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Windfall opportunities for airlines
posted by
Vivek Sharma
15 Apr 2008, 17:43
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labels: companies, aviation/aerospace
These are not quite the best of times for airlines, anywhere in the world. Except for the few well established carriers with an army of extremely loyal customers, most other airline companies are bleeding. American airline companies are among those struggling the most. Many years of underinvestment has resulted in ageing fleets, and many aircrafts have been grounded over the last few weeks after the aviation regulator suddenly woke up and realised that they may not be all that safe to fly.
Despite the troubles at airline companies, aircraft manufacturers are doing well – if you ignore the self-inflicted pain from overambitious delivery schedules for flagship models like the A380 and the 787 Dreamliner. Demand for planes have never been better, both Boeing and Airbus reported the highest ever annual orders in 2007. Their assembly lines are choked for the next five years or so and those who wish to buy any of the popular models have no option but to be patient.
The reason for buoyant demand for planes is easy availability of finance. These days, buying a plane is as easy as buying a good car with many financiers willing to help with the money. Launching an airline is also not difficult and does not involve much investment. As demand for air travel continues to rise, new airlines are taking to the air. This extreme competition drives down fares and in turn drives up demand even further, attracting even more players to start airlines. A vicious cycle which appears favourable to airlines from a demand perspective, but is vicious anyway in its effect on airline profits.
The high demand has pushed up aircraft prices and some airlines have been making money by selling old planes in their fleet and then leasing them back. Jet Airways has taken this route very profitably in recent years, when it was struggling to make money by flying passengers. But, most airlines have exhausted this opportunity by now.
Just as one window is closing, other short term opportunities maybe opening up. Those airlines who were lucky to have booked the A380 or the 787 Dreamliner from Airbus and Boeing respectively maybe able to extract some compensation for delayed deliveries. Airbus has already compensated some of the earliest customers of the A380 and Boeing may do so for its 787 customers – including Air India and Jet Airways.
Another opportunity for airlines that have placed large orders for aircraft is to sell their delivery rights for a premium. As neither Boeing nor Airbus is able to give deliveries in the near term, there are buyers willing to buy out earlier orders that are due for delivery. Deccan Aviation sold some of its purchase rights to an aircraft leasing company recently.
As these airlines are unlikely to make profits on new capacities and routes anytime soon, they maybe better off selling purchase rights and using the cash to support existing routes. Talk about windfall gains!
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