INDUSTRY INSIGHTS Aviation Briefing Prepared by ICF for ALTA 2018 Edition 1 TABLE OF CONTENTS Quarterly Aviation Briefing 2018 Edition 1 A320neo JetTrader ................................................................................................................................................................................3 Taking a Big Picture View of Aviation Sector Rates, Charges and Taxes… ............................................................................5 Making the Case for a Middle of the Market Aircraft ..................................................................................................................9 Calendar Controlled Maintenance Items for ALTA ..................................................................................................................... 15 A320neo JetTrader by Kara Levine | Manager, ICF [email protected] Angus Mackay | Principal, ICF [email protected] Background Airbus and Boeing have largely operated a duopoly in the over 100-seat aircraft market since the purchase of McDonnell Douglas by Boeing in the late 1990s. In the late 2000s, induced by sustained high fuel prices and potential challenges to the then existing industry dynamic from Bombardier with its CSeries and from China’s Comac C919, the major airframers brought forward plans to update their narrowbody product lines. Rather than waiting until the 2020s to launch new designs, Airbus (later followed by Boeing) opted to take advantage of the engine advancements from Pratt and Whitney with its geared turbofan (GTF) PW1000G and CFM International with its Leap-X engine and offer re-engined narrowbody aircraft. The advancements from the engine manufacturers, coupled with aerodynamic and airframe improvements, were expected to deliver fuel savings of up to 15 percent. The Airbus A320neo (New Engine Option) program, comprising A319, A320 and A321 family variants, was officially launched in December 2010 and orders from Virgin America (30 A320neos) and IndiGo followed shortly thereafter. The A320neo became one of the fastest-selling aircraft ever with more than 2,000 orders placed in the two years following the program’s launch. The primary change in the A320neo over the A320ceo (Current Engine Option) relates to the engines. Like its predecessor, the A320neo is offered with two engine options, the CFM International (CFMI) Leap-1A and the Pratt & Whitney (PW) PW1100G-JM. The Leap-1A is a significant improvement over CFM’s venerable CFM56 line that powers the A320ceo family, Boeing 737NG, and Airbus A340-200/300 aircraft. The Leap-1A incorporates scaled- down technologies from GE’s GEnx Low Pressure Turbine - such as flexible blades - as well as utilizing advanced composites materials. The bypass ratio of the engine is 11:1, an improvement over the 5-6:1 of the CFM56-5B. The Pratt & Whitney PW1100G-JM, colloquially known as the GTF, is considered a more radical technology shift, using a reduction gearbox to permit the fan of the engine to rotate at a different speed than the rest of the engine modules in order to maximize engine efficiency and reduce the number of engine stages. According to Pratt, the engine offers improved fuel efficiency of 16 percent and reduces the noise pollution by more than 50 percent. To date, both engines have experienced reliability problems. The A320neo retains the same cabin fuselage shape and length as the earlier A320ceo, but can seat up to nine more passengers due to the “Space-Flex” cabin which introduces a new galley and lavatory configuration. Other changes to the airframe are wingtip devices known as sharklets providing a 3.5 percent increase in fuel efficiency. Sharklets were first available for retro- and line–fit on A320s starting in 2012 and are standard on the A320neo. Improved cabin air purifying systems, lighting, and storage were also introduced with the A320neo. As of November 2017, 169 A320neo aircraft were in service with more than 28 airline operators worldwide. Aviation Briefing Prepared by ICF for ALTA 2018 Edition 1 3 Market Outlook The A320neo competes in the larger narrowbody aircraft space against its predecessor, the A320, as well as the Boeing 737-800 and Boeing’s re-engined offering, the 737 MAX 8. To date the Airbus A320neo has recorded more than 3,500 orders and its backlog continues to outpace that of the latter aircraft. The orderbook for the aircraft is particularly strong in the Asia Pacific region, in part due to the growth of Low Cost Carriers (LCCs) such as IndiGo and AirAsia. Much of the backlog for the A320neo seems to be dedicated to traffic growth rather than replacement as the majority of the current in service fleet of the A320 is less than 10 years in age (2,612 out of over 4,000). A320neo Fleet Status Number of Active In Service + Region Firm Backlog Options Operators Fleet Backlog Africa 0 0 23 23 0 Asia/Pacific 14 84 1,215 1,299 254 Europe 6 43 442 485 329 Middle East 0 0 178 178 70 North America 2 12 172 187 0 South America 6 27 371 398 40 Unknown 0 0 1,141 1,141 10 Grand Total 28 169 3,542 3,711 693 The first