Jens Flottau, Guy Norris As the industry manages through diverging near-term trends and challenges, these lessors and other players are positioning for growth.
Jens Flottau, Guy Norris
Past Dubai Airshows were mostly about the big Gulf carriers placing massive orders with Boeing and Airbus, launching programs like the 777X or rescuing the A380 with another follow-up commitment. No one involved left a doubt that their business was growing fast.
This year’s show—the industry’s first global air show since Singapore 21 months ago—underscored how dramatically things have changed. Emirates bought just two 777Fs to replace aircraft going off lease. Qatar Airways and Etihad Airways ordered none. Instead, the region’s airlines continued to negotiate the delivery schedule for aircraft ordered years ago. The stars of this year’s Dubai show were low-cost carriers (LCC), which accounted for virtually all of the large airline orders. And surely a significant part of the big Air Lease Corp. (ALC) commitment for A321neos will end up with LCCs, too.
The low-cost sector has been growing for decades, but the actions of key players during the COVID-19 crisis further expanded the LCCs’ market share while solidifying the sector’s credibility, according to DAE Capital CEO Firoz Tarapore. “In the past, the credit markets assumed that government ownership meant something,” he says. “The assumptions were turned on their head. LCCs went out of their way to meet their commitments [during the pandemic].”
The rationale is clear: If you behave now, you ensure future growth. Not every-one succeeded, but Indigo—the Indian LCC, not to be confused with the Indigo Partners investment firm—was a case in point, as it continued to take delivery of A320neos throughout the pandemic.
At the same time, the debates about overcapacity and strategic positioning at airlines and lessors are continuing as Airbus reinforced its commitment to raising monthly A320neo production rates to 65 by the middle of 2023, from 40 now. In the short term, Chief Commercial Officer Christian Scherer would like to push rates even higher more quickly, if possible. But a number of airlines still in crisis mode are complaining that Airbus is delivering aircraft that they did not want in an effort to gain an even higher share of the narrowbody market while it can. “Airbus simply referred customers to their contract,” Tarapore says. “Boeing was more flexible.” Some customers have even talked about a new “arrogance” that Airbus allegedly is showing in the relationships.
Scherer acknowledged that he has been aware of the complaints for some weeks, but he categorically rejects the notion. “The claim that we are arrogant bothers me,” he tells Aviation Week. “There is no arrogance in the Airbus culture at all.” While he acknowledges there were some “difficult discussions” with customers in 2020, “we don’t have to force deliveries right now,” he says. “If anything, we are hearing frustration about not being able to deliver enough in the short and medium term.” He adds: “We are not on a market share rampage. We don’t think that way.”
With Airbus now already in a comfortable leadership position in the single-aisle market, driving Boeing’s orders too low might force its main competitor to launch a new aircraft—something Airbus does not want.
Attention at the show also shifted markedly to the longer-term outlook. Most orders announced by the various carriers in Dubai were for deliveries starting in 2025—few positions for narrowbodies are available before then at either Airbus or Boeing. Those with ambitious growth plans, such as the Indigo Partners airlines Wizz Air, Volaris, JetSMART and Frontier or lessor ALC, are laying the groundwork for the second half of the decade.
Indigo Partners announced another massive Airbus narrowbody order, this time for 255 A321neos. The commitment more than tripled the number of Airbus’ firm net orders for 2021. Until the end of October, the OEM had collected just 125 net orders (after cancellations for 167 aircraft). Including the Indigo Partners deal, Airbus now stands at 380 aircraft orders for the year.
The new deal comes on top of a firm commitment from Indigo Partners at the 2017 Dubai show for 430 A320neo-family aircraft. “We have a distinct view of the market,” Managing Partner Bill Franke says. “We want to be early in the process,” therefore securing production slots further out before they become unavailable.
The Indigo Partners order is for the four airlines in which the fund holds stakes: Wizz Air (Hungary), Frontier Airlines (U.S.), Volaris (Mexico) and JetSMART (Chile). Wizz Air is taking the largest share of the additional aircraft, with 102 units, while Frontier will take 91, Volaris 39 and JetSMART 23. The deal includes 29 A321XLRs, 27 of which will be operated by Wizz Air and two by Jet-SMART. Volaris and Jet-SMART will convert previous orders for 38 A320neos to A321neos.
Lessor powerhouse ALC signed a letter of intent for a total of 109 aircraft, including the first commitment for the freighter version of the Airbus A350. The deal comprises 23 A220-300s, 55 A321neos, 20 A321-XLRs, four A330-900s and seven A350Fs. The agreement “is another sign that the end of the COVID-19 crisis wants to install itself upon us,” Scherer says.
ALC Executice Chairman Steven Udvar-Hazy says the new A220 order was based mainly on strong demand in Europe. Again, deliveries are largely for the second half of the decade.
There are some caveats with regard to the leasing market: DAE’s Tarapore finds that committing as far out as ALC has done can be “dangerous” because lessors have to assume lease rates are then in line with the current assumptions that have been reflected in their own purchase price of the aircraft.
Scherer says Airbus will take “a more sober approach” to the leasing market going forward. Airbus has been too exposed to lessors in the past, he argues. But as the airframer is now taking a more conservative approach, he notes that “the first movers have an advantage.”
For carriers that want additional lift now, turning to lessors is currently the only option, given the scarcity of open production slots. Lessors are taking a larger share of Airbus production while there is still substantially less traffic than in 2019, suppressing lease rates. As the OEM works to manage the lessor portfolio, ALC has clearly been selected as a partner for the long-term future. “[Having] fewer lessors is a good thing for everybody,” Tarapore says, although Airbus is now facing “ruthless decisions” about with whom it will do business in the segment.
While ALC and Indigo Partners transactions dominated headlines, others also underpinned the trends. Jazeera Airways, a Kuwait-based low-cost carrier, signed for 28 A320-neo-family aircraft. And Indian startup Akasa Air ordered 72 Boeing 737 MAXs, marking a significant win for Boeing against the current Airbus dominance.
The deal includes the 737-8 and the higher-capacity 737-8-200 and “speaks to the capacity these aircraft provide to the low-cost market in India,” says Darren Hulst, vice president of commercial marketing at Boeing.
The airline plans to begin operations in 2022 and will face tough competition from incumbent carriers such as Indigo. Akasa, part of the SNV Aviation group and backed by billionaire investor Rakesh Jhunjhunwala, negotiated the order, as it recently received clearance from the civil aviation ministry to launch the country’s latest ultra-low-cost carrier.
The orders are new additions to Boeing’s backlog rather than remarketed white tails. Boeing hopes the agreement will mark the start of more orders for the South Asia market, which it forecasts will require more than 2,200 new aircraft over the next 20 years.
Frontier is taking 91 A321neos as part of a large Indigo Partners/ Airbus order. Credit: joepriesaviation.net
Airbus sales chief Christian Scherer (left) and Indigo Partners’ Bill Franke exchanged contracts covering 255 aircraft. Credit: Jens Flottau/AW&ST
