Jetrader - January/February 2011 - 15

Fleet Renewal Activity:

A Rising Influence in the Aircraft Market
By Steven T. Gaal, President & COO, SkyWorks Holdings LLC The global ﬂeet of aging commercial jet aircraft is approaching a tipping point such that ﬂeet renewal activity will bear signiﬁcant inﬂuence over the aircraft market going forward. The number of commercial passenger jet aircraft between 20 and 25 years of age—“Newly Mature” aircraft for purposes of this discussion—is projected to nearly double over the next ﬁve-year period from about 1,600 units to about 2,900 units. This large population spike of Newly Mature aircraft over the next ﬁve years will be followed by more modest growth longer term (see Chart 1). The signiﬁcance of aircraft falling into the Newly Mature age category arises from the fact that airlines typically begin to address ﬂeet renewal as aircraft reach 20-25 years of age (see Chart 2). Given the substantial number of Newly Mature aircraft that will soon arise, it is timely and critical to understand the common factors that drive an individual airline to implement a ﬂeet renewal program. The decision to pursue ﬂeet renewal is not an exact science relating to aircraft age but rather is driven by a combination of strategic and ﬁnancial/operational factors. Moreover, certain exogenous catalysts will result in airlines seeking to accelerate ﬂeet renewal. It is also important to gain insight into how a growing proportion of order activity in support of ﬂeet renewal may inﬂuence the aircraft market as a whole. and be less adversely impacted by rising fuel costs or future environmental regulations. In a recent interview, FedEx Corporation CEO Fred Smith stated that the key to success in his business is having both an offensive and a defensive strategy. In the case of FedEx Corporation, this means exploiting its new 777 freighters to gain a competitive advantage but also operating a ﬂeet of older aircraft that can be more efﬁciently parked to reduce capacity during market downturns. Competitive positioning and branding are other important strategic factors inﬂuencing the approach to ﬂeet renewal. Airlines compete vigorously for their fair share of higher yielding trafﬁc, which is primarily related to competing product and service offerings in the marketplace. General cabin refurbishments can exceed $10 million on a widebody aircraft and thus can be diseconomic to perform on older aircraft. Leading-edge product offerings such as high bandwidth in-ﬂight entertainment may be

Strategic Factors Inﬂuencing Fleet Renewal
A primary strategic factor inﬂuencing ﬂeet renewal activity is an airline’s offensive and defensive objectives. These objectives vary by airline, as mature (i.e., out-of-production) aircraft have lower ownership costs and are more cost effective to park during a trafﬁc downturn. On the other hand, modern (i.e., current or future production) aircraft will generally have greater revenue-earning potential

CHART 1: TOTAL NEWLY MATURE AIRCRAFT
Source: Ascend CASE database; SkyWorks analysis; 2015E equals 95% of current 15-20 year old aircraft and 2020E equals 95% of current 10-15 year old aircraft.

CHART 2: AVERAGE ANNUAL PASSENGER JET AIRCRAFT RETIREMENTS BY AGE
(For the period 2005-2009; includes aircraft subject to full hull losses) Source: Ascend CASE database; SkyWorks analysis. Jetrader 15

Jetrader - January/February 2011

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