A320neo entered into service with Lufthansa in January 2016 and nearly 170 aircraft have been delivered. The A320ceo is also being delivered, and is likely to do so through the end of the decade due to both teething problems with the new aircraft and engines, as well as the low fuel cost environment, which has diminished the cost advantage of the A320neo with regards to fuel savings. With respect to engine choice, the CFM Leap engine seems to be the preferred option with 38 percent of the combined backlog and in-service fleet. Nevertheless, a large number of orders are currently listed as undecided as to engine choice (almost 40 percent); however, many of the orders placed in the last year have opted for the Leap engine likely influenced by the continued PW1100G-JM issues. The overall market for the A320neo is still developing and the aircraft has ENGINE CHOICE FOR IN-SERVICE AIRCRAFT AND ORDERS certainly faced short-term challenges with respect to engine program development. However, with the strong orderbook from a diverse set of airline operators and leasing companies, the aircraft seems destined to gain a significant market share of the large narrowbody segment. If 38% 38% Airbus’s bid for Bombardier passes regulatory muster, the aircraft likely will not face a significant competition outside of that offered by Boeing. As a result, it is likely that the duopoly position of the two manufacturers will continue over the next decade. 24% CFM PW Undecided Aviation Briefing Prepared by ICF for ALTA 2018 Edition 1 4 It is widely understood that the growth of air travel and Taking a Big Picture expansion of air service has brought significant benefits for local economies as well as for airlines, airports and View of Aviation hotels, which is the big picture. Curiously, many industry Sector Rates, Charges beneficiaries lose sight of this and devote energy to opposing the very fees and taxes that fund aviation and and Taxes tourism infrastructure. This often creates unfortunate tensions among stakeholders in the aviation and tourism by Jared Harckham | Vice President, ICF sectors, when they should be working as one for the [email protected] common good. Fees and taxes imposed on the industry Eric Toler | Manager, ICF arise primarily from the stakeholders’ need to fund their [email protected] operations, which is understandable. These organizations include national civil aviation departments, immigration Recent years have seen countries in Latin America and and customs services, airports, tourism departments, and the Caribbean experience a broad range of passenger airlines, but can also include a country’s general budget. growth rates. Some countries have experienced Fees and taxes that are levied include: consistent, annual double-digit growth as a result of supply and demand factors, including the expansion §§Taxes on air tickets and hotel stays, paid by of the low-cost carrier model, robust economic growth, passengers/visitors and the growing middle class. §§Airport fees paid by passengers in their tickets PASSENGER TRAFFIC GROWTH IN SAMPLE COUNTRIES, §§Airport fees paid by airlines as landing fees, rent, 2011-2016 CAGR parking and more The requirement for a visa along with complex issuing Dominican Republic §§ Mexico procedures and often a hefty fee for the visa, paid by +8% +10% travelers and airline crew Panama Colombia +20% +10% §§Restrictive air service bilateral agreements which can Ecuador limit aviation competition and protect inefficient airlines -2% Brazil +5% This short article will not address each issue in detail but Peru will focus on a few examples that illustrate the need for +15% Uruguay stakeholders to understand each other’s requirements and Chile +1% to work together for the good of multiple stakeholders as +9 fees and taxes are established. Argentina +7% Airports need revenue to operate and to fund capital investments, while airlines need to keep costs at reasonable levels to permit profits and expansion. Hotels need revenue Source: Airports Council International to operate, maintain, and promote their businesses, while governments need revenue to operate, create infrastructure, and to promote their destinations. Aviation Briefing Prepared by ICF for ALTA 2018 Edition 1 5 Some stakeholders argue that in many countries in the Latin Another example of controversial costs are the landing America and Caribbean region, taxes increase the cost of fees and other charges at airports. It is understandable airfares, making those destinations less competitive. In that airlines want these costs to be as low as possible, but addition, high airport fees can raise costs for airlines, making there are cases when airport charges must be understood by carriers because they fund airport facilities that it difficult to justify entry or expansion in a market due to enable massive economic impact and connectivity for lower levels of profitability. These arguments are intuitive, the community and support improved airline safety and but a case can be made that each situation is different and operational efficiency.