MIAMI — British Airways may lease five or six used A380s, according to news reports from Reuters and other sources. The news reports were prompted by a speech from Willie Walsh, CEO of British Airways parent International Airlines Group (IAG), at the Airline Economics Growth Frontiers Conference in Dublin.
In the same speech, Walsh also stated that British Airways would be interested in expanding its fleet of Boeing 777-300ERs with leased, used aircraft, and also announced that Spanish carrier Iberia, another member of IAG, would be keeping its fleet of Airbus A340-600s for longer than previously planned. Simultaneously with Walsh’s speech, Iberia also announced new non-stop service from Madrid to Tokyo Narita and Shanghai, both to commence during the IATA 2016-2017 Northern Winter season.
British Airways currently has ten A380s in its fleet, with two more aircraft on order and seven purchase options that Walsh characterized as “too expensive” in his speech. It also operates a fleet of 12 Boeing 777-300ER aircraft, while Iberia operates 17 A340-600s, which were planned for retirement over the next several years as Iberia takes delivery of a mix of Airbus A330-200s and A350-900s.
Sources for the A380 are easy to find; less so for the 777-300ERs
Assuming that British Airways wants to add 5-6 A380s, those would not be hard to come by on the open market. oneworld partner Malaysia Airlines operates a fleet of six A380s, but it is looking to lease out or sell the aircraft. Depending on British Airways’ preference, it could either lease the aircraft directly from its partner or do so indirectly via resale and lease with a lessor as intermediary.
Even if Malaysia Airlines isn’t the source of the A380s, Star Alliance member Thai Airways International is in dire financial straits and might consider leasing out its A380s or selling them off in concert with other fleet restructuring moves. In October of 2015, Thai Airways denied that it is looking to offload its A380 fleet, but the airline’s condition and operating environment has only worsened since then. Both Malaysia Airlines’ and Thai’s A380s are powered by the Rolls Royce Trent 900 engine, the same as British Airways’ A380s, so engine choice would not be a limiting factor in any deal.
The source for used Boeing 777-300ERs is less obvious, but Kenya Airways has three almost new (built in 2013 and 2014) Boeing 777-300ERs that it can’t afford to operate. Those aircraft would be a perfect start towards building up British Airways’ fleet of 777-300ERs, and the airline could either add the four 2007 and 2008-build aircraft that Jet Airways is currently marketing for sale, or wait for the first 777-300ERs at Emirates and Singapore Airlines to begin coming off lease (which should happen later this year). Regardless of the source, we expect that British Airways will add at least 6-8 used 777-300ERs.
This says more about the used aircraft market than anything else
British Airways’ interest in leasing second-hand A380s and 777s can certainly be taken as a vote of confidence in the A380’s capabilities and a further affirmation of the 777-300ER’s utility. And to be sure British Airways, with its slot restricted hub at London Heathrow, is one of the rare carriers for whom the A380 is actually a useful tool rather than a burden. But these plans are frankly more indicative of the current situation in the used aircraft market, which has an unprecedented glut of economically viable aircraft.
Earlier in this decade, airlines around the world began retiring newish (8-15 year old) aircraft of an older generation, ranging from Boeing 777-200s to Airbus A320s, putting several of these onto the market. At the time, this made sense given that jet fuel prices were hovering around $3.00 per gallon, rendering these aircraft inoperable.
Today jet fuel costs $1.00 per gallon, and accordingly these older aircraft are once again viable. The symptoms of this can be seen in increased secondhand market activity such as these potential leases and United’s order for 9 used Airbus A319s, as well as in airlines delaying retirement plans for older jets. British Airways plans to retain 18 refurbished Boeing 747-400s for several years, while the A340-600 appears to have caught a second wind at Iberia.
