COVID-19 has eroded demand for air travel, significantly deflating 2020 from its air travel growth prospects. Currently, there is a focus on restoring capacities and networks with existing fleets and not so much or, better said, not at all on growing fleets and taking new aircraft from Boeing (BA) and Airbus (OTCPK:EADSY). The big jet makers have adapted their production plans accordingly, and investors have started to focus on monitoring cancellations, for which we are developing a dashboard that will be released to subscribers of The Aerospace Forum soon.
What should be kept in mind is that while cancellations do tell part of the story, it does not tell the full story, as some orders will be deferred instead of being cancelled outright. At the height of the COVID-19 crisis in the airline industry, Airbus was not able to reach its customers, and afterwards threatened to sue airlines that do not honor their contractual commitments.
That sparked a reaction from Qatar Airways CEO Akbar al-Baker:
We are negotiating with both Boeing and Airbus to fulfil our requirement to defer and we hope that both the manufacturers will oblige. They have no other alternative to oblige and if they make it difficult to oblige, we will keep them in mind and we will not do business with them again.
In this report, we have a look at how much exposure Boeing and Airbus have to Qatar Airways. What should be kept in mind is that al-Baker’s words are meaningful, as his airline operates a fleet of over 200 aircraft, but for the foreseeable future, Airbus and Boeing dominate this market. That, however, should not withhold al-Baker from making certain statements, as part of negotiations are played via the media to force things. On top of that, al-Baker is known for giving jet makers a run for their money and using the media to get his message across.
Qatar Airways current fleet
Looking at the Qatar Airways fleet, we notice that airline operates an all-Airbus single aisle fleet, while there is a healthy 45-55 balance between Airbus and Boeing in the passenger wide-body fleet. The freighter fleet, unsurprisingly, is dominated by Boeing. Overall, there is a 50-50 balance in the fleet mix. That shows quite well that Qatar Airways has balanced its fleet, making optimal use of the Airbus-Boeing duopoly. It also explains, in part, why al-Baker is putting pressure on both jet makers: both companies want to maintain or possibly expand their share in the Qatar Airways fleet, and al-Baker knows that quite clearly, so he seeks for competitive terms for deferral, putting both parties on the edge in the media.
Qatar Airways backlog
Obviously, Qatar Airways is not going to remove Boeing or Airbus aircraft from the fleet to make a statement, but the balance in the fleet mix does show the company’s modus operandi when it comes to aircraft purchasing practices. To see where Qatar Airways can truly hurt either jet maker is by looking at the unfilled order book.
Figure 1: Qatar Airways backlog with Boeing (Source: AeroAnalysis)
Our Boeing Backlog Monitor, available to subscribers of The Aerospace Forum, shows that Qatar Airways has a modest 1.7% share in the Boeing backlog but 4.5% in terms of value, which can be explained by the order mix. That excludes an unidentified order for 15 Boeing 737 MAX aircraft which we can also connect to Qatar Airways, which would bring the share in the backlog to 2% and the backlog value to $18.5 billion, or 4.7%. The airline is said to have 30 MAX aircraft on order. If that is the case, part of the order intention for the Boeing 737 MAX was firmed in mid-2017, bringing the total share to 2.2% and the backlog value to $19.3 billion to almost 5%.
Qatar Airways is particularly important to the Boeing 777X program, which accounts for over 75% of the backlog value of the Gulf carrier with Boeing and almost 20% of the Boeing 777X backlog, while 20% of the value consists of orders for the Boeing 787 where Qatar Airways accounts for a modest 5.5% of the Dreamliner backlog. The remaining 5% of the value can be connected to the Boeing 777F. Qatar Airways wants to turn Doha into a cargo hub, so having a strong freighter fleet is of importance. With the current demand for freighter services, it is unlikely that these freighter orders are at risk. However, the same does not hold for the Boeing 777X and Boeing 787. The Boeing 777X program had some embedded risks even before COVID-19 was known to the world, and with a gradual redeployment of capacity, it is very likely that Qatar Airways won’t be too eager to take too many Boeing 777X aircraft in the near term, as that might simply be an aircraft too big for their current needs and needs in the upcoming years. Until 2016, Qatar Airways took delivery of up to 9 Dreamliners annually, so those are important deliveries when putting that into a context of 14 deliveries per month and the prospective rates that are half of that. However, with the blockade of Qatar, we did notice that since 2017 no Dreamliners were delivered until December 2019, when 7 Boeing 787-9s were delivered but never went into revenue service.
So, Qatar Airways will most definitely want to reduce its near-term delivery schedule for the Dreamliner as well as the Boeing 777X. For the Dreamliner program, the production rates are set to come down to 7 per month in 2022, so if Boeing has those slots filled, it can give Qatar Airways some leeway in deferring Dreamliner deliveries, but it will likely be less flexible on deferring Boeing 777X deliveries unless the company is absolutely positive that other customers remain in the queue for the aircraft or interest in the Boeing 777F increases significantly.
