Saudi Arabia-based Flyadeal’s July 7 decision to switch its preliminary commitment for up to 50 Boeing 737MAXs to Airbus A320neos garnered significant attention. Was this the first of an increasing number of cancellations now that it is clear the global grounding of the aircraft will continue for much longer than initially anticipated? Garuda and Lion Air said earlier they would like to back off larger orders, and Somon Air of Tajikistan now says it prefers to change its lease for one 737-8 to an -800.
In fact, the predicted wave of order cancellations has not materialized and many doubt it will. It looks as if some airlines may try to use the opportunity to cancel orders because of changes in business circumstances unrelated to the MAX. From Boeing’s perspective, there are far greater MAX issues of concern than losing up to 50 of 4,937 firm orders, 1% of the backlog, placed by a little-known startup.
The manufacturer will try to negotiate less favorable terms rather than agree to outright order terminations. From an airline perspective, in some regions it could be argued that given where the market is headed, more deals should be canceled or deferred.
Many doubt a predicted wave of cancellations will materialize
It could take until early 2020 for the MAX to come back
That is mainly the case for Europe where Bernstein Research warns that eventual late deliveries of MAXs to European airlines will make an already imbalanced supply-and-demand equation worse for those carriers. There, Boeing could be facing many requests for delivery schedule changes as airlines try to decide the best way and time to accept aircraft they expected in the previous year. One major MAX operator told Aviation Week it will not take any new aircraft in the summer, postponing deliveries to the slow seasons when the organization has spare management capacity to deal with integrating a new fleet. There is often flexibility in contracts to allow airlines to delay aircraft acceptance further when the manufacturer has been unable to deliver at the agreed time.
“The flood of planes is in full swing in Europe as narrowbody deliveries are set to reach record highs in 2020,” analyst Daniel Roeska writes in a recent study report. European airlines are scheduled to take delivery of around 300 narrowbody aircraft this year, rising to 400 in 2020. These figures do not include any MAXs yet; those deliveries are on hold because of the global grounding. However, Bernstein expects all of the 146 MAX aircraft that were due by the end of 2019 to be delivered by next summer. Including further aircraft that are to be phased in according to their normal schedules, European airlines could receive almost twice as many new narrowbodies than planned for this year.
The forecast makes the assumption that the MAX grounding will end relatively soon—current optimistic scenarios foresee October as the earliest time for a slow return to flight to begin. Many observers now believe it could take until early 2020 for the aircraft to come back. The European Aviation Safety Agency (EASA) and other regulatory authorities could take longer than the FAA to clear the aircraft.

European airlines could face overcapacity when parked 737 MAXs are delivered in 2020. Credit: Joe Walker
The expected inflow of MAXs in early 2020 will coincide with a significant deterioration in travel demand, Roeska warns. As leisure demand has been softer in 2019 than in the two previous record-setting years, recent weeks’ developments now also point toward the risk of a weakening environment for European corporate demand, notes Roeska. Such trends could “spill over into other traffic segments.” Companies could decide first 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 to 4% this year from 6% in 2018, but Roeska sees a serious risk that this trend cannot be sustained due to slowing demand. “Airlines will likely seek to deploy this capacity with the aim of generating at least some cash contribution to partially offset depreciation,” he writes.
Orders for narrowbodies are at 60% of the in-service fleet, an historical high, indicating no quick capacity abatement can be expected beyond 2020.
Furthermore, European airlines already are operating relatively young fleets. The average age of short-haul aircraft is 11 years. Fleet age has come down over several years as low-cost carriers grew fast, but has stabilized for now. However, with so many new aircraft expected, the average age could drop further as there is limited opportunity to retire aging aircraft.
In theory, bankruptcies also could limit capacity growth. While several smaller airlines like WOW Air, Primera and Germania have failed in recent months, the last large bankruptcy was Air Berlin in late 2017.
Roeska names Thomas Cook and Norwegian as two potential bankruptcy cases that could affect the industry as a whole. Norwegian accounts for 3.4% of European capacity while Thomas Cook controls 1.2%. SAS Scandinavian Airlines would benefit the most from the demise of Norwegian as SAS could pick up the former’s 30% of Scandinavia-based short-haul capacity. Large parts of Thomas Cook’s capacity would stay as tour operators would seek alternatives for their guests. TUI Group would see the most upside from a possible Thomas Cook bankruptcy, Roeska writes.
He believes Norwegian is increasingly likely to default on its outstanding bonds without an additional rights issue in the coming 12 months. Bernstein Research predicts a 2.3 billion krone ($266 million) loss for 2019, worse than the 1.8 billion krone deficit recorded in 2018. “While the company will get through the summer, as we move into 2019Q4 and 2020Q1, we expect losses to push book equity well below the 1.5 billion krone coven—or covenant level that would force [Norwegian] into a rights issue—or bankruptcy if shareholders are unwilling to provide additional capital.” A rights issue is “the most likely outcome,” Roeska writes.
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 chief financial officer, Ulrik Svensson, said last month 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 also would consider buying the airline division. EU ownership and control limitations would make that a tricky, though not impossible, undertaking.