Airshows and holidays
The last Airshow in the usual cycle was held in Singapore in early February 2020. The first news of a dangerous new virus was already out, and the even was rather muted. What followed, as we know, was a prolonged nightmare as COVID-19 brought a halt to decades of unparalleled growth in the airline business. The industry’s two signature events, Paris and Farnborough were cancelled as the industry hibernated. The Dubai Airshow, which took place in November 2021, was the first of its kind held for almost two years.
Airshows are known for the announcement of huge deals and lavish entertaining. Almost all the business has been usually concluded long before the actual event, which is just an excuse to wine and dine the buyers. Dubai’s hotels and restaurants were all full and the weather was warm but past the scorching summer heat. The mood at the show was optimistic and cheerful after almost two years of unremitting doom and gloom.
Predictably the show led to a spurt of orders, primarily for narrow-body aircraft also known as single-aisle jets. Indigo Partners of the USA (not to be confused with Indigo Airlines of India) ordered Airbus A321neos for their portfolio of airlines, Wizz Air of Hungary, Frontier of the USA, Volaris of Mexico and JetSmart of Chile. The European manufacturer had the major share of the 408 orders announced, a total which included the first for the A350 freighter. Boeing has long dominated the freighter market, first with its 747 and later the twin-engine 777F, which together form the backbone of what has been the only profitable niche during the pandemic. Airbus’s A330 freighter has a fraction of the payload that a 777F will carry and has seen disappointing sales. Airbus is determined to regain the market share it has ceded in this segment and the A350F is the design they hope will do that. But the A350’s carbon-fiber fuselage makes adding a large cargo door a complicated engineering challenge, which may delay production.
Boeing did not walk away empty-handed though, announcing orders for 101 aircraft. This included a substantial commitment for the Boeing 737 MAX from Indian start-up Akasa Air based in India’s tech-capital Bangalore (Bengaluru), as India’s domestic market heats up. The soon to be privatised Air India has not announced any orders yet, but these are expected early in 2022.
Other than the A350 order, most of the Dubai show’s sales were for single-aisle airliners, with prices of new aircraft recovering to almost pre-pandemic levels. However, the larger twin-aisle (wide body) jets are still in the doldrums with no substantial orders forthcoming. The discount on older single-aisle jets is now within 20% of 2019 values, representing a strong recovery from a year ago, but twin-aisle types are selling for less than 50% of their earlier prices.
Soon after the Dubai Airshow came the most important travel period of the year for US airlines: Thanksgiving weekend. A little-known fact of the airline industry is that leisure traffic is seasonal. Traditionally, the peak summer period (July and August), the Easter and Christmas breaks were the only reliably profitable weeks of the year for European airlines, with Thanksgiving being an additional hugely profitable week in the USA.
With more economic growth in other parts of the world, this narrow window of profitability has grown somewhat. The Chinese Lunar New Year and Golden Week (in autumn) have been busy times pre-COVID. Add to this the Hajj pilgrimage, Eid festival and a few other holiday periods – in total there are only around 22 weeks of the year when leisure-centric airlines can expect profitability. The challenge has always been how to make enough profit in this narrow window to tide over the remaining 30-something weeks during which loads are poor and airlines are almost guaranteed to lose money.
Slaves to the oil price
Another factor that makes life difficult for airline managers is the unpredictability of the price of aviation fuel. Ever since the first ‘oil shock’ of the 1970s, oil prices have fluctuated wildly. Most efforts to ‘hedge’ the price of aviation fuel have not been very successful, with some airlines losing billions while attempting to do so.
Currently, oil is trading at around USD 72 a barrel, down slightly from a high of USD 85 only a few weeks ago. At the height of the pandemic, oil prices briefly fell to almost zero as storage facilities ran out of space, but suppliers have drastically cut output since then, resulting in a price surge just as airline traffic appears to be recovering.
To further complicate matters, some airlines face a monopoly fuel supplier at certain airports, such as CPC (Ceylon Petroleum Corporation) in Sri Lanka. For many years CPC has charged a premium of USD 0.30 per US gallon of aviation fuel sold in the country. One ton of jet fuel is equivalent to approximately 29 gallons, and a long-haul flight from Colombo to London or Melbourne will consume about 60-70 tons. That means a premium of around 2,000 gallons, or around USD 600 extra, in fuel costs alone for Sri Lanka’s national carrier, compared to what competitor airlines will pay.
In a peculiar move, CPC abruptly lowered the premium to USD 0.10 a gallon in early 2019, resulting in even greater losses to the fuel supplier while making it cheaper to fly out of Colombo. Such are the vagaries of government-owned ‘business’ undertakings.
COVID surging again?
As this column goes to press, reports of a new ‘variant of concern’ named Omicron are emerging from Africa. The dangerously virulent new mutation was first identified in South Africa but has since spread to Hong Kong, Israel and Belgium. More than a dozen countries have announced the suspension of air services to southern Africa in the light of this information. It can only be hoped that this outbreak is contained and does not result in a situation like that caused by the Delta variant earlier this year. Whether the disruption caused is enough to derail the crucial Christmas travel period remains to be seen, but early signs are rather ominous.