Air Astana to replace 757s with A321neos, eyes new generation 757 (797?) as long-term solution

This is the second in a two part analysis report on Air Astana, which has emerged over the past several years as the leading carrier from Central Asia, with high growth rates and consistent profitability.

The first part looked at the carrier's short-term challenges but relatively bright medium and long-term outlook. This part looks specifically at Air Astana's unique long-term fleet plan with details that have not previously been reported.

See related report: Air Astana delays expansion, faces short-term challenges. But long-term outlook remains bright

Air Astana relies heavily on the 757

The 757 has been the backbone of Air Astana's medium/long-haul operation since shortly after the carrier launched services in 2002. The carrier currently operates five 757s to five of its seven medium/long-haul destinations - Bangkok, Ho Chi Minh, Hong Kong, Kuala Lumpur and London. Its other two medium/long-haul destinations - Frankfurt and Seoul - are currently served with the carrier's fleet of three 767s.

The five Asian destinations are all served from its Almaty hub while Frankfurt and London are served from its second hub in Astana. All seven of these routes are between six and eight hours, putting them within the range of its 757s or 767s but outside the range of the current generation A321, which Air Astana also operates.

Air Astana also currently uses both the 757 and 767 on seasonal charters to Antalya in Turkey, Barcelona in Spain and Heraklion and Rhodes in Greece. But with the exception of Barcelona these flights are about five hours in duration and could also be operated with Air Astana's A320 family fleet. Air Astana also uses its 757s and 767s to operate some flights on its six largest domestic routes - Almaty to Astana, Aktau, Aktobe, Atyrau, Shymkent and Ust-Kamenogorsk.

How to replace the 757s has long been an issue at Air Astana as the carrier believes some of its current medium/long-haul routes (as well as future routes such as Paris) will continue to be too thin for the 767 or 787. Some of these routes are within the range of A319s, which are used by other carriers such as Qatar Airways on six hour missions (such as Doha-Geneva and Doha-Yangon). But the A319, which Air Astana now operates on domestic and short-haul international routes of no longer than two hours, is much smaller and therefore is less attractive from a per seat cost perspective.

Air Astana selects A321neo over 737 MAX 9 as initial replacement for 757

Air Astana has closely studied the A321neo and 737-9 MAX since Airbus and Boeing launched the two types in late 2010 and mid-2011. Both aircraft, which offer improved range of the existing generation narrowbodies, are marketed as potential 757 replacements. But several 757 operators including Air Astana do not see them as entirely replacing the 757 and offering only a partial solution in some markets.

Air Astana has decided to acquire the A321neo after determining the type is a suitable replacement for the 757 on three of its seven medium/long-haul destinations - London, Frankfurt and Hong Kong. The type will also likely be used on new routes to Western Europe such as Paris, which Air Astana plans to launch in 2014, most likely with 757s. (In addition to London and Frankfurt, Air Astana also now serves Amsterdam but as Amsterdam is served from Atyrau in western Kazakhstan the route is only five hours and is operated with A321ceos.)

The 737 MAX 9 offers slightly more range than the A321neo but was excluded by Air Astana because of its smaller size. The MAX 9 has two fewer rows than the A321neo and Air Astana concluded transitioning from the 757 to MAX 9 would represent too much of a downsize.

Air Astana's selection of the A321neo gives Airbus its first customer for the type in Central Asia - and its first customer in Central Asia for the A320neo family. So far 17 airlines have committed to acquiring 467 A321neos (includes aircraft ordered directly from Airbus and known commitments with leasing companies which have ordered the A321neo), according to the CAPA Fleet Database.

The CAPA Fleet Database lists 1630 airline commitments for the more common A320neo - but none from Central Asia - and only 18 for the A319neo. (Leasing company orders that have not yet been placed with an airline are not included in these tallies.)

