Jetrader - January/February 2011 - 16

technically difﬁcult or cost-prohibitive to install in a ﬂeet that is reaching maturity. From a branding perspective, certain carriers have branded around a young ﬂeet and will be more likely to retire aircraft early in their lifecycle absent a wholesale change in marketing.

… certain carriers have branded around a young fleet and will be more likely to retire aircraft early in their lifecycle absent a wholesale change in marketing.
• Performance Considerations: Alliance or code share performance requirements, as well as increasing scrutiny by aviation authorities on carriers with negatively trending dispatch reliability, may result in re-ﬂeeting by certain airlines. • Transition Logistics: There are practical limits to the number of aircraft that can be transitioned into and out of a given operator’s aircraft ﬂeet. downturn. Fuel and environmental considerations are also inﬂuential as airlines may seek to accelerate retirements of aging aircraft if oil prices reach new plateaus or supply shocks create volatility in energy markets. Although environmental regulations have had a limited impact to date, these may have increasing inﬂuence over time. Ready access to capital at attractive rates will also serve as an inducement to placing a new aircraft order in order to capitalize on low ﬁnancing costs. Finally, strong demand for freighter feedstock may result in certain airlines pursuing “block sale” opportunities to exit their aging ﬂeets.

Financial and Operational Factors Inﬂuencing Fleet Renewal
The ﬁnancial and operational factors that inﬂuence ﬂeet renewal activity are numerous and include: • Operating Costs/Engineering: Tradeoff of lower ownership costs for mature aircraft against lower fuel/maintenance costs (as well as indirect costs) of operating newer aircraft. The technical limits of an aircraft may also be reached requiring retirement. • Mission Capability: Modern aircraft typically ﬂy heavier and farther, which may better optimize the airline’s network and improve operational ﬂexibility. Even if the current ﬂeet was previously optimal, it has likely become sub-optimal over time. • Network Structure: Hub carriers are generally better positioned to uphold reliability of older aircraft and head off aircraft on ground (AOGs), due to more frequent returns to major operational bases and lower aircraft utilization, allowing for better logistical access to parts, mechanics and spares.

Exogenous Catalysts
Exogenous catalysts will inﬂuence ﬂeet renewal activity. First and foremost among these is the introduction of new aircraft types, as technology improvements in aircraft directly alter the value proposition of a ﬂeet renewal program. Airline trafﬁc will also inﬂuence ﬂeet renewal activity as airlines with weaker balance sheets may focus on renewing their ﬂeets when business conﬁdence is strongest given the large CAPEX commitment this entails. Weak airline trafﬁc may also inﬂuence such activity, as ﬁnancially stronger airlines may seek to take advantage of favorable new aircraft pricing and availability, or they may choose to eliminate aircraft subﬂeets that may have been parked during a

Implications of Increased Fleet Renewal Activity on Aircraft Market
The large population of Newly Mature aircraft that is projected to develop over the next ﬁve years is expected to provide an increasingly strong underpinning to new aircraft production rates. Over the course of this decade, the aircraft replacement requirement can be expected to approach roughly 600 aircraft per year on average— consuming more than half of current production rates. Given that orders to support ﬂeet renewal are more sensitive to the improved value proposition of new aircraft programs, it can be expected that new aircraft launches will have a more stimulating effect on aircraft order activity in the future. An increasing proportion of order activity in support of ﬂeet renewal should also dampen the historical cyclicality of aircraft orders since orders to support ﬂeet renewal are inherently less cyclical than orders to support growth. This dampening of cyclicality can be expected to result in a reduced need for OEMs to adjust production rates in future cyclical downturns provided they maintain healthy order backlogs to buffer short-term order activity. Finally, reduced cyclicality for new aircraft may serve to stabilize the market values of modern aircraft types over the course of the aviation business cycle.

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Jetrader - January/February 2011

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