Firstly, as reports start to circulate that 777-300ER owners are seeing GE90 engines visiting repair shops far more than was planned due to corrosion, we are able to once again point out that we ran that story first in November 2011 with updates each year, most recently updated in Issue 16 of Airline Economics. We maintain our view that these engines continue to increase in value as parts and spares are sought, but the 777-300ER currently has an overvalued residual curve until additional shop visits are taken into account and that will continue until GE is able to solve the ongoing problems with the 115B engine. Once again it is worth mentioning that the decision by Emirates to have a large engine pool for its 777 fleet has insulated this player from these problems and at the same time the value of the same has shot up.
And this old news leads us once again to our question that we have been asking for some time: If you are in the market for a 350 seat aircraft today, is it not far more logical to get your hands on an A340-600 for around $60m than paying $160m for a 777-300ER the same age? Even before you leave the ground you are $100m up and then over the life of the aircraft you have Rolls Royce guaranteeing engine maintenance costs of four for two. Then take into account the fact that the GE90 115B is coming off wing too often, MROs are seeing delays in getting parts from GE for the 115B and you have a four engine aircraft that is indeed cheaper to maintain than a two engine aircraft. What about fuel costs I hear you cry!
There is no getting around the fact that a 777-300ER will burn less fuel than an A340-600, and it will reduce flight times as it is faster, but when considering fuel burn we need to also consider the modern business model of the US majors, some of whom have done very well indeed out of holding onto older aircraft types rather than paying far more for types that burn less fuel while fuel is flat or while hedges are in place.
The North American market has over the past six years cut seats, raised prices, eliminated unprofitable routes and charged for everything that it is possible to branch out and then re-include as an add-on. This, along with high fuel prices, destroyed the mantra that it was all too easy to start an airline. But it is the case that a competitor can still enter the market using the Allegiant model and there remains a gap in the market for an entrant to run an ultra-low-cost long-haul operation with an A340-600, which over the course of a five year period will provide far better economics than other 350 seat long range aircraft and in the process plug a market gap before next generation aircraft come online and fill it completely.
Indian market moves
The Indian airline sector is expected to post losses in the March 2014 quarter as high fuel (ATF) prices (up over 10% year on year), flat growth and a weak rupee hit home. Year on year the Indian rupee is some 14% down against the US Dollar increasing the operational cost by that much at least on MRO, leases and pilot salary costs for a start. It is estimated that the combined losses of Jet Airways and SpiceJet are expected to be in the range of Rs 750-800 crore, against Rs 930 crore in the same quarter last year.
According to the Directorate General of Civil Aviation (DGCA) demand fell by 5.8% in the January-February period for 2014. But the good news was that capacity was cut by 6.4% to compensate.
But yet again carriers in the period to march decided to go on a market share war with discounts of 75% and more which lead to an increase in demand of 8.8% with a calculated increase of 5.1% in the capacity of the airlines industry. All sold at a seat cost loss one assumes. Revenues of Jet Airways (Jet Airways and JetLite) and SpiceJet are on average expected to grow by between 10% and 15% in the quarter year on year but this will be consumed by cost increases. Operating losses of Jet Airways and SpiceJet combined should narrow to 10% from 16% last year for the same period.
Now, although travel agents in India say that IndiGo is matching SpiceJet prices, it is the case that IndiGo has increased prices for add-ons such as food, baggage etc and is therefore adopting the successful US model to a point to offset lower prices in the battle for passengers. Therefore I expect IndiGo to surprise for the period to March and for this period and for it to pull further away from rivals. IndiGo looks good.