Our week involves working with clients to build deep insights and forecasts for the coming market. With terabytes of new data ingested each week, we are constantly exploring new techniques to find the new trends, and to convey them through visualized data. This newsletter is just a portion of what we discovered throughout the week.
For industry observers, professionals, and those just curious, we offer the following insights free of charge.
United has a new problem
United just ordered another 270 narrow-bodies. The recent order consists of 150 737 Max 10 aircraft, 50 737 Max 8s, and 70 A321neos with deliveries beginning in 2023. In addition to the 228 on order, this brings the total number of new narrow-body aircraft commitments to just shy of 500.
Much has been discussed in the industry about United’s large order, the massive increase in seat gauge it will bring, and how the new fleet will fit into the recovering market. Yet, it is the ability to take delivery of the massive commitments that is now United’s new problem.
With 138 aircraft arriving in 2023 alone, according to the United press release, United will average nearly 11 aircraft deliveries per month. Historically, no airline has consistently achieved this number of new deliveries.
The operational, financial, and legal orchestra that takes place around an aircraft delivery is intense. The aircraft needs to be thoroughly inspected and tested at the factory, legal teams work to ensure proper transfer of ownership, and financing for the aircraft needs to be arranged, aligned with the delivery, and closed. This doesn’t even begin to describe the operational challenges – from pilot hiring and training to making room for 500 aircraft through retirements or growth, to ensuring there is ample gate space (or parking available) to house the aircraft when they arrive.
This order is a record in more than just aircraft quantity for United. It will also be the most ambitious injection of new aircraft into a single airline in aviation history. For context, American Airlines, which placed a record-breaking 460 narrow-body order in 2011, only averaged 7 aircraft during their peak deliveries in 2015. Of course, American’s balance sheet infamously bore the brunt of the financial impact, creating large debt loads to accept the seven aircraft per month.
Each month in 2023, United will take 11.
As a further point of reference, Southwest Airlines, which also recently placed a large order for 737 Max aircraft, has never averaged more than 5 aircraft per month, and Delta Air Lines briefly peaked at 7 per month in 2019.
Of course, Delta has been a heavy proponent of used aircraft, leveraging their Delta Tech Ops capabilities to be opportunistic with aircraft deals as they become available. In fact, they are now deploying that very same strategy, according to a fascinating scoop from Jon Ostrower at The Air Current. In the wake of United’s order, Delta is quietly pursuing a blockbuster deal of its own in quintessential Delta fashion.
As the world watches United’s deal, The Air Current subscribers are already reading about the next one. The article, alone is worth the annual subscription.
But for United, beyond each of these yet-to-be-demonstrated challenges of taking delivery of new aircraft lies the biggest yet – paying for them. United is anticipating $8.5 billion in capital expenditures for 2023, with similar numbers in 2024. In addition to the $4.5 billion in capex through 2022, United is staring down over $21 billion in a combination of new debt or operating leases over the next 3 years. For comparison, United entered 2020 with just $14.5 billion in total long-term debt and $5.5 billion in operating lease commitments.
Further to the challenge is that narrow-body aircraft aren’t even United’s oldest assets. With 767-300ER aircraft approaching 25 years, and 777-200 aircraft averaging similar, United still has a wide-body challenge that could further increase capex into the 2020s.
So far, United has said they are more comfortable with their older widebodies than narrow-bodies, however, the higher utilization of long-haul aircraft also offer a greater exposure to the higher fuel burns older aircraft bring. Considering many of these older widebodies also fly to Europe – increasingly sensitive to carbon emissions and with a recent history of disincentivizing airlines from producing them – economic pressure to increase United’s capex with a new widebody order could arrive sooner than expected.
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