Boeing, Airbus and Airline Overcapacity in Asia & Europe

And 200 miracle orders — well, just a letter of intent — for the Boeing 737 MAX at the Paris Air Show.

By MC01, a frequent commenter on WOLF STREET:

Airlines and aircraft manufacturers usually announce large deals during the big air shows to add an air of glitz and glamour to their dealings. With the growing importance of Asian markets, air shows such as Aero India and the Dubai Airshow have gained in importance over the past decade. But the most important worldwide are still the Paris Air Show and the Farnborough Airshow, held in France and England respectively on alternating years. This year it was Paris turn, and some big deals were signed, but not quite as expected.

Airbus introduced the A321XLR, a very long-range variant of the A321neo narrowbody, which managed to obtain 243 orders and options. While on paper this sounds impressive, several prominent critics emerged among whom is Lufthansa CEO Carsten Spohr, who likened the A321XLR to the old A318, a “niche” aircraft, and predicted Airbus will be “lucky” to sell 400 of the type over the next two decades.

The only order for Airbus widebodies came from Virgin Atlantic, which agreed to buy eight A330neo outright, lease six from specialized lessor ALC, and took an option for a further six.

With a few extra orders for the ubiquitous A320neo being placed by China Airlines and Flynas, Airbus walked away from Paris with roughly the equivalent of $35 billion at book value in orders and options.

Boeing as usual saw brisk business in the air freighter segment, selling 11 brand-new 777F freighters to Air China and Qatar Airways; and 10 of the brand-new 737-800BCF, a freighter factory conversion of the hugely popular 737-800 airliner, to GECAS, the leasing arm of General Electric. Boeing sold a further 25 widebodies, in form the 787 Dreamliner, to Korean Airlines and to leasing specialist ALC.

However, the big news was a maxi letter of intent signed by International Airlines Group (IAG) for 200 737 MAX in an unspecified version. IAG is the holding company for British Airways, Iberia, Vueling, LEVEL, Aer Lingus and their ancillary companies and the sixth-largest airline group in the world.

A letter of intent is not a firm order: It’s a preliminary commitment of one party to do business with another. Boeing and IAG still have to iron out a lot of details, and the deal may even fall through if no agreement is reached.

This is an extraordinary deal, but not so much because IAG is buying a “doomed aircraft”: Ryanair among others has already declared it’s negotiatingwith Boeing for more 737 MAX, obviously to be delivered at a large discount. This is an extraordinary deal because so far IAG as a whole has been firmly committed to an all-Airbus narrowbody fleet and has many more members of the A320neo family on order: Vueling alone currently operates 106 members of the A320ceo family, 17 of the A320neo family, and is slated to receive a further 39 of the latter from existing IAG orders.

All things considered, Boeing was able to match the $35 billion of Airbus sales, at book value.

Conspicuously absent from the Paris Air Show were the now customary maxi-orders from Middle Eastern and especially Asian airlines: Korean Air, Flynas and China Airlines simply converted options they had already placed in firm orders or just added to their existing orders.

The last large order by an Asian airline was placed in May by Starlux Airlines, a startup from Taiwan, for 17 Airbus A350. This is a very peculiar order as these aircraft will be wholly fitted with “luxury” interiors as Starlux aims to compete in the cutthroat market for business and first-class flights on the Asian market. Good luck to them.

Asian airlines are busy digesting the enormous orders they placed over the past five years with Airbus and Boeing.

For example, Vietnamese startup Bamboo Airways placed orders for 50 Airbus A321neo and 30 Boeing 787-9, with a combined book value of $15.8 billion. This is astounding because Bamboo Airways presently operates a grand total of 10 aircraft: the first four A321neo from their order plus a further six aircraft on wet (or ACMI) lease. To call this an ambitious expansion plan would be the understatement of the week.

And here I’d like remind readers that even during boom times these airlines can go bankrupt, taking their huge order books down with them: when India-based Jet Airways ceased operations earlier this year, it had 215 Boeing 737 MAX and 10 787-9 on order, worth $29 billion at book value.

How much the growth of air travel in Asia over the past decade was driven by economic growth and how much by lower fares resulting from exploding passenger capacity and competition growing at breakneck speed remains an interesting question, as is what will happen once all this new capacity will make itself felt.

And to see the effects overcapacity has on an air-travel market, let’s turn to Europe, a mature market where overcapacity is now the norm.

In June the otherwise profitable Lufthansa Group warned their low-cost division Eurowings (formerly Germanwings) will remain in the red at least until 2021. This came hot on the heels of another announcement by Lufthansa, warning shareholders that their European operations will be affected by “market-wide overcapacity” and “aggressively growing low-cost competitors.”

While the latter part is basically an admission the recent aggressive expansion plan by Ryanair into the ultra-mature German market is going strong and affecting even formerly untouchable Lufthansa operations, “overcapacity” is everywhere.

Czech airline Smartwings, for example, directly operates a fleet of 43 aircraft and has a further 32 Boeing 737 MAX on order. Using this fleet, Smartwings connects an expanding list of destinations, most of them in Southern Europe but with a growing number in Northern Africa. Smartwings also operates subsidiaries in Hungary, Poland and Slovakia, but all of these are small outfits working with local tour operators to shuttle tourists around vacation hotspots. The company also owns 98% of perpetual money-loser Czech Airline, which is going through yet another crash diet in an attempt to “restore profitability.”

And earlier this year, Smartwings announced the establishment of a German subsidiary, which must have come as more bad news to Lufthansa.

Inquisitive minds may want to have a look at Smartwings financials to see how well these recent expansion plans are going. Unfortunately, the last audited financial statement available is for Fiscal Year 2017 and it gave a loss of a little over $2 million for the period.

It may (or again may not) come as a surprise that Smartwings is quietly backed by Asian investors: In 2017, Chinese conglomerate CEFC Energy Group bought a 49% stake in Smartwings, the maximum amount allowed by EU rules on airline ownership. Why and how a Chinese energy company came to be interested in the cutthroat European aviation market is yet another interesting question. By MC01, a frequent commenter on WOLF STREET

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