With Covid-19 Surging, Aircraft Rejoin The Fleet Faster Than Demand Is Growing

By Dave Marcontell and Tom Cooper

_{Dave is a partner in Oliver Wyman’s Transportation and Services practice, and Tom is a vice president at CAVOK, the consulting firm’s technical consultancy and services division.}

The patchwork economic recovery from the coronavirus pandemic continues to challenge airline strategies on how much capacity they need to maintain, given unpredictable demand. After pulling almost 70 percent of the global fleet out of service between January and early April, carriers now may be erring on the other side — putting too many planes back online before reliable demand materializes.  

For a few airlines, the decision to boost capacity reflects efforts to grab market share during this precarious period. For others, especially in Asia, adding back aircraft reflects developing demand for domestic travel. Many are also pulling back older aircraft, so they can defer or even cancel new aircraft orders and save precious cash.

But reading the direction of the market correctly is trickier than ever, with new Covid-19 outbreaks in regions where the virus was believed contained and with large economies considering new restrictions. In the United States, the recent re-opening of economies in Southern and Western states led to a surge in Covid-19 cases — even greater than what was experienced in April. What people expected to kick-start growth ended up putting the brakes on the early stages of a recovery in air travel demand. In mid-June — normally the early days of a busy summer travel period — US ticket sales dipped in response to surging numbers of Covid cases in several large states. This reversed some gains made earlier in the spring. By mid-July, sales were 81 percent down from the same week in 2019.

As of July 10, the global in-service fleet stood at about 19,200 aircraft versus the peak of almost 28,000 in early January — before the world became aware of Covid-19. That new fleet total reflects decisions by airlines to bring back some 9,800 planes in late spring when many believed the world might be out of the woods on the pandemic. At its worst, the fleet dropped to about 12,724 planes, while more than 18,000 aircraft were sent to storage over a period of several months.

Regions diverge

Given that some regions of the world have been emerging from the Covid-19 curse sooner than others, their airlines have been more aggressive restoring planes to service. For instance, in response to rising domestic air travel numbers, Chinese airlines have put back into service 91 percent of the aircraft they sent to storage, meaning the fleet is quickly approaching pre-Covid levels. But while demand has revived, there are new viral outbreaks that the Chinese government will have to contain to keep business growing. 

In contrast, North America — a region that has not contained the virus yet — has restored only 46 percent. Even so, the region’s aircraft are seeing very low utilization, given the uncertain conditions and sporadic demand.

Most aircraft returning to service are narrowbodies. This reflects their current popularity with airlines because of cost efficiency. They also tend to dominate domestic travel, which is the first market segment that is showing signs of recovery. In contrast to widebodies, there have also been significantly fewer announcements on early narrowbody retirements by airlines.

Based on Oliver Wyman modelling, domestic air travel should match 2019 levels by mid-2022. International travel is not expected to match 2019 totals until mid-2023.

Potential for more deferrals

None of this is good news for aerospace. The large numbers of older aircraft returning to service may mean more deferrals and cancellations, especially as airlines diligently protect their cashflow.

In response, major manufacturers have announced production cutbacks and layoffs. Aerospace production rates already exceed airline demand for new deliveries and are likely to remain at reduced levels for four years at least, as the market works through inventory.

The only segment that may benefit from an older fleet will be the maintenance, repair, and overhaul (MRO) aftermarket. Older aircraft would suggest more maintenance needs over the short run. Our latest figure puts total MRO demand for 2020 at $50.3 billion, 45 percent lower than our original pre-Covid forecast of $91.2 billion. In May, we forecast total MRO demand for 2020 would be about $42.7 billion. A pickup in this sector will also help aerospace manufacturers, given that most of the big ones have established their own MRO divisions.

The key to a healthier aviation industry is virus containment. Hopefully, that can be achieved even before a vaccine is developed, although so far the news hasn’t been encouraging.