Neo, Max Transition Will Prove Orderly, Says Avolon

 - March 4, 2013, 2:00 PM
Avolon’s portfolio includes the Boeing 737-8 Max, above, as well as the re-engined Airbus neos and current-generation Boeing and Airbus narrowbodies.

Irish leasing company Avolon has endeavored to dispel what it characterizes as some common misperceptions about the market implications of the introduction of the Boeing 737 Max and Airbus A320neo in a new report titled Transitioning to Neo and Max: An Investor’s Guide. Speaking last Monday on a conference call from Dublin, Avolon executives argued for the likelihood of an orderly and healthy transition from the Airbus A320ceo (current engine option) and 737NG to their re-engined counterparts, in the process making the case for their company’s substantial investment in all four of the airplanes.

The report’s conclusion that market growth and fleet replacement demand will absorb single-aisle production into the end of the next decade does hinge on “disciplined and prudent” production rate planning by the two OEMs, however. In fact, Avolon advocates a drop in narrowbody production from the projected rate of 42 per month at both manufacturers while they execute the transition of their respective assembly lines from the current generation airplanes to the Neo and Max.

“We were concerned when much higher production rates were being mooted,” said Avolon president and chief commercial officer John Higgins, referring to rhetoric “from both sides of the Atlantic” suggesting rates as high as 50 a month or more. “We’re not concerned now. We can see sufficient market demand both from the point of view of growth and from the point of view of retirements and replacements to satisfy the currently anticipated levels of production.”

The Avolon report notes that the number of narrowbodies ordered by airlines as a percentage of the installed fleet in every region of the world remains “substantially” below the rate of traffic growth predicted over the next 10 years, suggesting a “deep reservoir” of unsatisfied demand for both new and used aircraft.

The continued rise of emerging markets and sustained development of low-fare business models will underpin demand for current types, it added, maintaining high levels of liquidity during and beyond the transition period from the present-generation airplanes to the next. Avolon estimates that it will take more than eight years from service entry of the Max and Neo to build a 35-percent share of their respective family fleets, reflecting a base of current generation airplanes in service three times the size of previous “transitional” fleets and mitigating any softening of Ceo and NG values.