Fleet Investments: Unconstrained by Fuel Price Volatility
June 19, 2018 - Regardless of the volatile nature of oil prices, airlines in the Middle East and beyond, continue investing in their fleets at a healthy pace. Conventional thinking would have airlines scaling down their fleet renewal and expansion plans when oil prices experienced a steep drop over the past two years. Boeing’s Randy Tinseth, Vice President, Marketing, Boeing Commercial Airplanes, explores the relationship between unpredictable oil prices and airline fleet expansion strategies.
When oil prices hit historic lows in 2015, it may have seemed logical then that airlines would act out of an abundance of caution and freeze plans to invest in their fleets. Yet, seemingly counterintuitively, carriers in the Middle East and around the world, continued to order and take deliveries of new aircraft.
In fact, from May 2015 – when the oil price began its decline, eventually dropping well below $50 a barrel – to the end of 2017, Boeing delivered 2,023 aircraft worldwide and took firm orders for 2,523 more. During this time, we delivered roughly one airplane per week to our customers in the Middle East.
If this is any indicator, the air transport industry is, once again, demonstrating its relative resilience against economic externalities. In the Middle East, the fact that fleet renewal and expansion strategies have largely remained unaffected is further evidence that the major airlines are commercially autonomous, accountable for their capital generation and spending.
Importantly for the airline industry, the decline in oil prices was not matched by a corresponding decline in air travel. As a matter of fact, air travel maintained its projected growth trajectory. Global passenger traffic growth has been above trend since 2010, with the trend being ~5.0 percent. 2018 is expected to be another strong year, with continued above-trend growth. In addition, the global airline industry has remained profitable. Between 2015 and 2017, airlines earned over $100 billion in net profits, double the amount that was earned between 1984 and 2014.
According to IATA estimates, the global airline industry is expected to continue its profitable run into 2018, when net post-tax profits are projected to reach almost $40 billion. Aircraft utilization and load factors are at record levels.
The airlines’ financial gains translate into a sustained appetite for investing in the capital-intensive aspects of the business, such as renewing and expanding fleets. And, when their balance sheets are healthy, they qualify as ‘investment grade,’ opening up access to debt financing for fleet-expansion strategies.
Fleet renewal is driven by different factors in different regions, and this is reflected in the varying average age of aircraft across the world. For instance, Emirates Airline, Etihad Airways, and Qatar Airways all have average fleet ages ranging from five to six years, while flydubai and Saudi Arabian Airlines have an average age that is below four years. All of these are well below the average in North America, which is 13.6 years, or Europe, which is 10.7 years.
The leading Middle East players clearly recognize that young fleets are a key differentiator: not only do they enable the superior passenger experience that the airlines from the region have become synonymous with, but they also allow better operating and environmental efficiencies.
These airlines are fully aware that new airplanes offer unprecedented fuel efficiencies and that investing in them offers a technology-led hedge against future volatility. The bottom line is that oil prices have, historically, fluctuated and can be expected to continue to do so in the foreseeable future. While airlines typically minimize the impact of unstable prices with hedging strategies, new aircraft with superior fuel economics also play an important role in controlling fuel costs, which can account for a third of airline operating expenses.
It comes as no surprise then that airlines in the Middle East have placed significant orders for fuel-efficient twin-aisle airplanes such as the Boeing 777X, the 787 Dreamliner and the single-aisle 737 MAX. In fact, the Middle East accounts for about three out of every four 777X currently on order making the region the largest market for what will be the largest and most efficient twin-engine passenger, jet in the world.
It is hard to predict what aviation fuel pricing trends will look like in 2020 when the first airplane is delivered. However, what the airlines do know is that the aircraft will offer 12 percent lower fuel consumption than the competition, a tangible promise that will yield savings regardless of the oil price at the time.
In summary, airlines will continue to invest in new, more fuel efficient and more reliable aircraft for their fleets, largely unaffected by volatility in oil prices. In the Middle East alone, airlines are expected to meet projections to take delivery of 3,350 new airplanes between now and 2037. These investments are being made with an eye on the future – the performance of new and future additions to the fleet being the only constant in an industry that takes uncertainty in its stride.