Waiting for take-off

Rows of parked aircraft in the desert are the traditional symbol of downturn in the airline industry and this cycle has seen more than ever before. But as markets recover, not all may make it back into the air

Signs of a nascent traffic recovery may finally be bringing some optimism back to the airline sector, but if anyone needed a reminder of the pain that the industry has been through then they only need take a look at the desert fleet. While traffic may be returning, the number of stored aircraft remains stubbornly high.

The Airclaims consultancy estimates that the number of idle aircraft soared above 2,000 as the crisis unfolded in 2002 and has stayed around that mark ever since. Such headline figures come with the usual warnings about the detail of what is being stored and why, but the figure is imposing nevertheless.

Even taking a more aggressive line on retiring the oldest among the desert fleet, BACK Aviation reckons that at the peak there were just under 1,500 airliners genuinely stored and waiting to return to the market. The consultancy detects a slight fall over the last year, now coming down to around 1,250, of which the bulk are mainline aircraft.

The high levels of stored aircraft can partly be explained by relatively robust production figures for new aircraft through the downturn. Airbus delivered just short of 300 airliners in 2003, edging above its US rival for the first time, as Boeing produced 274 excluding a handful of corporate jet types. The European manufacturer expects a repeat performance in 2004, with Boeing expecting to come in at around the 275-290 mark.

Some within the industry, and certainly at Boeing, have suggested that Airbus has been pretty liberal with its production rates during the downturn. Over the past couple of years Toulouse has maintained deliveries at around the 300 rate, not far off the 325 peak in 2001. By comparison, Boeing's output has virtually halved from above 500.

Narrowbodies are a case in point. Airbus turned out close to 230 of its A320 family last year - at the same time close to 100 of the type were sitting idle, according to Airclaims figures. It is true that the storage figures reflect the fact that nearly all the recent large-scale airline failures have been A320-family operators and Airbus strongly refutes any charges that it has been irresponsible.

Capacity questions

Engine manufacturer Rolls-Royce (R-R) points out that well over 1,000 new jet aircraft have entered the world fleet since 2000, despite the fact that traffic has yet to recover to those peak levels. "At first glance, it would appear that there must be an extremely severe problem of overcapacity," the company says. However, it points out that the crisis has not been universal.

While the North American majors were grounding aircraft, elsewhere fleets have actually grown. There has also been the rise of the low-cost sector, which has mushroomed by 65% from 2000 levels according to R-R. It estimates that the number of jet airline operators has increased by 10% since 2000, largely thanks to the rash of low-cost start-ups, particularly in Europe.

This is becoming something of a bugbear for mainline carriers, which have watched their low-cost competitors negotiate extremely competitive deals from the big manufacturers. "The high availability of employees and aircraft in the market means that the threshold for new players to become established is low," comments SAS chief executive Jørgen Lindegaard, presenting his own group's latest downbeat annual results.

Age of no return

While the fleet of stored aircraft still casts a worrying shadow over the industry, it is clear that a significant proportion of the idle aircraft are never going to come back into service. Many ageing types such as the Boeing 707, 727 or 737-200, simply do not meet Chapter 3 noise requirements.

The Boeing/McDonnell Douglas MD-80/90, which just squeeze into Chapter 3, are also struggling to come back, as potential operators fret about the threat of tighter noise standards in Europe. "These older types are slowly being whittled down," says Eddy Pieniazek at Airclaims. Scott Daniels at BACK notes that with the oil price at over $35 a barrel, the relatively poor fuel efficiency of older types such as 727s will count against them. R-R estimates that over the past three years, the average age of the stored fleet increased, with 65% now 20 years old or more.

If these aircraft do go back into service, more often than not it is into the developing world. For instance, Pieniazek notes that of the four 727s returned to service in February this year, three were freighter conversions for various African destinations. It is a similar story with the McDonnell Douglas DC-9, with three going to African airlines, one to Latin America, one to Central Asia and two being scrapped.

Even so, some non-production aircraft are still finding new homes. The US Airways fleet of Fokker 100s was taken up by German leisure/low-cost carrier Germania last year, while Spirit Airways in the USA has been in the market for the MD-80s and some investors are taking a punt on the Boeing 757.

Since Boeing announced the closure of the 757 production line late last year, some European charter carriers, one of the main customers for the type, have looked to switch to the 737 as they angle to raise frequency rather than seating capacity. However, Bermuda-based hedge fund Q Investments recently purchased nine ex-US Airways 757s, demonstrating that there are still those prepared to take a gamble on aircraft that are seen as out of favour.

