Very Large Commercial Aircraft: Current and Future Fleet Analysis

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8 November 2019 - 17:15, by , in Fleet Analysis, Comments off

As Counterpoint are releasing its annual Aerospace Interiors report in the upcoming weeks, we thought we would share our latest thoughts on the Very Large Commercial Aircraft segment.

By Very Large Aircraft, we mean Airbus’ A380 and Boeing’s 747-8i, and the prospects relate to speculation over their continuing operations over a period of lease ends, production end, airline fleet restructuring, continued questions on the economics of operations of four-engined aircraft, and upcoming heavy maintenance. Below we will consider some other factors too.

Airbus A380

Out of the two, we believe that the prospects for extended A380 operations are greater, driven by aircraft demographics such as the fleet size and operator spread. Of the 15 operators, five have made historic or reported future decisions that will mean a move away from the A380 aircraft.

  • Emirates has initiated a retirement plan that will see its A380 fleet decrease to around 90-100 aircraft by the mid-2020s (this will mean the retirement or disposal of at least 24 aircraft in five years). One of the key strategies for retiring some aircraft is to use those them as a spares source to reduce operational costs. Emirates CEO Tim Clark gave an example of buying a spare main landing gear for $25m from Airbus or using refurbished main landing gears from a retired aircraft that would cost a fraction of a new spare gear to service its fleet. As of early September 2019, Emirates had deactivated two A380 aircraft and we expect this trend of continue up to and beyond 2025, initially in smaller numbers. It should be noted that Emirates has a mix of operating and financial leases (to own) in place on its A380 fleet. Early aircraft on operating lease, are thought to have been extended as owned aircraft will be used as feedstock.
  • Singapore Airlines has both retired first off the line aircraft, and taken new aircraft in-line with its aircraft fleet age policies. One of the retired aircraft transitioned to HiFly, who plan on taking more A380s in future in-line with its fleet size target of 100 aircraft in ten years. The earliest of these examples are likely to be fomer Singapore Airlines examples to match current interior fit. HiFly has been quoted as being in the market for more than just two to three A380s. Over time, remaining Singapore A380s will be replaced with A350s.
  • Perhaps the most definite fleet exit is that of Air France which will be withdrawing its A380 fleet by 2022 citing operational costs and upcoming maintenance and interior financial burdens. The first aircraft is due to exit the fleet in late-2019 or early 2020 with four more exits in 2020, two in 2021, and three in 2022. At least five of its A380 aircraft are owned.
  • QATAR is likely to exit its A380 fleet from 2024 after 10 years of service citing 777X as a replacement. Whilst Al Baker’s comments can sometimes be taken with a pinch of salt, this seems like a clear strategy for the airline and it is in-line with a young operational fleet.
  • Lufthansa has agreed to sell six aircraft in its A380 fleet back to Airbus. Perhaps most important is that this will not occur until 2022 or 2023 around which time its replacement 787s will begin to trickle into the fleet as well as further A350s that will deliver out to 2027. There have been no further announcements regarding the remaining eight A380s, but for the time being, they look set to remain in the Lufthansa fleet beyond 2023.

Whilst other A380 operators have no such retirement or exit plans to speak of, some have indicated that they will likely remain committed to A380 operations for the foreseeable future.

  • QANTAS announced in October 2019 that it would be upgrading its business class seats as well as introducing redesigned upper deck lounges comprising business and premium economy seats. The first refurbished aircraft is already in service, and all its A380 aircraft are set to be refurbished by the end of 2020. QANTAS has stated that it intends to operate A380s out to at least 2030 with this new interior fit, at which point, the oldest A380 in its fleet will be 22 years old and the youngest, 19 years old. QANTAS is the fifth largest operator of A380s with 12 of the type.
  • British Airways has often speculated that it could take additional A380 aircraft particularly given on-going 747-400 fleet retirement that are currently staggered out to 2024. We believe that in the present market, opportunities are restricted because of the cost of acquisition and thereafter to transition. In future, we do see British Airways as one of few potential suitors for secondary market A380s but prices in the secondary market will have to come down. British Airways also has a long history of long operational service for its aircraft.
  • Thai Airways has announced that it is delaying the retirement of its 747-400 aircraft, a recurring theme of 747-400 operators during the past 5 years. This would suggest that it has no plans to retire any A380s as it represents newer Very Large Aircraft equipment in its fleet. Thai Airways operates six A380s.

The remaining operators have been muter on their plans, but this is to be expected given that the age of the aircraft have yet to pass 10 years of age.

