Monday, 3 June 2024 Reading time : 4 minutes

The aviation industry is not just about airlines operating passenger flights  it encompasses all aspects of flying, from airport operations to engine design and air freight. Contrary to expectations, demand for private and business travel has increased significantly since the pandemic. However, the market environment is characterized by problems in the supply chain and ongoing safety concerns, leading to aircraft groundings. Who are the main suppliers for these engines? And how is the Boeing-Airbus duopoly affecting the current aircraft shortage? The Lufthansa Group made a profit last year thanks to higher ticket prices, but customer and employee dissatisfaction appears to be having a significant impact.

Engines
The development and design of jet engines is a highly complex process that requires close coordination with the respective aircraft type. The market is currently dominated by GE Aerospace (GE), the US manufacturer Pratt & Whitney and Rolls-Royce. GE offers engines that are developed specifically for one aircraft model, but also engines that can be used in several similar aircraft types. Since 1974, GE parent company General Electrics and French engine manufacturer Safran have been cooperating in the joint venture CFM International, which is very successful today. For example, CFM manufactures the CFM56 and LEAP engines, which are installed in the Airbus A320 and Boeing 737 narrow-body aircraft. CFM56 is one of the best-selling engines in the world and has already been delivered over 33,000 times. The various CFM56 engines are the preferred choice of aircraft manufacturers, with CFM being the sole supplier to Boeing in some cases and accounting for over 60% of deliveries to Airbus. As demand for narrow-body aircraft increases, GE should be well positioned.

Aircraft
In the commercial aircraft industry, the market is dominated by the duopoly of Boeing and Airbus. Boeing has been under scrutiny for some time over safety concerns. Last January, a Boeing 737 Max's door plug broke after take-off in Alaska, causing the door to fall out during the flight. Although no one was seriously injured, concerns remain high following the crash of two 737 Max aircrafts in 2018 and 2019 due to a software error. 

Competitor Airbus has also faced difficulties in recent years. The group overestimated the demand for wide-body aircraft, especially for so-called superjumbos. As a result, Airbus discontinued production of the A380 superjumbo in 2019. Recently, Airbus' A320neo has proven to be competitive due to its fuel efficiency. In a direct comparison with Boeing's 737 Max, the Airbus aircraft type has a market share of around 60%. However, Airbus is benefiting from the flight ban imposed on Boeing aircraft. Problems with Pratt & Whitney engines forced Airbus to temporarily ground its A320neo aircraft, but this risk now appears to have been largely averted. Both manufacturers are currently benefiting from strong demand for airlines and are able to charge a premium due to the general shortage of aircraft.

Passengers
Airlines typically prepare for the summer season and the associated travel demand. However, this year, they are facing a challenge due to a shortage of aircraft. To address this, they have been investing heavily in repairing older, less fuel-efficient aircraft. In addition, more than 50% of fleets continue to be leased on average, although costs have already risen above pre-pandemic levels, according to the Financial Times. In doing so, the airlines are trying to meet rising demand for travel, which according to the Economic Times is expected to rise to 4.7 billion passengers this year, from 4.5 billion passengers per year before the pandemic (2019).

The German Lufthansa Group, whose airlines include Swiss, Austrian Airlines and low-cost carrier Eurowings, is currently facing several challenges. Not only has it lost its status as a 5-star airline, but it is also struggling with customer dissatisfaction. One measure is the Net Promoter Score (NPS), which balances very positive ratings with those of dissatisfied customers. A score above 50 is considered a benchmark, with the scale ranging from -100 to +100. Before the pandemic, the Lufthansa Group's premium airlines reached the target value of 50, but now the scores are only around 30. By comparison, competitor Air France-KLM claims to have achieved an NPS of 39 in 2023. Reasons for the dissatisfaction of Lufthansa passengers include the lack of premium services and higher prices. Although the increase in ticket prices has enabled the airline to become profitable in 2023, management is now investing in improving customer satisfaction in order to remain successful. However, employees are also unhappy: Recent strikes have forced the airline to lower its profit forecast for 2024.

Investment idea
For investors who want to position themselves in the aviation theme but want to hedge against possible price setbacks, a barrier reverse convertible offers an investment possibility. The product has a barrier of 57% and pays a guaranteed coupon of 10% per year.

BRC on Lufthansa, Airbus, General Electric
Termsheet (Valor: 132913952)

Indicative terms

 

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