Gulf airlines play long game
Disregarding oil price volatility, their purchasing decisions are more influenced by fuel efficiency and the need for more reliable aircraft
Their fleet expansion strategies are driven more by the need for fuel-efficient, reliable aircraft |
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 counter-intuitively, 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 (Dh183.65) 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 roughly one aeroplane per week to our customers in the Middle East, including 76 aircraft to airlines in the UAE.
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 — trend is about 5 per cent — and 2018 is expected to be another strong year, with continued above trend growth.
In addition, the global airline industry has remained profitable. Between 2015-17, airlines have earned over $100 billion in net profits, double the amount earned between 1984 and 2014. According to IATA estimates, the global airline industry is expected to continue its profitable run into 2018, when net post-tax profits are projected to reach almost $40 billion. Aircraft utilisation and load factor are at record levels.
Debt financing
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, Emirates airline now has an average fleet age of 5.2 years, while flydubai has an average of 3.4 years, and Etihad Airways 5.8 years. All of these are well below the average in North America, which is 13.6 years, or Europe, which is 10.7 years.
The leading Middle East players clearly recognise that young fleets are a key differentiator: not only do they enable the superior passenger experience that the airlines from the region have become synonymous with, but they also allow better operating and environmental efficiencies.
These airlines are fully aware that new aeroplanes offer unprecedented fuel efficiencies and that investing today, although fuel prices are low, offers a technology-led hedge against future volatility. The bottomline 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 Emirates and Etihad Airways have placed orders for fuel-efficient twin-aisle aeroplanes such as the Boeing 777X and the 787 Dreamliner, while flydubai will become one of the world’s largest operators of the single-aisle 737 MAX.
In fact, the UAE accounts for over half the global orders for the 777X, which will be the largest and most efficient twin-engine passenger jet in the world. It is hard to predict what aviation fuel pricing trends will look like in 2020 when the first aeroplane is delivered.
However, what the airlines do know is that the aircraft will offer 12 per cent 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 aeroplanes 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.