Mega-Carriers Likely To Have Big Fleet Decision Influence

by: Air Insight


The three US network carriers are the only mega-carriers.

Aircraft OEMs will focus on these three.

The big three fleet decisions likely will influence the rest of the industry.

As the end of 2016 there were 26,745 commercial passenger aircraft in service. While Asia/Pacific accounted for 30% of the global fleet compared to 24.3% in the USA, the latter market is much more concentrated. There are 560 airlines in Asia/Pacific whereas there are 177 airlines in the USA. The following table lists the world's top ten airlines by fleet size at year end 2016.

The top three airlines (American (NASDAQ:AAL), Delta (NYSE: DAL) and United (NYSE: UAL)) are so large that they are defined as Mega-Carriers. Southwest Airlines (NYSE: LUV) is also close to the fleet size of the big three, but Southwest does not fly across the globe.

In the next chart we explain how the big three got so big - in a word, consolidation. As these airlines merged with smaller US-based airlines they grew to become the largest airlines by fleet size.

These three airlines now cast a tremendous shadow over the aerospace industry. Their influence is probably going to decide what either Airbus (OTCPK:EADSF) (OTCPK:EADSY) or Boeing (NYSE: BA) does next. The next chart illustrates the impact these three airlines have on Boeing- and the sharply increased influence at Airbus. Since American merged with US Airways, it became Airbus' largest customer.

What should we expect these three airlines are going to do with respect to their fleets? In the next chart we can see that these airlines have been steadily improving their average fleet age. The chart also shows the unsteady relationship these airlines have had with Airbus. Only United has been a steady customer.

But whereas United bought once, American has come back and its Airbus fleet is getting younger as new deliveries arrive. The same for Delta. All three are great Boeing customers and appear to be accelerating their fleet renewals.

Before we discuss what might be coming next, first a chart showing how the big three fleet breaks down. The fleet is shown by seat count. The segment called "MOM" is the middle of market -from 170 to 250 seats. These are the 737-900s and A321s to the 767-300ERs and A330-200s. Note there are also aircraft between 200-249 seats. These are the 787s, which are separated because they are rather special in capabilities and should not be considered MOM.

MOM accounts for a third of the fleet, making it a crucial segment. The 131-179 seat segment (A320 & 737-800) is the largest at 38.2%.

Looking at what we call MOM (middle of market) is arguably one of the most complex segments because there is a crossover in it, from single aisle to twin aisle. Boeing is considering an NMA (new midsized airplane) and the competition is fierce and it has three single aisle offerings (MAX8-200, MAX9, MAX10X). Airbus offers its A321 (soon A321neo) and A330-200 (soon A330-800).

Airbus and Boeing are going to follow the lead set by the US big three because they are the largest users of the 757 and 767s. These two Boeing models are the bookends of MOM. Boeing has not effectively replaced them and Airbus snuck in. Airbus is now the leader in the segment as the next chart demonstrates.

Another area worthy of attention is the 100-130 seat segment. In this arena, Airbus and Boeing are being attacked from the bottom by Bombardier (OTCQX:BDRBF) and Embraer (NYSE: ERJ). Airbus and Boeing are moving their aircraft to higher to seat capacities.

The following chart shows the relative impact MOM and 100-130 segments have on the big three fleets.

The chart also shows that while MOM has seen updates as A321s, A330s and 737-900ERs enter service, the 100-130 seat fleet is not getting younger even as it has grown. The only way the big three lower the 100-130 segment fleet age is going to be buying from Bombardier and Embraer. As the big three focus on MOM options they are almost certainly going to think about the 100-130 segment.

As the table shows this is an attractive market for Bombardier and Embraer. Airbus and Boeing are so focused on the larger MOM segment that they can afford to ignore the 100-130 seat segment.

In summary, there are two important aircraft markets for the US big three mega-carriers. The larger one has the full focus of Airbus and Boeing. The stakes are very high because mega-carrier decisions will drive this segment. The smaller one, that has the full focus of Bombardier and Embraer, provides both with an entrée to the mega-carriers. Both fleet segments are likely to see fleet choices by the mega-carriers drive fleet decisions at other airlines around the globe.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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