On Monday, the 17th of June, the Paris Airshow will kick off. AeroAnalysis will be covering the event with daily overviews and analysis exclusively on Seeking Alpha. Aerospace and airline companies use the stage of this trade show to reveal customers, announce new orders and commitments or launch new aircraft. Over the past few years, Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) (OTCPK:EADSY) have secured many orders for their single aisle jets during air shows. A lot of big airlines such as Delta Air Lines (DAL) United Airlines (UAL), Lufthansa (OTCQX:DLAKF), British Airways (OTCPK:ICAGY) and Ryanair (NASDAQ:RYAAY) have already chosen between the Boeing 737 MAX and Airbus A320 to support their fleet in the years to come. One airline or better said airline group that has not yet placed an order with Boeing or Airbus for the next generation of single aisle jets is Air France-KLM (OTCPK:AFRAF). In this report, we look at what the possibilities are for the airline group, which consists of KLM, KLM Cityhopper Air France, HOP!, Transavia and Transavia France, and why an order should be placed soon… possibly during this year’s Paris Airshow.
Air France-KLM late in Europe
Air France-KLM is one of the biggest airline combinations in Europe with a fleet of 545 aircraft, including 243 Boeing and Airbus single aisle jets. In comparison, the Lufthansa Group (OTCQX:DLAKF) has a fleet of 431 single aisle jets from Boeing and Airbus, while easyJet (OTCPK:EJTTF) has a fleet of 326 aircraft and the Ryanair Group Holding has a fleet of 475 jets. Out of all major groups in Europe, Air France-KLM has been one of the few, if not the only, not to have made any disclosed decision yet.
Big chances for Boeing and Airbus
Currently Air France-KLM flies with a fleet of 90 Embraer (ERJ) aircraft, 25 Bombardier (OTCQX:BDRAF) aircraft, 114 Airbus A320ceo family aircraft and 129 Boeing 737s. So, there are many parties involved and things are further complicated by the group operating several airlines independently, each with their own fleet decisions. Luckily for the airline group, CEO Ben Smith has pulled the plug on some airlines within the group that should remove cost overhangs and allow for uniform fleet decisions. Nevertheless, the actual replacement of the current fleet is going to be a puzzle where important decisions will need to be made.
KLM Royal Dutch Airlines
Table 1: KLM Group fleet (Source: AeroAnalysis)
Starting with the KLM group fleet consisting of the mainline carrier KLM Royal Dutch Airlines and regional airline KLM Cityhopper, we see that the group consists of 100 aircraft. KLM Cityhopper operates a young fleet of 49 Embraer jets and currently we do not see a lot of reason to assume that KLM is already looking to replace these aircraft.
For the Boeing fleet operated by KLM Royal Dutch Airlines, a fleet decision seems to be long overdue. Typically, single aisle jets are operated for 28 years, but these days you will see the top tier airlines getting rid of their aircraft much faster at 20-25 years to maintain a young and cost-efficient fleet. Additionally, when leased, the average lease is around 9 years. The KLM fleet has an average age of 12 years with some of the aircraft already being older than 20 years. KLM has decided that by 2022 the Boeing 737-700 will be phased out and replaced by the Boeing 737-800. However, what we did note is that apart from 1 order with Boeing there are no orders from KLM and we haven’t heard any lease arrangement. Currently Boeing has 4,621 Boeing 737 MAX aircraft in backlog, so Boeing has production filled for the coming 7 years. This gives the impression that KLM is rather late with its fleet decision.
The Boeing 737 MAX is the most fitting fleet solution for KLM. However, it seems that the airline is either betting on Boeing to find early slots for the airline or that the airline is the unidentified customer that signed a tentative agreement for 125 Boeing 737 MAX 8 jets last year with purchase rights for 50 more aircraft.
Either way, KLM needs around 50 aircraft just for renewing the fleet. Currently the oldest Boeing 737-800 aircraft have already hit the 20-year mark. So, especially if fuel prices go higher, KLM will have a difficult time competing on the European mainland if its fleet renewal does not kick off in the coming years. If the airline places an order now, roughly 7 years from now (assuming no unoccupied slots in Boeing’s production book), the first aircraft will arrive in the fleet… right at the moment when the oldest aircraft will turn 28 years. So, if KLM has not placed any order with Boeing yet… now is the time to do it. A possibility would be to have a fleet of MAX 8 and MAX 10 aircraft, to allow for capacity growth, but given that KLM operates a small subfleet of 5 Boeing 737-900s the Boeing 737 MAX 8 might also suffice.
Table 2: Transavia fleet (Source: AeroAnalysis)
Both Transavia airlines operate a fleet of Boeing 737 aircraft, so the Transavia operations and a possible order should be viewed in connection with the KLM fleet. Currently Transavia has a relatively young fleet. Nevertheless, Transavia intends to operate the Boeing 737 MAX by 2021. This is where it gets tricky. With some exceptions KLM and both Transavia airlines do not need to order big. Half of the fleet of KLM and Transavia will turn 20 years or more within now and the coming 7 years, which is how far the current 737 MAX backlog stretches. If an order for those aircraft needs to be placed now, we’d be looking at roughly 60 Boeing 737 MAX orders for KLM and Transavia. Rather interesting to note is that KLM and Transavia have 129 Boeing 737 aircraft in their fleet. We have no confirmation whatsoever, but it could very well be the case Air France-KLM is behind this tentative agreement mentioned earlier.
