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Boeing exposure and Q4 trends impacting the airline industry

Now that the U.S Big 4 airlines have all reported their earnings, let’s look at some of the key trends underpinning the airline industry this quarter. The industry continues to be marred by several macro trends, including a triple whammy of inflation-driven increasing maintenance and labor costs, supply chain issues, and the unreliability of a major supplier (Boeing). Boeing’s perennial woes seemed to be a major point of discussion as every Big 4 airline faced an analyst question about it during their earnings calls.


The exposure of these airlines to Boeing is significant, with every Big 4 carrier having at least 50% of their mainline aircraft made by Boeing. In fact, Southwest Airlines is completely reliant on Boeing as its sole supplier of aircraft.


Supplier Reliance at the Big 4 Airlines

Airline

% of Boeing aircraft

% of Airbus aircraft

% of other aircraft

Total number of mainline aircraft

United Airlines

81.5%

18.5%

0%

944

American Airlines

50.5%

49.5%

0%

965

Delta Airlines

53.2%

46.8%

0%

978

Southwest Airlines

100%

0%

0%

817


Currently, Boeing is facing major issues with several of its models, especially with its MAX series. Here are some recent issues plaguing the beleaguered manufacturer with some of its models.



Problems Facing Boeing Models

Model

Problems

MAX 7

FAA certification delays

MAX 9

Grounded by several airlines recently after an incident

MAX 10

FAA certification delays

777x

Initial deliveries are expected to be at least 6 years delayed from the original date.

Additionally, Boeing is facing challenges with supplier defects that are delaying aircraft deliveries across the board.


The Max 7 and Max 10 not yet being certified by the FAA means that the airlines will have to wait longer to start flying these planes. Once again United and Southwest stand out as the most impacted. Southwest has a whopping 307 MAX 7 planes on order with 188 other models on top. United doesn't trail far behind with 277 Max 10 planes on order and 261 planes of other Boeing models. American on the other hand is the least impacted with only 71 Boeing planes on order, none of which are Max 7 or 10.


Max 7 and Max 10 Orders at Big 4 Airlines

Airline

MAX 7

Max 10

Other Boeing orders

United Airlines


277

261

Delta Airlines


100


Southwest Airlines

307


188

American Airlines



71


While some executives have been supportive of Boeing, others have been harsh.


Southwest Airlines:

 

They mentioned that their 2024 plans already took into account possible certification delays. When asked by analysts whether the management would consider ‘derisking’ their fleet by reconsidering their reliance on Boeing as a sole supplier, the CEO responded in the negative.


Even if you have multiple aircraft providers, say we were 50-50 you'd have 400 aircraft to one type and 400 of another type, and so an issue still creates great risk for the company. So the best thing that we can do is work with Boeing to make them an even better company, which is exactly what's happening. We've got great confidence again in the MAX 8, and we're eager to get to MAX-7, we're not in charge of that certification date.’


‘...And as I said before, better Boeing is very good for Southwest Airlines. So yes, I have absolute confidence that they will work their way through this and address the issues.


United Airlines: 


The management mentioned that the recent grounding of the Max 9 after the Alaska Airlines incident was negatively impacting their current operations. As of today, a week after the earnings call, the Max 9 is back up flying for United again. United also has a very large number of Boeing orders that might be extremely delayed and grappling with this reality, the management is “reworking their fleet plan”. As of today, United is already reported to be in talks with Airbus on increasing their orders for the Airbus A321neo jet.


‘We also expect a reduction in orders and deliveries from Boeing in 2025. This will require reworking of our fleet plan, and we will share the details when that work is complete….’


We are not canceling the order. We are taking it out of our internal plans. And so we're taking it out of our internal plan. And we'll be working on what that means exactly with Boeing. But Boeing is not going to be able to meet their contractual deliveries on at least many of those airplanes. And let's leave it at that.


In terms of business operations, United management are expecting the Boeing deliveries delay to constrain their growth plans in the medium to short term: 


‘Look, the reality is that with the MAX grounding, this is the kind of straw that broke the camels back, with believing that the MAX 10 will deliver on the schedule we had hoped for. And so we're working through an alternate plan. We do expect our growth rate to slow in coming years.


The United CEO couldn’t help cheering their supplier on though.


‘Boeing has a storied history and thousands of great people. They're one of the best engineering. They're one of the best technology companies in history. They've been a great American company, their biggest exporter. I have -- they're going through a rough patch right now, but I believe that Boeing is across the board from top to bottom is committed to changing and fixing it. I'm encouraging them to do it even faster. '


American Airlines: 


No current orders for any of the MAX fleet, thus they are the least affected. They also didn’t mince their words:


We're going to hold them accountable. Boeing needs to get their act together on the issues that they've been dealing with over the recent period of time, but also going back a number of years now, is unacceptable


And no matter who it is, all of Boeing needs to come together and to get back on the right track.And as I said before, we encourage Boeing to get their act together, get back on the right track.


We're also fortunate to be the operator of the world's largest fleet of [Airbus] aircraft. So look, we need Boeing to be successful over the long run. They've got to get their act together. We need all OEMs to do their job. It's hard enough running an airline. We need quality product, and that's what we demand.'


Delta Airlines:


Their exposure was also limited to  one hundred Max 10 orders, expected to be delivered starting 2025. They did mention the Max 9 grounding by their competitors caused a slightly positive impact to them in terms of bookings, but only at Seattle.


Cost Per Available Seat Mile (CASM) Increases


The airlines increased their CASM guidance this quarter predominantly quoting supply chain issues and continuous cost inflation in labour. Airlines with older fleets are more vulnerable to this maintenance cost spiral.


Cost per Available Seat Mile Guidance at Big 4 Airlines

Airline

Average age of fleet

Percentage of mainline fleet over 20 years old*

CASM-X guidance

American

13.1 years

~27%

+2-4%

Delta

15.2 years

~43%

Maintenance costs for the full year up $350M

Southwest

11.6 years

~13%

+6-7%

United

16.2 years

~49%

+8-9%

* Calculated using data from planespotters.net


As we can see, American can breathe easy due to its relatively younger fleet and their extensive investments in fleet modernization in the last decade.


Comments by management about increasing maintenance costs, showcasing long-term persistence: 


United Airlines


‘We're still overlapping new labor agreements, which shows in our CASM and the supply chain challenges aren't going away anytime soon. That means capacity will continue to ratchet down out of necessities and cost convergence will continue. But revenues will adjust to the new cost reality,’


At some point, the supply chain will fix itself in aerospace, but we don't see that today. And I think it probably takes well beyond 2024.’


Delta


‘And to me, the supply chain, both the cost and the constraints that we see in this industry continue unabated. We're not making nearly the progress on the supply chain improvements, if anything, every news we get seems to be a bit worse, not better. So that constrains growth and increased cost.’


Delta specifically singled out challenges with engine suppliers and maintenance and loss of experience among suppliers during covid:


‘I am referring principally to the engine side of the business. And there's a lot of work on [ Pratt ]. We have a lot of reliance on [ Pratt ] and their challenges that they're facing have been chronicled.


One of the things that we see on the engine side is as a lot of the incremental resources that our engine providers and suppliers have put their resources against it also strips away resources from the maintenance work on their existing business with us. So we're working through in a sufficient manner with [ Pratt ] they were in this week and we spent a lot of time with them. And gee, everybody in the engine world has challenges, not just on the original build, but more importantly, on the parts and the repair side of the business.


And a lot of it's an experience factor level, all the suppliers in our industry lost a tremendous amount of experience due to the pandemic, and it's taking time to get that back to get the term times down to where they need to be and we have higher turn times that not only delays the entry into service, it also causes cost to go up.’


American


Meanwhile, American considers itself very well positioned in the midst of the supply chain squeeze with its own maintenance capabilities in-house:


‘I think one of the things that I look at is that maintenance needs for the industry as a whole are going to increase, increase greatly. American is really well positioned, not only because of what we've done over the past decade by bringing in more new aircraft than anyone. But as well, remember that we have maintenance capabilities where we're not solely dependent on outside resources that are going to be incredibly constrained.


One of the things that I know David can talk to us about is that we're going to make sure that we have even more capacity to do engine overhauls. We already have 12,000 mechanics more than anybody else and commercial aviation, and we're going to put them to good use. And I think that that's going to be even more of a strategic advantage for American as we take a look at a really constrained resource.'


Southwest Airlines


‘...we currently estimate our CASM-X to increase in the range of 6% to 7% year-over-year. roughly 3 to 4 points of this estimated increase is driven by higher overall 2024 labor cost and market wage rate accruals. The remainder of the first quarter CASM-X increase is primarily due to year-over-year pressure in maintenance expense driven by rate increases as well as an increase in maintenance activity as our 800s are coming off their honeymoon period.


Cost Convergence 


Another theme of discussion in the earnings calls was around cost convergence. The ultra low-cost airlines are seeing a drastic increase in their costs due to major inflationary headwinds, leading to a convergence between low-cost and mainline carriers. 


Here is United management’s comments on this:


‘Notably, our unit cost in 2023 were up 17.8% versus 2019. The compared to ultra low-cost carriers unit costs that are expected to be up 25% on average. That more than 7-point cost convergence and costs occurred simultaneous with an emerging preference for United product…’


‘That cost convergence, the whole reason that the low-cost carriers existed was for -- is because they had lower costs. Those lower costs no longer exist. And so that creates, I think, a permanence to the higher margin, a sustainability to that higher margin. And where that settles, we still -- (inaudible) exactly where that up. But it is higher and more stable and more resilient and that is not recognized by the capital markets today.’


Other trends mentioned in the Big 4 earnings calls included: 


Over-supply in Latin America routes.


A large increase in supply to short-haul Latin American destinations and heavy discounting is negatively affecting the major airlines. United’s Latin American unit revenues were down 11% for this quarter, with their RASM (Revenue per available seat mile) expected to be negative in 2024 Q1 and Q2. Delta also referred to the pressure they are experiencing due to capacity increase at Latin American resort destinations. American airlines management also mentioned ‘challenging near-term revenue trends’ but were more positive about the long-term.


Southern Europe is no longer just a summer destination


United mentioned that Spain and Italy are no longer seen as just summer destinations but are now year-round, reflecting a capacity tilt towards Southern Europe away from Northern European destinations like the UK and Germany. Delta also mentioned the expansion of the ‘peak’ season for European leisure destinations - it is now March-October instead of just the summer season.



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