THE COWEN INSIGHT
Disruption has shaped the aviation industry since inception. We believe we will see two major disruptors over the next 20 years: start-up airlines and emerging technology aircraft.
Tech changes are being driven by environmental concerns. ESG and sustainability are core to airline strategy. Airlines are focused on using sustainable aviation fuel (SAF) to address these concerns. Low-cost airlines are best positioned to withstand near-term disruption while first movers will be better positioned for long-term disruption.
Part 1: Start-Up Airlines
Over the past decade, airline industry consolidation in the US saw fewer airlines. In every downturn for the past five decades, new airlines started at the bottom of the cycle, given availability of pilots and aircraft (relatively lower start-up costs). In the past three months, two new airlines started domestic service. We believe these two airlines, as well as several low-cost carriers will grow to at least 15% of the US market by 2025.
Part 2: Fleet Replacement
Airlines used the pandemic to rethink their network and fleet strategies. They right sized their fleets by retiring older, less efficient aircraft. The average age of one major airline, for example, dropped by two years. Another went from 7 fleet types to 5. A third has the largest fleet of wide-body aircraft among US airlines. Airline fleets are becoming more efficient as older aircraft are retired and new generation aircraft are delivered, resulting in less reliance on low fuel costs for margin production.
Part 3: Use of Sustainable Aviation Fuel (SAF)
The use of sustainable aviation fuel is the primary way airlines will address near-term environmental concerns. Though we believe policy intervention is needed. As our colleague, Jason Gabelman discusses, SAF is not being manufactured in sufficient quantities at this time.
In addition to SAF, airlines are using carbon offsets, carbon recapture and sequestration to reduce their carbon footprint. The issue with offsets is there isn’t enough land in the world to plant the number of trees needed to offset emissions. As a result, we believe SAF is the best alternative near-term.
Part 4: New Technology Aircraft (eVTOL)
We expect to see an increasing number of new technology aircraft led by Electric Vertical Takeoff and Landing aircraft (eVTOLs). These aircraft will go into service beginning mid-decade. From 2025 through 2035, the technology is likely to advance to the point where these aircraft replace smaller regional aircraft. We expect the initial manufacturers will also be the initial operators. Thus far, one operator has purchased eVTOL aircraft from an air mobility company.
Airlines Best Positioned for Disruption
Low-cost airlines will be relatively best positioned to handle near-term industry disruption. They’re largely ahead on the transition to more efficient aircraft and retain the ability to remain profitable as competition and disruption-related costs increase.
First movers will likely be winners when it comes to longer dated disruption (electrification of aircraft). Several carriers are currently focused on developing scalable sustainable aviation fuel and three others already have eVTOL orders / partnerships in place.
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