There has been much industry comment about whether the market has “over-ordered”, as the global firm backlog for commercial jets now represents a 60% share of the current fleet and almost nine years of production at 2016’s rate.
The backlog on 1 April stood at 14,105 units. Of these, some 9,410 aircraft, or 67%, have been ordered by airlines, 3,002 (21%) by lessors and 1,693 (12%) by unannounced customers.
At least 35% of the total backlog is accounted for by the Asia-Pacific region, with about 4,900 aircraft, including 1,325 in the unannounced customer total: believed to be mostly for Chinese airlines. Single-aisles make up 78% – or about 3,820 of the backlog – while 1,800 aircraft from the total announced are for low-cost carriers in the region. Most of the perceived “backlog risk” centres on these two aspects.
Looking at the annual number of Asia-Pacific deliveries, the past three years have seen an average of 650 aircraft transferred. The backlog for the next five years, including estimated deliveries into China of unannounced customers, is only 670 per year – an increase of just 3%.
However, it is also necessary to factor in lessors (see box p32), who are delivering around 50% of their backlog into the region but currently have only announced 200 leases – just 19% of their backlog for the next five years. Assuming they maintain this 50% rate, this would push Asian deliveries up to 4,200 units by 2020: an annual average of 840. This would represent a 41% increase over the past five years, and result in more than 900 annual deliveries by 2019.
Although the announced backlog for Chinese airlines is just 574 aircraft, which based on 2015’s delivery total is equivalent to just one and a half years of output, in reality Flightglobal’s Ascend consultancy estimates there are about 1,283 additional orders in the Airbus and Boeing orderbooks from unannounced customers which will go into China. This is based on an analysis of letters of intent announced by Chinese airlines.
Until government approval is given, these orders often remain unconfirmed until delivery. Once adjusted, this new total backlog of more than 1,850 aircraft equates to more than five full years of deliveries at last year’s rate.
The Chinese backlog is probably the firmest of any country in the region, given very strong continued traffic growth; up 15% in 2015, with international traffic – up 33% – outpacing domestic, which climbed by 9.7%. A number of new long-haul links have already sprung up in 2016, especially from secondary cities to Australia, Europe and the USA. The Chinese government’s control over supply and its five-year plans also mean there is little prospect of cancellations or deferrals.
DOMESTIC BIAS
Meanwhile, Indian airlines account for some 717 jets in the current backlog: around 15% of the Asia-Pacific region’s total. The nation’s focus is very much on single-aisles for the domestic market, with only 19 twin-aisles on order. This is unsurprising, given that India particularly is being driven by domestic traffic growth, which has seen a 20% increase since the start of 2015.
An average of 50 new aircraft per year are on order for Indian carriers over the next decade. This is very close to the past decade’s average of 48, although over the coming five years this rate is predicted to climb to 65 units per annum.
While the past decade was marred by the Kingfisher collapse, there have been several new entrants, including AirAsia India, Air Costa and Vistara. Perhaps the only uncertainty is whether airport infrastructure will be able to keep pace with fleet development.
Much of the concern about “over-ordering” lies in Southeast Asia, where the growth of low-cost carriers has been dramatic. A total of 1,255 aircraft are on order for airlines in Indonesia, Malaysia, the Philippines, Singapore and Thailand. Vietnam is another strong growth country, with 112 aircraft in the backlog.
This part of the region has spearheaded local LCC growth, primarily led by AirAsia in Malaysia and Lion Air in Indonesia. These groups have backlogs of 384 and 458 aircraft, respectively, and have multiple subsidiaries in joint ventures in the Southeast Asia region and as far afield as India and Japan.
Lion Air is the fastest growing Southeast Asian airline group; Flightglobal’s Innovata schedules service shows seat capacity was up 25% year on year in April, with most of the growth coming via its subsidiaries Batik Air and Wings Air. Lion says it sees the incoming deliveries – of 30- to 50-units per year – as manageable, since the assets will be spread across five airlines. Airbus A320neo and Boeing 737 Max narrowbodies will also be used to fly longer sectors, requiring fewer slots. Lion has also involved itself in leasing to other carriers, through affiliate Transportation Partners.
AirAsia has seen more uneven performance in its group airlines, with the shifting of some capacity between them, some deliveries deferred and only a 0.3% rise in seat capacity over the past year.
Some legacy carriers – for example Malaysia Airlines and Thai Airways – are also seeing capacity decreases, and this sub-region seems to be slowing, with airlines reacting to the level of competition and lower profits in 2013-2014. While seat capacity was up by 9% in April 2016 versus the previous year, major airports are seeing slower growth. Singapore’s Changi only saw passenger numbers increase by 2.5% in 2015, while Kuala Lumpur’s performance was flat, and Jakarta was down by 5.5%. This may indicate a move to secondary airports, with data showing the highest growth is in Indonesia and Vietnam, and at Thailand’s old Bangkok airport, Don Muang, and Phuket.
