Delays and deliveries; Turkish Airlines cancels 211 employee contracts

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By admin July 25, 2016 10:18

Delays and deliveries; Turkish Airlines cancels 211 employee contracts

It is the real question of 2016: The slowing of passenger demand comes once again at the same time as the aircraft delivery cycle kicks-in to full gear. This is good news for lessors as it tends to lead to extended lease agreements. However, more and more airlines may decide to lease out their own aircraft that are surplus to requirements instead of deferring deliveries – This has already been the case with Jet Airways, Lion Air, AirAsia, IndiGo, NAS and most likely in the future, GoAir. Other airlines already lease to subsidiary companies: MAS, SAA, Lufthansa, AirAsia, SIA. All these and many, many more have done this over recent years. Although for this decade this has all worked out fine for the industry, one wonders if it can continue given that the curve in aircraft deliveries is set to gain pace during a period when passenger numbers are falling away due to terrorist actions that states are more or less powerless to prevent, given the maxim from the UK Ministry of Defence some years ago following the 7/7 bombings: “For every terrorist action planned by groups we are able to capture and prevent the vast majority if not all – For every event planned by individuals without a previous record to trace we are only able, at best, to interject during the final stages of planning or during the execution of the event itself”.

It is likely that Thomas Cook will release another profit warning this week and revise down estimates, this is a bellwether for the European tour operator sector.

It is the case that no one can prevent a person from driving a car or lorry into people on the street but it is the case that European governments can help the aviation industry by tightening gun laws dramatically to match those of the UK and maybe this is what major European airlines should quietly be lobbying for at this time.

Growth in China is continuing and growth in India is speeding up rapidly and these vast markets are filling the void left by North Africa and European weakness. India is being fuelled by cheaper fuel prices and at this time there is little evidence to suggest that many airlines would survive a 2007-style high fuel price environment while Air India remains government subsidised, especially given the new passenger compensation regime, more passengers flying without booking during heavily discounted ticket sale periods needs to show-through before confidence can really pick-up. However, the relaxation of rules for domestic airlines being able to fly internationally are the key for a successful future and this alone should finally see all major domestic Indian carriers turn the corner to being insulated from domestic ATF price inflation. As such the GoAir order of A321neos this month was the perfect signal of intent that should see the airline grow across South East Asia at speed. Maybe these deliveries cannot come soon enough? The point is, as aircraft deliveries are deferred, there should be a fair number of airlines willing to move up the delivery stream, especially for narrowbody aircraft.

That said, who would like to take the American A350 slots right now? In no small part due to the partial collapse in passenger demand for European destinations, American Airlines on Friday followed the Delta lead and deferred the delivery of 22 A350s for an average of 26 months per unit. Southwest Airlines last month postponed delivery of 67 737 Max 8 aircraft by up to six years. Could this also be good news for the manufacturers that are struggling to ramp-up deliveries due to supply problems while also keeping cashflow buoyant?

Meanwhile in this environment, Rolls Royce has announced that it is taking a £2bn write-down for the first half of 2016 due to hedging losses caused by the fall in sterling against the US dollar. The cut-off date for this accounting adjustment came in the week after Brexit when sterling fell on the floor and as such the adjustment for accounting purposes is far harsher than the reality. With the A350 and 787 deliveries ramping-up, it could be argued that there is nothing wrong with Rolls Royce at this time – as such this coming week will be a great time for RR to buy back shares. However, if deferrals begin to mount-up on the A350 and 787, then there could indeed be a serious problem around the corner. For now though the number of deferrals is very small against the very large remaining orders/delivery schedules.

Deferrals are bad for very few companies in aviation at this time and we should look on the bright side which is that the current deferral trends are no major worry.

admin
By admin July 25, 2016 10:18