Still, the combination of global shortages and a recovering airline industry means that some midlife aircraft are worth more as a source of spares than functioning airplanes. Eirtrade has scrapped a pair of barely 10-year-old Boeing 787 Dreamliners in Prestwick, Scotland, to provide replacement parts. Does this make economic sense from a global perspective? Jim Anderton comments.
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Episode Transcript:
In 2001, he famously said, "If capitalists had been present at Kitty Hawk when the Wright brothers' plane first took off, they should have shot it down."
Airlines have always been a lousy investment. Very high fixed and variable costs, and extreme sensitivity to external events as varied as conflict between nations and bad weather. Engineers can’t do anything about the latter, but in terms of the former—in commercial airplanes at least—the major air-framers and engine makers appear to have found a way to ensure that airlines remain unprofitable for the foreseeable future.
A major variable cost for airlines is fuel, and the drive for more fuel-efficient airliners spurred the creation of technological marvels like Boeing’s 787 Dreamliner. The composite airframe is the technology of the future—and incredibly, two Dreamliners that are barely 10 years old are being scrapped by Eirtrade in Prestwick, Scotland.
Why cut up expensive, high-technology aircraft that are only one-third through their expected life? Because in the upside-down economics of commercial aviation, they’re worth more dead than alive. Even before supply chains were damaged by COVID, parts shortages were a factor leading to an upside-down world where the value of many perfectly functioning high-technology aircraft is less than the value of its component parts sold as spares.
We saw a similar phenomenon in the past with the giant Airbus A380, when market economics reduced the demand for very high-capacity aircraft. But the Dreamliner is just the right size for modern operations: a twin aisle, twin engine aircraft.
There are number reasons why a midlife aircraft might be scrapped, from a general industry downturn to specifics of the airframe itself. Japan Airlines, for example, used to order very special short range high-density 747s from Boeing. Australia’s Qantas needed the opposite, specialized very long-range aircraft.
Those airplanes may have very limited appeal on the used market, but this phenomenon is different. Margins are so tight in commercial aviation that downtime is unacceptable, and if a $200 million Dreamliner languishes in a hangar because of the bad air conditioning pack, or a flap actuator, or an APU, there will be considerable incentive to pay top dollar to get spare parts, fast. Basically, the airplanes are so expensive, and the margins in airline operations so thin, that any appreciable supply chain MRO breakdown makes cannibalizing perfectly good airplanes a money-maker.
Now, the economists would look at this and call this a market failure, since two-thirds of those Dreamliners’ useful lives have been squandered, and every seat mile not carried by those dead airframes has to be carried by new build aircraft, with a significant capital cost. But it’s as if the airline industry operates on Monopoly money, with revolving credit facilities handling staggering amounts of money to renew fleets, chasing every dollar of operating efficiency.
Economically, someone has to pay for the value lost in those two 787’s. It will, of course, be us.