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The Oil Drumbeat and B.A.B.E.

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OKC_2.jpgIs the airline crisis of 2008 worse than the economic aftermath of September 11, 2001?

Yes, absolutely.

9/11 was a crisis of confidence in the safety of air travel. Airlines simply couldn't fill their planes. The 2008 crisis is far more serious. The psychological injury of 9/11 has since healed and empty planes and cheap gas has given way to very full planes and the most expensive gas in US history.

The crisis cuts even deeper now because access to new sources of revenue aren't available when planes are already full. Instead we see higher ticket prices or new fees on first bags, second bags, legroom, food, curb-side check-in and soon seatbelt usage (snark). Eventually, the price of flying will become so prohibitively high that the bottom of the market may just fall out completely. The upper level of tolerance for ticket prices is not clear yet, but it will run out eventually, and when it does leisure travel is going to take a major hit, only further slowing the economy.

Just as 9/11 saw the retirement of 737-200s, 727s, 747-200s, DC-9s, 10s and L1011s, the crisis we find ourselves in today has 737 classics, the remaining DC-9s and soon MD-80s on the chopping block. Also, once the new generation of mid-size wide-body aircraft enter service at the end of next year, the older 767s will be retired.

So, as the fuel crisis for airlines only gets worse, the three options (the good, the bad and the ugly) merging, cutting capacity or declaring bankruptcy is the only way forward.

Struggling airlines invariably mean struggling manufacturers. Or does it?

The big four (Boeing, Airbus, Bombardier and Embraer) - B.A.B.E. - consider it coined - all have huge backlogs to fall back on if orders dry up.  However this crisis should give them all pause to ask themselves if their product lines are prepared for the painful market dynamics ahead. All would likely answer yes, but here's a few thoughts for the road ahead.
The first half of the B.A.B.E. - Boeing and Airbus - have their hands full with 787, 747-8, A350 and A380. Interestingly, the wide-body delays may just mean a booming winglet business for aging 767s.

On the smaller end of the market, ILFC's Steven Udvar-Hazy said neither manufacturer is in a position to launch a new program:

"Neither is in a position to launch a single-aisle program,'' contrary to the expectations of many aerospace experts, Udvar-Hazy said in an interview at an industry conference in Istanbul. "A year ago, I would have said 2016, but the complexity of the A380, the A350 and the 787 are just starting to be awoken to by the two manufacturers.''
ual757.jpg Taking fleet retirement one step farther, the 737 Classic retirement announce this week should also raise additional red flags for Boeing and Airbus. Namely the aging fleet of the 757s. After the 737, 757s are the backbone of the US fleet. Neither manufacturer has an offering that fills the gap on range. The A321 and 737-900ER barely have the capacity or the range to be a full replacements. Do airlines really need that many seats for routes that are being flown by 757 sized aircraft? I was on an overbooked United 757 between DCA and ORD earlier this week. Winglets have extended the life of the 757, but retirement isn't that far off. Airbus sees this as a niche market and Boeing is happy with its 737-900ER, but American, United, Delta/Northwest, Continental* and US Airways might see if differently for lower capacity Trans-continental or trans-Atlantic operations.

Across the Atlantic, Air France called out Airbus earlier this week on fuel prices and the development of the XXXL A380-900:

"If this expanded version was launched, Air France-KLM could order a significant amount," Jean-Cyril Spinetta, chief executive of Air France KLM, told La Tribune in an interview to be published on Tuesday and made available on Monday.

"We are trying to persuade Airbus to launch the A380-900 to make use of it as quickly as possible," Spinetta added.

"The very high level of fuel prices gives a very important place to the A380, notably to a long version."

cseries-interior.jpg If you're Bombardier there should be two very conflicting thoughts running through your head. First, you're looking at the retirement of 94 737s at United and 67 737s at Continental, you might just see an opening for CSeries to replace those aircraft. However, all signs point to a very expansion averse marketplace right now. Airlines aren't looking to expand, quite the opposite actually, and even if they were, there simply isn't money available to make big fleet replacement purchases right now.

ejets.gif Embraer has been very comfortable telling the world that they feel their product strategy is rock solid by fortifying their strategic plan with a complete business jet line rather than following Bombardier with an entry in the narrow-body fight. Yet, the as fleets consolidate and aircraft are scaled up, the E-Jets might find themselves in a precarious spot. Though, Pratt & Whitney's Geared Turbofan engine, which, according to P&W, would fit on the E-Jet, could deliver 10-15% improved fuel efficiency right out of the box for a next generation E-Jet.

The days ahead are going to be unpleasant, but this industry is inherently circular and the painful days will give way to a transformed and likely stronger industry. If oil prices don't fall, new business models for airlines and radical innovation from manufacturers will be the beacon by which the industry is guided. Only time will tell.

 *Continental operates the 737-900ER, but its 757 missions for the airline are lower capacity (and very profitable) transatlantic routes outside of the 737-900ERs range.

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