Podcast: Believe It Or Not, Widebodies Are Back

Nobody wanted a twin-aisle. Now there may not be enough of them. 

Aviation Week's Joe Anselmo, Jens Flottau and Dan Williams are joined by special guest Rob Springarn, Melius Research's lead research analyst for aerospace, to discuss how the market has changed.

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Rush transcript

Joe Anselmo:              Welcome to this week's edition of the Check 6 podcast. I'm Joe Anselmo, Aviation Week's Editorial Director.

It wasn't that long ago that the market for widebody aircraft was on life support. Domestic air travel was rebounding sharply, but demand for international flights, particularly in the Asia-Pacific, remain deeply depressed. Now, that problem seems to have been flipped on its head, with concerns that demand for widebody jets could outstrip the ability of Airbus and Boeing to deliver them. So what the heck has happened?

Here to help make sense of this is Jens Flottau, Aviation Week's Executive Editor for commercial aviation who attended this week's ISTAT EMEA conference in Marrakech, Morocco. Joining Jens, is a special guest, Melius Research Managing Director and longtime aerospace analyst Rob Spingarn, who issued a research note this week on what he calls “the new widebody cycle.”

And rounding out our panel is one of Aviation Week's data gurus, Fleet, Flight and Forecast Manager Dan Williams. Jens, I'm going to start off with you. Sixteen months ago on this podcast, we had a participant say, quote, "I think we're in for a long, long period of suppressed demand for widebodies." That person happened to be named Jens Flottau. So I want to ask you, are we past long, long now? 

Jens Flottau:              Well, I guess it tells you, you shouldn't take too seriously what I'm saying or writing. There's four things that play into this in this surprisingly fast turnaround. One is retirements of the legacy fleet. A lot of airlines have retired four engined aircraft: A380s, A340s, 747-400s. A lot of capacity has come out of the market and some of it will come back, but isn't yet back. At the same time, we've seen this faster than expected surge in international demand now that travel restrictions have fallen.

I would say the third factor is that production rates are very, very low. I just checked, Airbus delivered 13 A330neos in the first eight months of the year. The A350 is a little bit higher, but not much. I don't think I need to mention much the production issues on the 787 and even less so the 777 situation. So there you go, there's a lot of thing that come into play here. 

Joe Anselmo:             Rob Spingarn, thanks for taking the time to join us. Your note obviously talks about the pains in getting narrowbodies delivered, that the deliveries can't keep up with recovery and demand for air travel, but then you say the same phenomenon is beginning to occur in widebodies, and quote, "Nobody is watching." What do you mean by that? 

Rob Spingarn:           I want to go backwards, Joe. I'm going to want to go back two years ago because like anything else in the markets, there's a pendulum effect here. We overreacted in one direction two years ago, which is where Jens came up with this long, long wait for widebody recovery, international recovery, made complete sense at the time. The same thing was true, we even talked about narrowbody would take a while. I mean, we all remember we went a while where nobody was flying, you heard stories about one person on an airplane. We took the view back in June of 2020 that all of that was going to be exaggerated and that the original equipment market was going to actually end up being better off than people thought. And we were focused on the narrowbodies at the time, and it became clear that that would recover first, and it has. We've got regions today that are above 2019 levels. In fact, I wonder if next year, next summer, we actually have some negative growth, because this summer was so robust in some of these vacation areas with the pent up demand and so on.

Now moving to widebody, the same logic applies, and Jens talked about it. So the first thing we did is we parked anything with four engines, and the problem with parking something with four engines is it's a big, expensive airplane that costs a fortune to bring back. So once you parked an A380 or a 747, it was unlikely it was ever going to see the light of day again. Now some have, I think we all know that Emirates is flying a good portion of its A380 fleet, so they've been able to do that, but the expectation is those airplanes would go away forever. Let's not forget, there was an ESG element to that, that encouraged parking those big gas guzzlers.

And so, yes, we are seeing international travel come back but I want to focus on one of the four things that Jens talked about, which is the under delivery. We've spent the last two and a half years, and this will continue another year and a half, we're going to spend four years here from 2019 to 2023 under delivering the old widebody plan by 40%. That's 40% fewer aircraft that we'll deliver for a variety of reasons. The 787 pause, COVID, supply chain, etcetera. So we're going to have a 40% shortfall in terms of cumulative four year deliveries, but at the end of that four years, we're going to have a fleet that's normal and we're going to have traffic that's normal. It's just to be short 40% of the wid-bodies. That is why I say there's a wide-body cycle, and that's why I say we overshot in one direction, and now we have to come back and ramp up the production rates, ramp up the deliveries.

Of course, Boeing has a hundred-plus 787s in theory ready to go, so that'll relieve some of the pressure, but I think we're going to have a nice strong widebody cycle, and I'll go further, I think the 777X is going to benefit from this three or four years from now. 

Joe Anselmo:             I was just going to ask you about the 777X, I mean, conventional wisdom or at least a good number of people were saying during COVID the 777X is just too big for the market now. This has to be good news for that program, no? 

