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Supporting Airlines Through COVID-19 Part 1: Right-Sizing Fleets

While the effects of the coronavirus pandemic are still being felt around the world, airlines must effectively manage their assets, operations and cash flow to ensure sustainability and, ultimately, long-term business success. In the first in this three-part series, we delve into how fleet right-sizing can help airlines overcome issues of overcapacity resulting from the impact of COVID-19.

While the effects of the coronavirus pandemic are still being felt around the world, airlines must effectively manage their assets, operations and cash flow to ensure sustainability and, ultimately, long-term business success. Preparing for travel in a post-coronavirus world must happen now – and we’re here to help airlines make the most of the current situation.

Most carriers have already come to terms with the fact that business in a post-pandemic market will not look the same: and signs point to a return to pre-pandemic levels no earlier than 2022.

Airlines need to right-size their business to survive the current market and realign themselves to projected future demand levels. Key considerations are right-sizing fleets, revisiting and realigning business models, and ensuring they have adequate access to capital to carry the business through the pandemic.

In this three part series, we’ll cover each of these steps to success, during and after COVID-19.

Right Sizing Fleets

It goes without saying that airlines globally are facing a situation of overcapacity. Currently 62% of the global fleet is grounded and although we’re starting to see a number of aircraft return to service, it’s clear that demand will not return to pre-COVID-19 levels for several years to come.

Airlines have responded reasonably well in response to the impact of COVID-19 on business. A broad spectrum of airlines, both full-service and LCCs, have taken advantage of the spike in the ad-hoc charter demand, deploying their aircraft on repatriation flights – even removing seats to gain access to the PPE and freight markets. However, revenues generated from the ad-hoc market are far from sufficient to meet airlines top line requirements, evident in the latest airline financial releases.

The root problem is that airlines simply have too many aircraft for current and medium-term demand levels. Globally, airlines have taken action to scale down their fleets by the following means:

  • Early retirement of aircraft, primarily older and less efficient models, such as the Airbus A380 and Boeing 747
  • Deferral and restructuring of aircraft lease rental obligations to aircraft lessors
  • Early return of leased aircraft under various bankruptcy proceedings
  • Deferral of orderbook for new aircraft deliveries
  • Placement of excess capacity into long term storage

These actions have not been without significant spill-over effect on other stakeholders in the aviation industry – namely OEMs, MROs, financiers and many others in the broader community.

Airlines need to look to current market circumstances as an opportunity to re-evaluate their long-term fleet strategy, within the context of broader business realignment. There are several key considerations to be taken into account when revisiting fleet composition:

  • Projected near to medium-term passenger demand and associated capacity requirements; scaling down to meet short-term demand levels, while ensuring adequate capacity levels are in place to retain market share in a recovering market
  • Optimising fleet composition; aircraft families, age groups and underlying financing structures. Consideration needs to be given towards the cost savings and capital release that can be achieved through consolidating fleet types (commonality benefits) versus the network flexibility afforded by a more diversified fleet mix
  • The cost of retaining surplus aircraft (storage, parking, value loss, insurance) versus the ability to unlock cash, the flexibility of underlying financing structures to achieve that, and the level of equity remaining in any owned aircraft
  • Evaluating the various options available for exiting surplus equipment; sale, sublease (dry and wet), early lease return, part-out, retirement, and related timelines, value potential, practicalities and the market’s current appetite for such transactions
  • Internal resource availability and capability to effectively develop and implement such a fleet transformation plan

Each airline is different. COVID-19 has impacted demand levels and network access to varying degrees, affecting fleet composition, capacity requirements, operating profiles and their underlying aircraft financing structures. As such, there is no “one-size fits all” strategy for realigning airlines’ fleets with new market realities. Each airline requires a tailored approach.

Manage Assets Effectively During COVID-19

ACC has been instrumental in supporting airlines in this process. From helping airlines to define their long-term fleet requirements and assessing the current fleet against those requirements – to developing a transition strategy to reach the desired end goal, with support to implement it.

ACC possesses a breadth of aircraft, technical and transactional expertise to support airlines in the current market. We’re available to offer our asset management and strategic consultancy to airlines.

For more information about our range of services or to enquire about your airline’s specific requirements, get in touch, or speak with a member of our team on +971 4 250 0373.

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