by MD-90 retirements at others. Momentum for the A220 is “definitely picking up,” Udvar-Hazy said, as airlines opt to use an aircraft its size rather than a 180-seat aircraft on many routes.
Boeing, however, is a complicating factor in ALC’s portfolio. Boeing has some “very, very tough decision to make,” Udvar-Hazy said. The company needs to determine whether it will replace the 737 with a clean-sheet design, and it needs to bridge the gap between the 737 and the 787. But whether airlines will have the capital, after the pandemic, to buy large numbers of either new design, or even if Boeing has the financial wherewithal for the necessary research and development remain open questions. Boeing, in a recent earnings call, said it is still evaluating whether it will pursue the New Midmarket Airplane concept, which would fill the gap between its largest narrowbodies and smallest widebodies.
Production problems with the 787 are having a material impact on ALC’s business, CEO John Plueger said. The airframer has not delivered a 787 since October, and problems with quality control and regulatory inspections have “mushroomed,” he added. “We want Boeing… to get its house in order.”
Meanwhile, the way airlines finance aircraft orders is changing in lessors’ favor. Last year, more than half of Airbus’ deliveries were leased. Both Plueger and Udvar-Hazy said they believe this could be a new normal, that half of the world’s fleet could be leased from now on.
As for when the recovery occurs, much depends on the pace of vaccinations and whether people feel comfortable traveling this summer. Earlier recoveries faded when new virus variants emerged and fresh outbreaks of the disease surged.
ALC reported full-year 2020 revenues that were essentially unchanged from 2019. The company’s pre-tax margin was 32 percent, down from 37 percent in 2019. The company reached deferral or other accommodations on 61 percent of its leases last year, due to the pandemic, but does not expect a material impact to its earnings. Air Lease Corp. expects to take delivery of 72 aircraft this year.
In Other Fleet News
- Mesa Air Group is serious about cargo. The regional carrier last year announced it was straying from its usual strategy of operating regional aircraft for mainline carriers by leasing two Boeing 737 freighters.
And now it’s adding a third. The company said it is leasing another Boeing 737-400F, with delivery expected in May. Mesa currently operates its two freighters for DHL, and the third will join that operation. But in the regional’s recent earnings call, management said it is open to operating cargo flights for other providers. The boom in e-commerce, fueled in part by pandemic shopping by a population stuck largely at home, is buoying Mesa’s cargo operation.
Mesa plans to expand its freighter fleet to 10 737 freighters, with the possibility of going up to 12, the company said on its earnings call. An added benefit is the addition of the type is that Mesa pilots can earn hours on a mainline aircraft. “This aircraft will provide Mesa pilots with additional career advancement opportunities and provide flexibility to better meet the demands of the current cargo environment,” Chief Operating Officer Brad Rich said in a statement.
- KLM has taken delivery of an Embraer E195-E2, the first of 24 firm orders the carrier has for its KLM Cityhopper unit. In total, KLM has 35 commitments for the type, 25 firm and 10 options. The carrier recently raised the number of firm orders from 21 to 25, Embraer said. KLM Cityhopper has 50 E-Jets in its fleet.
- The FAA has levied a $5.4 million fine on Boeing for the airframer failing to comply with some of the improvement targets set out in a 2015 agreement in which it pledged to improve some regulatory compliance and internal processes. The airframer previously had paid $12 million in fines relating the 2015 agreement. “I have reiterated to Boeing’s leadership time and again that the company must prioritize safety and regulatory compliance, and that the FAA will always put safety first in all its decisions,” FAA Administrator Steve Dickson said in a statement.