Airbus & Boeing exposure to Qatar Airways limited to 4% of total commercial aircraft orderbook

12 June 2017, Global – We assess Qatar Airways’ huge aircraft orderbook and how the ongoing Qatar crisis may impact Airbus and Boeing as Qatar Airways is Airbus and Boeing’s 12th largest commercial aircraft buyer globally. Qatar Airways’ planned aircraft fleet growth is overly aggressive if it suffers from significant traffic decline for a protracted period so we expect Qatar Airways to consider deferring the delivery of some of its aircraft on order. Cancellation risk is possible but unlikely given Qatar Airways’ strong balance sheet (reaffirmed by its annual financial report released yesterday) and the financial penalties involved. In the event that Qatar Airways does cancel some of its aircraft orders, the impact on Airbus and Boeing is unlikely to be detrimental as their exposure to Qatar Airways is only around 3%-4% of their total orderbook, with Boeing having slightly greater exposure than Airbus.

The impact on Airbus and Boeing could also be mitigated by other airlines bringing forward their aircraft delivery schedules. Moreover, Qatar Airways could still take delivery of the aircraft then proceed to lease or sell its excess aircraft to the airlines it invested in, other third party carriers and lessors. Given the young age of its aircraft fleet averaging only 6 years old versus the global industry average fleet age of 12 years, it should not be difficult for Qatar Airways to find lessees/buyers for its aircraft.

However, if the market is flooded with too many Qatar Airways’ planes for sale or lease, it could potentially dampen aircraft sale prices and lease rates which will be negative for the aircraft resale market, aircraft lessors and even for the aircraft manufacturers.

QATAR AIRWAYS’ ORDERBOOK-TO-CURRENT FLEET RATIO IS 108%, 154% (INCLUDING AIRCRAFT ON OPTION), 184% (INCLUDING AIRCRAFT ON OPTION & LOI)

In a span of 20 years since its launch, Qatar Airways has become one of the world’s largest airlines and a major global hub carrier operating long-haul flights between Asia and Europe and North America via Doha. In FY17 (year to March), Qatar Airways carried 32 million passengers, +20% y/y, and 1.1m tons of cargo, +21% y/y.

Qatar Airways has been embarking on perhaps the most aggressive expansion plans in the history of civil aviation, averaging 20% per annum in the past 10 years, and 22% per annum in the next 2 years based on its scheduled aircraft deliveries based on firm orders or 25% per annum in the next 2 years if we include aircraft on firm order, options and letter-of-intent to purchase. These expansion plans are excessive considering that the Middle Eastern airline sector’s overall passenger traffic growth has been trending at only 9.1% y/y in January-April this year, which is weaker than the 11.2% growth in full year 2016, and passenger load factors are running at only 75.5% in Jan-April 2017, below the global sector average of 80.5% in the same period.

Currently, Qatar Airways has 200 aircraft fleet in service, comprising of 114 Airbus aircraft and 86 Boeing planes.

Chart: Qatar Airways’ current fleet of 200 aircraft

Chart: Qatar Airways’ current fleet of 200 aircraft

The airline has 217 aircraft on order which includes 113 Airbus aircraft and 104 Boeing planes.

Chart: Qatar Airways’ aircraft on order

Chart: Qatar Airways’ aircraft on order

In addition, Qatar Airways has 91 aircraft on option, including 41 Airbus aircraft and 50 Boeing planes. The airline has also signed a letter of intent to purchase 60 Boeing B737 MAX 8.

Chart: Qatar Airways’ aircraft on option

Chart: Qatar Airways’ aircraft on option

Excluding the aircraft on option, Qatar Airways’ orderbook-to-current fleet ratio is at 108% and 154% if we include the aircraft on option. Interestingly, Qatar Airways has the same number of Airbus and Boeing aircraft on order and on option of 154 planes from each manufacturer, raising its total number of aircraft on order and on option to 308 planes.

Qatar Airways also signed a letter of intent to purchase 60 Boeing B737 MAX 8 aircraft. Including these would raise Qatar Airways’ orderbook-to-current fleet ratio to 184%.

LARGE CAPITAL COMMITMENTS AHEAD

As at March 2017, Qatar Airways’ total capital commitments for aircraft and engines amount to QR261B or US$71B.

We expect Qatar Airways’ capex to accelerate in the next 2 fiscal years FY18 and FY19 as its aircraft deliveries increase.

As a reference, Qatar Airways’ capex for additions to property, plant and equipment was QR14B or US$3.9B in FY17 (year to March). It booked negative free cash flow of QR1.0B or US$286m in FY17.

In addition, Qatar Airways operates 109 aircraft under operating lease agreements and its total obligation under these operating leases up to the earliest termination dates is QR23B or US$6.3B.

