It is time to replace the 757

Eleanor Steed
By Eleanor Steed October 17, 2016 10:41

It is time to replace the 757

With a reputation for listening to its customers, historically, Boeing had the best products and the best sales personnel who knew where to place them. Staff rarely moved position and were easily accessible. The perception was that the reverse was true at Airbus. But at some point around 2009 that changed. Airbus ramped up its sales team, solidified a regional presence, and adopted a product strategy that fitted their customers’ needs.

Boeing was slow to react and rather than launch a new aircraft model to replace the 757, the company decided to launch the Max series as a reaction to the Neo. Ignoring the persistent and loud calls for a 757 replacement, which was at the time saving airlines following the credit crisis, provided an opening for Airbus’s A321neo, which is the mid-range market aircraft of choice at the moment and is outselling the Max-9. The P&W engine looks like it is going to come out as the real winner in all this. After a shaky start, the GTF performance is exceeding what were already high expectations. Boeing were looking to capitalise on its old standard NG when they made the Max an all CFMi play, but missed a trick with the GTF.

So what now? Boeing is ringing the changes. It is speculation but Ray Conner will most likely move up in the near future alongside the most effective sales managers in the APAC region. An all-new sales team is already partially in hand. But a new team requires new focus and new energy; so will Boeing finally take the plunge and launch a new mid-range aircraft as it should have done seven years back? And will this new aircraft – which would not be part of the Max program – be able to carry new engine options on wing including the GTF? Potentially, but Boeing has a problem. The launch of an all-new aircraft will upset a fair few lessors, especially given the current speculative order book (as mentioned just over a week ago). Boeing may have to flip a great many orders about before all are happy and even then will it leave the re-engined Neos and Max aircraft of this world with far shorter life spans – just like we all thought it would back in 2010 (refer to Airline Economics Issues 1, 2 and 3). That situation, coupled with the lower lease returns we are seeing on new aircraft agreements, makes for a worrying mix.

Investors beware, Boeing’s next aircraft decision will shift the market. Read the full detailed report on this matter in the November issue of Airline Economics.

Thus far, October has been a month where many questions have been posed with very few answers forthcoming in the airline sector. Air China has been engulfed by strike action and lost passenger revenue, while suffering from political and economic pressure. There is the ongoing saga of South African Airways, which has extraordinary similarities to what happened at Air India some eight years ago. The Kremlin is successfully nationalising private airlines so that state run Aeroflot has total control over the skies once again. Turkish Airlines and Pegasus Airways are in dire trouble as Europeans (including Russians) avoid Turkey. Regional airlines in India are going to the wall and, the saddest of all by far, the formally great Kenyan Airways is in existential trouble. Kenyan Airways now desperately requires a significant cashflow injection. The grounding of five aircraft and the subsequent sale of three (of which the deal for two marketed by Cabot Aviation won an Aviation 100 Award), assisted over recent months but the airline now requires a very large government bailout sooner rather than later. There is some reluctance to do so while the airline’s future is in doubt. The problem for Kenyan Airways is that all of its richest local markets have crumbled: Nigeria, Egypt, South Africa. At the same time its international markets for inbound tourist traffic have still not recovered from large scale terrorist actions over the past four years. Compounding all of this, and most importantly of all for the future direction of the airline, Kenyan Airways has been hit hard by Middle East majors connecting passengers via their hubs to the world, at the same time Chinese majors have taken all of the benefit from hugely increased Chinese traffic to East Africa.

So what can Kenyan do?  The only logical answer is for a huge government cash injection in the immediate term to get finances on an even keel, after that further cash injections will be required. Kenyan will then have to become an African-focused low cost operator (it has the aircraft to pull this off), using the JetBlue model, cementing its core markets, especially Nigerian/West African routes, back into long term profit with cheaper tickets on one hand and superior business class on the other. Secondly, the airline will have to look to make Nairobi an effective hub again, starting off by targeting the Chinese market far more effectively, with a costly ad campaign, concentrating on key city pairs and the ability to transit Chinese nationals to Kenya and all of Africa beyond on a single ticket. A focus on London should always remain but other European cities are not a priority. All easier said than done, but when there is ability to see gaps in the market there is always a ray of light. Re-branding Kenyan Airways beckons.

Also, given that JetBlue has been mentioned, it is well worth keeping an eye on premium traffic load factors as numbers appear to be falling across the Emirates and Etihad networks of late and that will filter through to JetBlue at some point.

Meanwhile, there is good news in India yet again – but yet again it is talk of action and not the latter which is getting headlines. Even so lessors will be buoyed by news that on October 13 high-level government discussions took place on ways to boost regional air connectivity. The end statement from these discussions was that the Indian government will be looking to de-regulate further by allowing foreign-registered aircraft to be operated by Indian firms. This will make life far easier for lessors to repatriate aircraft in the event of default.

But is this yet another example of Indian politicians trying to placate aircraft lessors in the wake of Kingfisher? Surely it would be far more beneficial for lessors if airlines were put on a solid footing through the government taking direct control of ATF taxes from the regions, or abolishing the same (the former was a manifesto promise a few years ago) and through legislation to cap airport fee increases? If at the same time the Indian government were to stop contorting the market by putting a stop to cash injections into Air India then money would actually be saved that could be fed back into local government to compensate for the loss of ATF taxes. Anyone holding their breath for such action will most surely have a long wait indeed.
As always – it is all go in the commercial aviation market.

Eleanor Steed
By Eleanor Steed October 17, 2016 10:41