Either way, the reduced production plans on the Boeing 787 and Boeing 777X already seem to be signaling that some key customers such as Qatar Airways have urged Boeing to spread the delivery profile. Boeing could be looking to be flexible on one program in order to get Qatar Airways to commit to near-term deliveries on another program, but that will be challenging.
Figure 2: Qatar Airways backlog with Airbus (Source: AeroAnalysis)
We also looked for Qatar Airways’ orders with Airbus, and what we found was that the Gulf carrier has 77 unfilled orders with Airbus valued $7.5 billion. So, Qatar Airways makes up for 1% of the 7,621-unit backlog and 1.6% of the value. While it stopped taking deliveries of the Boeing 787s as the blockade hit hard, the company continued taking deliveries of the Airbus A350 to reach an overall equal fleet distribution between Boeing and Airbus. Qatar Airways has 10 Airbus A321neo LR on order and 40 A321neo aircraft with deliveries starting this year. I’d expect that those deliveries are amongst the ones that the airline will look to defer. Oil prices are low, and the age of the current leased fleet of Airbus A320ceo aircraft is not extremely high with an average age of around 8 years. So, Qatar Airways might not be compelled to take A321neo aircraft at this stage, even more so if it can effectively shrink via attrition of the leased fleet and negotiate more attractive re-leases. On the Airbus A350 program, the airline won’t be too eager to take deliveries, as global networks remain depressed at this stage and the 327-seat Airbus A350-1000 might be a bit on the bigger side to absorb.
We observed that Boeing and Airbus have an equal share in the Qatar Airways fleet. I think that quite clearly shows the purchasing strategy where al-Baker tries to play out the commercial aircraft giants against each other. It is unlikely that there is a future in which al-Baker will exclusively buy from one company… the airline never did that, and its fleet composition reflects exactly that. Al-Baker is extremely well aware that the game of deferring on competitive terms can easily be played via the media. Including the Boeing 737 MAX orders, Boeing has a 49% share in the orders and Airbus has 51%. So that is roughly even, again reflecting the established purchasing practice from the airline. In terms of value, Boeing is more exposed, dominating the value mix with almost 70%.
I’d think that at this stage, Qatar Airways is looking for a way out of the 15/30 Boeing 737 MAX that it has on order as an unidentified customer, not because of the Boeing 737 MAX itself but because the airline for which Qatar Airways purchases the jets has gone bankrupt. Qatar Airways also planned to transfer some Boeing 787-8 to this airline as Qatar Airways would start taking Boeing 787-9, but those plans never came off the ground.
At this point, there seems to be no immediate need for Qatar Airways to take delivery of the Airbus A321neo aircraft, as the airline could opt to reduce its single-aisle fleet and negotiate attractive lease terms on the existing fleet. I believe that the Airbus A330, of which the airline has 19 aircraft in the fleet, will be the primary way to shrink the fleet, which would be at the expense of the Airbus A350-1000 and Boeing 787-9 deliveries that were scheduled to support the A330s phase-out by 2022. Instead of becoming today’s replacement aircraft, these aircraft should fuel tomorrow’s delayed growth, and that is likely what Qatar Airways is negotiating very hard on with both jet makers.
The Boeing 777X is in a particularly bad spot. Qatar Airways has a big share in the backlog, and at this point, with reduced demand, we don’t see how there is an urgent need for the biggest aircraft in the fleet. Surely, if we consider that the oldest Boeing 777-300ER aircraft which the Boeing 777-9 can replace are nearing the 12-year mark, there seemingly is a need “replacement-wise,” but with growth expectations being reset, Qatar Airways could opt to shrink the fleet to 200 aircraft by simply not taking delivery of new aircraft to support the replacement cycle. That way, the airline would shrink before it would grow again, and that would push out a significant number of deliveries.
What might boost the company’s fleet requirements is the 2022 FIFA World Cup hosted in Qatar, which, if Qatar Airways shrinks today, could push out 2020-2021 deliveries towards 2022, giving over 2 years of breathing space to let air travel demand recover. Subsequently, we would expect a significant push-out of deliveries previously planned for the 2022-2023 time frame.
Currently, I don’t see a lot of reason for Qatar Airways to take delivery of new aircraft. Some orders such as those for the Boeing 737 MAX should simply be cancelled, as it no longer fits the strategy, but other deliveries likely will be shelved (not cancelled) until the 2022 FIFA World Cup, as there will be an uptick in demand and the air travel industry is getting back on its legs. The implications are likely going to be bigger for Boeing, it seems, as Qatar Airways could start opting for the Airbus A350-1000 as the Boeing 777-300ER replacement instead of using the Boeing 777X as the prime replacement, but it is clear that if Qatar Airways sees the possibility, it will defer most, if not all, deliveries by at least 2 years.
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Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha