FRANKFURT—Bernstein Research warns that late deliveries of Boeing 737MAXs to European airlines will make an already imbalanced supply and demand equation worse for European airlines and sees only limited benefit for the sector of two possible major bankruptcies.
“The flood of planes is in full swing in Europe as narrowbody deliveries are set to reach record highs in 2020,” analyst Daniel Roeska wrote in a July 1 study. European airlines are scheduled to take delivery of around 300 narrowbody aircraft in 2019, rising to 400 in 2020. These figures do not include any 737 MAXs yet, deliveries of which are currently on hold as a consequence of the global grounding. However, Bernstein expects all of the 146 aircraft that are due by the end of 2019 will be delivered by the summer of 2020. Including further aircraft that are to be phased in according to its normal schedule, European airlines will get almost twice as many new narrowbodies in 2020 than this year.
The forecast assumes that the MAX grounding will end relatively soon—current optimistic scenarios foresee October as the earliest realistic time for at least a part of the fleet to return to flight. EASA could take longer than FAA to clear the aircraft. One further unknown is the airlines’ ability and determination to defer deliveries. One major MAX operator told Aviation Daily that it will not take any new aircraft in the summer but only in the low season when the organization has spare management capacity to deal with integrating a new fleet rather than being focused on flying at maximum capacity. One airline source said there was flexibility in the contracts to delay aircraft acceptance further when the manufacturer has been unable to deliver at the agreed time.
The inflow will coincide with a significant deterioration in travel demand, Roeska warned. After leisure demand has been softer in 2019 than in the two previous record-setting years, recent weeks’ developments now also point towards the risk of a weakening environment for European corporate demand. Such trends could “spill over into other traffic segments,” Roeska said. Companies could first decide to cut back on short-haul business travel and later reduce spending for long-haul flying, too. Employees, becoming concerned about the economic environment, could decide to spend less on their own travel “further depressing leisure demand.”
Intra-European capacity growth slowed from 6% in 2018 to 4% this year, but Roeska sees a serious risk that this trend cannot be sustained even though slowing demand would necessitate it. “Airlines will likely seek to deploy this capacity with the aim of generating at least some cash contribution to partially offset depreciation,” he wrote.
Orderbooks for narrowbodies are at 60% of the in-service fleet, a historical high, indicating that no quick abatement can be expected beyond 2020. Furthermore, European airlines are already operating relatively young fleets, the average age of short-haul aircraft being eleven years. Fleet age has come down over several years as LCCs grew fast and has stabilized for now. However, with so many new aircraft coming in, average age could drop further as there is limited opportunity to retire aging aircraft.
In theory, capacity growth could also be limited by bankruptcies. While several smaller airlines like WOW Air, Primera and Germania have failed in recent months, the last large bankruptcy was airberlin in late 2017.
Roeska named Thomas Cook and Norwegian as two potential cases that would matter for the industry as a whole. Norwegian accounts for 3.4% of European capacity while Thomas Cook controls 1.2%. SAS Scandinavian Airlines would benefit most from a demise of Norwegian as short-haul capacity from Scandinavia would fall by 30% in such a scenario. Large parts of Thomas Cook’s capacity would stay as tour operators would seek alternatives for its guests. TUI Group would see the most upside from a possible Thomas Cook bankruptcy, Roeska wrote.
He believes that Norwegian is increasingly likely to default on its outstanding bonds without an additional rights issue in the coming 12 months. Bernstein Research predicts a NOK2.3 billion ($269 million) loss for 2019, worse than the NOK1.8 billion recorded in 2018. “While the company will get through the summer, as we move into Q4 2019 and Q1 2020 we expect losses to push book equity well below the NOK1.5 billion coven- or covenant level forcing [Norwegian] into a rights issue—or bankruptcy if shareholders are unwilling to provide additional capital.” A rights issue is “the most likely outcome,” Roeska wrote.
Financially embattled Thomas Cook put its airline division up for sale earlier this year to raise money. Lufthansa, among others, made a non-binding bid although its CFO Ulrik Svensson said in June that a takeover was now unlikely. At the same time, Fosun International, a Chinese conglomerate, said it is interested in buying Thomas Cook’s tour operator business. Fosun already holds 18% of its shares. It is unclear whether the company would also consider buying the airline division—European Union ownership and control limitations would make that a tricky, though not impossible, undertaking.