BACK has recently worked with a charter airline that opted for the 757 due to the fact that it could be used for transatlantic services in summer and switched to north-south routes for the winter season. "Charter airlines like the range, seat costs and low price," says Michael Allen, chief operating officer at BACK. "It gives them flexibility." Finding a use for surplus aircraft outside the summer peak season is a major headache for charter operators.

Despite such niches, the general rule of thumb remains in place that: aircraft with 1970s technology will never come back into service; a small number of those with 1980s technology will wind their way back into the sky; and those of a 1990s vintage will come back as business picks up.

Figures from Airclaims suggest that there are currently a few short of 200 relatively recent A320 family and 737 Classics standing idle, the majority of which are likely to return to service. There are also just under 200 modern widebodies grounded, alongside nearly 150 747 Classics.

Yet current production aircraft have only been trickling back into service up until now and some believe that this can partly be explained by cost-conscious operators doing more with less as they make their assets work harder. "Utilisation levels are up," comments Allen, adding, however, that he sees a possibility of a pick-up in the out-of-storage rate once the summer season starts in April/May. "Slowly but surely some capacity has been coming back on to the market through the winter season."

Another reason for the slow emergence of stored aircraft is that the low-cost sector, which has been growing aggressively throughout the downturn, has been taking advantage of generous terms from the manufacturers to opt for new aircraft. This is in contrast to previous downturns, where start-ups have usually swallowed up the surplus stock that is in storage.

EasyJet, Ryanair and jetBlue all have major orders outstanding. EasyJet now holds a third of all orders for the A319 and Ryanair is close with the 737-700, despite its plans to slow delivery. As a result, there has been less secondhand take-up of traditional low-cost start-up aircraft, typically 737 Classics, although its relative affordability has seen the type chosen by start-ups AirAsia, SkyEurope and Hapag-Lloyd Express. Only a handful of 737NGs are in storage.

In the widebody market there have also been marked winners and losers. The Boeing 747-400 has continued to struggle, with the number of idle units edging up from 24 to 30 over the last year, according to Airclaims. At the same time, values have been slipping further in contrast to the recovery on newer narrowbody types and some stabilisation elsewhere.

Pieniazek notes that the Airbus A330/A340 has been "a major success story". Allen also notes that after 11 September and SARS, "people want smaller aircraft on longer routes". BACK has just one A330 in storage as the remaining A330-200s from the Swissair collapse work their way out of the system. The number of surplus A340s is also down to single figures.

777 holds up

The Boeing 777 has held up even better, although its ageing stable mate, the 767, has fared less well. It accounts for around 40%of the current widebodies now in storage. Aircraft appraisers point out that some of these aircraft are starting to look pretty old. American, Delta and United Airlines had around 30 767s on the ground as of March this year.

Overall, there are positive signs that the amount of slack in the system for certain types is starting to disappear, especially with carriers announcing some pretty liberal long-haul capacity additions for the coming summer season. Again the A330/A340 is expected to be among the winners. Much will depend on the fortunes of the struggling US majors, particularly United as it makes its way out of bankruptcy protection. It has a number of relatively new aircraft, including a 777, in storage as it negotiates with its creditors.

Presuming the general economic recovery continues, it may not be too long before other types see spare capacity begin to dry up. With hedge funds investing in 757s, there are clearly some people betting on this scenario.

Narrowbody – typical average market prices
Type	Build year	Market value $ million			Annual change
		Mar-02	Mar-03	Mar-04	Mar-03	Mar-04
A320-200	1989	18.1	16.5	15.2	-9.10%	-7.60%
	1999	29.6	26.9	25.6	-9.30%	-4.70%
B737-300	1989	10.1	8.2	6.9	-18.80%	-15.90%
	1999	17.6	15.3	13.7	-13.10%	-10.50%
MD-83	1989	7.4	6.1	ˆˆ5.4	-17.70%	-10.70%
	1999	13.9	11.5	10.5	-17.00%	-8.70%
Widebody – typical average market prices
Type	Build year	Market value $ million			Annual change
		Mar-02	Mar-03	Mar-04	Mar-03	Mar-04
A330-300	1994	56.5	54.2	51.1	-4.10%	-5.70%
	1999	67	63.9	60.8	-4.60%	-4.90%
B747-400	1989	49.4	43.4	34.8	-12.10%	-19.80%
	1999	79.9	71.2	59.3	-11.00%	-16.70%
Note: Airclaims data. Models are selected to provide a broad market overview, covering both old and new types

REPORT BY COLIN BAKER IN LONDON

Source: Airline Business