Capacity Shortages Reshape the Global Airline Industry
An airline is only as good as the airplanes it flies. Good news: Airbus and Boeing have a lineup of efficient planes that make money for airlines — planes with increasingly longer range, better fuel burn, improved comfort, lower emissions … But now the bad news: there’s not enough of them.
Three years ago, at the onset of a global pandemic, talk of an aircraft shortage was the farthest thing from anyone’s mind. With passenger demand for air travel roaring back, however, airlines need more capacity. Badly. Unfortunately, equipment makers and their suppliers can’t keep up, beset by a rash of production obstacles including labor shortages, parts shortages, supply chain disruptions, and certification delays.
Boeing’s recent discovery of quality defects on its popular 737 Max is only adding to the jet delivery delay dismay — and adding to the agonizing wait for new capacity. As Boeing remarked in its latest earnings call: “Unfortunately, the timing of these delivery shortfalls will impact summer capacities for many of our customers … we feel terrible about that.” American, for one, was recently forced to suspend some peak season flights to Spain because of delays receiving new 787s — with the transatlantic market currently booming, the timing couldn’t be worse. “Look,” said CEO Robert Isom last month, “at the end of the day, we need [Boeing and Airbus] to be incredibly reliable. We need to them to be better than what they’ve been … we need them to get their act together.”
Even more frustratingly for the industry, the latest generation of engines — while delivering lower fuel burn — aren’t meeting reliability standards. Air Lease Corp.’s Steven Udvar-Hazy, speaking in March, said “these new technology engines that power the 787, the A330neo, the 737 Max, the A320 and A321neo, all of those engines were developed 12- to 15-years ago,” intending to reduce fuel burn by about 15 percent while reducing carbon emissions and noise. “But to achieve that, all of the manufacturers — GE, Rolls-Royce, Pratt & Whitney, CFM — pushed technology to the outer end of the envelope in terms of the alloys, the heat in the engines and the efficiencies that they try to gain to achieve these objectives on fuel burn and environmental and noise. And so consequently, what we have today is engines that are delivering a 15 percent average reduction in fuel burn per seat, but the maintenance cost of these engines is far higher than what was originally projected because the engines do not stay on the wing in operational status as long as their predecessor engines.” He continued: “So engines come off, they have to go to the shop. They have to have new things to upgrade, whether it’s turbine blades or things in the combustor because they are coming out with product improvements and the airlines want these product improvements incorporated to extend the life of the engines, but that means the engines are on the ground. They have to go to the shop. There’s not enough shop capacity.”
AerCap’s Aengus Kelly said essentially the same in his company’s first-quarter earnings call last week: “These engines are masterpieces of engineering capability to reduce the fuel burn. The challenge is that in certain operating environments, they just don’t last as long on wing as was originally envisaged, and as the predecessor engines had lasted on wing.” He added: “This isn’t something that will go away in the next 12 or 24 months.”
Problems with Pratt & Whitney’s geared turbofan (GTF) engines, in particular, are wreaking havoc. India’s Go First, a low-cost carrier, filed for bankruptcy last week, blaming the 25 A320neos it was forced to ground due to “failing engines.” (Pratt for its part says the carrier’s problems run far deeper than just its engines). GTF-induced groundings have been a growing problem for many airlines, including Go First’s rival IndiGo, along with AirBaltic, Air New Zealand, Hawaiian Airlines, Lufthansa, and Spirit Airlines.
The resulting shortage of aircraft is greatly influencing the current state of the airline economy. Combined with strong demand, the supply deficit is driving up industry fares and yields, to levels far above where they were in 2019. It’s driving up aircraft prices, of course, simultaneously. But for many airlines, yields have gone high enough to underpin a post-pandemic return to profitability. Indeed, IATA said in February that it expects the airline industry to collectively earn a net profit this year. One additional consequence of the aircraft shortage: It creates a big barrier for prospective startup airlines. Separately, it’s likely playing some role in encouraging consolidation — JetBlue cited access to Spirit’s Airbus orders as a reason for its takeover.
How long will the aircraft supply shortage persist? For years, argue industry leaders like United’s Scott Kirby and Lufthansa’s Carsten Spohr. Aircraft, incidentally, are not the only thing in short supply. So are pilots, air traffic controllers, mechanics, capacity at key airports, training capacity, spare engines, engine parts, and aircraft maintenance facilities.
Last week, Airbus said it’s essentially sold out of planes for years — if you order an A320-family jet today, you won’t get it until 2029 at the earliest. The same is roughly true for Boeing and its Max. As ALC noted: “We fully expect delays to persist for several years as indeed one OEM [original equipment manufacturer] has advised us to expect delays compared to originally contracted delivery dates through 2028.” To help clear the big backlogs, Airbus aims to lift A320 production rates to 65 per month by the end of next year, rising to 75 in 2026. Boeing, meanwhile, eyes a production rate of 38 737 Maxes a month by year end, and 50 by 2025 or 2026. Recall that after two fatal accidents, Boeing stopped delivering Maxes between April 2019 and December 2020.
Widebodies are increasingly scarce as well. Boeing is currently producing a mere three 787s per month, rising to five by year end. It still has a backlog of nearly 100 787s built but not yet delivered. Production quality issues, remember, prevented Boeing from delivering any 787s from May 2021 to August 2022. Airbus, for its part, targets a build rate of nine A350s per month by the end of 2025. It hopes to build four A330neos a month next year. Back on the narrowbody side, it’s been building six A220s a month since early last year, targeting 14 by the “middle of the decade.”
Boeing of course, also has 244 firm orders for its new 777X, itself now several years behind schedule. It ultimately decided not to build a new middle-market aircraft sized between its 737 Max and 787. Why not? More because of stretched resources (as well as cost concerns) rather than lack of interest — on the contrary, lots of airlines were interested. By refraining from a mid-market aircraft, Boeing stands to lose further sales to the wildly popular A321neo, including its extended range LR and XLR variants. The XLR model, however, is — you guessed it — behind schedule; 14 to 16 months behind schedule, according to ALC. Boeing’s closest product size-wise to the A320neo is its 737-10, which still isn’t FAA-certified (United is its biggest buyer). Nor, for that matter, is Boeing’s smaller 737-7 (a plane ordered only by Southwest, WestJet, and Allegiant).
Will Airbus offer a future upsized -500 version of its A220, a plane that Air France has vocally clamored for? That’s another strategic OEM decision with potential to reshape airline fleet and network strategies (an A220-500 would challenge the 737-8 but also cannibalize the A320neo). For a time, Boeing plotted to attack the smaller narrowbody market by buying control of Embraer’s commercial aircraft business. Shortly after the onset of the pandemic, it backed away from that plan.
Another big question for the aircraft market involves China. Will it ever buy Boeing planes again? Is Comac, China’s state-owned aircraft producer, a potential challenger to Boeing and Airbus? That’s a longer-term question, as is the future timing of a new generation of narrowbodies. Will supersonic jets return to the commercial skies? Will large passenger aircraft ever fly with hydrogen or some other clean form of power?
In the here and now, airlines just want more planes. The aircraft supply crunch, while arguably helping industry profitability in the short term by driving up yields, is nevertheless frustrating efforts to expand networks, lower unit costs, introduce new seating amenities, and cut carbon emissions. And to be clear, the crunch is making at least some airlines less profitable not more. Ask Hawaiian Airlines about that. Or Go First, if there’s still anyone around to answer.