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Abu Dhabi, UAEWednesday 20 June 2018

Bigger new jets cause headache for plane majors

The problem is that jet fuel is cheap - US$550 per tonne, down 40 per cent from 2014.

Visitors holding Chinese and EU flags stand next to the first Airbus A330.  The French firm and is US rival Boeing are pinning their hopes on the growing Chinese market for bigger jets. Ramon Pilipey/ EPA
Visitors holding Chinese and EU flags stand next to the first Airbus A330. The French firm and is US rival Boeing are pinning their hopes on the growing Chinese market for bigger jets. Ramon Pilipey/ EPA

For the better part of a decade, the skies have grown increasingly hostile to jumbo jets such as Boeing's 747 and Airbus’ A380.

Now the fuel-efficient planes intended to replace those behemoths are also encountering resistance. Interest in Boeing’s 777X, a revamped version of its biggest wide-body set to begin deliveries in 2020, is flagging. And in recent weeks, United Airlines and Cathay Pacific Airways together have scratched 41 orders for the Airbus A350-1000, a twin-aisle plane designed to carry about 370 passengers, leaving Airbus with only 171 orders for the model. “We’re seeing sluggish demand” for the biggest planes, Steven Udvar-Házy, the chairman of the US jet-financing major Air Lease, said in August. “So we’re staying away from that segment of the market.”

The problem is that jet fuel is cheap - US$550 per tonne, down 40 per cent from 2014. At that price, it’s profitable for an airline to continue operating older wide-body models that launched in the 1990s, such as the Airbus A330 and Boeing’s original 777, and delay purchases of more efficient planes like the A350 - which has a fuselage and wings made from lightweight carbon fibre. Even if crude prices rebound, sales of the big jets might not fully recover, says Nick Cunningham, an analyst at Agency Partners in London. That’s because airlines are shifting from channelling traffic through mega-hubs toward nonstop routes between second-tier cities using smaller twin-aisle planes. “As the market evolves to favour direct flights and higher frequencies, it could be that the A350-1000 and 777X are needed in smaller numbers,” Mr Cunningham says.

Boeing’s 777X, the company’s biggest two-engine plane, featuring a newly designed wing made from composites, can seat as many as 425 passengers. The deluge of deals when the model was introduced in 2013 has slowed to a trickle, with only 20 of the 326 orders coming since 2015. While no carrier has scrapped 777X contracts, the Lufthansa chief executive Carsten Spohr has said his company’s 20-plane deal may be too big and he might delay some deliveries.

For now, the move away from the A350 has given a lift to the A350-900, a slightly smaller variant designed to carry 325 passengers. While about 80 deliveries of that plane have been delayed this year, Airbus has 679 firm orders, or about four times what it’s received for the larger version. The company says its assembly line can easily shift between the two models. United switched from 35 A350-1000s to 45 of the smaller plane - worth $1.4 billion extra at list prices, although airlines always get a discount. United has said it may replace 55 777s with the A350-900.

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Read more:

Turkish Airlines buys 40 Dreamliners to compete with Middle East carriers

Airbus now making A320s on three continents

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Despite airlines’ wariness, neither Boeing nor Airbus wants to risk ceding sales of the largest wide-bodies to the other. Until Airbus came out with the A380 double-decker, Boeing’s 747 had ruled the market for jumbos. In the slightly smaller wide-body category, the 777 was long the winner, with the 787 Dreamliner - the first composite jet - slotting in below it. Airbus responded with the A350 and an upgrade of the aging A330. Smaller twin-aisle planes got a further boost Thursday when Turkish Airlines said it had agreed to buy 40 787s, a deal valued at almost $11bn at list prices. The carrier had considered 747s or A380s, but decided those models were too big.

A potential bright spot for both plane makers is China, where jet travel is growing fast and airlines don’t have many large twin-aisle planes. Boeing predicts major carriers such as Air China, China Eastern, and China Southern will place substantial orders for its biggest planes after the country’s next five-year plan is put in place. “The prospects for the 777X in China are tremendous,” says Ihssane Mounir, Boeing’s commercial sales boss.

Of greater concern is the Middle East. The leading buyers of big wide-bodies are Arabian Gulf operators, and they’re under pressure from slowing economies. Dubai-based Emirates, and Abu Dhabi’s Etihad Airways together account for a large proportion of Boeing’s total backlog for the 777X, and of the contracts for the A350-1000 come from the region. Qatar Air the main buyer of the bigger A350, with 37 jets to be delivered starting this year - has been hobbled by a prolonged economic embargo imposed by its GCC neighbours the UAE, Saudi Arabia, among others over the state's alleged ties to terrorism. Iran Air, the fifth-biggest buyer of the A350-1000, could see its purchase blocked by the White House.

While Boeing hasn’t yet seen any pushback, the company would have a harder time reallocating 777Xs given the small customer base, Credit Suisse Group AG reports. “Risks to the wide-body segment are at their highest since the 2009 financial crisis,” the analyst Robert Spingarn wrote in July. For new orders, “there is no pickup in sight.”