“Never let a good crisis go to waste”, a saying often attributed to Sir Winston Churchill, seems particularly apt during the worst crisis in aviation history. Since early 2020, the world, particularly the travel and tourism sector, is struggling to deal with the fallout from the Covid-19 global pandemic.
In the UAE, Emirates Airlines recently reported the worst results in its history, plunging to a $5.5 billion loss after an enviable 35-year track record of sustained growth and profits. However, Emirates’ leadership expressed confidence that the airline will recover and be more robust than before.
According to Sheila Nazareth, Lead for the Aviation Advisory sector with KPMG Lower Gulf, that optimism is well-founded: “Recent figures reported by the TSA in the United States show people have started to travel with numbers at the highest since March 2020. However, recovery is currently primarily limited to airlines with large domestic markets. The continued patchwork of restrictions and lack of a global response to the pandemic means lucrative long-distance international tourist and business travel is yet to pick up. Given the uneven pace of vaccinations and fear of new variants, IATA estimates that the international aviation industry may likely not return to pre-pandemic levels before 2024.”
Terence Black, Principal at APF Advisors LLC, agrees: “This may further stymie the recovery of the aviation sector, particularly the Middle East Region, as it depends predominantly on international traffic and uses the connecting ‘hub and spoke’ model. Except for Saudi Arabia, most aviation markets in the Middle East have little access to a domestic market, paralysing their recovery. There is an urgent need for an international consensus on how to reopen borders safely. Vaccine passports may be part of the solution. Regional airlines are also at the forefront of pioneering the IATA Pass, one proposed model for confirming the vaccination and Covid-19 test status of passengers.”
Parking aircraft
The Middle East’s regional airlines currently have over 1300 aircraft in service (nearly 50% wide body) and over 450 aircraft parked. They also have an equal number of aircraft orders, most likely at rates negotiated pre-pandemic. These orders are dominated by the A320s and B737s and include a sizeable number of other fleet types. Overall, nearly half are owned aircraft and half are leased.
“An analysis of the parked aircraft in the Middle East region showed a large mix of all types of aircraft inactive – including A320s, A330s, A350s, B737s, B777s, B787s– most of them with tremendous potential,” said Nazareth. “As many airlines are significantly restructuring their fleet, some of these aircraft are unlikely to return to the skies. For example, Oman Air announced it would reduce its fleet by nearly half. Etihad Airways is restructuring itself to becoming a mid-sized, full-service carrier. Some airlines have already sent their aircraft to long-term storage outside the Middle East region, possibly hinting towards a permanent withdrawal from the fleet.”
So, what are airlines in the Middle East going to do with all the aircraft they have?
Time to renegotiate
Multiple airlines worldwide have defaulted on lease payments due to the outbreak of the pandemic. According to Black, it appears that lessors have taken a pragmatic view towards defaulting lessees. “Generally, it has been accepted that there is little point repossessing aircraft that cannot be remarketed. The problem is not with one airline or even one region – after all, it is a global pandemic. Emirates’ recently released 2021 annual report stated that during the year, the airline successfully restructured various aircraft leases and loans, testifying to aviation lessors’ and financing partners’ confidence in Emirates’ business model and mid to longer-term prospects.”
“In a recent English case involving SpiceJet, the court upheld the lessor’s contractual right to be paid, even though the airline could not operate the aircraft because of the pandemic and the grounding of the B737 Max. However, rather than giving a summary judgment against the airline, the court ordered the execution of the judgment to be stayed for a period to allow the parties to undertake mediation or some other form of alternative dispute resolution. This is a somewhat pyrrhic victory for the lessor and likely a relief for airlines, who have been unable to pay lease rentals due to the impact of the pandemic,” he added.
P2F Conversion (Passenger to Freighter)
During the next 20 years, Boeing anticipates that airlines will need 2,430 additional cargo aircraft, including 930 new widebodies and some 1,500 jets converted from passenger to cargo aircraft. “A strong cargo performance and a strong positive growth forecast is testimony to this. Boeing has forecast a strong demand in the coming years for 777Fs and 767Fs. Airbus A330-200 and A330-300 versions are also highly suitable for such conversions,” said Nazareth.
Parting out aircraft
Globally, around 700 aircraft are retired annually (out of the total 27,000 in service) with an average age of approximately 27 years (Source: IATA). “Aircraft part-out companies are, however, seeing significantly newer airplanes—some as young as six years old—sold for teardown. The sum of their parts is worth much more than the whole. This is a win-win revenue scenario for airlines parting out planes from their fleet and airlines who want parts at a lower cost. The number of reusable components depends greatly on the age of the aircraft, with the engines making up over 80% of the overall part-out value,” she added.
It seems likely that recovery from the pandemic will be uneven and international travel will be one of the last sectors to see a return to pre-pandemic levels. Where aircraft will not return to the fleet, it is time for airlines to take hard decisions to ensure profitability and growth.
Black believes airlines cannot extend their obligations, and lessors pretend they will never fall due. “It is in everyone’s interest to get to the negotiating table before they get to court. Airlines and lessors are indeed co-dependent. In the long term, each needs the other for its business to prosper.”
“The upheaval caused by the pandemic has perhaps created a unique opportunity to level the playing field and ensure both airlines and lessors enjoy a prosperous post-pandemic future,” concluded Nazareth.