The past aviation super cycle was driven by growing demand from Asia’s emerging middle class (China) as well as the expansion of no-frills carriers. With much of the world now subject to air travel restrictions more than two-thirds of the world’s passenger aircraft are parked. The reality is that most of these aircraft will be parked for the remainder of 2020.
Boeing expects air traffic may not return to 2019 levels for two or three years (David Calhoun at a recent investor presentation announced, “we will be a smaller company for a while.”) Airbus, the European plane maker, is cutting jetliner production initially by a third, and embarking on a plan to ‘right-size’ its business. In a ‘Best Case’ scenario traffic will return to ‘normal’ mid-2021. While both are optimistic air traffic will eventually revert to its long-term growth path, the reality is they just do not know when.
‘Lockdowns’ are causing businesses to lay off workers where face-to-face interaction is unavoidable. Over the past six weeks, the Labor Department’s initial jobless claims have totaled over 30 Million (unemployment is forecast at 20%, the highest since it reached 25% during the Great Depression). With the U.S. economy shrinking at a seasonally adjusted annual rate of 4.8% in the First Quarter and a further decline expected in the Second Quarter, we are entering a recession.
Conservative ‘Worst Case’ estimates expect a ‘U’ shaped recovery – two to three years for air traffic to return to trend line growth; Domestic narrow body smaller aircraft traffic first, International traffic later. Airline executives are now leaning toward smaller aircraft that can be more easily filled in a time of depressed demand. Delta is keeping all 31 of its fleet of A220s flying, despite grounding more than half of its fleet (it has firm orders for an additional 64). Boeing terminated discussions with Embraer SA (which produces a rival to the A220) and will now rely on returning its 737MAX to service. Will cabins be configured to allow social distancing while we wait for herd immunity, require everyone to wear a face mask, take temperatures at the gate, or a vaccine appears? Ultimately, how quickly global traffic recovers will depend on how well the current outbreak is contained and how the global community chooses to work together to limit future outbreaks.
The trend toward younger fleets started after 9/11. Markets were surprised when many U.S. carriers decided not to bring back the 737 Classic. Similarly, the COVID crisis is creating a dynamic that is forcing Carriers to ‘right-size’ existing fleets, retaining newer models, taking delivery of aircraft in the current production inventory (e.g. Boeing’s 737MAX — with financing supplied by the added liquidity the Fed is providing), and retiring older units. Air travel is not going away. Look closely, the pandemic is likely to create asset investment opportunities. But, be prepared for a ‘choppy sluggish’ recovery even after the virus is contained. To navigate to tomorrow’s fleet environment, call RESIDCO.
 With oil’s collapse, economics (and load factors) will ultimately decide whether existing equipment remains attractive.
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