Rob Spingarn:           Well, let's go back to what I think [Emirates President]  Tim Clark said recently about his A380 fleet, which was, these were left for dead a little while ago and now, I can't remember the numbers, maybe somebody else here remembers the numbers, but I think a large number of those aircraft have been reinserted into service. And he talked about, I think, six round trips from Dubai to London a day and not a seat available on any of them. And so that's what we are going to need on these big trunk lines. But at some point, those aircraft are not going to be available. Maybe for Emirates, they have the infrastructure to bring their A380s back, but most people don't. The cost is prohibitive to redo interiors, to update engines, and so when those are gone and the 747s are gone, the only reasonable answer is the 777X. 

Joe Anselmo:             Dan Williams, you're putting the finishing touches on your forecast for next year. What are you seeing in terms of widebody demand? Do you fall under line with Rob and Jens here?

Dan Williams:            A little bit of both. So, the good news for the forecast to add onto Rob is that the A380s has got a healthier outlook this year then last year, because people have made different plans. Airlines have announced they're coming back, even airlines like Qatar, who said they're never, ever, ever, ever, ever going to come back and now bringing them back. And there's many reasons down into this.

Some of the reasons that they're bringing back these big aircraft is because there's a pilot shortage. We're seeing a shift. We are seeing pilots moving out of regional jets, moving into narrowbody aircraft. And then we're seeing those routes being operated by those narrowbody aircraft, but maybe less frequently. And also we are now seeing the up gauging of some of those narrowbody routes to a widebody aircraft. And then you get the oddball ones like the United [777s] with the Pratt & Whitney [pw]4000 engines. They just upgraded those to the Polaris suite pre-pandemic and pre-engine blow up over Denver. But they were going to come back because I'm sure somebody paid something very handsomely to keep those aircraft back and they’ve come back with nice reinvigorated engines and they got nice Polaris suite, so they'll keep going for another good couple of years.

So there is some resurgence in it. I think there is a gap in the market courtesy of Boeing because of 787. Like I say, there's 100-plus that are [sitting] there waiting delivery. So, some of that gap has been caused by the manufacturers. But even pre-pandemic, we were seeing a drift and a shift away from widebody aircraft on certain routes, the A321neo LR XLR was going to steal some of those routes away from those widebodies and do some more point to points routes rather than trunk roots. However, if you look at British Airways, the A380 is ideal for them in slot constrained Heathrow. There was a time a couple of years ago where BA would've bought more.

I think BA may have bought some secondhand ones, if there were some secondhand ones with Rolls-Royce [engines] available, however, the only Rolls-Royce ones really are Emirates and they want to keep those because Emirates are not going to replace all of theirs until the days of the 777X, because they need the seat capacity on the aircraft. So there's just many factors that are building into this. Some of them OEM, some of them circumstances, some of them short term because of the lack of the 787s, other aircraft have survived, and these will play out over the coming years, for sure. 

Joe Anselmo:             Rob, what do you think about that? There were so much talk about the long- range, narrowbodies eating into permanent leading to the widebody aircraft market. Do you think that phenomenon was overstated or is this just the tide is lifting all boats? 

Rob Spingarn:           I think that's a legitimate situation. I think the XLR is going to do that. We've had some 400 orders on the XLR since 2018, 2019. Will that take out aircraft? I think of it replacing, for example, some of the 330COs that's probably a good market there. Now remember, the 330CO, we have between the -200 and the -300, we have 2,000 aircraft out there. So the 321's going to make a dent, but is it going to be the only aircraft that replaces those? No, the 787s and the 350 will play in that market as well. But this will dampen to some extent the phenomenon I'm talking about, you will certainly see some encroachment into the widebody market from the 321XLR, less so for example, from a MAX 10, because it just doesn't give you the range.

Jens Flottau:              And the big question is who's going to operate it and who's going to replace it. Who's going to replace what? So United will replace 757s across the Atlantic. Air Arabia will fly the XLR from Sharjah to Madrid maybe, or to Frankfurt or even to London, but will Lufthansa use 30 XLRs out of the Frankfurt hub on routes to Chicago, New York and Denver? No. So I guess a new type of airline operating a new type of network might well develop based on the availability of the XLR, plus the 757 replacement. The hardcore hub carriers, Lufthansa, Singapore, I don't know, ANA, not sure that's going to be happening to a big extent. 

Joe Anselmo:             So Jens, you're just on your way back from the ISTAT show for Europe and the Middle East. Tell us what the mood was there? Were people concerned about all these economic clouds and potential recessions in the US and Europe? 

Jens Flottau:              I went there and I looked at all the factors, inflation, interest rates, potential recession, high fuel costs, high labor costs, it sounds like a nightmare really for the industry. But then I met a lot of happy bankers, a lot of happy lessors that were complaining about, “We don't have any widebodies left, let alone narrowbodies.” So it seems that business is really, really good for them. Lease rates are up, and I mean, it's because of the strong demand that we're seeing right now.

The replacement, that's a big factor. We've got a huge replacement wave coming up for this industry in the next few years. Steve Házy from ALC cited a number of 6,000 aircraft will be older than 20 years in 2025, so these need to be replaced at some point. But coming back to all these negative factors, the lessors believe that the strength and revenues that airlines are seeing today is overcompensating the risks for the time being. Now it may all change or some of it may change next year, but for the time being, they're not seeing it yet. 