Fuel price decreases are helping airline profitability, which naturally leads carriers to be more optimistic and plan higher capacity. However, the stimulation from lower fuel prices will fall over the course of this year as fuel hedging unwinds, so by 2017 lower traffic growth could be seen.
Over the past five years, the Asia-Pacific fleet has grown by almost 2,000 aircraft (44%), and a further 1,000 have been replaced, meaning that just 34% of the almost 3,000 deliveries have been for replacement.
LIMITED RISK
Deliveries to the region have averaged some 11% of the fleet annually, and the current Flightglobal Fleet Forecast predicts a five-year growth of 3,080 jets (48%). The current backlog and forecast lessor deliveries of 4,200 aircraft implies a retirement total of 1,120 (17%), a moderate increase over the previous five years.
Deliveries will still average 11% of the annual fleet. This suggests that the region’s deliveries going forward are not out of step with the recent trend, and that room remains for further retirements – or not leasing in extra aircraft – if a capacity surplus emerges.
On a seat capacity basis, the current backlog equates to an average 5.7% annual increase over the next five years, rising to 7% if expected leases are included (before any retirements are factored in). Traffic and capacity increases of 8.2% and 6.4% respectively in 2015 are indicative that the region has not over-ordered as a whole, assuming that traffic continues to grow at strong levels. China itself has a 9.7% capacity increase on order.
All of these factors suggest that there may be some risk to the backlog at some carriers in Southeast Asia. There may not be enough room for all the legacy, low-cost and new carriers, and infrastructure may be an issue if all airlines want to serve the main centres. However, strong growth in other countries is likely to absorb any available slots.
Longer-term, many of the countries in the Asia-Pacific region still have very low departing seats per head of population, which suggests that it has a positive outlook for both flights and fleet.
CHINESE CHALLENGE: LESSORS MUST DIVERSIFY AND BRACE FOR DOWNTURN
Operating leasing is a key part of the commercial aircraft industry, accounting for nearly 42% of today’s commercial jet fleet. But after experiencing continuous growth from the late 1970s, the sector’s fleet share has stagnated since 2008.
However, the latter period of apparent stabilisation has witnessed the rise of a new player that is making a big impact in the industry: the Chinese operating lessor.
Since 2008, the mainland Chinese operating lessor fleet has grown from a mere 30 aircraft to more than 780 today, representing 9% of the global lessor jet fleet. Including lessors in Hong Kong and Singapore-based Bank of China subsidiary BOC Aviation, the greater China share rises to 13.5%.
The mainland lessor fleet has grown at a staggering compound annual rate of 38% since 2010, although lessors are still focused on Chinese operators, with which two-thirds of their fleets are placed.
Flightglobal’s Fleets Analyzer database shows 15 mainland-based operating lessors with in-service fleets, but that number is growing as additional aircraft enter use.
INVESTMENT DRIVE
Mainland Chinese lessors can be divided into three categories. Domestic-domiciled examples include major banks, but also insurance companies – such as Ping An Leasing – and original equipment manufacturers, like AVIC.
Examples of Chinese money invested into leasing companies abroad are Hong Kong tycoon Li Ka-shing’s investment in 2014 into Accipiter, a new leasing platform currently operating out of Dublin. This was followed by Bohai’s acquisition of Dublin-based Avolon.
Chinese airlines also are creating new leasing companies, motivated by tax and financing reasons to lease aircraft to their own carriers. In time, they may also decide to set up a more global leasing platform, as airlines like Lion Air and Transportation Partners have done recently.
China is not short on capital for the leasing business, but the nation still has some way to go to achieve a world-class system, despite the progress being made through the development of free trade zones.
Lessors have so far been focused on adding aircraft to their portfolios, so their ability to achieve an acceptable residual value at the end of a lease and remarket assets is still largely untested – especially when trying to place such aircraft outside the country. They also have had virtually no experience with lessee bankruptcy, with the first real test having come late last year, after two Chinese-owned Airbus A321s were grounded when Russian carrier Transaero ceased operations.
While Ireland-based lessors have their assets spread all over the world, with the highest concentration – 35% – in the Asia-Pacific region, their Chinese counterparts have 80% of their fleet within the area, and 84% of this total within China.
Chinese lessors have become formidable global leasing players, but as lease returns become due and economic conditions change, they will have to learn to conduct business during a downturn, remarket their aircraft and achieve portfolio diversity.
Source: Flight International
