Aircraft Suppliers to Benefit from Airline Fuel Woes

Look at Google earth near Edwards Air Force Base in the Mojave dessert or at Davis-Monthan Air Force Base near Tucson, Arizona, and you might think you just found an airplane parking lot. Actually, this is where many of the older airplanes that are no longer being used are kept before they are finally scrapped. With the recent announcements from a number of airlines, the next photos from Google will show more planes taking up space there. Actually, they will be at the Mojave location, since the Tucson location is primarily for military aircraft.

Who Benefits

Who will benefit with the price of jet fuel at record highs? Of course, the firms that manage the all the mothballed aircraft will benefit. What about Boeing (BA) and Airbus [EADS]? Many traders in the market and several contributors with Seeking Alpha are assuming that the airlines will be postponing their purchases of new aircraft, as they do not need more airplanes. I do not believe this makes sense.

In an article on June 10, 2008, in the Wall Street Journal Scott McCartney points out that it cost $300 to $500 per passenger in the cost of jet fuel as shown in the table below. You can see how the high cost of jet fuel is the largest cost of an airline ticket. 

New Planes

No wonder the airlines are removing the planes from their fleets that consume the most fuel per passenger. The question is what they will do next. Like any good business, they will start to replace their existing fleet with more fuel-efficient aircraft. The new aircraft such as the 787 Dreamliner is able to reduce fuel usage per passenger by 20%. 20% of $500 is $100 per passenger on a flight from New York to LA. That is a big cost savings, and one that any airline can use to change the competitive landscape.

Further, airlines are finding that their international routes have less competition making them more profitable, though fuel costs are also a big problem. British Airways (BAIRY.PK) is looking for ways to lower the cost of its London-Sydney route, now primarily served by the Boeing 747, fuel hungry plane. This is where the more fuel-efficient planes from Boeing and Airbus will shine.

Companies that help to make these planes more fuel-efficient will also benefit. Precision Castparts (PCP), Allegheny Technologies Inc. (ATI), Titanium Metals Inc (TIE), Hexcel Corporation (HXL) and Carpenter Technology Corporation (CRS) should also benefit as the demand for titanium and carbon components grows.

The Bottom Line

Investors looking to beat the market should look to the more fuel-efficient airplanes that are going to be produced.  These planes might be the ticket to a revival of the airline industry. It is certain that without them the airlines face a bleak future. Boeing, Airbus and their suppliers should also see a pick up in business. Look to buy on dips in the price as the market pulls back.

Disclosure: None.

Comments

[Beautyseer]

What about aircraft engines? Can older aircraft be retrofitted with more efficient engines? If so, who will profit there? Rolls Royce? Pratt & Whitney? And will this scenario lessen the demand for new aircraft in an era of cost cutting? Anyone flying alternative fuels commercially that show promise in this regard?

[burque]

On engines, WGOV is a leader in making turbines run more efficiently and saving fuel, but they are not very cheap right now. For alternative fuels, planes in South Africa run on coal-to-liquids provided by SSL, but this is out of local resource necessity and not a technology that saves money or energy, from what little I know.

[Beautyseer]

Just noticed a June 11th press release on the Pratt & Whitney site that claims their engine WASHING services can save airlines millions. See "Southwest Airlines to Save Millions in Fuel Costs and Significantly Reduce Carbon Dioxide Emissions with Pratt & Whitney EcoPower® Engine Wash Services" in the press releases section of their site. Rolls Royce estimates 38% of its revenue in corporate jet engines is aftermarket servicing, so it is possible that engine washing could be a substantial item. Who woodah thogt that rapidly washing a jet engine would have much impact on fuel use and aircraft turn around?!?

[Hans Wagner]

The engine manufacturers will benefit with newer engines. However, the retrofit idea is more difficult for a variety of techncial reasons. The real benefit is making the planes lighter, which then requires less power fly, which lowers fuel consumption.

The U.S. Air Force is funding research into using bio fuels as a way to heop lower the cost of fuel. This is a few years a way at the least.

[Hans Wagner]

Beautyseer, great catch on engine washing. An interesting idea and another plus for United Technology as well as P&W.

[sunrises]

Doesn't TIE supply titanium in many other industries along with making planes lighter?

[OracleofOmaha]

Carbon composites are the future. Now all I need is for more airline manufacturers to recognize and tout that fact. And then for airlines to buy em... in bulk..... from HXL.