News roundup: China, Cathay Pacific, preighters, lessors, 773F, quarantines, Airbus, Boeing, Rolls Royce

The old aviation news cycle has been severely disrupted of late. It used to be dead over the weekends and Monday, pick up Tuesday, but all the so-so news would drop on a Wednesday, the important news on a Thursday and the bad news late Friday so it got buried at the weekend.

With press and PR types furloughed or working fewer hours, face to face meetings things of the past for now, and not so much happening, there’s been less to report, but it’s starting to come back.

Let’s first deal with China.

Politics and aviation go hand in hand, especially in a dictatorship that’s now directly challenging the US form regional and even global dominance at every level, and seemingly winning.

China quarantined itself to stop Covid cases from incoming visitors and returnees, after a spike from that source happened in several cities. However it continued to fly its routes where it could to the US and many other countries. The US decided this deserved retaliation, and was about to block all Chinese flights. Now it’s going to allow two flights a week. China was never aiming to stop US flights out of some spite, it was for once a practical consideration. Trump didn’t see it like that.

What is of huge importance is what has happened in Hong Kong, because this may well be the beginning of the end for Cathay Pacific as we’ve known it.

The introduction of Chinese Secret Police and their operations in Hong Kong under the new security laws being imposed on the city, have promoted the US to declare the city no longer autonomous, denying it its special economic and trading status.

Most western countries have said the same and the U.K. Government has offered HK residents with British National Overseas Passports – some 5 million people, a visa-free 12 month residency in the U.K. with a path to full U.K. citizenship if they want it. China is fuming.

This is a disaster for Cathay Pacific. It’s driving force is the city’s businesses, the commercial head quarters who are there because of the cities status outside of communist China’s direct control. It’s tourism and commercial life is driven by visa free travel from the U.K. and many other countries. All of that is likely doomed.

Cathay has had a dire time in the last year. The pro-democracy demonstrators put off much travel and caused the airline endless hassle with the mainland Chinese authorities.

Then the pandemic dropped on top of that and now it faces an even more uncertain future in the maelstrom of Chinese and international politics. Could a once great airline finally be brought down by events beyond its control?

Quarantines are much in the news. The U.K. imposes one on Monday 8 June. IAG is going to court over it on behalf of its airlines. The chances are it won’t last more than three weeks anyway.

However airport screenings in Athens, Greece forced a Qatar Airways flight to take back its passengers and fly home, when 12 tested positive on arrival.

Another AirIndia flight was denied entry to its destination when the pilot and crew were identified as Covid positive. There will be much more of this as the weeks go by.

Preighters – oh how the professional air cargo industry hates them! Sharp opinions and words are flying between cargo airlines who feel preighters are just opportunistic – er, they are! And letting them get on with their jobs, doing the heavy lift, while passenger airlines should stick to belly cargo.

Demand in Europe for PPE is now in steep decline, but in South America, it’s rising sharply, as it is in Southern Africa. In both regions mismanaged Covid policies, and in Brazil outright denial by President Bolsanro, have led to rapidly rising infections and death rates spiking.

But that means the air cargo operators have simply shifted regions, and freight rates have soared. Every cloud has a silver lining for someone.

Leasing companies are frightening Boeing and Airbus. In the past lessors never cancelled or deferred aircraft deliveries, generally preferring to take aircraft anyway, then finding a customer for them. They have acted almost like a shock absorber, reliably taking production when airlines might not.

There are two reasons for this. Firstly, leasing was a low level business 25 years ago. Less than 10% of aircraft were leased. That figure is now 55%.

25 years ago as leasing expansion moved ever upward, there was always a market for them to lease what they ordered, airlines turned to leasing post 9-11 in 2001, and again during the Great Recession of 2008-12, so they didn’t have to spend their cash.

Now leasing has fully matured as the preferred option. With so many leased aircraft on airline books, they don’t have a way out, there’s no option this time, they’re already leasing so if anything the leasing companies are getting aircraft back as airlines ditch them, and the last thing they need is new aircraft to sell to airlines who don’t want them.

The shock absorber has hit the stops, there is no room to give. Airbus and Boeing are facing unprecedented cancellations and deferments from a once reliable buying market and its having a rapid impact. Airbus are talking a 40% reduction in build rates and deliveries for as long as three years, with a slow ramp up, but to lower numbers than 2019, by 2025.

Which brings us to Rolls Royce as a prime example of what’s happening in the aircraft supply chain globally.

They’re looking for 30% cut in staff. Mostly in management and manufacturing because they just don’t have the orders to keep going at the rate they were. More to the point, it’s going to be years before demand picks up to what it was. Most of its engines were for large aircraft like the A350, 787, A330. All of those are facing cuts of up to 50% in build rates.

Imagine that magnified across the whole supply industry from seating to tyres, sheet metal and carbon composite to wiring looms and window manufacturers and myriads more. Many are small companies that may simply cease operating.

For some it’s a double catastrophe. They reluctantly went along with these constant production increases demanded by the manufacturers, investing heavily often against their better judgement. There’s always a downturn and they didn’t want to get caught out again. Now here they are saddled with debt and no income to pay for it. Ironically their only way out may be to sell out at rock bottom prices to Airbus and Boeing – and it’s already started happening.

The first 773ER has been delivered to Israel for conversion to freighter. Owners GE leasing are said to have a client ready. See the article on the conversion here: The Big Twin

Have a good weekend!