  • Malaysia Airlines has had the most active speculation, from stopping A380 services, using them on special services, to wet lease services such as Thomas Cook rescue operations in late-September. The A380 has never been a good fit for loss-making Malaysia Airlines and we would expect an announcement to exit from its A380 fleet before too long, coinciding with an end to lease payment commitments.
  • Korean Airlines could be compared to both Lufthansa as both are 747-8i and A380 operators, as well as Thai Airways, which both see Very Large Aircraft as crucial within operations. It is thought that Korean has no plans to exit its A380 fleet. Further, Korean has been quoted as planning upheaval of its first-class seating throughout its fleet, including A380s. This upheaval would mean the removal of first-class seating.
  • Of the remaining carriers including Etihad (10), Asiana (6), China Southern (5), and ANA (2), there have been no announcements. China Southern is the only operator which uses the A380 domestically.

The chart below shows our predictions of A380 fleet exits and the on-going fleet size out to 2030.

Boeing 747-8i

Boeing 747-8i fleet prospects did look rather poor, especially considering that lead operator Lufthansa had loose plans to exit its entire 747-8i fleet at the same times they were entering the fleet. However, this could have changed in 2019 as we will see. Even so, there are only three passenger operators, with a total fleet size of 36 and no outstanding backlog.

  • Lufthansa operates 19 747-8i passenger aircraft and it has long been rumoured that it would exit the fleet after 10 or so years of operation. This early belief has somewhat gone away and there are perhaps reasons to suggest that the aircraft will remain with Lufthansa for longer. Reasons include new livery and cabin concepts that are being prepared for the 777-9 introduction. We must also remember that Lufthansa still has 13 747-400s, that are due to exit its fleet by 2025. These aircraft will be directly replaced by 777-9 before any 747-8i aircraft replacements. Further hope comes about because we must remind readers of the small number of aircraft programmes that enter service at the intended target date, and when they do, have a smooth service entry incurring few service delays; the Airbus A350 is an example in recent times, and aside from some GEnx-2B icing issues, the 747-8i that could be considered here too.
  • Air China has a long history of 747 family operations, and it retains three 747-400 aircraft. Whilst it has orders for A350-900s, we do not see those replacing 747-8i aircraft. It operates seven 747-8i aircraft.
  • Korean Airlines like Lufthansa operates both 747-8i and A380 aircraft. There are no fleet plans for 747-8i either and its fleet is the youngest of the three airlines with most deliveries occurring between 2015-2017. It operates 10 of the type.

Conclusions

  • Considering interior retrofits, if Emirates do have 90-100 aircraft in 2025, there is likely to be some retrofit activity in-line with its overall on-board passenger experience which has historically been highly thought of by customers. In future, we could also expect British Airways, Lufthansa (for its remaining A380s) and Thai Airways to conduct some level of retrofit.
  • Aside from those airlines who we believe or know will discontinue A380 operations, Etihad, Asiana, and China Southern are airlines who could exit the fleet much earlier than expected. Etihad has a history of exiting aircraft much before economic life age, and aircraft with four engines. China Southern uses the A380 partly as a domestic niche which has not always been profitable. Lastly, Asiana has been struggling financially and will likely have to scale back some of its operations.
  • Delays and potential further delays to 777X entry into service could delay A380 fleet exits and prompt some shorter-term A380 lease or operational extensions.
  • Aircraft on Financial Lease terms will eventually become cheaper to operate as the result for airlines is eventual ownership, thus eventually foregoing on-going lease payments although such payments will be replaced by potential cabin retrofit costs and heavy maintenance costs for airframe, landing gears, and engines.
  • There has been a lull in widebody orders, and presently, we believe there would have to be more order activity in this segment to displace all 747-8i and A380 aircraft. Conversely, if orders were made, we believe that there is ample production capacity at the OEMs in coming years and especially during the mid-2020s.
  • Secondary market transactions are expected to be limited for both types with potential suitors being HiFly and British Airways for a smaller number of aircraft. British Airways would likely only capture any Rolls-Royce powered A380s so any early Emirates aircraft would not be an option. HiFly might be less selective. We see very little potential for the 747-8i in the secondary market.

There will undoubtedly be more early retirements of A380 aircraft, but a significant fleet size will remain as we get to the middle of the next decade and likely beyond. We predict between 50 – 60 retirements or fleet exits of A380 aircraft up to and including 2025. Whilst 747-8i operations are very narrow amongst operators, aircraft will likely remain without serious fleet plans until the mid-2020s, and it is entirely possible that there will be a level of interior retrofit, albeit across 37 aircraft. Do not be surprised if Lufthansa announces exit plans for both 747-8i aircraft and remaining A380s though, although this should not be imminent, both in terms of announcement, retirement dates, and considering that it has just converted 14 of its 34 777-9 orders to options.

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