Growth and consolidation

With all the continued talk of mergers both in Europe and in the United States, the average observer might think a dramatic consolidation is taking place in our industry. In fact at the recent Geneva Forum on Aircraft Finance and Commercial Aviation, a poll revealed that 85% of participants there predicted an increase in consolidation over the next two years.

But the truth is, the market is actually not consolidating. It’s going in the other direction. If you take a close look at the total number of airlines in operation, as well as frequency growth in the marketplace, you’ll see that nothing could be farther from the truth.

What we’re actually seeing is that the number of airlines in the world has increased by 150% over the past 20 years, and frequencies continue to grow by about 5% a year. We also continue to see growth in city pairs, or nonstop markets.

image

This chart shows the vitality of the airline marketplace. The reality is, while consolidation talks go on, over the last 20 years we’ve seen continuous growth in the number of carriers.

Over the last 10 years, approximately 1,300 new airlines entered the industry and about 850 airlines exited it. Since more airlines enter the industry than exit in any given year, the total number of airlines increases.

So what’s going on? Are these things inconsistent with the talk of consolidation and possible airline mergers? Well, first of all in terms of “consolidation,” yes, we’ve seen a few airlines over the past several years consolidate – KLM and Air France, for example, and U.S. Airways and America West.

But overall we’re really seeing growth in the number of airlines worldwide. Growth that is primarily fueled by new business models, whether they are additional low cost carriers, all-business class airlines, new regional carriers, or other models.

It’s a more diverse marketplace today than it’s ever been. And as the market gets bigger we expect this trend to continue.

New and innovative airline business models create additional value for passengers and are then incorporated by other airlines. In the end, passengers are better served with more convenient travel for lower fares, and in many cases, in more comfortable surroundings.

Airlines are looking for a way to better compete in light of rising fuel prices and new outside competition as markets liberalize. So as we go into the future expect to see more new airlines, new business models, new ideas - a constant and continuous increase in the airlines operating around the world. That growth brings in new people, new ideas, new technology, and that helps make all the airlines better.

And for us, it helps to further diversify our customer base. Which helps our position in this very cyclic business.

As we look to the future, there will be some consolidation. But that’s going to be offset by new opportunities for new airlines and new business models as the market gets larger.

Comments (8)

RSW:

So, how many of these airlines actually buy new airplanes from Boeing and Airbus? How many of those are limited to just one type, such as 737 or A320?

G (France):

According to your chart, the number of airlines has grown very fast since 2003.

If my memory serves me well, in 2003, Kerosene-Type Jet Fuel Spot Price was at about 0.90 USD per gallon. In the same year, SARS crisis started in Asia and more importantly, the federal funds rate was at 1%.

In other words, the cost of capital was very low. There were hundreds or even thousands of airplanes parked in the deserts and other places. Leasing companies were facing a financial black hole. At that time, lease rate was ridiculously low. So, many startups have been able to start with cheap airplanes, cheap fuel and cheap capital.

Today the situation has changed a little bit. Fuel price is at 3 USD per gallon, the interest rate increased and demand for airplanes is very high. It means, airlines' operating cost skyrockets. What happens if you add the "R" word in the equation?

I believe some of those startups will go bust in the next three or four years.

Norman (Long Beach, California, United States):

As a resident of Long Beach, California living here in the nineties I can attest to airlines that came and went from Long Beach Airport after the major airlines left in the very early nineties, small and poorly planned out airlines like Sun Jet International, Sterling One, Presidential Air (A300), Far West, Arizona Airways, and Win Air have
dominated the air field largely one at a time as each one failed almost like clock work and as expected. I one time booked a flight just to have the the airline Sun Jet fail. The 2000's have been better with the stability of Jet Blue Airways ironically an Airbus airline in Boeing territory.

In the 2000's in the United States we have seen only a few airlines fail as far I know, only Access Air and Independence Air have failed again to poor planing. People who started airlines in this decade
have been a lot smarter in how to run an airline, secure better loan for the lease or purchase, and hire honest and competent employees. Though the future of Skybus and even Frontier is in question as they recall roots and destinations, this is a way better decade than the go-go eighties and nineties not to mention safer. Books like Deregulation Knockout:Round One and Round Two by Tom W Norwood and published by Airways International Ltd, tell the story of all the airlines that failed even the ones that came from nowhere and went back to nowhere the same day.

