Jet fuel prices have long driven airline profitability and the aviation industry as a whole, representing between 14% and as much as 31% of airline operating costs in the past decade, according to global consulting services company ICF. But it is not the sole driver when it comes to aircraft deals and asset valuations.
The company, the sole provider of aircraft valuations and lease rate data to CAPA – Centre for Aviation’s online Fleet Database, says that history shows that significant movement in fuel price “is a key driver” in aircraft purchase and retirement decisions, given that the comparative operating economics of new versus used aircraft “change dramatically” with a relatively small change in fuel price.
“Airline ordering behaviour has grown reactive to fuel prices, especially since the end of the 2008-09 recession,” explains ICF. When oil prices remained stubbornly high, airlines “were motivated to place new aircraft orders to reduce fuel consumption” and gain operating cost advantage, with the added benefit of reducing emissions and noise.
A clear example of this can be seen in the first year of this decade. As jet fuel reached USD3 per gallon in 2011, Airbus registered a record order of more than 1,000 A320-200neo aircraft in a single year—and that is not counting the smallest and largest variants of the neo family, the A319 and A321.
But ICF notes that the cost of fuel has differing impacts on narrowbody and widebody aircraft. As fuel prices have gradually risen, recent years have seen a resurgence in orders for next-generation aircraft (especially the Airbus A320neo and Boeing 737 MAX families). “These increased orders coincide with the retirement of older, less fuel-efficient aircraft,” it explains.
As fuel prices increase, older aircraft become less profitable to operate at higher utilisations than advanced technology aircraft and are consequently retired in increasing numbers. This is especially true in the narrowbody sector, notes ICF. “As fuel started inching back up in 2017, more than 800 ageing jet aircraft were retired worldwide,” it says.
On the other hand, as narrowbody aircraft have “become more capable,” demand for widebody aircraft has been “relatively muted,” acknowledges ICF. Order data shows widebody aircraft commitments constitute less than 20% of the total commercial jet aircraft orders in the current decade, compared to more than 45% in the previous decade. “A drop in fuel prices, among other factors, has also adversely impacted certain next-generation widebodies (such as the Boeing 777X and Airbus A330neo, launched in 2013 and 2014 respectively), ICF explains.
While fuel is a consideration when it comes to aircraft decisions, the lower order volume for widebodies during the most recent cycle, relative to single aisle aircraft, can also be attributed to “smaller customer bases and significant order volumes achieved in the post-9/11 period driven by ‘clean-sheet’ designed 787 and A350,” says ICF.
It is clear these new aircraft has changed market sentiment against large widebodies in the face of route fragmentation as air traffic demand grows and new city pairs become economically feasible, only to be served by smaller aircraft.
Interestingly, ICF highlights that the retirement patterns of widebodies, unlike narrowbodies, are not strongly correlated to fuel price. Several drivers make it harder for airlines to retire widebody aircraft given their high level of customisation and deployment on strategic routes, it explains. Additionally, a smaller widebody operator base and higher reconfiguration costs makes widebody aircraft much less liquid than narrowbodies.
The data above shows that the value premium of new versus older aircraft does move in close correlation to fuel prices. But what does this all mean for the asset values ICF provides to CAPA? When it comes to aircraft value appraisals ICF acknowledges they also require “a comprehensive evaluation of external factors”.
“When conducting aircraft appraisals, it is important to take into account outside influences beyond just the physical attributes of the aircraft itself. External factors can and do influence an aircraft’s value and their active consideration by appraisers can help form a more reasonable appraisal range,” it says.
Launched last year and powered in association with CAPA – Centre for Aviation and CAPA Fleets, ICF’s online Truebook platform encapsulates insights from ICF’s appraiser team and reflects detailed and thorough review of the commercial and technical aspects of narrowbody and widebody aircraft, product life cycle, incorporated technology, industry demand and current order book.