Will the shortage of aircraft hamper the growth of Bangladesh's aviation industry?
Ongoing international crises and supply chain issues have caused a shortage of aircrafts. It threatens Bangladeshi airlines' growth
Recently, the International Air Transport Association (IATA) projected that global airlines would carry 4.7 billion passengers in 2024, compared to the pre-pandemic (2019) record of 4.5 billion. The Asia-Pacific region has experienced the highest passenger growth so far. Bangladesh is no exception. Biman Bangladesh Airlines and US Bangla Airlines have also experienced such encouraging growth.
The growth of air travellers would demand airlines to procure more aircraft. The market for air travel is increasing in our country, and we do not have enough aircraft. So. the question arises – "Where do we get aircraft?"
Almost all Bangladeshi airlines are desperate to procure aircraft, but wide-body and narrow-body aircraft are nearly unavailable now due to the placement of several big orders by some major airlines and lessors, the production halt of Boeing's 737 MAXs, delayed production of aircraft by major manufacturers owing to supply chain issues, and the ongoing two-year-long Russia-Ukraine War.
Such a scarcity of aircraft might hinder the growth of the aviation industry in Bangladesh and further shrink the local airlines' market share in the international market.
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Options of aircraft procurement
Aircraft are generally procured in several ways.
The first is purchasing 'Off-the-shelf'. Since aircrafts are a high-value asset, they are generally not available off-the-shelf and are only manufactured on order. The only way to get them off-the-shelf is when the original buyer does not like to take delivery of aircraft.
For example, Biman Bangladesh Airlines purchased 2 298-seater Dreamliner 787-9 planes from Boeing in 2019, initially ordered by Hainan Airlines of China but Hainan declined to take delivery of the same following the US-China trade war.
The next option is 'Pre-ordering' the aircraft from the manufacturer. This involves huge pre-delivery payments. Biman has procured, on a G2G basis, ten Boeing aircraft through an order placed in 2008 and 3 Dash-8-Q400 aircraft from Bombardier through another order placed in 2018.
The third option for procurement is 'Dry lease', where an aircraft is leased by an airline (lessee) from lessors for a reasonably long period (generally 5-8 years) without crew members (pilot and cabin crew). It offers greater flexibility and control to the lessee (the airline) and allows airlines to access aircraft without the upfront large capital expenditure of purchasing. Both Biman Bangladesh Airlines and US Bangla Airlines have aircraft on dry lease.
The fourth and final option, applicable for shorter duration periods (generally for less than a year), is that aircraft may be procured through 'Wet lease' (also called ACMI lease), where the aircraft (A) crew members (C), maintenance (M) and insurance (I) are provided by the lessor. This type of lease is a very expensive option, but it is very common when the requirement is for a short time only.
Strong duopoly in aircraft manufacturing
There is a near duopoly between Boeing and Airbus in the manufacturing of passenger aircraft, especially in the case of narrow-body (1 aisle) and wide-body (2 aisle) aircraft. There is hardly any possibility that a third company will emerge soon to compete with these giant companies.
In the foreseeable future, global airlines must depend primarily on Airbus and Boeing to meet their aircraft requirements. Nonetheless, these two companies have limited production capacities, which cannot be enhanced overnight.
The expansion plans of different global airlines across the globe have created additional demand for aircraft. Interestingly, some airlines signed agreements with Boeing and Airbus for big purchases. This indicates that the major airlines and lessors have already absorbed a significant amount of these two maufacturers' production capacity.
Supply chain issues
The recent slowdown of the aircraft parts supply chain has deepened the aircraft delivery crisis, as aircraft manufacturers are dependent on hundreds of suppliers of aircraft parts. The production lines at both Airbus and Boeing have been suffering since the beginning of the war in Ukraine, which led to an inadequate supply of titanium, which is essential for aircraft manufacturing.
This is compounded by the irregular supply of aircraft engines, parts, and components from Original Equipment Manufacturers (OEM) who have also been hit by supply chain problems.
When there were 2 fatal crashes, Lion Air Flight 610 in October 2018 and Ethiopian Flight 302 in March 2019, involving Boeing 737 MAX, the fleet was grounded across the globe.
Moreover, there have been allegations that Pratt & Whitney's Geared Turbofan engines are faulty. It has affected nearly forty airlines and lessors globally and will cause the grounding of nearly 350 A320s through 2026, with 2024 being the most impacted year.
In January 2024, a mid-air blowout of the door of a 737 MAX aircraft of Alaska Airlines occurred. It caused the US regulatory authority, the Federal Aviation Administration (FAA), to stop the planned increase in the rate of production of 737 MAXs. Such a shortage has impacted the certification timeline of the Boeing MAX 10 and the 777-X.
As a result of such manufacturer production faults, the number and frequency of regulatory interventions have increased in the recent past. It has resulted in significant delays in the production and delivery of aeroplanes.
Options for Bangladeshi airlines
The small airlines of Bangladesh are likely to suffer from an inadequate supply of aircraft (narrow-body and wide-body) for the next 5 to 7 years at least. If any aircraft is available at all, the 'procurement cost' (purchase or lease) will be very high. Importantly, at this critical juncture, it is assumed that Boeing and Airbus, in general, will accept orders only with a very high lead time of 3 to 4 years or more.
So, what should the local airlines do?
The local airlines should immediately place orders for either outright purchase or 'dry lease'. The intended aircraft may be new or old (not beyond ten years). They should not opt for a 'wet lease' (ACMI), in general, because it is the most expensive option and is not a sustainable model for creating a profitable business in the long run.
The airlines should keep scanning the environment and act very fast to acquire aircraft since the market demand is high now, and it will continue to remain like that for the next couple of years. They should offer extra prices to secure aircraft and counterbalance that additional cost, primarily from other administrative heads.
The aircraft supply situation to the local air operators has further aggravated since the Civil Aviation Authority of Bangladesh (CAAB) has recently reduced the permissible age for induction of old aircraft to fifteen years as compared to the previous benchmark of twenty years.
This is a very good initiative, as it enforces the requirement to get relatively newer aircraft into the country. But in today's environment, amidst a severely restricted supply of aircraft, perhaps the CAAB could reconsider the decision until the supply situation improves.
The government could also support the industry by allowing, on a priority basis, the operators to open a letter of credit (LC) and providing for a partial waiver of certain CAAB fees. These measures would help to facilitate the growth of local airlines by partially compensating for the high procurement costs of aircraft.
In addition to the procurement of aircraft, for the greater good of the industry, local airlines, through cooperation, need to pursue a common strategy to enable Bangladeshi airline operators to increase their market share in terms of passengers and cargo carried to and from Bangladesh.
Air Commodore Dr Mahbub Jahan Khan is an aviation aficionado with a long career in the aviation industry.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