The successful merger of America West and US Airways
came as rather of a surprise, I was expecting very massive layoffs, low morale, and fleet chopping similar to what happened with PSA and US Air, and American and TWA and yes Macy*s and Robinsons-May around my area. I am happy that the merger was not as bad as I have feared but as gas prices go up the urge to merge has gone up too by the legacy airlines. Every week it seems their is talks between United and Delta, United and Continental, Northwest and Continental, Northwest and Delta, United and Northwest and so on and so on, the thing that concerns me if such an merger happens is that this with reduced competition will allow air fares to hit the magnetosphere "another planet's" in space, not to mention mass removal of aircraft from the smaller airline and cramped planes, and of course bad service.

With the progress of new airlines forming in the United States since 2000 with new planes too. The future looks bright particularly with the new and well financed crop of airlines and they can handle themselves relatively well in a bad economy. I like to see Jet Blue order Boeing 787's as they think about doing trans-Atlantic service and they should consider the 787-8 for domestic service particularly from New York and From Long Beach. Since Jet Blue Serves Long Beach LGB and not Orange County SNA and these two communities are large and adjacent to each other. The 787 can be used from Long Beach as well as carry passengers from the O.C. who want to avoid using expensive SNA to serve Long Beach to San Francisco SFO, Las Vegas LAS, Denver DEN, Chicago ORD, New York JFK, Philadelphia PHL, Washington DC IAD, Boston BOS, and if possible Honolulu on to Kahului HNL-OGG, and London LGW, I think passengers in the O.C. won't mind traveling a little bit of distance to LGB to save good money and ride a new cool plane with a wide cabin, big windows, and a quiet ride. I'd like to think that the quietness of the 787 will permit new slots into LGB. I'm having fun with this idea, I major in marketing be at it may.

The big market for new airliners is the international community particularly the Middle East, South Asia, and East Asia, opportunities are almost boundless. The biggest market is the Middle East with giant new airlines expanding world wide like Emirates Airlines now anchoring Los Angeles as it's third US gateway and longest root a 16 1/2 hour long flight and has plans according to a member of airliners.net Emirates plans to expand to San Francisco, Chicago, Washington DC, Philadelphia, and Boston on Boeing 777's and New York will be the first city to have the A380 for Emirates Airlines.

Other Middle Eastern Airlines like Etihad and Qatar Airways are expanding like crazy and picking up 777-300ER's and others to serve new roots and destinations worldwide. Gulf Air wants to stay small but is ordering the 787 to renew it's fleet. The smaller discount airlines in the region like Air Arabia, and Bahrain Air and others that use smaller planes are great because they all have plans to expand their networks and acquire new planes. The new orders from the leasing company Dubai Aerospace Enterprise has been a boon to Boeing as they have ordered 100 Boeing aircraft like the 737-700, 747-8, 777-300ER, and the 787. South Asia has enjoyed a boon in aircraft orders as Air India doubles it's fleet numbers and Jet Airways and Kingfisher Airlines has even larger orders than Air India, the smaller ones like Spice Jet, IndiGo, and Jet Lite are expanding fast and will have more planes than the "big three". East Asia's market is still growing strong especially China's Market with big orders coming from Air China, China Eastern, and China Southern, to expand and renew, Hainan Airlines seems to be the fourth International airline in formation as it expands its services to Seattle, Chicago, and Newark, The new crop of privately held airlines in China like Okay Airlines, Spring Airlines, Kunpeng Airlines, East Star Airlines, United Eagle and others are on the growth and will need new planes for their networks. Indonesia has been a major market for Boeing planes Garuda Indonesia and Lion Air procure 737's 777's and 787's into their fleets.

I am glad to see airlines like AeroMexico, and Mexicana renew their aging fleets and airlines like Gol in Brazil to become a leader in big orders for the 737 as it is the biggest discount airline in the Latin America and the biggest airline in Brazil.

European airlines despite being the home and prime territory for Airbus have also been a good market for Boeing products, airlines like Ryan Air with the 737, British Airways with the 787, Air Berlin with the 737, and Air France-KLM with the 777.

Qantas despite their threat to order the A350 still has over 100 787's on order and Air New Zealand was the first airline to order the 787-9. I am glad to see Virgin Australia succeed in a market dominated by Qantas since Ansett Australia and Australian Airlines "the original" went out of business.

As markets become more liberalized and grow as new middle-class societies emerge the market for new airlines and airliners will grow, though state owned airlines like Emirates, Qatar, Etihad, and the larger Chinese airlines still will make the big orders in the immediate future, the order list from the smaller private airlines will increase as economies world wide grow bigger and less regulated.


Paulo M (Johannesburg, RSA):

We’ve had some successful start-ups here in South Africa. The airlines seem financially sound – there’s good support, management, staff, etc. There’s been good pricing as a result. These airlines are of high safety standards. In this business, fatal crashes are simply unacceptable.

I think people get the impression of consolidation from the intense focus on the actual merges of a few, very significant players – such as the current Air France/KLM and Alitalia activity. (The Air France/KLM union has been extremely successful – when companies do plan to ‘marry’, that’s what they should try to emulate.)

As for starting an airline, now would be a really tough time to try – in the US. The reasons for that have companies such as EADS taking massive poundings as the US Dollar moves further south.

Onto carriers such as Emirates & Qantas: the Big Bird needs just around 3.4% more range to carry the flag and the kangaroo. Amongst my wishes for the Big Bird - of which only two remain unanswered - range has to be an average of the X & X Stretch proposals. I'd really like to meet her there:)

To get away from it all, I’d recommend enacting your greatest fantasies, such as a barrel roll under the Golden Gate, or landing on an aircraft carrier – in an airliner. Maybe not the former, but if you type Funchal at airliners.net you’ll get close enough. Better still, take a flight there and enjoy Madeirense hospitality.

Nikhil K. Rao (Tukwila, WA):

I believe consolidation is occuring behind-the-scenes and should be tracked by the number of investing conglomerates instead of number of airlines. A good analogy is the 5-7 publishing houses that own and influence 80% of the 4000+ news media in our country (Is this freedom of speech?).

Reece Lumsden (Everett, WA):

I imagine the majority of the increase would be due to new carriers entering from the lower end, partly the reason I believe why Embraer and Bombardier would be experiencing such good times.

Norman (Long Beach, California, United States):

Though I like the growth of airlines world wide especially in the Middle East and in the most of the rest of Asia as well as Quanta's and Air Canada's orders, the orders for aircraft in the United States for the most part remains stagnant primarily do to a lack of funds and the loss of money, unfortunately air transportation is a business that is only less hard to keep and maintain revenue than the local clock, puzzle, map, and sward store, all real stores that have came and went at my local mall.

As our planes of our airlines get older, aircraft become harder and harder to maintain, Though DC-9's, MD-80's, DC-10's, and 747-200's are great planes and many are built like tanks and are reliable as hell, it is time for our airlines to be serious about replacing those legendary old birds and purchase or lease new planes like the 737NG,767,777,787 and so on, I know the 787 would good in the American, Delta, United, US Airways, and Jet Blue livery.

Hypothetical orders for America's airlines may include 50+150 additional 737-800's for American Airlines, 60 additional 737-800's for Delta Air Lines, 120 737-700's for United Airlines to replace older 737's, 20 747-8 Intercontinental for Northwest Airlines, 30 747-8 Intercontinental for United Airlines, 12 777-200LR for United Airlines, 10 777-200LR for Northwest Airlines, 8 777-200LR for Continental Airlines, 8 777-200LR, 8 777-200LR for American Airlines, 18-24 777-300ER for Northwest Airlines, 35 777-300ER for United Airlines, 60 787-8 + 20 787-9 for American Airlines, 70-100 787-8 + 20 787-9 for Delta Air Lines, 25 787-9 for Northwest Airlines, 40 787-8 + 30 787-9 for United Airlines,
20 787-8 for US Airways, 25-40 787-8 for Jet Blue Airways, outside of Boeing, 150 C Series for Northwest Airlines. All of these numbers are my hypothetical analysis based on the needs for an aircraft type for all the mentioned airlines.

Despite the low order count for airlines in the United States with the exception of a few. Boeing and Airbus have enjoyed gangbusters orders and every year the orders get bigger and bigger in fact last year Boeing was in near parody with Airbus both with more the 1,400 orders last year, but with new orders still coming fast this first quarter I thing Boeing will take the lead by year end.

Even with the delays of the Boeing 787 and all the push backs the 787 is still gaining, orders from around the world still keep coming and even though the Airbus A350 is doing quite well the 787 has more than double the orders at now over 890 units and option level of 920 compared with 355 for the A350 and options of 452, this is very good for Airbus but the 787 even with the issues is the fastest selling airliner in history and in short order will be the best selling wide body airliner in history.

With the growth of 5% every year in aircraft needed,
the demand to offer a diversified field of aircraft in sizes is important and the more types of aircraft you build that fits the market the better you are in gaining orders over your competitor. Boeing has the lead when it comes to marketable types and when the types that Boeing has have a competitor in the Airbus stable the Boeing product has the numerical advantage A310 to 767-200, A300 to 767-300, A340-300 to 777-200, A340-600 to 777-300, A350 to 787 A330-300 to 777-200, A320 family to 737 family, Airbus's advantage is with A330-200 to 767-400ER, and A380-800 to 747-8 Intercontinental. So far Boeing leads in market sustainable types, for the current day and the immediate future.

xashruak:

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