Low-cost Airlines' Current Cutbacks on New Aircraft
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Budget airlines that have long sought new aircraft are now reassessing their priorities. Facing financial constraints, these low-cost carriers are postponing substantial investments in new planes to conserve cash as they strive for consistent profitability while dealing with the repercussions of engine maintenance issues.
This year, airlines have inundated the U.S. market with flights, leading to a significant drop in ticket prices, especially in the domestic sector where budget airlines dominate. This surge in supply has negatively impacted revenue, even as operational costs have risen. Spirit Airlines, JetBlue Airways, and Frontier Airlines last recorded annual profits in 2019, while larger airlines have managed to return to profitability.
Fare-tracking service Hopper indicates that "good deal" roundtrip fares for domestic flights in September average $240, reflecting an 8% decrease from the previous year. In response, several budget airlines are scaling back their expansion strategies and delaying the arrival of new aircraft, as the majority of an aircraft's cost is incurred upon delivery.
Frontier's CEO, Barry Biffle, noted, "With an oversupply in the market, it’s logical for our industry to cut back." Recently, Frontier announced it would defer the delivery of 54 Airbus planes until at least 2029. Biffle explained that previous delays in aircraft deliveries have led to a backlog, necessitating a more measured approach to fleet expansion.
Despite carrying 17% more passengers, Frontier's revenue only increased by 1% in the second quarter, with average fare revenue plummeting by 16% to just under $40. JetBlue Airways anticipates saving approximately $3 billion by postponing the delivery of 44 Airbus A321 aircraft until 2029, opting instead to extend some existing aircraft leases. Although JetBlue reported an unexpected profit in the second quarter, it is urgently seeking to cut costs through these deferrals and by withdrawing from unprofitable routes.
The airline is also contending with grounded planes due to a recall of Pratt & Whitney engines. JetBlue's CEO, Joanna Geraghty, acknowledged the complexity of deferring aircraft deliveries while facing a shortage due to the engine recall, stating, "We require planes for growth, but accepting deliveries of aircraft that remain idle after payment exacerbates our challenges." She added that the airline's increasing debt limits its ability to acquire numerous new planes.
Spirit Airlines, which had aimed to merge with JetBlue until a court blocked the deal in January, is also deferring aircraft deliveries as it attempts to recover from significant losses. The airline recently reported an 11% decline in revenue and a $192 million loss, compared to a $2 million loss the previous year, and plans to furlough around 240 pilots soon. Spirit has been particularly affected by the Pratt & Whitney engine recall, leading it to defer all Airbus aircraft orders from the second quarter of next year through 2026 until at least 2030.
Aircraft leasing company AerCap announced it would take over 36 of Spirit's Airbus A320neo family aircraft from its order book, with CEO Gus Kelly describing the arrangement as beneficial for both parties. Despite these adjustments from budget airlines, the broader airline industry continues to experience a scarcity mindset, with new, fuel-efficient aircraft in limited supply.
Leasing rates for new Airbus A320s and larger A321s reached record highs in July, averaging $385,000 and $430,000 per month, respectively. Meanwhile, leases for the popular Boeing 737 Max 8 are also nearing record levels at $375,000 monthly. Airlines can either purchase aircraft directly from manufacturers or lease them from firms like Air Lease or AerCap, often opting for sale-leaseback arrangements to generate cash flow.
Boeing and Airbus, the two primary manufacturers of commercial aircraft, are struggling to boost production due to lingering post-COVID challenges, including shortages of skilled labor and supply chain disruptions. Airbus has recently lowered its delivery targets for the year, while Boeing is constrained in its output as it addresses safety concerns.
Despite the deferrals from budget airlines, an Airbus representative stated that demand for A320 family aircraft remains strong, with over 7,000 unfulfilled orders. Boeing has nearly 4,200 orders for its competing 737 Max models. "We provide a comprehensive range of aircraft to accommodate our customers' needs and enhance their fleet management flexibility," the Airbus spokesperson remarked.
However, airlines are feeling the pressure. Executives have indicated that delays in new aircraft deliveries have compelled them to slow or even halt hiring and other growth initiatives. Southwest Airlines' CFO, Tammy Romo, mentioned on a recent earnings call that the airline is actively seeking ways to alleviate cost burdens, including addressing overstaffing issues linked to Boeing delivery delays. When discussing Southwest's fleet strategy, Romo noted the airline's flexibility with its Boeing order book, although she refrained from disclosing specific plans, promising more information at an upcoming investor day.
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