Airline fleet investments unconstrained by fuel price volatility

Conventional thinking would have airlines scaling down their fleet renewal and expansion plans in the face of the steepest drop in oil prices in recent times. The same thinking would question the need for new, fuel-efficient aircraft when fuel prices are declining. Yet, airlines in the Middle East and beyond, continue investing in their fleets at a healthy pace. When oil prices hit historic lows in 2015, it may have seemed logical that airlines would act out of an abundance of caution and freeze plans to invest in their fleets. Yet, seemingly counterintuitively, carriers in the Middle East and around the world, continued to order and take deliveries of new aircraft. In fact, from May 2015 – when the oil price began its decline, eventually dropping well below $50 a barrel – to the end of 2017, Boeing delivered 2,023 aircraft worldwide and took firm orders for 2,523 more. During this time, we delivered 26 airplanes to Qatar Airways alone and took orders for 58 more. If this is any indicator, the air transport industry is, once again, demonstrating its relative resilience against economic externalities. In the Middle East, the fact that fleet renewal and expansion strategies have largely remained unaffected is further evidence that the major airlines are commercially autonomous, accountable for their capital generation and spending.  Importantly for the airline industry, the decline in oil prices was not matched by a corresponding decline in air travel. As a matter of fact, air travel maintained its projected growth trajectory. Global passenger traffic growth has been above trend since 2010, with the trend being approximately 5%. 2018 is expected to be another strong year, with continued above trend growth. In addition, the global airline industry has remained profitable. Between 2015 and 2017, airlines have earned over $100bn in net profits, double the amount that has been earned between 1984 and 2014. According to IATA (International Air Transport Association) estimates, the global airline industry is expected to continue its profitable run into 2018, when net post-tax profits are projected to reach almost $40bn. Aircraft utilisation and load factors are at record levels.The airlines’ financial gains translate into a sustained appetite for investing in the capital-intensive aspects of the business, such as renewing and expanding fleets. And, when their balance sheets are healthy, they qualify as ‘investment grade,’ opening up access to debt financing for fleet-expansion strategies.  Fleet renewal is driven by different factors in different regions, and this is reflected in the varying average age of aircraft across the world. For instance, Qatar Airways has an average fleet age of 5.7 years, well below the average in North America, which is 13.6 years, or Europe, which is 10.7 years. Airlines such as Qatar Airways clearly recognise that young fleets are a key differentiator: Not only do they enable the superior passenger experience that it has become synonymous with, but they also allow better operating and environmental efficiencies. These airlines are fully aware that new airplanes offer unprecedented fuel efficiencies and that investing today, although fuel prices are low, offers a technology-led hedge against future volatility. The bottom line is that oil prices have, historically, fluctuated and can be expected to continue to do so in the foreseeable future. While airlines typically minimise the impact of unstable prices with hedging strategies, new aircraft with superior fuel economics also play an important role in controlling fuel costs, which can account for a third of airline operating expenses. It comes as no surprise then that Qatar Airways has placed orders for 60 Boeing 777x aircraft, which will be the largest and most efficient twin-engine passenger jet in the world. It’s hard to predict what aviation fuel pricing trends will look like in 2020, when the first airplane is delivered. But what the airline does know is that the aircraft will offer 12% lower fuel consumption than the competition, a tangible promise that will yield savings regardless of the oil price at the time. In summary, airlines will continue to invest in new, more fuel efficient and more reliable aircraft for their fleets, largely unaffected by volatility in oil prices. In the Middle East alone, airlines are expected to meet projections to take delivery of 3,350 new airplanes between now and 2037. These investments are being made with an eye on the future – the performance of new and future additions to the fleet being the only constant in an industry that takes uncertainty in its stride. * Randy Tinseth is vice president (Marketing), Boeing Commercial Airplanes