Either way, when an order will be placed, we’d expect an order covering the replacement of the entire fleet and not a partial one. So, Boeing could count on 130 aircraft just to support replacement, where timing of introduction and exit dates of the aircraft can allow for capacity expansion.
Table 2: Air France fleet (Source: AeroAnalysis)
Air France, the mainline carrier, currently operates a narrow body Airbus fleet and that is also not expected to change. However, what complicates things is that HOP!, the regional airline of France, will be integrated into Air France and the same goes for Joon.
Source: Air France-KLM
The Air France fleet seems to be in dire need for its entire single aisle fleet, except for the Airbus A320ceo. It seems to be most certain that the Airbus A321ceo will be replaced by the Airbus A321neo. The big question, however, is how Air France will replace the A318/A319. One would think that the Airbus A220-100 and the Airbus A220-300 are preferred. The Air France fleet could be renewed by a combination of A220/A321neo orders possibly in combination with order for the A320neo. JOON, which will be migrated back into Air France, has a fleet of 12 Airbus A320/A321 aircraft with an average age of 13.3 years. So, also for this fleet replacement is desired.
Source: Business Traveller
The biggest question mark is what will happen with the HOP! fleet. It is known that the ATR 42 will be leaving the fleet this year followed by the ATR 72 a year later. Currently HOP! has the ERJ-145 and ATR-42 as 50-seat aircraft, the ATR-72, ERJ-170 and CRJ-700 as 70-80 seat aircraft and the CRJ-1000 and Embraer 190 as 100-seat aircraft. By eliminating ATR, HOP! will turn into an airline without any turboprop aircraft but the fleet remains complex with overlap in seating but no single manufacturer can offer a uniform product spanning the 50-100 seat segment.
An odd but somewhat fitting set up would be if Mitsubishi Heavy Industries (OTCPK:MHVYF), which is set to acquire the CRJ program from Bombardier, offers its MRJ-70 (70 seats), MRJ90 (90 seats) and CRJ-1000 (100 seats). It would offer a solution in the 70-100 seat segment, while Embraer offers a solution in the 90-130 seat segment. A lot is going to depend on what segment Air France still wants to serve and whether it wants to keep serving a single-class service across its regional network. If Air France focuses on the 90 and 100 seat segment with HOP!, Embraer would offer a fitting solution with the Embraer E175-E2 and Embraer 190-E2, while instead of ordering the Airbus A220 for the Air France mainline fleet, the Embraer E195-E2 would be ordered and orders for the Airbus A319neo.
Whether Air France selects Embraer or the Airbus A220 likely to a major extent depends on the strategy that Air France management will stipulate for HOP!. At this point a re-orientation of HOP! would allow the Air France single aisle fleet to be simplified from 12 types to just 6.
Due to the variety in the HOP! fleet and recent integration into the Air France fleet, it is hard to tell what the Air France-KLM order will look like. There are a couple of possibilities:
- The odd solution would be if the airline goes with an order mix of 50 MRJ and CRJ aircraft, 50 A220 aircraft and 60 Airbus A320neo family aircraft for the Air France combined fleet along with 130 Boeing 737 MAX aircraft for KLM, Transavia and Transavia France.
- The other solution would be a more uniform one with 60 Embraer E2 orders, 100 Airbus A320neo family aircraft and 130 Boeing 737 MAX aircraft.
- Alternatively, if Air France decides not to order any replacement for the A320ceo, it could opt for 60 Embraer E2 orders, 65 Airbus A320neo family aircraft and 130 Boeing 737 MAX aircraft.
The single aisle fleet renewal of Air France-KLM is a complex one because the airline group is looking to place new order while it is also restructuring its brands and with that likely also strategic changes will be made that can impact the need for certain aircraft. Air France has to weigh whether it goes for a uniform fleet where it accepts that the Airbus A319neo is less efficient than the Airbus A220-300 or it accepts introduction costs and costs associated with support for the Airbus A220 which is more fuel-efficient than the A319neo opting for an A220/A320neo family fleet.
If Air France-KLM has not yet figured that part of the equation out, the airline group still needs to place an order for 200 Boeing and Airbus aircraft sooner rather than later, where the fleet planning can be put together in such a way that the orders can also be used to grow capacity. The obstacle we are currently seeing is that while an order for the Boeing 737 MAX seems to be a logical one granted that Boeing fixes the problems with the aircraft, placing an order now might put an airline in an unwanted spotlight. Ideally, we’d see the Air France-KLM Group ordering during the Paris Airshow but if need be it could also happen in the months after when there is more clarity on return-to-service for the Boeing 737 MAX. I continue to believe that Air France-KLM should be placing an order this year, where Airbus as well as Boeing will benefit with a possible role for Embraer as well.
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Disclosure: I am/we are long BA, EADSF, AFRAF, DAL. 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.