Is the airline crisis of 2008 worse than the economic aftermath of September 11, 2001? Yes, absolutely.
9/11 was a crisis of confidence in the safety of air travel. Airlines simply couldn't fill their planes. The 2008 crisis is far more serious. The psychological injury of 9/11 has since healed and empty planes and cheap gas has given way to very full planes and the most expensive gas in US history.
The crisis cuts even deeper now because access to new sources of revenue aren't available when planes are already full. Instead we see higher ticket prices or new fees on first bags, second bags, legroom, food, curb-side check-in and soon seatbelt usage (snark). Eventually, the price of flying will become so prohibitively high that the bottom of the market may just fall out completely. The upper level of tolerance for ticket prices is not clear yet, but it will run out eventually, and when it does leisure travel is going to take a major hit, only further slowing the economy.
Just as 9/11 saw the retirement of 737-200s, 727s, 747-200s, DC-9s, 10s and L1011s, the crisis we find ourselves in today has 737 classics, the remaining DC-9s and soon MD-80s on the chopping block. Also, once the new generation of mid-size wide-body aircraft enter service at the end of next year, the older 767s will be retired.
So, as the fuel crisis for airlines only gets worse, the three options (the good, the bad and the ugly) merging, cutting capacity or declaring bankruptcy is the only way forward.
Struggling airlines invariably mean struggling manufacturers. Or does it?
The big four (Boeing, Airbus, Bombardier and Embraer) - B.A.B.E. - consider it coined - all have huge backlogs to fall back on if orders dry up. However this crisis should give them all pause to ask themselves if their product lines are prepared for the painful market dynamics ahead. All would likely answer yes, but here's a few thoughts for the road ahead.
The first half of the B.A.B.E. - Boeing and Airbus - have their hands
full with 787, 747-8, A350 and A380. Interestingly, the wide-body
delays may just mean a booming winglet business for aging 767s.
On the smaller end of the market, ILFC's Steven Udvar-Hazy said neither manufacturer is in a position to launch a new program:
Taking fleet retirement one step farther, the 737 Classic retirement
announce this week should also raise additional red flags for Boeing
and Airbus. Namely the aging fleet of the 757s. After the 737, 757s are
the backbone of the US fleet. Neither manufacturer has an offering that
fills the gap on range. The A321 and 737-900ER barely have the capacity
or the range to be a full replacements. Do airlines really need that
many seats for routes that are being flown by 757 sized aircraft? I was
on an overbooked United 757 between DCA and ORD earlier this week.
Winglets have extended the life of the 757, but retirement isn't that
far off. Airbus sees this as a niche market and Boeing is happy with
its 737-900ER, but American, United, Delta/Northwest, Continental* and
US Airways might see if differently for lower capacity
Trans-continental or trans-Atlantic operations.
Across the Atlantic, Air France called out Airbus earlier this week on fuel prices and the development of the XXXL A380-900:
If you're Bombardier there should be two very conflicting thoughts
running through your head. First, you're looking at the retirement of
94 737s at United and 67 737s at Continental, you might just see an
opening for CSeries to replace those aircraft. However, all signs point
to a very expansion averse marketplace right now. Airlines aren't
looking to expand, quite the opposite actually, and even if they were,
there simply isn't money available to make big fleet replacement
purchases right now.
Embraer has been very comfortable telling the world that they feel
their product strategy is rock solid by fortifying their strategic plan
with a complete business jet line rather than following Bombardier with
an entry in the narrow-body fight. Yet, the as fleets consolidate and
aircraft are scaled up, the E-Jets might find themselves in a
precarious spot. Though, Pratt & Whitney's Geared Turbofan engine,
which, according to P&W, would fit on the E-Jet, could deliver
10-15% improved fuel efficiency right out of the box for a next
generation E-Jet.
The days ahead are going to be unpleasant, but this industry is inherently circular and the painful days will give way to a transformed and likely stronger industry. If oil prices don't fall, new business models for airlines and radical innovation from manufacturers will be the beacon by which the industry is guided. Only time will tell.
*Continental operates the 737-900ER, but its 757 missions for the airline are lower capacity (and very profitable) transatlantic routes outside of the 737-900ERs range.
On the smaller end of the market, ILFC's Steven Udvar-Hazy said neither manufacturer is in a position to launch a new program:
"Neither is in a position to launch a single-aisle program,'' contrary to the expectations of many aerospace experts, Udvar-Hazy said in an interview at an industry conference in Istanbul. "A year ago, I would have said 2016, but the complexity of the A380, the A350 and the 787 are just starting to be awoken to by the two manufacturers.''