A321neo customers: as of 27-Jun-2014

Airline	Country	Aircraft	On Order
Total:			467
Air New Zealand	New Zealand	Airbus A321-200neo	3
All Nippon Airways	Japan	Airbus A321-200neo	23
American Airlines	United States	Airbus A321-200neo	100
Arkia Israeli Airlines	Israel	Airbus A321-200neo	4
Cebu Pacific Air	Philippines	Airbus A321-200neo	30
Etihad Airways	United Arab Emirates	Airbus A321-200neo	26
Hawaiian Airlines	United States	Airbus A321-200neo	16
JetBlue Airways	United States	Airbus A321-200neo	30
Lion Air	Indonesia	Airbus A321-200neo	65
Lufthansa	Germany	Airbus A321-200neo	40
Middle East Airlines	Lebanon	Airbus A321-200neo	5
Novair	Sweden	Airbus A321-200neo	3
Pegasus Airlines	Turkey	Airbus A321-200neo	18
Philippine Airlines	Philippines	Airbus A321-200neo	18
Qatar Airways	Qatar	Airbus A321-200neo	14
TransAsia Airways	Taiwan	Airbus A321-200neo	12
Turkish Airlines	Turkey	Airbus A321-200neo	60

Note: Air Astana not included as its 11-aircraft commitment has not yet been announced by the airline, manufacturer or any leasing companies
Source: CAPA Fleet Database

Air Astana's A321neos to seat 159 passengers in long-haul configuration

Air Astana CEO Peter Foster told CAPA that the carrier has decided to acquire 11 A321neos, seven of which will be delivered in medium/long-haul configuration (similar to its 757s) and four of which will be delivered in short-haul configuration (similar to its existing A320 family aircraft). The medium/long-haul configuration will feature 22 flat bed business class seats and 137 economy seats.

Air Astana's five 757s, which were retrofitted in 2011, are configured with 16 flat bed business class seats and 150 economy seats. While Air Astana will lose 13 economy seats as it transitions from the 757 to A321neo the revenue per flight should be significantly higher as it gains six business class seats (for a net reduction of seven total seats). Air Astana is keen to have a larger premium cabin, particularly on flights to Europe as its European flights consist mostly of business traffic. (Asia sees a higher mix of leisure passengers, particularly Southeast Asia.)

Mr Foster says Air Astana has been talking to leasing companies with A321neo order books and has secured delivery slots for 2017, 2018 and 2019. The new lease commitments, which should be finalised over the next few months, will enable Air Astana to phase out its 757 fleet by the end of 2019 as well as provide two growth aircraft to enable the launch of new medium/long-haul routes.

Potential new routes with the A321neo include Shanghai and additional cities in Western Europe after Paris, which will be launched in 2015 using the existing 757 fleet. Air Astana can easily add Paris without reducing any flights across its current network of medium/long-haul destinations or adding aircraft as it is now under-utilising its 757/767 fleet. As CAPA analysed in the first part of this report, the carrier's 757/767 utilisation rate has been reduced by about 13% over the past year as a third 767 has been added without any capacity increases.

Air Astana has been evaluating Chengdu and Shanghai as potential new destinations in mainland China. Chengdu is the first priority and will be launched next but can be served with existing A320 family aircraft. Shanghai would require the A321neo (or 757) as it is about the same distance from Almaty as Hong Kong. Air Astana's two existing mainland destinations in China, Beijing and Urumqi, are now served using A320 family aircraft. (Air Astana also uses Embraer E190 regional jets from Astana to Urumqi, which is in far western China and near the Kazakhstan border, while Beijing is about a five hour flight from both Almaty and Astana.)

Air Astana to lease one A320neo from 2016

Air Astana also has secured a 2016 delivery slot for one A320neo. This aircraft will be used for growth and be delivered in short-haul configuration.

Mr Foster says the carrier would have preferred to take an A321neo, matching the four A321neos it is later taking in short-haul configuration, but there currently are no A321neos available for lease in 2016. Air Astana was also not interested in taking an additional A321ceo as the carrier does not see the point of continuing with current generation technology. The A320neo is slated to enter service in 2H2015 with the A321neo to follow in 2H2016, but Airbus plans to continue producing A320ceo family aircraft for a couple of years alongside the new A320neo family.

Air Astana currently operates four A321s, nine A320s and one A319, according to the CAPA Fleet Database. Three of the A320s were delivered in 1H2014.

The carrier does not plan to take any additional current generation A320s and has no outstanding A320ceo family orders with Airbus or leasing companies. Over the past several years Air Astana has acquired A320ceo family aircraft through a mix of leases and orders directly with Airbus but for the A320neo family has opted to rely entirely on leasing companies. The decision to go to leasing companies for its A321neo requirement was likely driven by the need to secure early delivery slots which have been sold out for some time.

Leases are also the preferred vehicle for acquiring A321neos as they give Air Astana the flexibility to swap out the A321neo after about seven years. Mr Foster envisions the carrier only using the A321neos in its medium/long-haul network for seven to eight years, at which point Boeing's new-generation 757 is likely to have entered service.

Boeing could be closing in on decision to launch a 757 replacement (or 797?) programme

Boeing has been studying the potential development of a 757 replacement, recognising there is a significant market as remarkably almost 90% of the 1,050 757s that were produced are still in service. A couple of hundred of these aircraft are now operating trans-Atlantic routes that are too long for the A321neo but too thin for the 787.

Boeing stated at the Singapore Airshow in Feb-2014 that it was looking at the 757 replacement market and talking to airlines about the interest in a possible new type. Boeing tells CAPA these studies are continuing but the manufacturer is now focused on the 737 MAX, 787-10 and 777X development programmes. "We're in the early stages of studying what the market size and requirements are, what's right for our customers and what's right for Boeing," Boeing states. "There is no timeline. This is one of many studies evaluating markets and how to spiral new capabilities into our products to better serve our customers."

But Boeing has been providing airlines with potential timelines and specifications for the new aircraft programme. Boeing has told carriers the new aircraft (if launched) would enter service in the early middle part of the next decade, likely 2022, 2023 or 2024.

While Boeing also has studied potentially re-engining the original 757, it is expected to decide on pursuing a clean sheet aircraft that would borrow from the airframe technologies used with the 787. Boeing has promised potential customers that the new aircraft (which could be called the 797 although a name would not be selected for some time) would have a common cockpit with the 787. The new aircraft would have similar specs to the 757 in terms of range and payload and be designed to seat between 180 and 210 passengers in dual-class configuration.

"It was a glimmer of an idea in Singapore. We now understand it's more than just a glimmer of an idea," Mr Foster says. "It is being very seriously debated with dates, times and production facilities now being talked about and thought about internally at Boeing. We love it. It would be brilliant for us."

Air Astana at least for now sees the A321neo as an interim and partial solution for medium/long-haul routes as it does not do everything the carrier wants in a 757 replacement. Mr Foster points out that a seven-year lease from 2017 would expire in 2024, which would be "absolutely perfect" as it would allow the carrier to transition to the new-generation 757 soon after its entry into service.

Air Astana could also potentially replace 787s with new Boeing narrowbodies

A new-generation 757 could also potentially be acquired by Air Astana to replace its planned fleet of 787-8s.

As Air Astana phases out its 757s towards the end of this decade it will have to move its three 767-300ERs to the Bangkok, Ho Chi Min, Kuala Lumpur and Seoul routes as the carrier does not expect the A321neo to have the legs to operate these. Air Astana's fleet plan calls for the 767-300ERs to be replaced by three 787-8s, which are now slated to be delivered in 2017 through 2019.

But a new-generation 757 (or 797) would provide a new option for these routes, in addition to replacing the seven A321neo in medium/long-haul configuration which are being delivered in 2017 through 2019. As the new-generation 757 would have the same or greater range than the original 757, the aircraft would easily be able to cover all of Air Astana's Asian and European routes. This would free up the 787 for even longer routes, such as the US, or markets which become thick enough over time to support larger capacity aircraft.

The other option would be to phase out the 787-8s after only seven or eight years, similar to Air Astana's plans for the A321neos. While it has ordered its 787s directly from Boeing, Air Astana could sell and lease them back, giving them the option to make the three 787-8s a bridge solution along with the seven A321neos until the new generation 757 is available.

A US airline order will be needed if Air Astana is to get its new-generation 757s

But Air Astana is too small an airline to justify the launch of a new aircraft programme. Ultimately at least one of the three US majors will need to commit for the programme to be launched. This is a feasible scenario given that the three main US airline groups account for over 50% of the passenger 757s currently in service.

