U.S. reliance on large narrowbody orders showing first signs of stress

US reliance on large narrowbody orders showing first signs of stress

Why it Matters:

As the world waits for narrowbody aircraft, the U.S. is first in line. The combination of an influx of large narrowbodies and a sharp reduction in regional flying has created new challenges for the market. Notably, the number of options for travelers has dropped at many of the nation’s medium-sized airports.

While seemingly trivial, the impact of this will be felt across fleet planning teams and earnings for years. With an expansive order book of almost exclusively large narrowbodies on order, the benefit of unit costs and overall capacity growth is limited to the most significant markets. From a business travel perspective, the number of options to complete a short trip is sharply lower in most cities, creating further challenges for recovery in the sector.

Crucially, the number of options to reroute passengers around operational disruptions is also hampered by the reduction in flights. With more people on fewer flights, the opportunity to route passengers around a storm in the Midwest is impaired.

The Edge:

While the trend is up-gauging, watch the U.S. market for what it looks like when that trend is stretched too far. The world’s largest market has been built on connectivity, but that connectivity has been breaking down since 2010, largely as a result of the growth of ULCCs and consolidation. However, the new trend of up-gauging has accelerated since 2019, creating the first signs of stress by way of domestic RASM erosion.

We believe this erosion will only continue, considering the order books in place. From an aircraft perspective, we also consider aircraft demand in the very high likelihood of a recession in the next 24 months, and an international recovery that can only slow down after this summer’s 2022-like sharp recovery. Balancing it out are the delivery delays, which may just become welcomed by the U.S. airlines next year. The pressure to increase delivery rates may begin to be relaxed, not because the world doesn’t need narrowbodies, but because the U.S. has too many on the way and control of the early positions.

Opportunities to shift aircraft to aircraft-hungry regions could become more defined in 2024, particularly to India and China. Orderbooks for those countries are large, but further out, creating an imbalance of supply and demand between them and North America.

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