The Race for EfficiencyIn its latest investors’ presentation (available on its website), page 12, Air Canada mentions that the average age for its mainline fleet will be 6.5 years by end 2021. Of the major North American airlines, Air Canada will have by far the youngest fleet (while achieving the lowest leverage ratio of the three US legacy carriers two years before this target!)
For investors (and analysts) this is significant. Here is what McKinsey says about fleet age in their Pathway to Value Creation document published a few years ago (key message in bold).
The race for efficiency: Burdening capex as a prerequisite for competitiveness
Transportation assets are becoming smarter, greener, and larger at an ever-faster rate. Companies need to invest constantly in new-generation assets to remain competitive, while retaining capital discipline. Companies endowed with older assets in capital-intensive industries are typically able to generate windfall profits. However, the opposite holds true for the transportation industry. There is a strong inverse relationship between economic profit and the average age of an airline or shipping fleet.
Lower costs. Asset size has roughly doubled every ten years, reducing unit costs by 16 percent and 25 percent, respectively, for new-generation aviation and container shipping assets (Exhibit 14). Over the past 30 years, marginal capacity cost in a number of the eight transportation and logistics industries has amounted to as much as 25 to 50 percent.
Asset deflation. Furthermore, scale and technological progress have driven up the operating efficiency of new assets. New-generation assets (e.g., large container ships, the new Boeing 787, or Gigaliner trucks) are 10 to 30 percent more efficient than previous generation assets and have correspondingly lower unit operating costs. New assets often set lower market prices, causing older, less efficient assets to deliver lower than expected return on investment. Further, as we have shown in our report “Where is the value in transportation?” from 2012, new-generation assets devalue older assets as secondhand prices tumble.