According to the CAPA Fleet Database, US carriers currently account for 547 of the 926 757s in service. This includes 380 aircraft at American/US Airways, Delta and United with most of the remaining aircraft at cargo carriers. (Of the 926 757s in service globally, there are 724 passenger aircraft, 201 freighters and one combi - contact info@centreforaviation.com for details.)

Central Asia accounts for only 17 of the 926 757s in the global fleet. The 757 is ideal for the Central Asian market as Central Asia is roughly equidistance between East Asia and Western Europe with routes to both regions generally too long for other existing narrowbody aircraft types but too thin for widebodies. There are now five Central Asian carriers operating 757s, all of which could be potential candidates for the new generation 757.

Central Asia 757 operators: as of 26-Jun-2014

Airline	Country	Aircraft	In Service
Total:			17
Air Astana	Kazakhstan	Boeing 757-200	4
Air Astana	Kazakhstan	Boeing 757-200(ETOPS)	1
SCAT Airlines	Kazakhstan	Boeing 757-200	2
Tajik Air	Tajikistan	Boeing 757-200(ETOPS)	1
Turkmenistan Airlines	Turkmenistan	Boeing 757-200	4
Uzbekistan Airways	Uzbekistan	Boeing 757-200	5

Source: CAPA Fleet Database

757 and potential E190 replacements are next components of Air Astana's fleet renewal

If Boeing ever wants to launch a 757 replacement, now would be the time. The 757 fleet is ageing and the next decade is really the last window to come up with a like for like option.

The 757 is by far the oldest type of aircraft in Air Astana's fleet. The carrier's five 757s have an average age of 17 years, according to the CAPA Fleet Database.

The carrier's 767 fleet currently has an average age of about six years but this is about to be reduced to less than one year as Air Astana will be taking delivery within the next few weeks of the third and final 767-300ER, which it ordered in early 2012. As this aircraft is placed into service, Air Astana will return an older model 767-300ER which is 17 years old.

Air Astana average fleet age by aircraft type: as of 27-Jun-2014

Source: CAPA Fleet Database

Air Astana's current A320 family fleet has an average age of only four years as the carrier has been returning most of its older A320s. This fleet could ultimately be replaced with additional A320neo/A321neos as the 12 orders now in the process of being placed with leasing companies are predominately for 757 replacements and growth.

Air Astana configures its A321s with 28 recliner style business class seats and between 147 and 151 economy seats. Its A320s have 16 business class and 132 economy seats while its lone A319 has 12 business class and 114 economy seats.

Air Astana aircraft specifications

Source: Air Astana

Air Astana also operates nine E190s which have been delivered over the last two years (a mix of used and new aircraft, including one that was delivered new earlier this year). Its E190 fleet currently has an average age of less than three years.

The carrier has studied the Bombardier CSeries as a potential E190 replacement but has ruled out acquiring CSeries. Mr Foster expects the carrier will eventually acquire the re-engined E190-E2, which is slated to enter service in 2018, to replace its current generation E190s. But Air Astana is not likely to place an early order for the E2 as its E190 fleet is still new. The carrier also does not envision expanding its regional fleet but it does see a need to continue using 100-seat aircraft on thin short-haul routes to secondary destinations in Central Asia and Russia.

Air Astana's strategy is to pursue frequency rather than large capacity equipment

Increasing frequencies rather than up-gauging is generally Air Astana's most likely path as it expands. Most of the carrier's international routes are not currently served daily. Keeping aircraft relatively small - including 100-seat aircraft for regional routes and 200-seat aircraft for medium/long-haul routes - will enable Air Astana to gradually add more frequencies and provide a better schedule for its largest segment, business passengers.

Air Astana seeks to keep its fleet young - it vows not to again acquire used aircraft. But the position of Kazakhstan and Central Asia means it also needs to keep its long-haul aircraft small. The A321neo is a sensible choice, but does not entirely solve its requirement.

Air Astana will be watching closely as Boeing moves towards a decision on a new-generation 757 and will be ready to place an early order if the manufacturer launches the programme.