The last few weeks have been full of news about aircraft retirements. That was the case for Virgin Atlantic 747’s, Air France’s A380’s, KLM’s 747’s, and Qantas B747’s. These were triggered by a fall in demand for air travel, which left many airlines financially vulnerable, forcing them to seek cost-cutting measures. Shrinking the sizes of their fleets and getting rid of inefficient aircraft is one of them. It turns out that airplane retirements are not only sad news for aviation enthusiasts, but have a profound impact on the value of airlines.
Our hypothetical scenario
Imagine that five years ago, you purchased a brand new Mercedes for $100,000 for your daily commute to work. You expected to use it for the next ten years and then sell it on a used-car market. According to the car manufacturer, your Mercedes should be able to drive 100,000 kilometers throughout its lifetime. It turns out that in the first five years, you have driven by approximately 50,000 kilometers, so you assume that today your car is worth around half of what you bought it for. As the pandemic has spread, you realize that you no longer need your car because you work remotely. Thus you now wish to sell it. Unfortunately, it turns out that no one wants to buy your Mercedes, as everyone is now working from home.
Additionally, you need to pay your mortgage and are in urgent need of cash and do not want to pay for the parking slot and the maintenance of this car. Thus, you decide to sell it to a scrap-yard for a mere $2,000, where the metal will be used to make cans. You have just lost $48,000.
This somewhat lengthy story illustrates the current headwinds faced by many airlines. Simply substitute “Mercedes” with a Boeing 747 and work from home with air travel demand. The critical difference is that airlines own not one airplane, but hundreds. Furthermore, their collective worth goes not into thousands, but billions. Even if the retirements are not “costing” the airlines any cash, they very much result is massive losses of value, a magnitude of which is striking.
The magnitude of loss
- In the first quarter, American Airlines prematurely retired several models of aircraft including the Boeing 757, Boeing 767, Airbus A330-300, and Embraer 190 aircraft, which resulted in a cumulative loss of $744 million. Additionally, retiring Embraer ERJ-140 and Bombardier CRJ200 aircraft brought a loss of $88 million. In a matter of weeks, American Airlines lost over $800 million just in the value of its fleet.
- Air France-KLM’s lost over €45 million ($49.07 million) in the first quarter, due to an earlier phase-out of the A380’s and B747’s.
- Delta Air Lines reportedly lost $22 million on an early phase-out of the MD88 fleet. The news about retiring Boeing 777’s and MD90’s came out later. Thus these losses will appear at the end of the current quarter.
The trend of premature retirements is likely to continue, and we are likely to witness more of these in the coming months.
The impact on the future fleets
The key trend of the retirements is about getting rid of the inefficient aircraft. Unfortunately, the industry might witness significant fleet unifications, with a handful of four-engine machines flying at its end. Yes, the transformation towards full twin-engine domination was already in place before the virus struck, but its pace has just significantly increased.
A380’s are the most likely “first-out” victims, due to their capacity. Filling them up to a profitable load factor will not happen anytime soon. A340’s and B747’s are next in line, because of their “four-engine” inefficiencies. Additionally, other older frames, the likes of B767’s or old A330’s are likely to lose out to newer B787’s and A350’s.
Survival of the fittest will not only occur among the airlines but also among the aircraft types, where the “fitness” is measured in liters per 100km.
What is your take on airlines retiring their fleets?