Chart: Qatar Airways fleet expansion plan

Chart: Qatar Airways fleet expansion plan

Given such a huge orderbook, Qatar Airways could potentially defer or cancel some of its existing aircraft orders if it suffers from significant traffic decline for a protracted period. Please refer to our 5th June 2017 report for more details:

Qatar Airways & global airlines industry impact: Severing of Qatar links by Saudi-led alliance

QATAR AIRWAYS’ AIRCRAFT FLEET EXPANSION PLAN LOOKS TOO AGGRESSIVE IN 2017 and 2018 UNLESS THE QATAR CRISIS CAN BE RESOLVED SOON

Based on the firm aircraft orders, Qatar Airways’ fleet is expected to grow aggressively 22% y/y in 2017 and 2018 before moderating to 10% in 2019 and 2020 and 4% by 2021 before taking into account aircraft retirement. These exclude the 151 aircraft that the airline has on option and on letter-of-intent.

Chart: Qatar Airways’ aircraft fleet growth including firm orders only (2016 to 2021)

Chart: Qatar Airways’ aircraft fleet growth including firm orders only (2016 to 2021)

Including these would imply an even more aggressive capacity growth of 22% in 2017, 29% in 2018, 16% in 2019, 13% in 2020 and 7% in 2021 before taking into account aircraft retirement.

Chart: Qatar Airways’ aircraft fleet growth including firm orders, options and letter-of-intent (2016 to 2021)

Chart: Qatar Airways’ aircraft fleet growth including firm orders, options and letter-of-intent (2016 to 2021)

BOEING HAS SLIGHTLY GREATER EXPOSURE TO QATAR AIRWAYS THAN AIRBUS BUT THE TOTAL EXPOSURE IS NOT DETRIMENTAL RELATIVE TO THE HUGE SIZE OF BOTH MANUFACTURERS’ TOTAL COMMERCIAL AIRCRAFT ORDERBOOK

Qatar Airways is Boeing’s 12th largest commercial aircraft buyer. Boeing has a total order backlog of around 5,700 commercial aircraft amounting to US$417B. Qatar Airways’ 104 Boeing aircraft on order amounts to 1.8% of Boeing’s total commercial aircraft order backlog. In terms of contract value exposure to Qatar Airways, we estimate that Qatar Airways’ firm orders amount to 4% of Boeing’s total commercial aircraft orderbook.

Chart: Boeing’s top 50 commercial aircraft buyers

Chart: Boeing top 50 commercial aircraft buyers

Qatar Airways is also Airbus’ 12th largest commercial aircraft buyer. Airbus has a total orderbook of 6,705 commercial aircraft, representing 8 years of production and amounting to around US$1.2 trillion. Qatar Airways’ 113 Airbus aircraft on order amounts to 1.7% of Airbus’ total commercial aircraft order backlog. In terms of contract value exposure to Qatar Airways, we estimate that Qatar Airways’ firm orders amount to 3% of Airbus’ total commercial aircraft orderbook.

Chart: Airbus’ top 50 commercial aircraft buyers

Chart: Airbus top 50 commercial aircraft buyers

Overall, Boeing has slightly greater exposure to Qatar Airways than Airbus but the total exposure is not detrimental relative to the size of either manufacturer’s total commercial aircraft orderbook.

ORDER CANCELLATION RISK IS LOW GIVEN QATAR AIRWAYS’ STRONG BALANCE SHEET BUT DELIVERY DEFERRALS ARE POSSIBLE

We believe the risk of Qatar Airways cancelling some of its aircraft orders is low given the cancellation penalties involved, unless the Qatar crisis becomes protracted or permanent and/or securing financing for the aircraft deliveries becomes a challenge.

Moreover, Qatar Airways has a strong balance sheet (reaffirmed by its annual financial report released yesterday). Its net debt-equity was only 11% at the end of March 2017, down 2ppts y/y. Key profitability metrics in FY17 (year to March): EBITDAR margin 27%, flat y/y; Operating profit margin 5%, down 3ppts y/y; Net profit margin 5%, flat y/y; ROE 3%; ROA 2%.

Qatar Airways could also consider leasing or disposing its excess aircraft to the airlines it invested in, other third-party carriers and aircraft lessors. Given the young age of its aircraft fleet averaging only 6 years old versus the global industry average of 12 years, it should not be difficult for Qatar Airways to find lessees/buyers for its aircraft but the latter could drive rather hard bargains.

In the event that Qatar Airways does cancel some of its aircraft orders, the impact on Airbus and Boeing may also be mitigated by other airlines bringing forward their aircraft delivery schedules.

However, if the market is flooded with too many Qatar Airways’ planes for sale or lease, it could potentially dampen aircraft sale prices and lease rates which will be negative for the aircraft sale-and-purchase market, aircraft lessors and even for the aircraft manufacturers.

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