Taking fleet retirement one step farther, the 737 Classic retirement
announce this week should also raise additional red flags for Boeing
and Airbus. Namely the aging fleet of the 757s. After the 737, 757s are
the backbone of the US fleet. Neither manufacturer has an offering that
fills the gap on range. The A321 and 737-900ER barely have the capacity
or the range to be a full replacements. Do airlines really need that
many seats for routes that are being flown by 757 sized aircraft? I was
on an overbooked United 757 between DCA and ORD earlier this week.
Winglets have extended the life of the 757, but retirement isn't that
far off. Airbus sees this as a niche market and Boeing is happy with
its 737-900ER, but American, United, Delta/Northwest, Continental* and
US Airways might see if differently for lower capacity
Trans-continental or trans-Atlantic operations.Across the Atlantic, Air France called out Airbus earlier this week on fuel prices and the development of the XXXL A380-900:
"If this expanded version was launched, Air France-KLM could order a significant amount," Jean-Cyril Spinetta, chief executive of Air France KLM, told La Tribune in an interview to be published on Tuesday and made available on Monday.
"We are trying to persuade Airbus to launch the A380-900 to make use of it as quickly as possible," Spinetta added.
"The very high level of fuel prices gives a very important place to the A380, notably to a long version."
If you're Bombardier there should be two very conflicting thoughts
running through your head. First, you're looking at the retirement of
94 737s at United and 67 737s at Continental, you might just see an
opening for CSeries to replace those aircraft. However, all signs point
to a very expansion averse marketplace right now. Airlines aren't
looking to expand, quite the opposite actually, and even if they were,
there simply isn't money available to make big fleet replacement
purchases right now.
Embraer has been very comfortable telling the world that they feel
their product strategy is rock solid by fortifying their strategic plan
with a complete business jet line rather than following Bombardier with
an entry in the narrow-body fight. Yet, the as fleets consolidate and
aircraft are scaled up, the E-Jets might find themselves in a
precarious spot. Though, Pratt & Whitney's Geared Turbofan engine,
which, according to P&W, would fit on the E-Jet, could deliver
10-15% improved fuel efficiency right out of the box for a next
generation E-Jet.The days ahead are going to be unpleasant, but this industry is inherently circular and the painful days will give way to a transformed and likely stronger industry. If oil prices don't fall, new business models for airlines and radical innovation from manufacturers will be the beacon by which the industry is guided. Only time will tell.
*Continental operates the 737-900ER, but its 757 missions for the airline are lower capacity (and very profitable) transatlantic routes outside of the 737-900ERs range.
Jon, I'm not sure I understand your points with regards to the E-Jets. It certainly seems the latest largest variants of them are well placed to start challenging for the narrow-body market pretty much immediately (remembering clearly my flight on an E190 last year, and how it was superior in every way to any other recent flight I'd taken taken on another narrow body). Yet the picture you paint here is most certainly pessimistic. I would love to see a bit more reasoning on why, if you're willing.
I'm also curious to hear more on the P&W GTF ... are you saying Embraer so far as looked down on the idea? If not, then ... ?
Looking forward to hearing more, and keep up the good work!
The Fan
The Fan,
Thanks for your comment. My intention was not to be pessimistic here, but rather take a critical look at what manufacturers have to do in terms of evaluating their respective product lines. For Embraer, my point was the smaller E-Jets may be at risk as consolidation accelerates, but more broadly, even with great fuel burn on the CF34, the increase in fuel might overwhelm an operators ability to operate profitably.
(On the flip side, if E170/175 sales slow, the E190/195 is built on the same line and a healthy backlog is healthy no matter what variant is ordered)
I was merely suggesting that the GTF might be a good platform for delivering 10-15% improvement in fuel consumption right out of the box. This would ultimately negate the need for an all-new 70-100 seater.
When I was visiting Embraer in March, I asked a senior engineer if the GTF was in the cards for the E-Jets. At the time he said that it wasn't in the cards at the moment, it certainly was something worth looking at down the road. With oil rapidly heading for $150..$175...it might be a good chance to evaluate specifically what it would take for Embraer to get a new engine on the E-Jets.
Jon
I am fascinated by the speed with which Airbus have initiated a GTF programme on the A340.
It has happened so quickly, one wonders if the original engine pylons(designed for a GTF) were adapted for the CFM56 enabling a relatively simple swap to occur.
If it works, perhaps we could see a very healthy retro market for early model A340's
I believe the A340 GTF program is a flying test bed - I had not imagined making the A340 viable so much as a refit package for the A320 family would be. Both Boeing and Airbus will rue the day they told the customer they did not need, and would not have, a more efficient single aisle before 2020.
The backlogs of 737 and A320 family aircraft can rapidly evaporate with the explosion in fuel prices.
A GTF re-engining package could be an effective stop gap.