Narrowbody COVID-19 Disruption

Gokhan, can you just lay out how you’re looking at the chaos that’s unfolding in the aircraft and airline industry today?

As you know, there is the coronavirus right now, which is affecting the whole commercial airline industry. What I mean by that is the cargo operators and the passenger operators. I exclude business jet operators, so these are not the subject of the conversation today. As of today, what we know is, there is $250 billion lost already, in the aviation industry. You can see Delta is grounding aircraft and they are now using around 13 different airports, all over the US, to park and to use some of their wide-body aircrafts for cargo operators. Also, you can see EasyJet, for example, one of the low-cost carriers, are grounding all of their aircraft. This means, the impact from coronavirus is not only affecting flag carriers, like Turkish Airlines, British Airways, Delta. But it is also affecting the low-cost carrier business, as well.

The low-cost carrier models usually have one type of aircraft, which are usually narrow bodies, A320s or 737s. Their business model is to carry passengers for as low a cost as possible and make a quick turnaround time. That means they fly from, let’s say, Istanbul to Ankara, a two-hour flight and then they only have 45 minutes turnaround time. They unload the passengers; they load passengers and then they fly back again. With that business model, they have to use brand new aircraft. When you look at the fleets of low-cost carriers, they are not older than six years old. Right now, these brand-new aircraft are already grounded. All low-cost carriers, which includes EasyJet, Ryanair, Pegasus Airlines, Spirit Airways, Northwest Airlines, have the cash available to only continue for three months, on average. That means if any airline, any low-cost carrier, may be able to go on for six months, without flying, and the other low-cost carriers can continue for maybe only two months. So this virus is game changing.

When I look at the market today and think about the future, we are hearing about a lot of cancellation orders, from the OEMs. I’m going to share a couple of numbers with you. In the news, the Avolon leasing company have just cancelled 75 737 MAX orders. But the point is that there is a walk away for the airlines. The typical wording in all OEM and airlines contracts includes that a customer will be able to walk away from orders, without penalty, due to material adverse change clauses that kick in, if the plane maker fails to deliver within a year of the delivery date.

MAX is not an aircraft that is flying. We already know that it has been grounded for almost a year now. Any airline now, if the aircraft is not delivered in one year, they can say, you know what, there is no penalty and I can walk away. But right now, it is not the only case. Because MAX is not flying, because other aircraft are not flying also, airlines will start cancelling their own orders. When you look at the history, you can see a lot of over-ordered numbers. We can speak about flydubai, for example. I think they already have 234 orders from Boeing. Right now, they are not willing to take any of them, because their order was already 200 more than they were supposed to get. Flydubai is a low market; they don’t need 234 aircraft. Or Malaysia, Lion Air, Air Asia, they don’t need these aircraft.

Think about that. Right now, we are in the position where OEMs are over-producing aircraft, but now there are no customers to sell them to, which will possibly affect the future of the early-retirement aircraft. Speaking about EasyJet or Ryanair or the low-cost carrier business model, when you look at them, their air fleet is already younger. Now five and six-year-old aircraft are parked. The hotels are already empty. There is no hotel now that is accepting any clients. This is a different road now, we are facing. It’s a challenging industry now. I don’t know how it will come back but, of course, we need these OEMs in our industry. From my side, what I would say is, OEMs must still surround the market. Yes, there are a lot of aircraft parked outside, without customers. But I think the plan is going to be, for engine OEMs and aircraft OEMs, to let these aircraft that are already in the air, which are maybe 10 or 16 years old, to be retired and call it early retirement. They’re going to be retired and maybe they will be purchased by the OEMs, as trade-in options. That can happen. You give them unserviceable parts, which is called an exchange and then you get serviceable parts.

A couple of years ago, CFM was using that model, for their CFM56-3C aircraft, which powers 737 classic aircraft. They said, okay, if you let outside investors purchase this aircraft, then they will control the market, for parts. So what they did was, they called the CFM56-3C operators, when the engine was due for overhaul and said, bring me your engines. I will give you another green-time engine. They would get a usable engine, from their line and they would give a serviceable, green-time engine to the airline. We might see the same business model now, for aircraft in the future, because there are already too many aircraft parked, not flying. Also there are too many aircraft already produced and waiting, in a parked line, not flying. That’s why it’s going to change.

What we can say is, what could be the next step? Maybe exchange options or buying the aircraft with trade-in options, etc. I think, in the near future, we might see some of the aircraft, regional jets, might come into the game, because they still are still powered by engines, like GTF, for example, or Embraer E195 engines and Airbus A220 engines, still longer nautical miles, quiet engines and the cabin carries less passengers. Maybe 120, 125, 140 passengers. Isolation is going to be one of the major subjects, for all of us, today. Even today, if I see an announcement in the paper, saying that, you know what, coronavirus, there is no danger now; you can fly to Italy. You wouldn’t fly to Italy tomorrow. Would you? I would not, either, because of the isolation. This isolation is going to affect the regional jet market, in a positive way and possibly, the business jet market, in a positive way.