Joe Anselmo:             Rob, it sounds like what Jens is saying, sort of dovetails with what you wrote about in your research note, that there is just so much pent up demand from the last two years that we're going to motor through all these factors. 

Rob Spingarn:           It's not just pent up demand. It's just, it's relative, right? We've been producing for a fleet that's half the size of what the fleet actually is, now that we're well through the recovery. So in other words, we need the right-size production and right-size deliveries for how much we're flying. And if you believe that we're going to finish recovering in domestic, and then we're going to eventually finish recovering in international, we're going to end up with a traffic system that looks like it used to, but with a fleet that is stale because we under-delivered for four years.

My point's real simple, and we can talk about a hundred 787s that are ready to go, but we under-delivered widebodies, 2019 to 2023 by 700-plus aircraft. So yes, the 787s a hundred of those 700, but there are takers for the other 600 aircraft out there and they're very anxious to get those. And that is going to support this upward cycle from this point forward. The issue actually is the supply chain and how quickly Boeing and Airbus can get moving on this. 

Joe Anselmo:             Your firm put out another note, I think this was last Friday, where you talked about if Airbus and Boeing are to meet Wall Street consensus for deliveries in 2022, they're both going to really have to pick it up in the fourth quarter, and I thought it was really interesting that you said Boeing is actually better positioned than Airbus to do so. You want to explain why you said that? 

Rob Spingarn:           Yeah, it is, and it's by accident. It's because they have aircraft on hand. So because Boeing made mistakes and has several hundred airplanes ready to go, and granted, most of those are designated for specific carriers, but they have aircraft with engines. Most of the aircraft, the 787s and the 737 MAXs that Boeing has in its inventory happens to have engines, because they've been building them all along before the supply chain crunches necessarily began to happen and things like forgings and castings, which have been the issue for engine production.

Airbus, in contrast, is having trouble getting engines because of casting and forging shortfalls and therefore they have been building a small number of gliders. We've all heard about the 20-30 A320s that are sitting in Toulouse or in Hamburg, wherever they are, without engines. So Boeing with fully finished aircraft can deliver those, even if they're not producing at the rates they want to be at, whereas Airbus has less flexibility. Unexpected and ironic, but that's the way it is. 

Joe Anselmo:             Jens you mentioned Steve Házy and Icon and the lessor industry. He gave a pretty fiery speech at ISTAT didn't he? 

Jens Flottau:              He did, he was not happy with Airbus and Boeing. He said, essentially, all of his deliveries are two to four months late. He pointed to all the factors that Rob just mentioned, but it feels very much like 2018, 2019. I remember talking to Steve at the time, and he was complaining about the exact same thing. "All my aircraft are two to four months late. What's going on? They need to fix this. They have to get their act together." That's actually, when he was asked at the conference, what's on his wish list for Airbus and Boeing, it was one line. "Get your house in order." 

Joe Anselmo:             Dan, we're starting to run short on time, but why don't you bring us to the finish line? I know you're finishing your forecast, but you want to give us some clues on what we're going to see? 

Dan Williams:            Oh, some behind the scenes. Well, the outlook is reasonably rosy. Like I said, the A380 fares a little bit better. We're looking at a roundabout -- these are just off the top of my head -- 20 thousand-ish deliveries, 19-plus seaters over the coming decade, with about half of those will be replacement aircraft. Again, it winds us back to the conversation before some of those will replacing similar, so A321LRs XLRs for 75s, but then A321LRs XLRs for some widebodies. The biggest stat, and it was a big stat last year and it's a big stat this year, nearly a quarter of all new build deliveries will be some form of A321, be it the Neo, the LR, XLR. And that's a staggering fact when you consider the number of aircraft that are delivered in the world. 

Obviously there's big effects with Russia, because just to go back to the widebody angle we had with this, Russia was a very good taker of secondhand widebody aircraft. Lots of secondhand 777s went to Russia. That market is currently closed and even if the war in Ukraine was to end tomorrow, I'm sure the sanctions on Russia wouldn't also coincide with that.

So there's still fall out from that. And obviously these usual caveats, we don't envisage another global pandemic, heaven forbid, AN country tries to invade AN other country -- you can insert whatever names you wish to in that. So, the outlook is reasonably rosy. It takes it a step on, we had that slight blip be courtesy of Boeing in the 787 and obviously the 737MAX hasn't ramped up quite as anybody expected, probably Boeing first and foremost. So there's a slight deficit there as well. So find out more at [Aviation Week’s]MRO Europe [in October], that's all I could say. 

Joe Anselmo:             Okay. Well, Dan, thanks for taking the time. Rob Spingarn, always a pleasure to have you on the podcast and Jens Flottau, in an airport lounge, changing planes, heroic effort. That is a wrap for this week's Check 6. Special thanks to our producer in London, Guy Ferneyhough. And to our listeners, one request, if you're listening in Apple Podcast and want to support this podcast, please leave us a star or write a review. Bye for now, and thank you for your time.