Jetrader - Spring 2015 - 39

Can the Commercial
Aircraft Backlog Withstand

50%

T

Lower Fuel
Prices?

By Stephen J. Fortune

The recent dramatic decrease in oil prices
has provided an opportunity for improving
global economic conditions (except in those
countries whose economies are dependent
on high oil prices). The outlook from Seattle
and Toulouse may be less sanguine since
the aircraft manufacturer's revenue stream
is dependent in part on a continuation of
high jet fuel prices. What will the impact
be on existing orders as well as retirements
from existing fleets from this unexpected
drop in fuel prices?
Every new aircraft presentation from
the manufacturer begins with a promise
that the newer model will have markedly
better fuel burn (usually on the order of
15 percent) thereby providing operators
cash savings on their largest operating
expense. For a typical narrow-body aircraft, this represents about a 10 percent
reduction in block hour costs provided fuel
costs $4/gallon. However, at $2/gallon,
that savings drops to only 5 percent, not
a compelling argument for an airline considering replacing its current generation
aircraft. Unfortunately, the fuel cost savings will always be offset by an approximate
30 percent increase in ownership cost per
block hour. Although the manufacturer also
promises an improvement in maintenance
costs, after a honeymoon period, those
costs will often increase back to the level
of the older equipment. Regrettably, the
ownership cost increase is permanent.
Presumably, there are valid reasons other
than fuel burn why an operator would elect
to replace an existing low capital cost asset
with a significantly more expensive one.

*	 Technical obsolescence (i.e. IFE, navigation and cockpit related improvements
not feasible for existing fleet type)
*	 Attractive long-term engine maintenance
contract on new fleet type
*	 Reduction	in	ancillary	costs	associated	
with newer equipment
*	 Favorable	new	equipment	financing
*	 Tax	and/or	book	advantages
The combined benefit from these other
items could offset some or all of the higher
capital cost.
Given the modest cash operating cost
improvement from lower fuel prices, there
is unlikely to be a mad rush to defer or
cancel existing orders (new orders are a different matter) based on fuel prices alone.
Forecasters did not foresee the unprecedented drop in prices, and no one can
accurately predict if or when they will rise
again. A rational buyer would not likely
alter a long-term decision based on shortterm events. There would be have to be

solid evidence of a sustained period of low
oil prices to alter behavior or significant
change in another block hour expense, such
as finance rates.
One interesting question to consider -
how will the airlines choose to redeploy
their fuel cost savings?
*	 Lower	fares	(don't	hold	your	breath)
*	 Return to the shareholders and/or
employees (maybe)
*	 Buy more coach seats to squeeze into
their cabins (probably for some)
*	 Order more new equipment (John Leahy's
prediction)
Stephen J. Fortune is principal at Fortune
Aviation Services, which provides its clients
with guidance to achieve financial goals or
profitable investments in commercial aircraft market and related activities. Clients
include investment banks, leasing companies, airlines and MROs.

Jetrader  *  Spring 2015 39
Jetrader - Spring 2015

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