To discuss that latter aircraft in a bit more detail, the low price of fuel is a huge win for Iberia. While the Airbus A330-200 and A330-300 are more economically efficient than the hulking A340, as a four-engine plane the A340-600 (and A340-300) has a special utility for Iberia’s Latin American routes. Many of these Latin routes, including Mexico City and Bogota, operate under so-called “hot and high” conditions where the added thrust provided by four engines is critical for allowing Iberia to operate the long route to Madrid nonstop with a full payload. Thanks to fuel, Iberia won’t have to struggle along with A330-200s and can instead operate a more optimally performing aircraft in such markets.
The new A330s will be re-deployed for growth (such as the Asian routes covered below), which fits into IAG’s broader strategic positioning. Like Delta and its American legacy peers, British Airways appears to be using delayed aircraft retirements as a lever for sustainable, low risk capacity growth. In a best scenario, Iberia can continue operating the A340 or some time on core routes while using the A330s to open up newer and thinner routes and expand its network profitably. But if fuel spikes, all Iberia has to do is park the A340s (which are paid for and thus cheap to park) and then shift the A330s to core routes while cutting marginal ones. This is a financial windfall enabled by smart fleet planning on the part of IAG and the headwind of a precipitously low fuel price.
Cuts a potential A380 and 777 buyer but still a win for Airbus/Boeing
The new plan from British Airways is a mixed bag for both Airbus and Boeing. On the one hand, it cuts off any potential follow up firm orders for new build A380s from British Airways exercising its options, once again reducing the expected backlog for the slow-selling Whale Jet. Boeing probably didn’t expect much action from IAG on new 777-300ERs to help bridge its production gap to the re-engined 777X, but there was at least still an outside chance, which has now been squashed.
Still used market activity for both aircraft is welcomed by the big two original equipment manufacturers (OEMs), as it has an indirectly positive effect on both aircraft programs. In the case of Airbus, figuring out what will happen to A380s once they are retired or returned by the primary carrier has been a huge headache. This has been a sticking point for carriers placing orders in the past (as they would like the flexibility of selling off the A380 if it doesn’t work in their fleet), and British Airways just provided a tangible data point contravening that worry.
For Boeing, anything that boosts 777 aftermarket values is a good thing given the now infamous dip in its shares after comments by Delta Air Lines CEO Richard Anderson on the carrier’s third quarter 2015 earnings call. Admittedly much of the worry was around plunging secondhand values for older 777-200s and 777-200ERs, but even so, used activity for the 777-300ER should help boost residual values for the 777 program as a whole.
Iberia pivots to Asia under IAG
Less high profile but arguably more important than some of the fleet news was Iberia’s announcement on the same day of new service to Shanghai and Tokyo. Both destinations will be served thrice weekly, with service to Tokyo commencing October 18, 2016. The launch date to Shanghai has not yet been finalized as Iberia still needs to finalize slots and route permits but is tentatively planned for the “winter season 2016/17.”
This route is major news for Iberia, as it represents the first rebalancing of the carrier’s long haul network away from Latin America and the Americas as a whole. While the carrier does operate two flights per week with the A330-300 to Luanda, Angola, the remaining 25 long haul destinations, served by a fleet of 33 widebody aircraft, are all in the Americas (five in the US, three in the Caribbean, five in Central America, and a dozen in South America).
Under the aegis of IAG, Iberia has undergone a painful but necessary financial restructuring that has put it into a position to prosper. Now it is time for Iberia to broaden its network and leverage the raw connectivity that its Madrid hub delivers to an underserved developing region (Latin America). Over time, Iberia could easily add 3-4 additional destinations in Asia (Singapore, Seoul, Beijing, and Delhi might make sense) as well as Johannesburg in Africa.
At peak, each of these destinations could be served daily, creating a powerful connecting complex that complements London Heathrow and Dublin in the same way that Munich successfully complements Frankfurt for Lufthansa. While these two routes in and of themselves are not overwhelmingly impressive, they are hopefully a signal that Iberia is spreading its wings to the Far East and upgrading Madrid to truly become the seventh intercontinental connecting hub of Europe (after London Heathrow, Frankfurt, Amsterdam, Paris Charles de Gaulle, Munich, and Zurich).